36、Which of the following are the most likely effects of an increase in tax on interest income on the investment demand and interest rates, respectively?

Select exactly 1 answer(s) from the following:

A. AnswerA.

B. AnswerB.

C. AnswerC.

D. AnswerD.

37、The best description of the elasticity of supply of renewable and nonrenewable natural resources, respectively, is: 

Select exactly 1 answer(s) from the following:

A. AnswerA.

B. AnswerB.

C. AnswerC.

D. AnswerD.

38、For factors of production that differ in their supply elasticity, perfectly elastic or perfectly inelastic, the factor income is entirely:

Select exactly 1 answer(s) from the following:

A. AnswerA.

B. AnswerB.

C. AnswerC.

D. Answer D

39、Which of the following is the most likely effect of changes in inflation and/or unemployment on the Phillips curve?

Select exactly 1 answer(s) from the following:

A. A change in the expected inflation causes a shift in both short-run and long-run Phillips curves.

B. A change in the natural rate of unemployment causes a shift in both short-run and long-run Phillips curves.

C. A change in the natural rate of unemployment causes a shift in the short-run but not the long-run Phillips curve.

D. If inflation falls below its expected rate, unemployment falls below its natural rate and there would be a movement up along the short-run Phillips curve.

40、According to the feedback rule with productivity shocks, in order to stabilize the price level the most likely action by the Fed and the resulting effect on real GDP, respectively, are:

Select exactly 1 answer(s) from the following:

A. AnswerA.

B. AnswerB.

C. AnswerC.

D. AnswerD.

36 Correct answer is B

“Fiscal Policy,” Michael Parkin
2008 Modular Level I, Vol. 2, pp. 441-443
Study Session 6-27-b
discuss the sources of investment finance and the influence of fiscal policy on capital markets, including the crowding-out effect
The quantity of investment that firms plan to undertake depends only on how productive capital is and what it costs - its real interest rate. Therefore, a tax on interest income has no effect on investment demand. On the other hand, a tax on interest income weakens the incentive to save as savers look at the after-tax real interest rate they receive. The interest rates would rise as a result of the decrease in saving supply.

37 Correct answer is C

“Demand and Supply in Factor Markets,” Michael Parkin
2008 Modular Level I, Vol. 2, pp. 271-274
Study Session 5-21-g
differentiate between renewable and non-renewable natural resources and describe the supply curve for each
The quantity of land and other renewable natural resources is fixed and their supply is perfectly inelastic. On the other hand, the flow supply of a nonrenewable natural resource (e.g., oil) is perfectly elastic.

38 Correct answer is C

“Demand and Supply in Factor Markets,” Michael Parkin
2008 Modular Level I, Vol. 2, pp. 275-277
Study Session 5-21-h
differentiate between economic rent and opportunity costs
When the supply of the factor is perfectly elastic (horizontal supply curve), the factor’s entire income comprises opportunity cost. When the supply of the factor is perfectly inelastic (vertical supply curve), the factor’s entire income comprises economic rent.

39 Correct answer is B

“Inflation,” Michael Parkin
2008 Modular Level I, Vol. 2, pp. 414-418
Study Session 6-26-e
explain the impact of inflation on unemployment, and describe the short-run and long-run Phillips curve, including the effect of changes in the natural rate of unemployment
A change in the natural rate of unemployment shifts both short-run and long-run Phillips curves. Suppose the natural rate of unemployment increases from 6 to 9%, but the inflation remains constant at 10%. As a result, both short-run and long-run Phillips curves move outward adjusting to the new, higher level of natural unemployment rate. The new point of intersection between the two lines would be at 9% unemployment rate and 10% inflation rate (Figure 11, p. 418)

40 Correct answer is B

“Monetary Policy,” Michael Parkin
2008 Modular Level I, Vol. 2, pp. 473-475
Study Session 6-28-c
discuss the fixed-rule and feedback-rule policies to stabilize aggregate supply in response to a productivity shock and a cost-push inflation shock
According to the feedback rule, when the price level rises the Fed decreases the quantity of money in order to reduce aggregate demand. As a result, the price level as well as the real GDP would remain constant.

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