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Suppose 1) nominal GDP increases in a given year. Based on this information, we know with certainty that: A) real output has increased. B) the price level (GDP deflator) has increased. C) real output and the price level (GDP deflator) have both increased. D) either real output or the price level (GDP deflator) have increased. E) real output has decreased and the price level has increased. Register to View Answer2) If nominal GDP rises from $10 trillion to $12 trillion, while the GDP deflator rises from 2.0 to 2.2, the percentage change in real GDP is: A) -10%. B) 10%. C) 1.1%. D) 9.1%. E) 20%. Register to View Answer3) Suppose that for the year 2003, a company spends $200 million on intermediate goods and $400 million on wages, with no other expenses. Also assume that its total sales are $900 million. The value added by this company is: A) $200 million. B) $300 million. C) $500 million. D) $700 million. E) $800 million. Register to View Answer4) Suppose nominal GDP in 2003 increased by 6% (over its previous level in 2002). Given this information, we know with certainty that: A) real GDP increased during 2003. B) the GDP deflator increased during 2003. C) both the GDP deflator and real GDP increased during 2003. D) More information is needed to answer this question. Register to View Answer5) When disposable income is zero, we know that: A) consumption must be zero. B) saving must be zero. C) saving equals investment. D) saving is negative. E) the marginal propensity to consume must be zero. Register to View Answer6) If C = 100 + .5YD, what increase in government spending would raise GDP by 1000? A) 500 B) 1000 C) 1500 D) 2000 E) 2500 Register to View Answer7) An increase in the marginal propensity to consume from .5 to .7 will cause: A) the ZZ line to become steeper and a given change in government spending (G) to have a smaller effect on output. B) the ZZ line to become steeper and a given change in government spending (G) to have a larger effect on output. C) the ZZ line to become flatter and a given change in government spending (G) to have a smaller effect on output. D) the ZZ line to become flatter and a given change in government spending (G) to have a larger effect on output. Register to View Answer8) When C = c0 + c1YD, an increase in c0 will cause which of the following to increase? A) equilibrium income B) equilibrium disposable income C) equilibrium saving D) all of the above E) none of the above Register to View Answer9) The interest rate will increase as a result of which of the following events? A) a decrease in income B) an open market purchase of bonds by the central bank C) an increase in income D) all of the above E) none of the above Register to View Answer10) Suppose the central bank wishes to conduct expansionary monetary policy. Given this, we would expect which of the following to occur? A) a central bank purchase of bonds and an increase in the interest rate B) a central bank purchase of bonds and a reduction in the interest rate C) a central bank sale of bonds and an increase in the interest rate D) a central bank sale of bonds and a reduction in the interest rate Register to View Answer11) Suppose there is an open market purchase of bonds. Such an event will cause: A) an increase in bond prices and an increase in the interest rate (i). B) a reduction in bond prices and an increase in i. C) an increase in bond prices and a reduction in i. D) a reduction in bond prices and a reduction in i. E) none of the above Register to View Answer12) Suppose there is an open market sale of bonds. Such an event will cause: A) an increase in bond prices and an increase in the interest rate (i). B) a reduction in bond prices and an increase in i. C) an increase in bond prices and a reduction in i. D) a reduction in bond prices and a reduction in i. E) none of the above Register to View Answer13) Suppose the economy is operating on the LM curve but not on the IS curve. Given this information, we know that: A) the goods market is in equilibrium and the money market is not in equilibrium. B) the money market and bond markets are in equilibrium and the goods market is not in equilibrium. C) the money market and goods market are in equilibrium and the bond market is not in equilibrium. D) the money, bond and goods markets are all in equilibrium. E) neither the money, bond, nor goods markets are in equilibrium. Register to View Answer14) Suppose the economy is operating on neither the IS nor LM curve. Given this information, we know that: A) the goods market is not in equilibrium. B) the money market is not in equilibrium. C) the bond market is not in equilibrium. D) financial markets are not in equilibrium. E) all of the above Register to View Answer15) After a contractionary fiscal policy: A) the LM curve shifts and we move along the IS curve. B) the IS curve shifts and we move along the LM curve. C) both the IS