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# Practice Quiz 5 Answers - ECN202 Practice Questions 1930s...

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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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