Question 41

A country’s price level increases from 120 to 130 in Year 1. At the beginning of Year 2 the central bank announces its intention to keep inflation at the same rate as in Year 1. Decision makers in the economy find the policy announcement credible and reflect it in their inflation expectations. The price level increases from 130 to 140 in Year 2, which will most likely cause:

A)    the unemployment rate to decrease.

B)   actual inflation to equal expected inflation.

C)   an unexpected increase in the real value of wages.

D)   a shift in the position of the short-run Phillips curve.

Question 42

The type of economic market that features a large number of competitors offering differentiated products is best characterized as:

A)    perfect competition.

B)   oligopoly.

C)   monopolistic competition.

D)   monopoly.

Question 43

Which of the following statements about the money multiplier for a change in the monetary base is most accurate? The money multiplier:

A)    becomes smaller when the required reserve ratio increases.

B)   is the product of the required reserve ratio and currency as a percentage of deposits.

C)   becomes larger when the currency drain increases.

D)   is determined by the central bank.

Question 44
   

If the demand for physical capital increases, what is the effect on demand for financial capital?

A)    Decrease, because a firm cannot add physical capital without reducing its financial capital.

B)   No effect, because the two demands are not related.

C)   Decrease, because financial capital is a substitute for physical capital.

D)   Increase, because financial capital is needed to purchase the physical capital.

Question 45

When fiscal policy results in companies borrowing at higher interest rates and thus making fewer capital investments than they would have made at lower interest rates, this is most likely caused by:

A)    the government running a surplus, which provides more liquidity to the capital markets.

B)   deteriorating credit quality of firms borrowing money.

C)   the government spending more, which reduces the overall money supply.

D)   the government running a deficit, which increases the demand for loanable funds.

[此贴子已经被作者于2008-11-8 18:01:41编辑过]

Question 41

A country’s price level increases from 120 to 130 in Year 1. At the beginning of Year 2 the central bank announces its intention to keep inflation at the same rate as in Year 1. Decision makers in the economy find the policy announcement credible and reflect it in their inflation expectations. The price level increases from 130 to 140 in Year 2, which will most likely cause:

A)    the unemployment rate to decrease.

B)   actual inflation to equal expected inflation.

C)   an unexpected increase in the real value of wages.

D)   a shift in the position of the short-run Phillips curve.

The correct answer was C) an unexpected increase in the real value of wages.

The inflation rate in Year 1 is (130 - 120)/120 = 8.3% and the inflation rate in Year 2 is (140 - 130)/130 = 7.7%. Since decision makers were expecting an unchanged inflation rate in Year 2, this represents an unexpected decrease in inflation. When inflation decreases unexpectedly, employees gain at the expense of employers because their real wage rate is higher than employers had agreed to pay.

According to the Phillips curve model, if actual inflation is less than expected inflation, the unemployment rate should increase, as shown by a move along the short-run Phillips curve. A change in expected inflation would cause the short-run Phillips curve to shift its position.

This question tested from Session 6, Reading 26, LOS c

Question 42

The type of economic market that features a large number of competitors offering differentiated products is best characterized as:

A)    perfect competition.

B)   oligopoly.

C)   monopolistic competition.

D)   monopoly.

The correct answer was C) monopolistic competition.

Monopolistic competition is used to describe markets where there are a large number of competitors producing differentiated products.

In perfect competition all firms produce identical products. In an oligopoly there are a small number of firms and in a monopoly there is only one seller.

This question tested from Session 4, Reading 16, LOS f

Question 43

Which of the following statements about the money multiplier for a change in the monetary base is most accurate? The money multiplier:

A)    becomes smaller when the required reserve ratio increases.

B)   is the product of the required reserve ratio and currency as a percentage of deposits.

C)   becomes larger when the currency drain increases.

D)   is determined by the central bank.

The correct answer was A) becomes smaller when the required reserve ratio increases.

The money multiplier is calculated as (1 + c) / (r + c), where r is the required reserve ratio and c is currency as a percentage of deposits. Increasing the required reserve ratio decreases the money multiplier. A larger currency drain (currency increases as a percentage of deposits) results in a smaller money multiplier. The central bank does not determine the money multiplier; the central bank can influence it by changing the required reserve ratio, but the currency drain depends on individuals’ preferences as to how much currency to hold.

This question tested from Session 6, Reading 24, LOS f

Question 44

If the demand for physical capital increases, what is the effect on demand for financial capital?

A)    Decrease, because a firm cannot add physical capital without reducing its financial capital.

B)   No effect, because the two demands are not related.

C)   Decrease, because financial capital is a substitute for physical capital.

D)   Increase, because financial capital is needed to purchase the physical capital.

The correct answer was D) Increase, because financial capital is needed to purchase the physical capital.

The greater the demand for physical capital is, the greater is the demand for the financial capital necessary to purchase the physical capital.

This question tested from Session 5, Reading 21, LOS d

Question 45

When fiscal policy results in companies borrowing at higher interest rates and thus making fewer capital investments than they would have made at lower interest rates, this is most likely caused by:

A)    the government running a surplus, which provides more liquidity to the capital markets.

B)   deteriorating credit quality of firms borrowing money.

C)   the government spending more, which reduces the overall money supply.

D)   the government running a deficit, which increases the demand for loanable funds.

The correct answer was D)

The crowding out effect is when the government runs a deficit and must borrow more, which increases the demand for loanable funds. This causes interest rates to increase. At the higher rates, firms invest less in physical capital. The effect of expansionary fiscal policy is reduced by the crowding out effect.

This question tested from Session 6, Reading 27, LOS b

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