and LM curves shift. D) neither the IS nor the LM curve shifts. E) output will change causing a change in money demand and a shift of the LM curve. Register to View Answer16) Based on our understanding of the IS-LM model, we know that a tax cut: A) must cause investment spending to decrease. B) must cause investment spending to increase. C) will cause no change in investment spending. D) may cause investment spending to increase or decrease. E) a reduction in money demand and a reduction in the interest rate. Register to View Answer17) If the demand for money is very sensitive to the interest rate, then: A) the IS curve should be relatively flat. B) the IS curve should be relatively steep. C) the LM curve should be relatively flat. D) the LM curve should be relatively steep. E) neither the IS nor the LM curve will be affected. Register to View Answer18) Suppose investment spending depends only on the interest rate and no longer depends on output. Given this information, a reduction in government spending: A) will cause investment to decrease. B) will cause investment to increase. C) may cause investment to increase. D) will have no effect on output. E) will cause a reduction in output and have no effect on the interest rate. Register to View Answer19) If investment spending is very sensitive to the interest rate, then: A) the IS curve should be relatively flat. B) the IS curve should be relatively steep. C) the LM curve should be relatively flat. D) the LM curve should be relatively steep. E) neither the IS nor the LM curve will be affected. Register to View Answer20) Suppose there is a policy mix of expansionary monetary policy and expansionary fiscal policy. This combination of policies must cause: A) an increase in the interest rate (i). B) a reduction in i. C) an increase in output (Y). D) a reduction in Y. Register to View Answer21) Suppose there is a policy mix of contractionary monetary policy and expansionary fiscal policy. This combination of policies must cause: A) an increase in the interest rate (i). B) a reduction in i. C) an increase in output (Y). D) a reduction in Y. Register to View Answer22) Suppose there is a policy mix of expansionary monetary policy and contractionary fiscal policy. This combination of policies must cause: A) an increase in the interest rate (i). B) a reduction in i. C) an increase in output (Y). D) a reduction in Y. Register to View Answer23) The reservation wage is: A) the wage that an employer must pay workers to reduce turnover to a reasonable level. B) the wage that ensures a laid-off individual will wait for re-hire, rather than find another job. C) the wage that would make an individual indifferent between working or not working. D) the wage offer that will end a labour-strike. E) the bribe that must be paid to a maitre d' when you want a table but did not call in advance. Register to View Answer24) The natural rate of unemployment is the rate of unemployment: A) that occurs when the money market is in equilibrium. B) where the markup of prices over costs is zero. C) where the markup of prices over costs is equal to its historical value. D) that occurs when both the goods and financial markets are in equilibrium. E) consistent with both the wage-setting and price-setting equations. Register to View Answer25) The natural level of output is the level of output that occurs when: A) the goods market is in equilibrium. B) the economy is operating at the unemployment rate consistent with both the wagesetting and price-setting equations. C) the financial markets are in equilibrium. D) the unemployment rate is zero. E) both the goods and financial markets are in equilibrium. Register to View Answer26) In a graph with the real wage on the vertical axis, and the level of employment on the horizontal axis, the wage-setting relation will appear as: A) a vertical line. B) a horizontal line. C) an upward sloping line. D) a downward sloping line. E) a curve that first slopes upward, then downward. Register to View Answer27) In the aggregate demand relation, a reduction in the price level causes output to increase because of its effect on: A) government spending. B) the interest rate. C) the nominal wage. D) firms' markup over labour costs. E) the expected price level. Register to View Answer28) The aggregate demand curve will shift to the right when which of the following occurs? A) a decrease in the money supply B) a reduction in consumer confidence C) a rise in the price level D) a decrease in taxes E) a decrease in the price level Register to View Answer29) Which of the following represents the short-run effect of an increase in the money supply? A) a decrease in output B) an increase in the interest rate C) a decrease in the price level D) none of the above E) all of the above Register to View Answer30) Suppose there is an increase in the price of oil. This change in the price of oil will cause which of the following in the medium