Week 09, Day 2 - Quiz 2 Solutions

Week 09, Day 2 - Quiz 2 Solutions - QUIZ #2 SOLUTIONS 1. c...

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QUIZ #2 SOLUTIONS 1. c Household or private savings is equal to the amount of GDP and transfers that households have left over after paying taxes and spending on consumption. If government transfers are lower, households have less income with which to use for savings. If consumer spending is higher, households have less income left over for savings. If taxes are lower, households have more income left over for savings. 2. g If the government decreases its budget deficit, the demand for loanable funds decreases (shifts to the left). As a result, the equilibrium interest rate decreases. The lower interest rate means more investment projects are profitable and business investment will increase. The lower interest rate means that it is less attractive to save and private savings decreases. 3. b If interest rates increase, the demand for stocks will decrease (shift to the left) because bonds become a more attractive form of financial investment. Also, the supply of stock will increase (shift to the right) because current stockholders will want to sell those stocks and buy bonds instead. Both the decrease in demand and the increase in supply cause the price of stocks to fall. However, it is not clear how the quantity of stocks exchanged will change since the demand and supply move in opposite directions. 4. d The aggregate demand (AD) curve shows the relationship between the aggregate price level and the quantity demanded of aggregate output. A change in the aggregate price level causes a movement along the AD curve. A change in a third variable (such as stock and house prices) causes a shift of the AD curve. 5. d The net export effect is one of three reasons for why the AD curve is negatively sloped. It explains why an increase in the aggregate price level causes a decrease in the quantity of aggregate output demanded. Specifically, if the aggregate price level increases in a country, its products become more expensive compared to foreign products. Therefore, its exports (X) decrease as foreigners buy less of its products and its imports (IM) increase as it buys more foreign products. Therefore, the trade balance (X – IM) decreases. 6. c Government purchases of infrastructure increases an economy's physical capital and results in higher productivity. This, in turn, increases the economy's potential output and shifts the long-run aggregate supply (LRAS) curve shifts to the right. The increase in government purchases of infrastructure also causes the AD curve to shift to the right. An increase in foreign incomes, an increase in wealth, and an in government transfers cause only the AD curve to shift to the right. A decrease in commodity prices shifts the SRAS curve to the right. 7.
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This note was uploaded on 10/13/2009 for the course ECON 1221 taught by Professor Whitaker during the Winter '09 term at Langara.

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Week 09, Day 2 - Quiz 2 Solutions - QUIZ #2 SOLUTIONS 1. c...

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