9 as the interest sensitivity of investment demand

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9. As the interest sensitivity of investment demand decreases, the size of the crowding-out effect decreases. 10. If the Fed wants to reduce the inflation rate, it should sell bonds in the open market.
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NAME: RI’s NAME: 11. If in the same period output doubles and the price level remains the same, nominal GDP doubles. 12. Stock market transactions are a part of I in the GDP. 13. If more students leave school and enter the work force, labor force participation rate would increase. 14. Deficit targeting is a stabilization policy. 15. Fed is able to weaken the dollar by increasing taxes.
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NAME: RI’s NAME: Part III: Short Answer 1. (7 points) What action could the Fed take to reduce the crowding-out effect of an expansionary fiscal policy? 2. (8 points) Assume that interest rate sensitivity of investment is zero (i.e. Investment does not respond to changes in the interest rate). a) Is fiscal policy effective? b) Is monetary policy effective?
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NAME: RI’s NAME: Part IV: Problems 1. (15 points) Assume the economy produces only two goods, X and Y. In this economy, Year 1 is the base year. Production Prices Year 1 Year 2 Year 3 Year 1 Year 2 Year 3 Good X 50 100 100 $1.00 $1.10 $1.20 Good Y 75 100 120 $0.60 $0.75 $1.00 a. (2 points) What is the nominal GDP in Year 1? b. (2 points) What is the growth rate between years 1 and 2?
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NAME: RI’s NAME: c. (5 points) What is the GDP deflator in Year 3? d. (6 points) What is the inflation rate between Year 2 and Year 3?
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NAME: RI’s NAME: 2. (15 points) Assume that an economy is characterized by the following set of equations: C = 100 + 0 . 75 Y D T = 100 I = 150 G = 100 a. Fill the values for C, I, G, T, AE and changes in inventories. Y T C I G AE 4 Inv. 1100 1200 1300 1400 1500 1600 b. What is the equilibrium level of output?
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NAME: RI’s NAME: c. Assume Government expenditures are increased by $100. (i.e. the new G = 200). What is the new equilibrium level of output? d. Replicate your answer to part c) by using the government spending multiplier.
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NAME: RI’s NAME: 3. (10 points) Graphically illustrate and explain the effects of an increase in taxes on the equilibrium interest rate, investment, and equilibrium output. Clearly label all curves and the initial and final equilibria.
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