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18:2018: 20 5月9日周四 67%67 \% 文件预览 MACROECONOMICS SECTION I Time-1 hour and 10 minut...
May 9, 2024
1 Solution
a
Limited Resources and Societal Choices: Due to scarcity, societies cannot have everything they want and must prioritize
1 Answer
(E) Societies must make choices.
Key Concept
Explanation
2 Solution
a
Price-Quantity Relationship: Both supply and demand curves illustrate the relationship between the price of a good and the quantity supplied or demanded
2 Answer
(A) illustrate the relationship between the price and the quantity of a good
Key Concept
Explanation
3 Solution
a
Economic Models: The circular flow model represents the movement of money, resources, and goods and services through an economy
3 Answer
(B) Circular flow model
Key Concept
Explanation
4 Solution
a
Complementary Goods: If the price of a complement increases, the demand for the related good typically decreases
4 Answer
(D) The equilibrium quantity of Good YY will decrease.
Key Concept
Explanation
5 Solution
a
Production Possibilities Curve and Employment: Movement towards the curve represents better utilization of resources, including labor
5 Answer
(D) A movement from point FF to point GG
Key Concept
Explanation
6 Solution
a
Market Equilibrium: Market equilibrium occurs when the quantity demanded equals the quantity supplied
b
Identifying Market Disequilibrium: If consumers want to purchase more than what is available (quantity demanded > quantity supplied), there is a shortage
6 Answer
(B) The market is experiencing a shortage.
Key Concept
Shortage in a Market
Explanation
A shortage occurs when the quantity demanded exceeds the quantity supplied at the current market price.
7 Solution
a
GDP Components: GDP includes all market transactions for goods and services within a country in a given period
b
Non-Market Transactions: Transactions that do not involve a market exchange, such as volunteer services, are excluded from GDP
7 Answer
(B) A lawyer provides free legal counsel in her community.
Key Concept
Non-Market Transactions and GDP
Explanation
GDP does not include non-market transactions such as volunteer services because they do not have a market price.
8 Solution
a
Stocks vs. Bonds: Stocks represent ownership in a company and can earn dividends, while bonds are debt instruments that earn interest
8 Answer
(E) Bonds earn interest, while stocks do not.
Key Concept
Financial Instruments: Stocks and Bonds
Explanation
Stocks offer potential dividends and ownership, while bonds provide fixed interest payments and are a form of debt.
9 Solution
a
Comparative Advantage: An individual has a comparative advantage in producing a good if they can do so at a lower opportunity cost than others
b
Calculating Opportunity Cost: For Hector, the opportunity cost of knitting one scarf is 3 waxed floors (6 floors / 2 scarves). For Marie, the opportunity cost of waxing one floor is 0.5 scarves (3 scarves / 6 floors)
9 Answer
(B) Hector gives up 3 waxed floors for every scarf that he knits.
Key Concept
Opportunity Cost and Comparative Advantage
Explanation
Comparative advantage is determined by who has the lower opportunity cost in producing a good. Hector's opportunity cost for knitting scarves is higher than Marie's, indicating his comparative advantage is in waxing floors.
10 Solution
a
Definition of Exchange Rate: The exchange rate is the price of one currency expressed in terms of another currency
10 Answer
(B) exchange rate
Key Concept
Exchange Rate
Explanation
The exchange rate defines the price of one currency in terms of another.
11 Solution
a
Real Output Increase: An increase in aggregate demand typically leads to a higher level of real output in the short run, assuming prices are sticky
11 Answer
(E) a phase of the business cycle
Key Concept
Explanation
12 Solution
a
Expansionary Monetary Policy: This policy aims to increase the money supply and lower interest rates to stimulate economic activity
b
Open Market Operations: The primary tool for implementing expansionary monetary policy is through open market bond purchases, regardless of reserve levels
12 Answer
(B) The primary policy tool is open market bond purchases.
Key Concept
Expansionary Monetary Policy
Explanation
Open market bond purchases are used to implement expansionary monetary policy in economies with both limited and ample reserves.
13 Solution
a
Real Interest Rate Calculation: The real interest rate is calculated as the nominal interest rate minus the inflation rate. Using the formula r=i−πr = i - \pi, where rr is the real interest rate, ii is the nominal interest rate, and π\pi is the inflation rate
13 Answer
(A) 1%1 \%
Key Concept
Real Interest Rate
Explanation
The actual real interest rate is the nominal rate (6%6 \%) minus the actual inflation rate (5%5 \%), which equals 1%1 \%.
14 Solution
a
Economic Growth Indicator: Economic growth is often measured by an increase in real output per capita, which indicates a rise in the standard of living
14 Answer
(A) An increase in real output per capita
Key Concept
Economic Growth
Explanation
Economic growth is indicated by an increase in real output per capita, not just population growth or changes in unemployment or inflation rates.