run? A) a decrease in output B) no change in the price level C) an increase in the interest rate D) all of the above E) none of the above Register to View Answer31) Which of the following events would NOT cause a movement along aggregate supply curve in the short run? A) an increase in the money supply B) an increase in government spending C) a decrease in the markup D) all of the above E) none of the above Register to View Answer32) Which of the following would cause an increase in the natural level of output? A) a decrease in government spending B) a decrease in the money supply C) an increase in taxes D) a decrease in taxes E) none of the above Register to View Answer33) For this question, using the AS-AD diagram and assume that the economy is initially operating at the natural level of output. An increase in taxes will cause which of the following? A) a reduction in output and no change in the aggregate price level in the short run B) a reduction in employment and no change in the nominal wage in the short run C) an increase in investment in the medium run D) an increase in the aggregate price level, no change in output and no change in the interest rate in the medium run Register to View Answer34) For this question, assume that the economy is initially operating at the natural level of output. An increase in the price of oil will cause which of the following in the medium run? A) a reduction in the interest rate B) a reduction in output and no change in the aggregate price level C) a reduction in output and a reduction in the interest rate D) a reduction in unemployment, an increase in the nominal wage and an increase in the aggregate price level E) a reduction in the aggregate price level and no change in output Register to View Answer35) For this question, assume that the economy is initially operating at the natural level of output. A reduction in the government spending will cause: A) an increase in the real wage in the medium run. B) a reduction in the real wage in the medium run. C) no change in the real wage in the medium run. D) ambiguous effects on the real wage in the medium run. Register to View Answer36) For this question, assume that the economy is initially operating at the natural level of output. A reduction in taxes will cause: A) an increase in the real wage in the medium run. B) a reduction in the real wage in the medium run. C) no change in the nominal wage in the medium run. D) ambiguous effects on the real wage in the medium run. E) none of the above Register to View Answer37) For this question, assume that the economy is initially operating at the natural level of output. An increase in unemployment compensation/benefits will cause: A) an increase in the real wage in the medium run. B) a reduction in the real wage in the medium run. C) no change in the real wage in the medium run. D) ambiguous effects on the real wage in the medium run. Register to View Answer38) For this question, assume that the economy is initially operating at the natural level of output. When the central bank controls the interest rates, an increase in the price target will cause: A) no change in the real wage in the medium run. B) an increase in investment in the medium run. C) a reduction in the interest rate in the medium run. D) no change in the nominal wage in the medium run. Register to View Answer Ch.8 1) If policymakers underestimate the natural rate of unemployment, they may follow policies that cause Australia to have: A) more unemployment than necessary. B) an unemployment rate that is "too high." C) a higher inflation rate than necessary. D) a steadily decreasing inflation rate. E) a dramatically fluctuating unemployment rate. Register to View Answer2) Which of the following would be most likely to cause a change in the natural rate of unemployment? A) a change in monetary policy B) a change in fiscal policy C) a change in the composition of jobs D) a change in the rate of inflation E) a change in the price of oil Register to View Answer3) Assume that expected inflation is based on the following: et = t-1. An increase in will cause: A) an increase in the natural rate of unemployment. B) a reduction in the natural rate of unemployment. C) no change in the natural rate of unemployment. D) inflation in period t to be more responsive to changes in unemployment in period t. Register to View Answer4) Assume that expected inflation is based on the following: et = t-1. If = 0, we know that: A) a reduction in the unemployment rate will have no effect on inflation. B) low rates of unemployment will cause steadily increasing rates of inflation. C) high rates of unemployment will cause steadily declining rates of inflation. D) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate. Register to View Answer5) Assume that expected inflation is based on the following: et = t-1. If = 1, we know that: A) a reduction in the unemployment rate will have no effect on inflation. B) low