Multiple Choice questions 1. B – increase in savings 2. D – increase taxes by $28 Bn 3. B – increase equilibrium GDP 4. A – deficits in recession and surplus in inflation 5. B - $8 Bn downshift in consumption 6. C – equal to 1 7. D 8. B – destabilize economy 9…
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D – fractional reserve 20. A – 450 21. D – 1/R 22. C (E – 1/m) 23. D – increase GDP with low interest (inc money supply) 24. A – sell sec, reduce rates and inc reserve req 25. B– money supply 100 26. D – increase money supply to 100 27. C – 4 28. D 29. B – prime intt rate 30. D – decrease exports and appreciate $ 31. B - monetarism 32. C –Keynesian economics 33. A – rational expectation 34. C – Philips curve 35. C – Speed of adjustment 36. C –Laffer curve 37. B – below ob 38. D – done all 39. A – 3.6 trillion 40. B – Canada 41. D – all of the above 42. A – excise on imports 43. B – less resources and more needs 44. D – rent, wages, intt, profits 45. A – increase one at another’s expense 46. A – direct, inverse 47. C – price (price changes the demand curve not movement on same demand curve) 48. C – increase in demand 49. D – both statements are ok unless it is some sort of trick question! 50. D – high marginal cost of production 51. B – 1 and 200 52. B – 1.60 53. D – 0.50 54. D – corporate profits 55. B – functional 56. A – personal 57. D – top 1/5th get 8 times the lowest 1/5th 58. A – no claim on proprietor personal assets 59. C – GDP 60. B – PI 61. A – all final goods and services in a year 62. C – 25% 63. C – supply shock 64. B – 180 Bn 65. C – 40 at all levels 66. D - $2 for every +$3 in GDP 67. B – 3 Short Answers Question 1 The macroeconomic equation of exchange is the relationship between Money supply that is the total nominal amount of money in circulation (M), Velocity of money meaning the average frequency with which money is spent (V), Price level (P) and index of real expenditures (Q). It is expressed as M x V = P x Q From the equation of exchange, we see that money together with velocity is the source of funding for economic activities. Furthermore, it shows that for a given stock of money, an increase in velocity helps finance a greater value of transactions than money could have done by itself. Thus, the velocity of money describes the amount of economic activity with a given money supply. If all other things remain constant, changes in velocity of money can greatly affect the prices. A very high V at same M and Q would result in an increase in P (price level), that is inflation, and vice versa. If the velocity of money is stable, economists are able to predict the GDP levels and take action accordingly. Money supply can be effectively used to implement the economic policies with the desired result. If, however, V is unstable, it leads to fluctuations in price levels, and the economic policy changes in M can bring negative result. For example, if V decreases suddenly, inflation will also drop. In order to control this, the government might decide to increase the money supply. Now, if the V also increases after the increase in money supply, this would lead to sudden high inflation with combined effect of increased M and V. So, the stability of V is very important for governments to be able to decide and implement effective economic policies. Question 2 The structure of Federal reserve system is shown below in figure 1. Figure 1 Structure of Federal reserve system The components of the federal reserve system and their functions are described below: 1. Board of governors: they are appointed by the US president and confirmed by the US senate. The primary responsibility of the Board members is the formulation of monetary policy. The Board sets reserve requirements and shares
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