15 Solution
a
Short-Run Aggregate Supply Curve: The short-run aggregate supply curve is upward sloping because, in the short run, some prices, particularly input prices, are slow to adjust to changes in the level of demand
15 Answer
(B) Input prices are slow to adjust.
Key Concept
Short-Run Aggregate Supply
Explanation
The short-run aggregate supply curve is upward sloping due to sticky input prices, which do not adjust immediately to changes in economic conditions.
16 Solution
a
Medium of Exchange: Money serves as a medium of exchange when it is used to facilitate the buying and selling of goods and services
b
Analyzing Options: Option (C) directly describes a transaction where money is exchanged for a good, which is the definition of money being used as a medium of exchange
16 Answer
(C) Greta uses a \\ 5$ bill to purchase an ice-cream cone.
Key Concept
Medium of Exchange
Explanation
Money is used as a medium of exchange when it facilitates transactions, as in the purchase of an ice-cream cone.
17 Solution
a
Short-Run Aggregate Supply (SRAS) Shift: A decrease in both the price level and real GDP in the short run typically indicates a leftward shift of the SRAS curve
b
Analyzing Options: Option (C) suggests a decrease in investment spending by businesses, which would reduce aggregate demand, leading to a lower price level and real GDP
17 Answer
(C) Investment spending by businesses decreased.
Key Concept
∻Explanation∻
A decrease in investment spending by businesses can lead to a decrease in aggregate demand, which in turn can cause both the price level and real GDP to decrease in the short run.
∻18 Solution∻ ‖ a ⋮ Monetary Base and Money Multiplier: The monetary base increases by the amount of bonds purchased. The money supply increases by the monetary base multiplied by the money multiplier, which is the reciprocal of the required reserve ratio. ‖ ‖ b ⋮ Calculating Money Multiplier: With a required reserve ratio of 10%10\%, the money multiplier is 1/0.10=101 / 0.10 = 10. ‖ ‖ c ⋮ Maximum Change in Money Supply: The maximum change in the money supply is the change in the monetary base multiplied by the money multiplier, which is \\50million∗10= million * 10 = \\500$ million. ‖ ∻18 Answer∻
(D) Increase by \\ 50 million & Increase by \\500 500 million
∻Key Concept∻
Money Multiplier Effect
∻Explanation∻
The maximum possible change in the money supply is determined by the initial change in the monetary base multiplied by the money multiplier, which is based on the required reserve ratio.
19 Solution
a
Understanding Unemployment Measurement: The official unemployment rate measures the percentage of the labor force that is jobless and actively seeking employment
b
Criticism of Unemployment Rate: The criticism is that it does not account for certain individuals who may wish to work but are not currently searching for jobs, such as discouraged workers
c
Answer Choices Analysis: Among the provided options, the category that is not counted as unemployed but may wish to work are those who have stopped looking for jobs
19 Answer
(C) Individuals who are not working and have stopped looking for jobs are not counted as unemployed.
Key Concept
Unemployment Rate Measurement
Explanation
The measured unemployment rate does not include individuals who have stopped looking for jobs, which can lead to an understatement of the actual level of joblessness.
20 Solution
a
Impact of Energy Cost Increase: An increase in the cost of energy typically raises production costs, which can reduce aggregate supply
b
Short-Run Aggregate Supply Curve: In the short run, higher production costs shift the short-run aggregate supply (SRAS) curve to the left, leading to higher price levels and lower output
c
Answer Choices Analysis: The option that reflects the impact of a leftward shift in the SRAS curve is the one that indicates a decrease in real GDP
20 Answer
(D) Real GDP will decrease.
Key Concept
Short-Run Aggregate Supply
Explanation
An economy-wide increase in the cost of energy will typically lead to a decrease in real GDP in the short run due to higher production costs and a leftward shift in the SRAS curve.
21 Solution
a
Loanable Funds Market Equilibrium: The loanable funds market is in equilibrium when the quantity of loanable funds demanded equals the quantity supplied at the equilibrium real interest rate
b
Real Interest Rate Above Equilibrium: If the current real interest rate is above the equilibrium, there is a surplus of loanable funds, as the quantity supplied exceeds the quantity demanded
c
Market Adjustment: To eliminate the surplus and reach equilibrium, the real interest rate will tend to decrease, which will increase the quantity demanded and decrease the quantity supplied of loanable funds
21 Answer
(C) The real interest rate will decrease, causing savers to decrease the quantity supplied of loanable funds.
Key Concept
Loanable Funds Market Equilibrium
Explanation
When the current real interest rate is above the equilibrium, the market will adjust by decreasing the real interest rate, which in turn decreases the quantity supplied of loanable funds by savers.
C
Key Concept
Monetary Policy
Explanation
The central bank can influence economic activity by adjusting the policy rate. Lowering the rate can stimulate investment and consumption, potentially closing a recessionary gap and restoring full employment.