rates of unemployment will cause steadily increasing rates of inflation. C) the actual unemployment rate will not deviate from the natural rate of unemployment. D) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate. Register to View Answer6) Suppose policymakers underestimate the natural rate of unemployment. In a situation like this, policymakers might implement a policy that: A) attempts to maintain output below the natural level of output. B) results in deflation. C) both a and b D) results in steadily rising inflation. Register to View Answer7) For this question, assume that expected inflation depends on past inflation. Also assume that the unemployment rate has been equal to the natural rate of unemployment for some time. Given this information, we know that: A) the rate of inflation should be zero. B) the rate of inflation should neither increase nor decrease. C) the rate of inflation should steadily increase. D) the rate of inflation should steadily decrease. E) the natural rate of unemployment should steadily decrease. Register to View Answer Ch.9 1) For this question, assume that the natural rate of unemployment is 6%. Suppose the Australian inflation rate has been 10% for many years, and the policy makers want next year's inflation rate to be 5%. According to the Phillips curve for Australia, the unemployment rate next year will have to be: A) 0%. B) 7%. C) 13%. D) 20%. E) 22%. Register to View Answer2) In Australia, suppose output grows 1% slower than normal. In this case, the unemployment rate will increase by how many percentage points? A) 0.5 B) 1.3 C) 3.5 D) 5.2 E) 6.9 Register to View Answer 3) Based on a dynamic AD relation when the central bank controls nominal money, output growth will equal zero when which of the following conditions is satisfied? A) 0% nominal money growth; 4% inflation B) 4% nominal money growth; 0% inflation C) -4% nominal money growth; 3% inflation D) 4% nominal money growth; 4% inflation E) none of the above Register to View Answer4) Which of the following would allow the policymakers to maintain the unemployment rate 1% below the natural rate? A) nominal money growth of 1% B) nominal money growth that is 1% greater than the normal growth rate of output C) nominal money growth that is 1% greater than the inflation rate D) nominal money growth that is 1% greater than the sum of the inflation rate and the normal output growth rate E) none of the above Register to View Answer5) Which of the following will reduce the inflation rate in the medium run? A) a permanent reduction in the price of oil B) a large budget surplus C) a permanent reduction in inflation target D) all of the above E) none of the above Register to View Answer Ch.10 1) Suppose the stock of capital (K) increases by 7%. Holding all other factors constant, we know that: A) output will increase by 7%. B) output per capita will increase by 7%. C) output will increase by less than 7%. D) the capital labour ratio will decrease. Register to View Answer2) Suppose the stock of capital increases by 3% and employment increases by 2%. Given this information, we know that: A) output per capita will increase by 5%. B) output per capita will increase by more than 3%. C) output per capita will increase by less than 3% and more than 2%. D) output per capita will increase by less than 2%. Register to View Answer3) Suppose there is a permanent increase in a country's saving rate. This increase in the saving rate will cause: A) a permanently faster growth rate of output. B) a permanently higher level of output per capita. C) a permanently higher level of capital per worker. D) both A and B E) both B and C Register to View Answer4) Suppose there are two countries that are identical with the following exception. The saving rate in country A is less than the saving rate in country B. Given this information, we know that in the long run: A) the growth rate of output per capita will be greater in B than in A. B) the growth rate of output per capita will be greater in A than in B. C) output per capita will be greater in B than in A D) output per capita will be greater in A than in B E) none of the above Register to View Answer5) Suppose there are two countries that are identical with the following exception. The saving rate in country A is less than the saving rate in country B. Given this information, we know that in the long run: A) the capital-labour ratio (K/N) will be greater in B than in A. B) the capital-labour ratio (K/N) will be greater in A than in B. C) the capital-labour ratio (K/N) will be the same in the two countries. D) More information is needed to answer this question. Register to View Answer6) Suppose the stock of capital (K) increases by 7%. Holding all other factors constant, we know that: A) output will increase by 7%. B) output per capita will increase by 7%. C) output will increase by less than 7%. D) the capital labour ratio will decrease. Register to View