PS5_Ans - C will definitely induce a downward shift in the...

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Assessment 5 1 C 2 A 3 A 4 B 5 B 6 A 7 C 8 C 9 B 10 D Suggested explanations to selected questions: Q2 Decrease in Social Security payment reflects a drop in disposable income. Q3 Bear in mind that financial market investments are not regarded as ‘investments’ in Aggregate Expenditures. Q4 A) increase in real interest rate will definitely encourage savings and discourage (current) consumptions. B) is right, e.g. when you buy an air-conditioner, you may settle your payment through a 12-month installment scheme. Thus, an increase in REAL interest rate will increase the NOMINAL interest rate in your installment contract (assuming inflation rate constant). D) real interest rate reflects the cost of borrowing. Q5 MPC (out of disposable income) = C / disposable income = ($900-$600)/($1500-$1000) = 0.6 Q6 See which of the factors can shift up the AE curve B) as explained in Q4, an increase in (real) interest rate will discourage consumption and investments, thus shifting down the AE curve.
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Unformatted text preview: C) will definitely induce a downward shift in the AE curve as Investments will be discouraged. D) (by assuming that our home country is ‘USA’ in this question), when USD appreciates, our export will be discouraged. Thus Net Export will be worsen and it will induce a downward shift in the AE curve. Q7 The question implies that the equilibrium GDP is fall short of the potential GDP, i.e. the economy is NOT operating at full capacity/ full employment. (reference: slide 35 of lecture powerpoint/ fig. 11.11). Q8 A higher inflation in US then that in other countries implies that goods in US are relatively more expensive. Export of US will be hurt; US citizens would like to consume relatively more imports than local goods. As a result, net exports will be worsen. Q9 A) It may be possible for the multiplier to depend on ‘Marginal Propensity to Imports’, as import also depends on disposable income....
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