23 Solution
a
Long-run Phillips Curve: In the long run, the Phillips curve is vertical at the natural rate of unemployment, indicating no trade-off between inflation and unemployment
23 Answer
(C) As inflation increases, unemployment remains constant.
Key Concept
Explanation
24 Solution
a
M1 Definition: M1 includes currency in circulation and demand deposits
b
M2 Definition: M2 includes M1 plus savings accounts and small-denomination time deposits
c
Calculation of M1: M1 = Currency in circulation + Demand deposits = 400million+400 million + 600 million = $1000 million
d
Calculation of M2: M2 = M1 + Savings accounts + Small-denomination time deposits = 1000million+1000 million + 388 million + 55million=55 million = 1443 million
24 Answer
(B) M1: 1,000million;M2:1,000 million; M2: 1,443 million.
Key Concept
Explanation
25 Solution
a
Multiplier Effect: The multiplier effect is calculated as 1/(1−MPC)1/(1 - MPC), where MPC is the marginal propensity to consume
b
Calculation of Multiplier: Multiplier = 1/(1−0.60)=2.51/(1 - 0.60) = 2.5
c
Change in Real GDP: Change in GDP = Multiplier × Change in Taxes = 2.5 × 100billion=100 billion = 250 billion
25 Answer
(E) $250 billion
Key Concept
Explanation
26 Solution
a
Increase in labor productivity: An increase in labor productivity due to new technology can lead to an increase in equilibrium real output and a decrease in the price level
b
Aggregate Supply Shift: New technology improves production efficiency, shifting the aggregate supply curve to the right, resulting in higher output and lower prices
26 Answer
B) New technology resulted in higher labor productivity
Key Concept
Aggregate Supply Shift
Explanation
New technology increases productivity, shifting the aggregate supply curve rightward, increasing output and decreasing price level.
27 Solution
a
Bank's balance sheet: The liability side of a bank's balance sheet includes sources of bank funds, such as deposits from customers
27 Answer
B) Demand deposits
Key Concept
Bank's Liabilities
Explanation
Demand deposits are the bank's liabilities because they are customer funds that the bank owes.
28 Solution
a
Automatic stabilizers: These are government policies that automatically adjust to economic conditions without additional legislative action
b
Tax revenues and income: As incomes increase during periods of increased aggregate demand, tax revenues automatically increase, moderating the expansion
28 Answer
A) Households will pay more in taxes as their incomes increase.
Key Concept
Automatic Stabilizers
Explanation
Increased income leads to higher taxes, which is an automatic response to temper aggregate demand.
29 Solution
a
Real GDP calculation: Real GDP is calculated by dividing nominal GDP by the GDP deflator and then multiplying by 100
b
Mathematical expression: Real GDP in 2021 = $12 billion150×100=$8 billion\frac{\$12 \text{ billion}}{150} \times 100 = \$8 \text{ billion}
29 Answer
B) $8 billion
Key Concept
Real GDP Calculation
Explanation
Real GDP adjusts nominal GDP for inflation using the GDP deflator, revealing the actual economic output.
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30 Solution
a
Expansionary Fiscal Policy and Price Level: Expansionary fiscal policy typically increases aggregate demand, which can lead to higher price levels
b
Exchange Rate Effect: A higher price level can make domestic goods more expensive relative to foreign goods, potentially decreasing the demand for the domestic currency
c
Currency Depreciation: If the demand for Macroland's currency decreases due to higher price levels, the currency would depreciate in the foreign exchange market
30 Answer
(C) The demand for Macroland's currency will decrease, resulting in a depreciation.
Key Concept
Expansionary fiscal policy can lead to currency depreciation if it results in higher domestic price levels.
Explanation
Higher price levels from expansionary fiscal policy can decrease demand for a country's currency, leading to depreciation in the foreign exchange market.
31 Solution
a
Reserve Market Shift: A rightward shift in the demand curve for reserves at any given policy rate indicates an increase in the quantity of reserves demanded
b
Monetary Policy Action: This shift could be caused by the central bank's actions to lower interest rates or by providing more reserves to the banking system
c
Open Market Operations: Buying bonds on the open market is a common monetary policy action that increases the quantity of reserves in the banking system
31 Answer
(E) Buying bonds on the open market.
Key Concept
Explanation
A rightward shift in the demand for reserves is consistent with the central bank buying bonds on the open market, which increases reserves and lowers the policy rate.
32 Solution
a
Inflation Factors: Inflation can be caused by factors that increase aggregate demand or reduce aggregate supply
b
Tax Cuts and Oil Prices: A decrease in income taxes can boost consumer spending, increasing aggregate demand, while an increase in the price of oil can increase production costs, reducing aggregate supply
c
Short-Run Inflation: The combination of higher demand and higher costs for production can lead to higher inflation rates in the short run
32 Answer
(C) A decrease in income taxes and an increase in the price of oil.
