ECN202
Practice Questions: 1930s
Capital Market in Classical Market
1. How would you show a reduction in the budget deficit in the graph of the capital market that appears above?
a.
shift the I curve out
c. shift the I curve in
b.
shift the S curve in
d. shift the S curve out
a budget deficit is the government borrowing so this means the deficit shows up in the I curve  a smaller deficit means
the I curve shifts in
2. In the late 1970s there was a rebirth of interest in the quantity theory of money that was a central piece of the
Classical macro model. If you believed in the quantity theory of money and you expected velocity to increase at a rate
of one percent, and you wanted real output to grow at three percent, what should be your target growth rate for the
supply if you want only zero percent inflation?
a.
0 percent
b. 1 percent
c. 2 percent
d. 3 percent
e. 6 percent
use the equation m+v = p+y and substitute in the knowns v=1, y = 3, and p = 0 so m = 2
Which scatter diagram best represents the relationship between
3. the gold supply (x) and the money supply (y) if the economy was on the gold standard?
There is a positive relationship  more money higher prices  graph B is a positive relationship
4. the government budget deficit (x) and interest rates (y) if you believe in the Classical model?
this is the first question in a different form  when the budget deficit increases the I curve shifts out ( greater borrowing)
and this drives up interest rates = a positive relationship  graph B
5. David Ricardo once wrote, "neither a state nor a bank ever has had unrestricted power of issuing paper money,
without abusing that power; in all States, therefore, the issue of paper money ought to be under some check and control;
and none seems so proper as that of subjecting the issuers of paper money to the obligation of paying their notes, either
in gold coin or bullion." If you believed this, you would most likely be a supporter of:
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a.
the multiplier
b. the gold standard
c. the accelerator
d. the Phillips curve
the gold standard since it took control of the money supply away from governments
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 Fall '08
 Mead
 Macroeconomics, Deficit, Inflation, Monetary Policy, Public Finance, Keynesian economics

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