Answer7) Suppose there is permanent a reduction in a country's saving rate. This reduction in the saving rate will cause: A) a permanently slower growth rate of output. B) no permanent effect on the level of output per capita. C) a permanently lower level of capital per worker. D) both A and B E) both B and C Register to View Answer Ch.11 1) The capital-labour ratio will increase when which of the following conditions is satisfied? A) Investment per worker equals saving per worker. B) Investment per worker exceeds saving per worker. C) Investment per worker exceeds depreciation per worker. D) Saving per worker equals depreciation per worker. E) Output per worker exceeds capital per worker. Register to View Answer2) In the absence of technological progress, which of the following remains constant in the steady state? A) capital per worker B) output per worker C) investment per worker D) all of the above E) none of the above Register to View Answer3) Suppose a country experiences a large reduction in its capital stock. As the economy adjusts to this situation, we would expect: A) a relatively low growth rate for some time. B) a relative high growth rate for some time. C) zero growth for some time, followed by a gradually increasing growth rate. D) positive growth, followed by negative growth, and then zero growth. E) no growth at all, until its capital stock has been replaced by other countries. Register to View Answer4) Suppose the economy is operating at the steady state. Given this information, we know that steady state saving: A) equals consumption. B) is less than total consumption. C) is just sufficient to replace depreciated capital. D) exceeds depreciation each year by a constant amount. E) none of the above Register to View Answer5) A permanent reduction in the saving rate will: A) always increase consumption in the long run. B) always decrease consumption in the long run. C) have no effect on consumption in the long run. D) increase consumption in the long run only if the decrease in saving exceeds the decrease in depreciation. E) decrease consumption in the long run only if the decrease in saving exceeds the decrease in depreciation. Register to View Answer6) Suppose there is an increase in the rate of saving. This increase in the saving rate must cause a reduction in consumption per capita in the long run when: A) capital per worker already exceeds the golden-rule level. B) the saving is used for education rather than physical capital. C) the rate of saving exceeds the rate of depreciation. D) there is no technological progress. E) technological progress depends on human capital. Register to View Answer7) When capital per worker is below the golden-rule level, a reduction in saving rate will: A) increase consumption in both the short run and the long run. B) decrease consumption in both the short run and the long run. C) decrease consumption in the short run, and increase it in the long run. D) increase consumption in the short run, and decrease it in the long run. E) leave consumption unchanged in both the short run and the long run. Register to View Answer Ch.12 For the following question(s) assume that: (1) the rate of depreciation is 10% per year, (2) the population growth rate is 3% per year, and (3) the growth rate of technology is 1% per year. 1) The annual growth rate of "effective labour" in this economy is: A) B) C) D) E) 1%. 3%. 4%. 10%. 14%. Register to View Answer2) The level of investment needed to maintain a constant capital stock (K) in this economy is: A) 0.01K. B) 0.03K. C) 0.04K. D) 0.10K. E) 0.14K. Register to View Answer3) The level of investment needed to maintain constant capital per effective worker (K/NA) in this economy is: A) 0.01K. B) 0.03K. C) 0.04K. D) 0.10K. E) 0.14K. Register to View Answer4) The steady-state growth rate of output in this economy is: A) B) C) D) E) 1%. 3%. 4%. 10%. 14%. Register to View Answer5) The steady-state growth rate of output per worker in this economy is: A) B) C) D) E) 1%. 3%. 4%. 10%. 14%. Register to View Answer6) Suppose the economy has achieved balanced growth. Given this information, we know that: A) S/NA = (d + gA + gN)K/NA. B) S/NA = (gA + gN) K/NA. C) I/NA = (d)K/NA. D) I = dK. E) none of the above Register to View Answer7) An increase in the saving rate will cause: A) no change in K/NA. B) a permanent increase in the rate of growth of output per worker. C) a permanent increase in the rate of growth of output. D) no change in Y/NA. E) none of the above Register to View Answer Ch.18 1) Assume that the interest rate in a foreign country is 20% and that the country's currency is expected to appreciate by 10% during the year. For each dollar that an Australian resident invests in foreign bonds, he/she can expect to get back a total of: A) $.80. B) $.90. C) $1.00. D) $1.10. E) $1.20. Register to View Answer2) Suppose Australia's one-year interest rate is 5% per year, while a foreign country has