Econ Final

10. Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion. Suppose that the MPC is .80 and that there are no crowding out or accelerator effects. What is the combined effects of these changes? Why is the combined change not equal to zero?

The increase of $150 billion in government spending changes the aggregate demand by 5 times to $750 billion. The tax increase decreases overall income by $150 billion which leads to an initial decrease in consumption by $120 billion due to the MPC of .80. This leads to a net change of $150 billion due to the multiplier effect of $600 billion ($120 x 6 = $600). The changes don't cancel each other out, because a tax increase decreases consumption by less than the tax increase

19. Some economists argue suddenly reducing money supply growth is a costly way to reduce inflation and that it may not work. For example, if a government cuts money growth but makes no real fiscal reforms, people will expect the government will eventually need to expand the money supply to pay for its expenditures. This, the promise to fight inflation will not be credible. Explain why credibility is important to a reduction in the inflation rate.

When the government proposes this idea, the people start to believe that they will honor this promise to reduce inflation and inflation expectations fall along with it. This change shifts the short-run Phillips curve left so that the actually unemployment and inflation rates will be lower. If the government reduces money supply growth and at the same time people reduce their inflation expectations, unemployment will rise less than if people retained their previous inflation expectations.

20. Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

When the price level increases, the purchasing power of money that is held by citizens declines. This causes money holders to feel poorer or less wealthy which causes them to lend less money to different outlets. The lowered lending makes the interest rate go up and this discourages spending. The aggregate quantity of goods and services decreases with this trend. As the interest rate increases, the supply of money in the market for currency exchange drops and people buy less foreign assets. This causes the dollar to appreciate which decreases net exports.

12. Suppose the Central Bank of Namdia Purchases 25 million días of Namdian Treasury Bonds from banks. Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the same. By how much would the money supply of Namdia change?

a. 200 million dias

5. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2012, and those two points correspond to points B and C, respectively. on the left-hand graph. Also suppose we know that the price index equaled 120 in 2011. The the number 115 and 130 on the vertical axis on the left-hand graph would have to be replaced by

b. 138 and 156, respectively

7. Suppose that in some tax year you earned a nominal interest rate of 6 percent. During the time you held these funds inflation was 1 percent. You compute that you made a real after-tax interest rate of 3 percent. What was your tax rate?

b. 33.3 percent

9. The country of Solidia is politically very stable and has a long tradition of respecting property rights. If several other countries suddenly became politically unstable, we would expect Solidia's

b. Real exchanged rate to rise.

6. Suppose the price index was 100 in 2014, 109 in 2015, and the inflation rate was lower between 2015 and 2016 than it was between 2014 and 2015. The means that

b. The price index in 2016 was lower than 118.9

8. Refer to the table above. Which of the following is not correct?

b. This economy experienced growth from 1975 to 1976.

3. If an increase in inflation permanently reduced unemployment, then

b. money would not be neutral and the long-run Phillips curve would slope downward

2. If over a short time there is an increase in the number of people retired and a decrease in the number of people working, then productivity

b. rises but real GDP per person falls

1. Suppose Harry, Darby, and Jake are the only demanders of sandwiches. Also Suppose the following: x=2, the current price of a sandwich is $3.00, The market quality supplied is 4, the slope of the supply curve is 2

b. shortage of 6 sandwiches, and the equilibrium price of a sandwich is $5.00

11. In the economy of Talikastan in 2015, consumption was two-thirds of GDP, government purchases were $1000 more than investment, investment was one-ninth of GDP, and the value of exports exceeded the value of imports by $500. What was Talikistan's GDP in 2015?

c. $13,500

14. Refer to the table above. What were Crete's Government purchases in 2010?

c. $1837

13. Refer to the table above. What was country A's investment in 2010?

d. $1999

17. If an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.49 in 2007. A hamburger cost $5 in 2006 and $6 in 2007. Which of the following statements in correct?

d. When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007

4. Which of the following leads to a lower level of unemployment in the long run?

d. neither an increase in the size of the money supply nor an increase in the money supply growth rate