Key Concept
Demand-pull and cost-push inflation
Explanation
A decrease in income taxes can lead to demand-pull inflation, while an increase in oil prices can cause cost-push inflation, both contributing to a higher inflation rate.
33 Solution
a
Economic Growth Promotion: Policies that promote economic growth often involve increasing productivity and investment
b
Investment Tax Credits: Providing tax credits for investment can encourage businesses to invest in capital, which can increase productivity and economic growth
33 Answer
(E) Increasing investment tax credits.
Key Concept
Investment incentives for growth
Explanation
Investment tax credits can stimulate business investment, which is a key driver of economic growth.
34 Solution
a
Impact of Tariffs on Currency Demand: Tariffs on international goods make imports more expensive, leading to a decrease in imports. This increases the demand for domestic currency by foreign exporters who receive the domestic currency in exchange for their goods
b
Impact of Foreign Investment in Domestic Bonds: When a foreign citizen purchases government bonds, they must convert their currency into the domestic currency, increasing the demand for the domestic currency in the foreign exchange market
34 Answer
(E) A German citizen purchases United States government bonds.
Key Concept
Foreign Investment and Currency Demand
Explanation
A German citizen buying U.S. government bonds would increase demand for the dollar as they convert their euros to dollars to make the purchase.
35 Solution
a
Fiscal Policy and Unemployment: An increase in government spending can stimulate economic activity, leading to a decrease in the unemployment rate in the short run
b
Monetary Policy and Interest Rates: An open market bond purchase by the central bank injects liquidity into the banking system, which can help maintain constant interest rates even when reserves are limited
35 Answer
(B) Increase in government spending & Open market bond purchase.
Key Concept
Explanation
The combination of increased government spending and open market bond purchases is likely to decrease unemployment and maintain constant interest rates in the short run.
38 Solution
a
Impact of Decreased National Savings: A decrease in national savings implies that there is less money available for investment. This would directly affect the supply of loanable funds in the economy
38 Answer
(E) The supply of loanable funds
Key Concept
Loanable Funds Market
Explanation
A decrease in national savings reduces the supply of loanable funds, which can lead to higher real interest rates.
39 Solution
a
Nominal Interest Rate Determinants: An increase in nominal interest rates can be caused by factors that affect the demand and supply for money, such as changes in aggregate demand or monetary policy
b
Aggregate Demand Increase: If aggregate demand increases, it can lead to higher price levels (inflation) and higher nominal interest rates as the demand for money increases
39 Answer
(D) Aggregate demand in Gamma increased
Key Concept
Aggregate Demand and Nominal Interest Rates
Explanation
An increase in aggregate demand can lead to higher price levels and increased demand for money, which can push up nominal interest rates.
40 Solution
a
Inflation with Full Employment: In the long run, an economy operating at full employment with inflation and no change in real output suggests a shift in the aggregate supply or demand that affects the price level
b
Money Supply and Inflation: An increase in the nation's money supply for a sustained period can lead to inflation without changing the real output in the long run, as per the quantity theory of money
40 Answer
(D) The nation's money supply increased for a sustained period of time
Key Concept
Quantity Theory of Money
Explanation
According to the quantity theory of money, an increase in the money supply, if not matched by an increase in real output, will lead to inflation.
41 Solution
a
Balance of Payments Structure: The balance of payments is divided into two main accounts: the current account and the capital and financial account
b
Current Account Transactions: The current account includes transactions related to goods, services, primary income, and secondary income. Payments for exports are transactions involving goods
c
Recording Exports: Payments for exports are recorded as credits in the current account because they represent money flowing into the country
41 Answer
(B) As a credit to the current account
Key Concept
Balance of Payments: Current Account
Explanation
Payments for exports are recorded as credits in the current account of the balance of payments.
42 Solution
a
Government Budget: When government outlays exceed tax revenues, the government runs a budget deficit
b
Budget Deficit Consequences: A budget deficit typically requires the government to borrow funds, which increases the demand for loanable funds
c
National Debt Implication: Borrowing to finance a deficit adds to the national debt
42 Answer
(D) Bobland's national debt will increase.
Key Concept
Government Budget Deficit
Explanation
When a government's outlays exceed its tax revenues, it runs a budget deficit, which leads to an increase in national debt as the government borrows to cover the shortfall.
43 Solution
a
Labor Force Participation Rate Formula: The labor force participation rate is calculated as Labor ForceCivilian Noninstitutional Working-Age Population×100%\frac{\text{Labor Force}}{\text{Civilian Noninstitutional Working-Age Population}} \times 100\%
b
May Labor Force Participation Rate: In May, the labor force participation rate was 120 million150 million×100%=80%\frac{120 \text{ million}}{150 \text{ million}} \times 100\% = 80\%
c
June Labor Force Participation Rate: In June, the labor force increased to 125 million (120 million + 5 million new job seekers), so the participation rate was 125 million150 million×100%=83.3%\frac{125 \text{ million}}{150 \text{ million}} \times 100\% = 83.3\%
d
Change in Participation Rate: The participation rate increased from 80% to 83.3%, which is an increase of approximately 3.3%3.3\%
43 Answer
(A) It increased by approximately 3.3%3.3 \%.