a one-year interest rate of 25% per year. Ignoring risk and transaction costs, an Australian investor should invest in foreign bonds as long as the expected yearly rate of appreciation of the foreign currency is: A) less than 25%. B) greater than 25%. C) greater than 20%. D) less than 20%. E) less than 1%. Register to View Answer3) Which of the following events will cause the smallest change in the real exchange rate (e)? A) a 6% nominal depreciation and level (P*) B) a 6% increase in the domestic P* C) a 6% nominal depreciation and D) a 3% nominal appreciation E) a 2% nominal appreciation and Register to View Answer4) Which of the following events will cause the largest real depreciation for the domestic economy? A) a B) a P* C) a D) a 6% decrease in E and a 6% increase in the foreign price level (P*) 6% increase in the domestic price level (P) and a 6% reduction in 6% increase in E and a 6% reduction in P* 3% reduction in E a 6% increase in the foreign price price level (P) and a 6% reduction in a 6% reduction in P* a 2% increase in P E) a 2% reduction in E and a 2% increase in P Register to View Answer 5) Suppose you have one Australian purchase U.K. (one-year) bonds in expressions represents the amount receive in one year (i.e., period period t? A) i B) 1 + i* C) (1 + i*)Eet+1/Et D) (1 + i*)Et/Eet+1 E) none of the above Register to View Answer dollar with which you wish to period t. Which of the following of Australian dollars you will t+1) from purchasing U.K. bonds in 6) Assume the interest parity condition holds and that individuals expect the Australian dollar to depreciate by 3% against the US dollar during the coming year. Given this information, we know that: A) the interest rate differential between the two countries exceeds 3%. B) i < i*. C) i = i*. D) individuals will only hold foreign bonds. E) none of the above Register to View Answer7) Suppose i = 4%, i* = 2%, and that the domestic currency is expected to depreciate by 3% during the coming year. Given this information, we know that: A) individuals will only hold domestic bonds. B) individuals will only hold foreign bonds. C) individuals will be indifferent about holding domestic or foreign bonds. D) the interest parity condition holds. Register to View Answer Ch.19 1) Which of the following conditions would most likely cause the Marshall-Lerner condition not to hold? A) Imports and exports are very price-sensitive. B) Imports and exports are not very price-sensitive. C) The marginal propensity to consume is very large. D) The marginal propensity to consume is very small. E) The budget deficit is very large. Register to View Answer2) In an open economy, a reduction in domestic demand has: A) a smaller effect on output than in a closed economy and a positive effect on the trade balance. B) a smaller effect on output than in a closed economy and a negative effect on the trade balance. C) a larger effect on output than in a closed economy and a positive effect on the trade balance. D) a larger effect on output than in a closed economy and a negative effect on the trade balance. Register to View Answer3) In a large country, the effect of a given change in government spending: A) on output is large and the effect on the trade balance is small. B) on output is large and the effect on the trade balance is large. C) on output is small and the effect on the trade balance is small. D) on output is small and the effect on the trade balance is large. Register to View Answer4) Assume the Marshall-Lerner condition is satisfied. Which of the following will cause a reduction in net exports? A) a decrease in government spending B) a decrease in investment C) an increase in foreign output D) a real appreciation E) all of the above Register to View Answer5) Suppose there is a real depreciation. This real depreciation is more likely to cause an increase in net exports when: A) domestic output is relatively low. B) foreign output is relatively high. C) the Marshall-Lerner condition does not hold. D) imports are not at all sensitive to price changes. E) exports are very sensitive to price changes. Register to View Answer6) Suppose net exports are positive (NX > 0) for a country. Given this information, we know that: A) demand for domestic goods will be equal to the domestic demand for goods. B) demand for domestic goods will be greater than the domestic demand for goods. C) demand for domestic goods will be less than the domestic demand for goods. D) a budget surplus exists. Register to View Answer7) For this question, assume that equilibrium output is determined in the ZZ-Y diagram. Further assume that policy makers' goals are: (1) to achieve balanced trade (i.e., NX = 0); and (2) to achieve a target level of output, say YT. , suppose that the initial level of equilibrium output is equal to YT (i.e., Y = YT) and that a trade deficit exists at this initial level of output. Which of the following policy actions would most