As the stock markets of other countries fall, investors pull their funds out and

Question

As the stock markets of other countries fall, investors pull their funds out and place them in investments in the U.S. This rush causes domestic interest rates to fall. Which diagram best depicts the changes to the U.S. economy?

1 points   

QUESTION 4

This graph describes the loanable funds market, where demand for and supply of loanable funds are initially D and S, respectively. Which of the following events could cause the interest rate to decrease in the manner shown in the graph?

The government's tax revenues rise, and it no longer needs to borrow funds to finance a deficit.

Seeking a risk-free place to store money, foreign citizens place funds in domestic banks.

Instead of investing part of their incomes, households decide to purchase more goods and services.

Banks and other financial institutions start issuing credit cards

People buy large numbers of new, fuel-efficient cars and trucks.

1 points   

QUESTION 5

Suppose consumption expenditures in Japan can be modeled by the equation: C = ¥50 trillion + 0.8 Yd, where Yd is aggregate disposable income, and ¥ is the symbol for a yen. Initially, aggregate personal income is ¥500 trillion, and taxes are ¥100 trillion. If the Japanese government cuts taxes by ¥50 trillion, what will happen to real GDP?

It rises by ¥200 trillion.

It rises by ¥40 trillion.

It falls by ¥40 trillion.

It rises by ¥370 trillion.

It falls by ¥200 trillion.

1 points   

QUESTION 6

Suppose the economy's unemployment rate is 5%. A drop in business investment leads to a recession, causing a 4% rise in the unemployment rate. After several months, the unemployment rate falls back to 5%. What would explain the drop in unemployment?

Menu costs

Permanent income hypothesis

the money multiplier

The natural rate hypothesis

Spending multiplier

1 points   

QUESTION 7

The market for wooden baseball bats starts in equilibrium. Over the course of a year, the price of aluminum baseball bats and the price of wood both rise. Which of the following diagrams correctly illustrates the changes in the market for wooden bats?

Explanation / Answer

C = 50 + 0.8 Yd, where aggregate personal income is ¥500 trillion, and taxes are 100 initially. Initial Yd = 500 - 100 => 400. C = 50 + 0.8x 400 => 370

When taxes decrease to ¥50 trillion. Yd = Y -T => 500 - 50 = 450. C = 50 + 0.8 x 450 => 410

Change in C = 410 - 370 => 40 and Y = C + I + G + (X-M). C increase by 40 and hence GDP increase by 40.

4. The natural rate hypothesis. In long run unemployment at potential GDP is natural rate of unemployment.

5. Figure 2 where demand increase and shift to right because of increase in price of substitute aluminium bats. Supply decrease and shifts to left because of increase in cost of production due to rise in price of wood.

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