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quiz1answers - 14.02 Fall 2001 QUIZ 1 Answers QUESTION 1 1...

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14.02. — Fall 2001 — QUIZ 1 Answers QUESTION 1: 1. FALSE. The car should not be counted (it was already counted when Bond fi rst bought the car). The only services produced were the tuning and repairing. Therefore GDP increases by £1000. 2. FALSE. People keep less cash. This implies that the money multipier increases. Therefore the Central Bank needs to exchange fewer bonds in order to have the same e ff ect in the Money supply. 3. TRUE. Both increase money supply. One directly increasing High- powered money and the other increasing the multiplier. 4. TRUE. Money supply increases therefore interest rates decrease. As interest rates decrease, investement increases, counteracting the e ff ects of the decrease in investors’ con fi dence. QUESTION 2: 1. The demand for consumption depends positively on disposable income, that is, income after taxes, since this is the pool of resources from which con- sumers decide how much to consume or save. Only a fraction of additional spending is actually consumed so c 1 < 1 . There is also an autonomous compo- nent of demand for consumption that could re fl ect necessities that consumers will always want to satisfy or the level of consumers’ con fi dence (this is, how much they believe in the availability of future resources). The demand for investment also has an autononomous component that will depend on investors’ con fi dence. Then, as production increases, there are more investement opportunities, while high interest rates make it more costly to bor- row in order to undergo an investment proyect (or, if you prefer this explanation, it is preferrable to save in bonds than to carry out the project).
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