5. Given the nation has a capital account surplus and a federal budget deficit,

Question

5. Given the nation has a capital account surplus and a federal budget deficit, which of the following is an effect of an increase in interest rates?

a. Lower structural unemployment

b. An increase in the trade deficit

c. Aggregate demand and aggregate supply will intersect in a steeper section of the aggregate supply curve

d. An outward shift in the production possibilities frontier

e. An inward shift of the consumption possibilities frontier

6. Which of the following pairs of actions suggest that fiscal policy and monetary policy are working in the same direction?

a. Taxes are lowered, and the discount rate is raised.

b. Government spending increases, and the Fed sells bonds on the open market.

c. Government spending and taxes increase by the same amount, and the required reserve ratio is increased.

d. Taxes are increased, and the Fed buys bonds on the open market.

e. Government spending and taxes decrease by the same amount, and the Fed sells bonds on the open market.

7. Which of the following is true if cyclical unemployment is high?

a. Velocity is low.

b. Monetary policy has little effect on the price level.

c. The marginal propensity to consume will be particularly high.

d. The country ’s currency has a low value in foreign exchange markets.

e. The Fed could bring the economy back toward full employment by selling bonds on the open market.

8. For the last several years, the money supply in the fictitious nation of Mauritania has been rising by 10% annually, and inflation has been running at 8%. The central bank is going to cut growth of the money supply back to 3% annually. Which of the following statements regarding the effects of this action is true, ceteris paribus?

a. According to the quantity theory of money, inflation will be 1% in the next year.

b. According to the quantity theory of money, economic growth will slow down.

c. If the assumption of rational expectations holds, output will fall by 10% in the next year.

d. If the assumption of adaptive expectations holds, there will be no effect on output in the following year.

e. None of the above

Explanation / Answer

5.

Correct option: (b) an increase in trade deficit

Reason: As interest rates increase, imports will increase and exports will fall and thus there will be trade deficit

6.

Correct option: (e) Government spending and taxes decrease by the same amount, and the Fed sells bonds on the open market

Reason: These are both contractionary and fiscal policies together.

7.

Correct option: (d) The country’s currency has a low value in foreign exchange markets

Reason: Because of high cyclical unemployment, inflation will be low, leading to low value of currency in foreign markets

8.

Correct option: (e) none of the above

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