Canvas Quizzes Flashcards
(16 cards)
Money neutrality suggests that an increase in the money supply leads to _____ in price level and inflation and _____ in real GDP.
an increase/no change
High and unexpected inflation has a greater cost
for savers in high income tax brackets than for savers in low income tax brackets.
Country X taxes nominal interest income at a rate of 10%.
Country Y taxes nominal interest income at a rate of 20%
The real interest rate before tax in country X and Y is 4%
Country X has an inflation rate of 16% per year
Country Y has an inflation rate of 6% per year
The after-tax nominal interest rate in country X is _____%.
18
Country X taxes nominal interest income at a rate of 10%.
Country Y taxes nominal interest income at a rate of 20%
The real interest rate before tax in country X and Y is 4%
Country X has an inflation rate of 16% per year
Country Y has an inflation rate of 6% per year
The after-tax real interest rate in country Y is ____ %.
2
A reduction in the inflation rate would make relative prices
less variable, making it more likely that resources will be allocated to their best use.
Refer to the figure below. A decrease in the interest rate, independent of the price level, would cause a movement from
D to A
Feedback: According to the interest-rate effect, the increase and decrease in the interest rate affect the aggregate demand curve. If the interest rate decreases, then the price of goods and output increases. The aggregate demand curve shifts to the right because the real GDP increases. So there’s a change in the equilibrium point from D to A.
The short-run consequence of an increase in the personal income tax levied on households is best described by graph
C
Feedback: If the income tax levied on households increases, the income of consumers will decrease. Based on the wealthy effect, it affects the element of “C”, which is consumer spending. If the consumers’ spending decreases, then the real GDP also decreases. It affects the aggregate demand and has nothing to do with the supply curve. As a result, the aggregate demand curve shifts to the left.
An increase in human capital in an economy would lead to
an increase in long-run aggregate supply.
A decrease in the nominal wage rate would lead to ___ in short-run aggregate supply and ____ in long-run aggregate supply.
an increase / no change
Suppose the economy begins in long-run equilibrium. Workers negotiate a higher nominal wage rate. This is best described by the graph
D
Feedback: One of the reasons that the short-run aggregate supply curve shifts are the change in the wage rate. If the wage rate increases, then the SRAS shifts to the left (decreases). So here, if the nominal wage rate increases, then it only shifts the SRAS to the left, and has no impact on any other curves.
Refer to the figures above. Which graph best describes the short-run effect of an open market purchase of securities by the Federal Reserve?
C
Feedback: From the previous chapters, we know that the Federal Reserve controls the money supply by using open market operations. Here, if the Fed purchases the securities, then the money supply increases (shifts to the right).
Refer to the figures above. Which graph best describes the effect of a decrease in income, all else constant?
B
Feedback: The three determinants of money demand are price level, interest rates, and real incomes. So here, a decrease in income affects the price level. Thus, shifting the money demand curve to the left.
Refer to the figure above. Suppose the the economy begins with real GDP below the natural level. An open market purchase of securities moves the economy from point ___ to point ___.
C/B
When the interest rate decreases,
I. The domestic currency depreciates and net exports increase.
II. The return to saving increases and households save a higher fraction of income.
III. Firms are able to finance more capital purchases and investment increases.
IV. Aggregate demand increases.
I, III and IV
Feedback: Only the second option is not a result of a decline in interest rates. Because when interest rates fall, the interest you earn on your saving is supposed to be decreasing. Thus, households will save a lower fraction of income.
Which of the following would lead to a decrease in the multiplier effect of fiscal policy?
Households save a higher fraction of income.
Feedback: The multiplier effect is 1/(1-MPC). A higher saving rate means 1-MPC is higher, thus multiplier will decrease.