Key Concept
Labor Force Participation Rate Change
Explanation
When the labor force increases while the working-age population remains constant, the labor force participation rate increases.
Solution
a
Monetary Policy and Interest Rates: When the central bank decreases the interest rate on reserves, it encourages banks to lend more because they earn less interest on reserves held at the central bank
b
Increase in Real Output: Lower interest rates reduce the cost of borrowing, stimulate investment, and increase consumer spending, which leads to an increase in aggregate demand and thus an increase in real output in the short run
c
Price Level Response: Higher aggregate demand from increased spending can lead to higher prices in the short run, thus increasing the price level
d
Exchange Rate Impact: Lower interest rates make the country's assets less attractive to foreign investors, leading to a capital outflow and a depreciation of the country's currency in the foreign exchange market
Answer
A
Key Concept
Expansionary Monetary Policy
Explanation
When the central bank decreases interest rates, it is engaging in expansionary monetary policy, which typically leads to increased real output and price levels, and a depreciation of the currency in the short run.
45 Solution
a
Aggregate Production Function: The aggregate production function shows the relationship between inputs, such as labor and capital, and the total output produced
b
Impact of Labor on Output: Increasing the number of workers, all else equal, typically increases the total output of the economy
45 Answer
C
Key Concept
Aggregate Production Function
Explanation
According to the aggregate production function, if firms increase the number of workers they employ, output will increase.
46 Solution
a
Short-Run Aggregate Supply (SRAS) Curve: The SRAS curve shows the relationship between the price level and the quantity of goods and services that firms are willing to produce and sell, holding all else constant
b
Short-Run Phillips Curve: The short-run Phillips curve illustrates the inverse relationship between inflation and unemployment in the short run
c
Inflationary Expectations: A change in inflationary expectations affects both the SRAS and the short-run Phillips curve by shifting them
46 Answer
A
Key Concept
Inflationary Expectations
Explanation
A change in inflationary expectations will shift both the short-run aggregate supply curve and the short-run Phillips curve.
47 Solution
a
Fiscal and Monetary Policies: These policies are used to influence aggregate demand with the goal of achieving full employment
b
Aggregate Demand Increase: Both expansionary fiscal policy (increased government spending or tax cuts) and expansionary monetary policy (lowering interest rates to increase money supply) aim to increase aggregate demand
c
Interest Rates Short-Run Effect: Expansionary monetary policy typically lowers interest rates in the short run, but expansionary fiscal policy may lead to higher interest rates due to increased borrowing
d
Crowding Out: Increased government borrowing can lead to higher interest rates, crowding out private investment. However, during a recession, this effect may be muted
47 Answer
B
Key Concept
Fiscal and Monetary Policies
Explanation
If the federal government and central bank implement fiscal and monetary policies correctly during a recession, aggregate demand will increase, but the effect on interest rates is indeterminate because the two policies have opposing effects on interest rates.
48 Solution
a
Shift in the Demand for Loanable Funds: An increase in government spending can shift the demand curve for loanable funds to the right, from DLF1 to DLF2, indicating an increased demand for loanable funds
b
Crowding Out Effect: The increase in demand for loanable funds leads to a higher equilibrium interest rate (from r1 to r2) and quantity of loanable funds (from Q1 to Q2). This higher interest rate can discourage private investment, as borrowing costs are now higher
48 Answer
(B) Private investment spending will decrease.
Key Concept
Crowding Out Effect
Explanation
When the government increases its spending and borrows more, it can lead to higher interest rates, which in turn can reduce private investment spending.
49 Solution
a
Calculating the Unemployment Rate: The unemployment rate is calculated as the number of unemployed divided by the labor force. With a labor force of 40 million and 38 million employed, the number of unemployed is 2 million. The unemployment rate is 2 million40 million×100=5%\frac{2 \text{ million}}{40 \text{ million}} \times 100 = 5\%
b
Comparing to Natural Rate of Unemployment: The calculated unemployment rate of 5% is higher than the natural rate of unemployment of 4%, suggesting that the economy is not at full employment
49 Answer
(B) It is experiencing a recessionary gap.
Key Concept
Recessionary Gap
Explanation
When the actual unemployment rate is higher than the natural rate, it indicates that the economy is experiencing a recessionary gap, with output below potential.