likely enable the policy makers to achieve their two goals simultaneously? A) a reduction in government spending B) convince the country's trading partners to pursue policies that will cause an increase in foreign income (Y*) C) a depreciation of the domestic currency D) a reduction in taxes E) a simultaneous depreciation of the domestic currency and an increase in tax Register to View Answer Ch.20 1) Assume that the interest parity holds and that the dollar is expected to depreciate against the pound. Given this information, we know that: A) U.S. and U.K. interest rates are equal. B) the U.S. interest rate exceeds the U.K. interest rate. C) the U.K. interest rate exceeds the U.S. interest rate. D) individuals will prefer to hold U.S. bonds because the U.S. interest rate exceeds the U.K. interest rate. E) none of the above Register to View Answer 2) In an open economy under flexible exchange rates, a reduction in the interest rate will cause an increase in which of the following? A) investment B) exports C) net exports D) all of the above E) none of the above Register to View Answer3) Under a fixed exchange rate regime, a tax increase will: A) cause a reduction in Y. B) require a reduction in the money supply. C) cause no change in the domestic interest rate. D) all of the above Register to View Answer4) Suppose a country implements simultaneously a fiscal expansion and monetary contraction. In a flexible exchange rate regime, we know with certainty that: A) the exchange rate and output would both increase. B) the exchange rate would increase and output would decrease. C) the exchange rate would increase. D) the exchange rate would decrease and output would increase. Register to View Answer5) Under a fixed exchange rate regime, a reduction in consumer confidence will cause: A) a reduction in i and an increase in E. B) a reduction in investment. C) no change in output. D) no change in net exports. E) an increase in imports. Register to View Answer6) In a flexible exchange rate regime, a reduction in the foreign interest rate (i*) will cause: A) the IP curve to pivot to the right and be flatter. B) the IP curve to shift to the left. C) a movement along the IP curve. D) neither a shift nor movement along the IP curve. Register to View Answer7) In a flexible exchange rate regime, an increase in the expected future exchange rate will cause: A) the IP curve to shift to the left. B) the IP curve to pivot to the right and be flatter. C) a movement along the IP curve. D) neither a shift nor movement along the IP curve. Register to View Answer Ch.21 1) Suppose that policy makers devalue the currency. Which of the following will occur in the medium run as a result of this devaluation? A) an increase in net exports B) an increase in the price level C) an increase in output D) all of the above E) none of the above Register to View Answer2) In a fixed exchange rate regime, which of the following policies could be implemented to reduce a trade deficit and leave aggregate demand constant? A) devalue the currency B) decrease government spending C) increase government spending D) increase government spending and devalue the currency E) decrease government spending and devalue the currency Register to View Answer3) In a fixed exchange rate regime, a reduction in the price level will cause: A) a real depreciation and a rightward shift in the aggregate demand curve. B) a real depreciation and no shift in the aggregate demand curve. C) a real appreciation and a leftward shift in the aggregate demand curve. D) a real appreciation and no shift in the aggregate demand curve. E) no change in the real exchange rate, and no change in aggregate demand. Register to View Answer4) In the short run, a revaluation leads to: A) a reduction in net exports. B) a reduction in the price level. C) a reduction in output. D) all of the above E) none of the above Register to View Answer Question 1. The following diagram shows the IS-LM curves for the economy of Toughtimes in 2003. The point A, denotes the equilibrium. Suppose in 2004, there is a sudden fall in expenditure and the economy enters a period of recession. i LM0 A i0 A' i1 IS1 IS0 Y1 Y0 Y (a) Using dotted lines (or a different colour), show on the diagram above the SHORTRUN consequences of the recession. Mark the new equilibrium as A' and the corresponding output and interest rates as Y1 and i1 respectively. Answer: The fall in expenditure will shift the IS curve towards left. The movement in the IS curve and the new equilibrium is shown in the figure above. (b) What will be the effect of this change on the stock prices in 2004? Give a brief explanation for your answer. Answer: As we can see from the answer to part (a), the decrease in expenditure will lower output and interest rates. Lower output implies future profits of firms will be lower hence this will tend to lower stock prices. However, lower interest rates will mean that any future dividends