Question

Determine if each of the following statements is TRUE or FALSE.
a) According the fisher equation, when an economy maintains zero inflation, the economy's real interest rate is zero as well.

b) In the Slow growth model, when an economy's level of capital reaches its steady state, the economy's real GDP also reaches its steady state, if there is no technological progress.

c) In an economy the government's expansionary monetary policy can creat high inflation, when it is implemented in normal times.

d) When the Fed sells bonds, it pulls funds out of the lonable funds market , thus decreasing interest rates and increasing investement.

e) An expansionary fiscal policy may create a government budget deficit.

Answer 1

a. False The fisher equation states that the nominal interest rate is equals to the sum of real interest rate.

b. True. Steady state is reached when output, capital and labor all are growing in the same rate and output per worker and capital per worker is constant.

c. False, because expansionary monetary policy is used a s a method of inflation control.

d. True. When fed sells bond it decrease the money supply by removing cash from the economy in exchange of bonds.

e. True. when a government spend more than it taxes it runs a deficit, due to expansionary monetary policy.