50 Solution
a
Capital and Financial Account Balance: A decrease in a nation's capital and financial account balance implies that there is a net outflow of financial capital from the country
b
Current Account Balance: The balance of payments must balance, so a decrease in the capital and financial account balance would typically be associated with an increase in the current account balance, assuming no changes in official reserve transactions
50 Answer
(D) A decrease in the current account balance.
Key Concept
Balance of Payments
Explanation
A decrease in the capital and financial account balance indicates a net outflow of capital, which is often offset by an increase in the current account balance, reflecting a nation's trade surplus or reduced trade deficit.
51 Solution
a
Long-Run Phillips Curve Shift: The long-run Phillips curve represents the relationship between inflation and unemployment when expectations of inflation are fully adjusted. A rightward shift would indicate a higher natural rate of unemployment
b
Factors Affecting Natural Rate of Unemployment: A decline in the labor force participation rate can increase the natural rate of unemployment, as a smaller proportion of the population is actively seeking employment, which can shift the long-run Phillips curve to the right
51 Answer
(C) A decline in the labor force participation rate.
Key Concept
Long-Run Phillips Curve Shift
Explanation
A decline in the labor force participation rate can lead to a higher natural rate of unemployment, which would cause the long-run Phillips curve to shift to the right.
52 Solution
a
Monetary Policy to Increase Aggregate Demand: Decreasing the discount rate or decreasing administered interest rates, or buying bonds on the open market are actions that would increase the money supply, leading to lower interest rates and increased investment and consumption
b
Fiscal Policy to Increase Aggregate Demand: Increasing government spending or decreasing taxes are fiscal policies that directly increase aggregate demand by increasing government purchases or leaving more income in the hands of consumers and businesses
c
Combining Policies: The combination of expansionary monetary policy (such as buying bonds or decreasing interest rates) with expansionary fiscal policy (such as decreasing taxes or increasing government spending) will definitely result in an increase in aggregate demand
52 Answer
D
Key Concept
Expansionary Monetary and Fiscal Policies
Explanation
Expansionary monetary policy combined with expansionary fiscal policy will definitely increase aggregate demand.
53 Solution
a
Real vs. Nominal Interest Rate: The real interest rate is the nominal interest rate adjusted for inflation. It represents the true cost of borrowing and the real yield to lenders
b
Inflation Adjustment: The nominal interest rate is the stated or observed interest rate, not adjusted for inflation. The real interest rate is the nominal rate minus the inflation rate, reflecting the purchasing power of the interest earned or paid
c
Correct Distinction: The correct distinction between real and nominal interest rates is that the real interest rate is adjusted for inflation, while the nominal interest rate is not
53 Answer
A
Key Concept
Inflation Adjustment
Explanation
The real interest rate is the nominal interest rate adjusted for inflation, which affects the purchasing power of money.
54 Solution
a
Long-run Equilibrium: In the long run, the economy is expected to reach a point where the aggregate demand (AD) curve intersects with the long-run aggregate supply (LRAS) curve, which is vertical at the natural level of output
b
Inflationary Expectations: If inflationary expectations increase, the short-run aggregate supply (SRAS) curve will shift to the left, leading to a higher price level and lower output in the short run, until a new long-run equilibrium is reached
54 Answer
(A) Inflationary expectations will increase, and the economy will move to a new equilibrium at point CC.
Key Concept
Inflationary expectations and long-run equilibrium
Explanation
An increase in inflationary expectations typically shifts the SRAS curve to the left, resulting in a higher price level and lower output in the new long-run equilibrium.
55 Solution
a
Supply Decrease and Currency Value: A decrease in the supply of Truca's currency will lead to an appreciation of the currency on the foreign exchange market due to the increased scarcity and demand for the currency
b
Currency Appreciation and Net Exports: An appreciation of Truca's currency makes Truca's goods more expensive for foreign buyers, leading to a decrease in net exports
55 Answer
(C) Appreciate & Decrease
Key Concept
Explanation
56 Solution
a
Monetary Policy for Lower Price Level: Increasing the discount rate is a contractionary monetary policy that reduces the money supply, leading to a higher real interest rate
b
Higher Real Interest Rate Effects: A higher real interest rate reduces investment and consumer spending, which decreases aggregate demand, leading to a lower price level and potentially higher unemployment in the short run
56 Answer
(D) An increase in the discount rate
Key Concept
Contractionary monetary policy
Explanation
Increasing the discount rate is a contractionary policy that can lead to a lower price level and higher unemployment in the short run.
57 Solution
a
CPI and Substitution Bias: The Consumer Price Index (CPI) may overestimate the true inflation rate due to substitution bias. When prices of certain goods increase, consumers may choose less expensive alternatives, which is not fully captured by the CPI
57 Answer
(C) Consumers substitute away from more expensive products.
Key Concept
Substitution Bias in CPI
Explanation
CPI may not accurately account for consumer behavior in substituting cheaper goods for more expensive ones, leading to an overestimation of inflation.