will be discounted at a lower rate. This will tend to increase stock prices. The change in stock prices will depend on which one of these effects dominates. In general based on the information we have so far the effect on stock prices is ambiguous. (c) In 2004, suppose the Reserve Bank cuts interest rates to boost the economy. Show the effect of this policy on the economy's equilibrium. Mark the new equilibrium as A'' and the corresponding output and interest rates as Y2 and i2 respectively. (Show the answer to Part (a) as well.) Answer: In 2004 the Reserve Bank cuts interest rates. It will do so through open market operations. The Reserve Bank will have to increase money supply by buying government bonds. The effect of the Reserve Bank policy is shown in the figure below. i LM0 LM1 A i0 A' i1 A'' i2 IS1 IS0 Y1 Y2 Y0 Y 2 (d) In 2004, if the Reserve bank's response was anticipated by the financial market, what will be the effect of Reserve bank's policy on the stock prices? Give a brief explanation for your answer. Answer: As we can see from the answer to part (c), Reserve Bank's policy lowers interest rate and increases output. In 2004, if the Reserve bank's policy response was anticipated by the market then the market would have incorporated these effects in their evaluation of future expected dividends and future expected interest rates. Hence the Reserve Bank's policy will have no effect on stock prices. (e) In 2004, if the Reserve bank's response was unanticipated by the financial market, what will be the effect of Reserve bank's policy on the stock prices? Give a brief explanation for your answer. Answer: As we can see from the answer to part (c), Reserve Bank's policy lowers interest rate and increases output. In 2004, if the market had not anticipated the policy response of the Reserve Bank, it will update this new information. Lower interest rates will mean future dividends will be discounted at a lower rate which will tend to increase stock prices. Also higher output implies higher future profits and hence higher future dividends. This will tend to increase stock prices as well. The overall effect will be an increase in stock prices. For the following questions only a brief outline of the answers are provided. Refer to the textbook for details. Question 2. Graphically illustrate and explain the effects of a reduction in the saving rate on the Solow-Swan growth model. In your answer, you must clearly label all curves and the initial and final equilibria. In your answer, explain what happens to the rate of growth of output per worker and the rate of growth of output as the economy adjusts to this event. Answer: The graph is easy. The saving rate falls causing the saving/investment function to shift down. K/NA and Y/NA will fall to some permanently lower level. The growth rates of Y and Y/N will temporarily decrease and then return to their original levels. Refer to page 266 of your textbook Question 3. Using the IS-LM model, graphically illustrate and explain what effect a reduction in money growth will have on output, the nominal interest rate, and the real interest rate in the short run. Register to View Answerreduction in money growth will cause the LM curve to shift up. This will raise the nominal rate. Assuming expected inflation does not change, the real rate will rise by the same amount. Investment will fall causing a drop in demand and output. Refer to page 318 of your textbook 3 Question 4. Using the ZZ/Y and NX graphs, illustrate graphically and explain what effect a reduction in foreign output (Y*) will have on output, exports, imports, and net exports. Clearly label all curves and clearly label the initial and final equilibria. Register to View Answerreduction in foreign income, Y*, will cause a reduction in exports (the NX curve shifts down) and a reduction in demand. As demand falls, Y will fall causing a drop in C and S. As Y falls, imports will fall as well. As shown in the text, the drop in imports will be less than the drop in exports. So, NX will be lower. Refer to page 421 of your textbook Question 5. Suppose output is below the natural level of output. In a fixed exchange rate regime, explain the two ways the economy can return to the natural level of output. Answer: Devaluation. Policy makers could devalue the currency. This would cause an increase in NX, and increase in demand, and an increase in Y. Graphically, the AD curve would shift to the right. Economy self-corrects. With Y below the natural level, the expected price level (or expected inflation) will fall causing W to fall. As W falls, P will fall. As P falls, a real depreciation occurs and NX rise. We would move along the AD curve. Refer to page 469 of your textbook You can attempt more short answered type questions on the Blanchard and Sheen textbook website: http://wps.pearsoned.com.au/blanchardsheen 4 ... View Full Document

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