True False Uncertain Econ

Income and wealth are both examples of stock variables.

False, income is a flow, while wealth is a stock variable.

The price of bonds increases when the interest rate rises.

False, inverse relationship

The increase in domestic output following a fiscal expansion abroad is higher the higher the foreign propensity to import, and the higher the domestic propensity to import.

False, it is higher only for the foreign propensity to import.

A farmer sells wheat to a baker for £2. The baker uses the wheat to make bread, which is sold for £3. The total contribution of these transactions to GDP is £5.

False, only final goods count towards GDP

The central bank can increase the supply of money by selling bonds in the bond market

False, the Central Bank can increase the supply of money by buying bonds

The central bank can determine the money supply or interest rates but not both at the same time.

True. Cannot control both the price and quantity of money at the same time in a free market.

The demand for money depends on the real income

Uncertain, the nominal demand for money depends on the nominal income and the real demand for money depends on real income.

Monetary contraction and fiscal expansion increase equilibrium output and the interest rate

Uncertain, the total effect on output depends on the shift of the IS and LM.

If government spending and taxes increase by the same amount, the IS curve does not shift.

?

Leaving aside statistical measurement error, the sum of the current account and the capital of balance of payments is either positive, negative or zero.

?

Suppose that over the past decade U.S. inflation is less than that in Japan. Further assume that during this same period, the dollar depreciates relative to the Japanese yen. Given this information the dollar real exchange rate must have depreciated.

?

The AS curve is upward slopping because producers sell more goods when the price is high

False

A decrease in the propensity to consume will increase the value of the expenditure multiplier.

False

A farmer sells wheat to a baker for £4. The baker uses the wheat to make bread, which is sold for £6. The total contribution of these transactions to GDP is £10.

False

Discouraged workers are those who shirk due to their low wages.

False

The LM curve is upward sloping because a higher level of the money supply is needed to increase output.

False, the LM curve is upward sloping because in equilibrium, an increase in the level of income increases the demand for money and the interest rate to ensure that is constant.

The demand for money does not depend on the interest rate because only bonds earn interest.

False, the demand for money is given by the consumer's choice between holding money or bonds, so it depends by the interest rate.

The demand for money depends on the real interest rate.

False, the nominal demand for money depends on the nominal interest rate

If government spending and taxes increase by the same amount, the IS curve does not shift

False: An increase in taxes would shift the IS curve to the left, while an increase in government spending would shift the curve to the right, but the effect on the output will not be the same. Y will increase of 1 unit if both G & T increase by 1 unit each.

A real appreciation of the exchange rate means that domestic goods become more expensive relative to foreign goods

True

If all the exogenous variables in the IS relation are constant, then a higher level of output can only be achieved by lowering the interest rate.

True

The central bank can determine the money supply or interest rates but not both at the same time.

True

In Blanchard's IS-LM model given a fixed supply of money an increase in government spending leads to a decrease in investment.

True, an increase in government spending leads to an increase in income, resulting in a rise in demand for money and a rise in the interest rate. The rise in the interest rate decreases investment.

Expansive fiscal policies that reduce the budget surplus, make domestic bonds relatively less attractive than foreign bonds, and hence, depreciate the currency.

True, expansive policies decrease the interest rate and because of the uncovered interest parity condition, depreciate the currency.

An increase in the propensity to consume will increase the value of the expenditure multiplier.

True, the multiplier in a closed economy is 1/(1-c) so if the propensity to consume increases it increases the value of the multiplier.

If all the exogenous variables in the IS relation are constant, then a higher level of output can be achieved only by lowering the interest rate.

True, this occurs through changes in endogenous investment relation