58 Solution
a
Government Borrowing and Interest Rates: An increase in government borrowing can lead to higher demand for loanable funds, which typically raises the real interest rate in the short run
b
Economic Growth and Interest Rates: Higher real interest rates can crowd out private investment, potentially leading to a decrease in the economic growth rate in the long run
58 Answer
(B) Increase & Decrease
Key Concept
Explanation
59 Solution
a
Phillips Curve and Unemployment: A decrease in frictional and structural unemployment would typically move the economy to a point with lower unemployment
b
Consumer Spending and Inflation: An increase in consumer spending on durable goods would likely lead to higher inflation, moving the economy up along the Phillips Curve
59 Answer
(B) point AA to point CC
Key Concept
Phillips Curve Movement
Explanation
A decrease in unemployment coupled with increased consumer spending would move the economy from higher unemployment and lower inflation to lower unemployment and higher inflation on the Phillips Curve.
60 Solution
a
Real Interest Rate and Capital Flows: An increase in the real interest rate in an open economy with a flexible exchange rate would make financial investments more attractive, leading to increased net financial capital inflows
60 Answer
(C) Net financial capital flows into Country G
Key Concept
Capital Inflows and Interest Rates
Explanation
Higher real interest rates attract foreign capital, increasing net financial capital inflows into the country.
a Solution
a
To calculate the actual rate of unemployment, add the natural rate of unemployment to the cyclical rate of unemployment: Actual Unemployment Rate=Natural Rate+Cyclical RateActual\ Unemployment\ Rate = Natural\ Rate + Cyclical\ Rate
a Answer
5%
Key Concept
Actual Unemployment Rate
Explanation
The actual unemployment rate is the sum of the natural rate and the cyclical rate of unemployment.
b Solution
b
The expected real interest rate is calculated by subtracting the expected inflation rate from the nominal interest rate: Expected Real Interest Rate=Nominal Interest Rate−Expected Inflation RateExpected\ Real\ Interest\ Rate = Nominal\ Interest\ Rate - Expected\ Inflation\ Rate
b Answer
2%
Key Concept
Expected Real Interest Rate
Explanation
The expected real interest rate adjusts the nominal rate for the expected loss of purchasing power due to inflation.
c Solution
c
To draw the short-run and long-run Phillips curves, plot the actual unemployment rate on the x-axis and the expected inflation rate on the y-axis. The short-run Phillips curve is downward sloping, and the long-run Phillips curve is vertical at the natural rate of unemployment. Label point E at the intersection of the actual unemployment rate and the expected inflation rate
c Answer
Graph with short-run and long-run Phillips curves, point E labeled
Key Concept
Phillips Curve
Explanation
The Phillips curve illustrates the inverse short-run relationship between inflation and unemployment, with the long-run Phillips curve being vertical at the natural rate of unemployment.
d(i) Solution
d(i)
To calculate the maximum possible change in aggregate demand (ΔAD) due to a change in government spending, use the government spending multiplier: ΔAD=Multiplier×ΔGovernment SpendingΔAD = Multiplier \times ΔGovernment\ Spending, where Multiplier=11−MPCMultiplier = \frac{1}{1 - MPC} and ΔGovernment Spending=$220 million−$200 millionΔGovernment\ Spending = \$220\ million - \$200\ million
d(i) Answer
$50 million
Key Concept
Government Spending Multiplier
Explanation
The government spending multiplier amplifies the effect of a change in government spending on aggregate demand, depending on the marginal propensity to consume (MPC).
d(ii) Solution
d(ii)
On the graph from part (c), show a new short-run equilibrium point W to the right of point E, indicating a lower unemployment rate and potentially higher inflation due to increased aggregate demand
d(ii) Answer
New short-run equilibrium point W on the graph
Key Concept
Short-Run Equilibrium Shift
Explanation
An increase in aggregate demand shifts the short-run equilibrium to a point with lower unemployment and potentially higher inflation.
d(iii) Solution
d(iii)
Draw the loanable funds market with the supply and demand for loanable funds. The increase in government spending without an increase in tax revenues represents a budget deficit, which increases the demand for loanable funds, shifting the demand curve to the right and raising the equilibrium real interest rate
d(iii) Answer
Graph with increased equilibrium real interest rate
Key Concept
Loanable Funds Market
Explanation
A government budget deficit increases the demand for loanable funds, leading to a higher equilibrium real interest rate.
e(i) Solution
e(i)
An increase in the real interest rate can slow down long-run economic growth by making borrowing more expensive, which can reduce investment in capital goods
e(i) Answer
Slower long-run economic growth
Key Concept
Real Interest Rate and Economic Growth
Explanation
Higher real interest rates can deter investment, slowing capital accumulation and long-run economic growth.
e(ii) Solution
e(ii)
Higher real interest rates attract foreign capital, increasing financial capital inflows as investors seek higher returns
e(ii) Answer
Increased financial capital inflows
Key Concept
Financial Capital Inflows
Explanation
Higher real interest rates in a country make it a more attractive destination for foreign investment, leading to increased financial capital inflows.
