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Question 1 When the interest rate falls, a. borrowing becomes less expensive, more investment projects look profitable, and investment in buildings...
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Question 1 When the interest rate falls,

a. borrowing becomes less expensive, more investment projects look profitable, and investment in buildings and equipment increase.

b. borrowing becomes more expensive, some investment projects look less profitable, and investment in buildings and equipment decreases.

Question 2

  1. Crowding out occurs when

a.increased spending in the goods market increases the money supply. The resulting lower interest rate reduces investment spending.

b.increased spending in the goods market decreases money demand. The resulting higher interest rate increases investment spending.

c.increased spending in the goods market increases money demand. The resulting higher interest rate reduces investment spending.


Question 3

  1. In the goods market, if a rise in stock market values causes consumers to spend more and save less,

a. aggregate demand will increase, output will increase and the price level will increase.

b. aggregate demand will decrease, output will decrease and the price level will decrease.

c. aggregate supply will increase, output will increase and the price level will decrease.

d. aggregate supply will decrease, output will decrease and the price level will increase.

Question 4

  1. Suppose banks become pessimistic and reduce their lending. The result would be
  2. n increase in the money supply, reducing the interest rate, increasing aggregate demand, and increasing real output.
  3. an increase in the money supply, reducing the interest rate, decreasing aggregate demand, and decreasing real output.
  4. a decrease in the money supply, raising the interest rate, increasing aggregate demand, and increasing real output.
  5. a decrease in the money supply, raising the interest rate, decreasing aggregate demand, and decreasing real output.
Question 5
  1. When aggregate demand rises in the goods market, so that equilibrium output is greater than potential output,
  2. the price level will rise in the goods market, which increases input costs, which decreases aggregate supply, moving equilibrium output back towards potential output.
  3. the price level will fall in the goods market, which reduces input costs, which increases aggregate supply, moving equilibrium output back towards potential output.
  4. the price level will rise in the goods market, which increases input costs, which decreases aggregate supply, moving equilibrium output farther away from potential output.
  5. the price level will fall in the goods market, which reduces input costs, which increases aggregate supply, moving equilibrium output farther away from potential output.

4 points 

Question 6
  1. Your model of bank lending generates the following hypothesis: increases in inflation should cause increases in the nominal interest rate charged by banks. You collect data for many years on inflation and interest rates in an economy, and find a correlation of 0.82 between the two data series. Which of the following is true?

a. The correlation between inflation and nominal interest rates is large and positive. This is evidence rejecting your hypothesis.


b. The correlation between inflation and nominal interest rates is positive but close to zero. This is evidence rejecting your hypothesis.

Question 7


  1. The correlation coefficient between the unemployment rate and the CPI core inflation rate over the 1961-2016 period is 0.21.  This provides evidence that 

a.high unemployment decreases the price level, and low unemployment increases the price level.

b.high unemployment increases the price level, and low unemployment decreases the price level.

c.there is no consistent relationship between the price level and unemployment.


Question 8


  1. Second shift #2 implies that an increase in the real intrest rate (measured by the BAA-AAA interest rate spread) causes a decrease in aggregate demand, which decreases real GDP growth. Which of the following is evidence for this hypothesis?

a.A correlation between the BAA-AAA interest rate spread and real GDP growth of -0.57.

b.A correlation between the BAA-AAA interest rate spread and real GDP growth of -0.07.

c.A correlation between the BAA-AAA interest rate spread and real GDP growth of +0.07.

d. A correlation between the BAA-AAA interest rate spread and real GDP growth of +0.57.



Question 9


  1. The financial panic in New York caused a nationwide recession in 1907-08, because
  2. the money supply decreased, the real interest rate increased, investment spending fell, and aggregate demand decreased.
  3. he money supply decreased, the real interest rate increased, investment spending fell, and aggregate supply decreased.
  4. the money supply increased, the real interest rate decreased, investment spending rose, and aggregate demand increased.
  5. the money supply increased, the real interest rate decreased, investment spending rose, and aggregate supply increased.


Question 10

  1. During and after World War I, the Federal Reserve followed a policy which led to high inflation. Which of the following describes this policy?
  2. To keep interest rates low with falling money demand, the Fed had to decrease the money supply.
  3. To keep interest rates low with rising money demand, the Fed had to increase the money supply.
  4. To keep interest rates high with falling money demand, the Fed had to decrease the money supply.
  5. To keep interest rates high with rising money demand, the Fed had to increase the money supply.  


Question 11

  1. Suppose the inflation rate was 2.1% and the unemployment rate was 4.3%. Inputs are scarce and input costs are expected to increase. A counter-cyclical monetary policy would be to


a. raise the discount rate in order to increase aggregate demand.

b.raise the discount rate in order to decrease aggregate demand.

c.reduce the discount rate in order to increase aggregate demand.

d. reduce the discount rate in order to decrease aggregate demand.

e.there is no clear counter-cyclical policy in this economy.


Question 12
  1. The Federal Reserve suddenly increased the discount rate in January 1920. As a result,

a. banks stopped borrowing from the Fed and stopped lending to businesses and consumers. Consumption and investment spending dropped. Inflation stopped and a sharp recession began.

b. banks stopped borrowing from the Fed and stopped lending to businesses and consumers. Consumption and investment spending increased. This ended a post-war recession.

c. banks started borrowing from the Fed and started lending more to businesses and consumers. Consumption and investment spending dropped. Inflation stopped and a sharp recession began. 


Question 13
  1. For two years after World War I, the U.S. Treasury required the Federal Reserve to hold interest rates low, to reduce the cost of paying interest on war bonds. As a result
  2. the money supply rose at the same rate as output, resulting in price stability.
  3. the money supply suddenly decreased, causing a sharp recession.
  4. the money supply continued to increase, and inflation remained high.

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