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Questions and Answers

(338 solutions)

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In the model of aggregate demand and aggregate supply, the initial impact of a decrease in consumer optimism is to _______.

d. shift aggregate demand to the left...

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Posted by Cleveland on September 10, 2024
Which of the following is not a reason why the aggregate-demand curve slopes downward?


c. The classical effect...

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Posted by Cleveland on September 10, 2024
Which of the following would not cause a shift in the long-run aggregate-supply curve?

d. A change in price expectations...

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Posted by Cleveland on September 10, 2024
According to the interest-rate effect, aggregate demand slopes downward because _______.

b. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases...

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Posted by Cleveland on September 10, 2024
Which of the following statements about economic fluctuations is true?

d. A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together....

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Posted by Cleveland on September 10, 2024
Pat receives a portion of his income from his holdings of interest-bearing U.S. government bonds. The bonds offer a real interest rate of 3% per year. The nominal interest rate on the bonds adjusts automatically to account for the inflation rate.
The government taxes nominal interest income at a rate of 20%. The following table shows two scenarios: a low-inflation scenario and a high-inflation scenario.
Given the real interest rate of 3% per year, find the nominal interest rate on Pat's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario.
Inflation RateReal Interest RateNominal Interest RateAfter-Tax Nominal Interest RateAfter-Tax Real Interest Rate
(Percent)(Percent)(Percent)(Percent)(Percent)
2.53.0
 
6.53.0
 
Compared with lower inflation rates, a higher inflation rate will    the after-tax real interest rate when the government taxes nominal interest income. This tends to    saving, thereby    the quantity of investment in the economy and    the economy's long-run growth rate.

iven the real interest rate of 3% per year, find the nominal interest rate on Pat's bonds, the after-tax nominal interest rate, and the after-tax real interest rate under each inflation scenario.Inflation RateReal Interest RateNominal Interest RateAfter-Tax Nominal Interest RateAfter-Tax Real Intere...

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Posted by Cleveland on September 10, 2024

Rod manages a grocery store in a country experiencing a high rate of inflation. To keep up with inflation, he spends a lot of time every day updating the prices, printing new price tags, and sending out newspaper inserts advertising the new prices. His employees regularly deal with customer annoyance over the frequent price changes. This is an example of the    of inflation

Rod manages a grocery store in a country experiencing a high rate of inflation. To keep up with inflation, he spends a lot of time every day updating the prices, printing new price tags, and sending out newspaper inserts advertising the new prices. His employees regularly deal with customer annoyanc...

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Posted by Cleveland on September 10, 2024

The Fisher effect and the cost of unexpected inflation

Suppose the nominal interest rate on savings accounts is 12% per year, and both actual and expected inflation are equal to 7%.
Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply.
Time PeriodNominal Interest RateExpected InflationActual InflationExpected Real Interest RateActual Real Interest Rate
(Percent)(Percent)(Percent)(Percent)(Percent)
Before increase in MS1277
 
Immediately after increase in MS127 10
 
Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 7% to 10% per year.
Complete the second row of the table by filling in the expected and actual real interest rates on savings accounts immediately after the increase in the money supply (MS).
The unanticipated change in inflation arbitrarily benefits    .
Now consider the long-run impact of the change in money growth and inflation. According to the Fisher effect, as expectations adjust to the new, higher inflation rate, the nominal interest rate will    to
per year.

omplete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply.Time PeriodNominal Interest RateExpected InflationActual InflationExpected Real Interest RateActual Real Interest Rate(Percent)(Percent)(Percent)(P...

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Posted by Cleveland on September 10, 2024

5. Using money creation to pay for government spending

Consider Katmai, a hypothetical country that produces only lobster rolls. In 2019, a lobster roll is priced at $8.00.
Complete the first row of the table with the quantity of lobster rolls that can be bought with $900.
Hint: In this problem, assume it is not possible to buy a fraction of a lobster roll, and always round down to the nearest whole lobster roll. For example, if your calculations result in 1.5 lobster rolls, the answer should be 1 lobster roll.
YearPrice of a Lobster rollLobster rolls Bought with $900
(Dollars)(Quantity)
20198.00 
2020
Suppose the government of Katmai cannot raise sufficient tax revenue to pay its debts. In order to meet its debt obligations, the government prints money. As a result, the money supply rises by 50% by 2020.
Assuming monetary neutrality holds, complete the second row of the table with the new price of a lobster roll and the new quantity of lobster rolls that can be bought with $900 in 2020.
The impact of the government's decision to raise revenue by printing money on the value of money is known as the    

omplete the first row of the table with the quantity of lobster rolls that can be bought with $900.Hint: In this problem, assume it is not possible to buy a fraction of a lobster roll, and always round down to the nearest whole lobster roll. For example, if your calculations result in 1.5 ...

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Posted by Cleveland on September 10, 2024
Consider a simple economy that produces only jean jackets. The following table contains information on the economy's money supply, velocity of money, price level, and output. For example, in 2020, the money supply was $400, the price of a jean jacket was $7.50, and the economy produced 800 jean jackets.
Fill in the missing values in the following table, selecting the answers closest to the values you calculate.
YearQuantity of MoneyVelocity of MoneyPrice LevelQuantity of OutputNominal GDP
(Dollars)(Dollars)(Jean jackets)(Dollars)
2020400 
7.50800    
202140815    800    
The money supply grew at a rate of    from 2020 to 2021. Since jean jacket output did not change from 2020 to 2021 and the velocity of money    , the change in the money supply was reflected    in changes in the price level. The inflation rate from 2020 to 2021 was    .

Fill in the missing values in the following table, selecting the answers closest to the values you calculate.YearQuantity of MoneyVelocity of MoneyPrice LevelQuantity of OutputNominal GDP(Dollars)(Dollars)(Jean jackets)(Dollars)2020400 157.508006,000.00   2021408157.65   800...

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Posted by Cleveland on September 10, 2024