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Solution
a
Long-run Self-adjustment: In the long run, the economy of Antilly would self-adjust through changes in wages and prices. As the economy is experiencing an inflationary output gap, it implies that actual output is above potential output, leading to upward pressure on wages and prices. Over time, as wages and prices rise, the short-run aggregate supply (SRAS) curve will shift to the left, moving the economy back to its long-run equilibrium at the potential level of output
b
Monetary Policy Action: To decrease the inflation rate in the short run, the central bank of Antilly would likely increase the policy interest rate. This can be achieved by conducting open market operations where the central bank sells government securities, which would reduce the reserves in the banking system, leading to an increase in the policy rate
c
Graph of Reserve Market: The graph would show an upward shift in the supply curve of reserves due to the central bank's sale of government securities. This would result in a higher policy rate
d
Effect on Real Output: An increase in the policy rate would lead to higher borrowing costs, which would reduce investment and consumption. Consequently, aggregate demand (AD) would decrease, leading to a lower level of real output in the short run
Answer
In the long run, Antilly's economy self-adjusts through wage and price changes, the central bank would increase the policy rate to decrease inflation, the reserve market graph would show a higher policy rate, and real output would decrease in the short run.
Key Concept
Self-adjustment in the long run and the central bank's role in controlling inflation
Explanation
Antilly's economy self-adjusts to its potential output level in the long run through wage and price changes, while the central bank can use monetary policy to influence inflation and output in the short run.
a(i) Solution
a
Decrease in Consumer Confidence: A decrease in consumer confidence typically leads to a reduction in consumer spending, as households choose to save more and spend less due to uncertainty about future income and economic conditions
b
Aggregate Demand and Price Level: A decrease in consumer spending will shift the aggregate demand (AD) curve to the left, resulting in a lower equilibrium price level in the short run, according to the AD-AS model. The formula for aggregate demand is AD=C+I+G+(X−M)AD = C + I + G + (X - M), where CC is consumer spending, II is investment, GG is government spending, and (X−M)(X - M) is net exports. A decrease in CC leads to a decrease in ADAD
a(i) Answer
The price level in Singapore will decrease in the short run.
Key Concept
Aggregate Demand Shift
Explanation
A decrease in consumer confidence leads to a decrease in consumer spending, which shifts the aggregate demand curve to the left, resulting in a lower price level.
a(ii) Solution
a
Unemployment and Aggregate Demand: When aggregate demand decreases, firms experience a reduction in the quantity of goods and services demanded
b
Short-Run Unemployment Effect: As a result, firms may reduce production, which can lead to layoffs or a hiring freeze, increasing unemployment in the short run. This relationship is described by Okun's Law, which posits an inverse relationship between changes in the unemployment rate and the growth rate of real GDP
a(ii) Answer
Unemployment in Singapore will increase in the short run.
Key Concept
Okun's Law
Explanation
A decrease in aggregate demand leads to reduced production, causing firms to lay off workers or stop hiring, thus increasing the unemployment rate.
b(i) Solution
a
Net Exports and Price Level: A decrease in the price level in Singapore makes Singaporean goods and services cheaper relative to foreign goods and services
b
Impact on Net Exports: Cheaper domestic goods and services increase the competitiveness of Singapore's exports, leading to an increase in net exports, which is the difference between exports and imports (X−MX - M)
b(i) Answer
Singapore's net exports will increase in the short run.
Key Concept
Price Competitiveness
Explanation
A lower price level in Singapore increases the competitiveness of Singaporean exports, leading to an increase in net exports.
b(ii) Solution
a
Supply of Singapore Dollar: An increase in net exports implies that more foreign currency is being exchanged for Singapore dollars to purchase Singaporean goods and services
b
Exchange Market Impact: This increased demand for Singapore dollars leads to an increase in the supply of Singapore dollars in the foreign exchange market as exporters convert their earnings to SGD
b(ii) Answer
The supply of the Singapore dollar in the foreign exchange market will increase in the short run.
Key Concept
Exchange Rate Dynamics
Explanation
An increase in net exports leads to an increased supply of Singapore dollars in the foreign exchange market as exporters convert foreign earnings to SGD.
c Solution
a
International Value of SGD: The supply of a currency in the foreign exchange market is one determinant of its value
b
Value Change Due to Supply: An increase in the supply of the Singapore dollar, all else being equal, would typically lead to a depreciation of the SGD as there are more SGD available relative to other currencies
c Answer
The international value of the Singapore dollar will decrease in the short run.
Key Concept
Currency Supply and Value
Explanation
An increased supply of SGD in the foreign exchange market, due to higher net exports, will typically lead to a depreciation of the SGD's international value.
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