{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

7solfin4 - Solutions May 2004 Final 1 True When prices...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Solutions May 2004 Final 1. True . When prices increase, consumers can substitute away to lower priced goods which would produce a lower CPI. However, since the CPI uses base year quantities, these substitutions would not reflect in the results. Hence, the CPI without substitution is biased upward. 2. False . The money multiplier would result in an increase in the money supply. 3. Uncertain . If we assume that the substitution effect dominates, then, an increase in the interest rate will lead to a decrease in consumption. When this is the case, an expansionary fiscal policy will crowd out not only private investment, but also consumption, and so the increase in output would be less then otherwise. 4. True . If G and M do not change and Pm is the only exogenous variable, than the AD curve will not shift. Changes in Pm will, however, shift the AS curve and with AD constant these shifts will trace out a negative relationship between Y and the price level. 5. True . Though economists disagree about the short run causes of inflation (see monetarist v. Keynesian theories in the book), pretty much everyone agrees that sustained long-run inflation is a purely monetary phenomenon. If the monetary supply were to be held constant, increases in the price level would continuously increase the interest rate (via higher monetary demand). Eventually the interest rate would reach a level where, even if there were additional increases in r, investors would not be willing to lend any more money to the government. At this point additional inflation could result only if the Fed was willing to increase the money supply. 6. True . A high rate of inflation in one country relative to another puts pressure on the exchange rate between the two countries, and there is a general tendency for the currencies of the relatively high-inflation countries to depreciate. 7. True . This one is tricky, but if you look at this from the forward market's perspective you have: F=(1+r*)*e/(1+r) . Since (1+r*)/(1+r) is greater than 1, F>e and if we assume that F represents the expected future exchange rate, then the dollar will appreciate. Intuitively, it has to be the case that investors expect the dollar to appreciate and the pound to depreciate; otherwise they would all sell their US treasury bill and invest in UK bonds. 8. True . The trade feedback effect takes place when as a result of an increase in Country A’s imports, we have an increase in Country B’s exports (thus leading to more output for country B, more imports, and correspondingly more exports and output for Country A). The higher the sensitivity of imports to output, the stronger this feedback effect will be. [IM EX* Y* IM* EX ↑→ Y ] 9. True/ Uncertain . If Y is assumed to be constant or close to potential, then, there is a proportional relationship between changes in the money supply and changes in the price level.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}