Question

1. For each of the following statements, state if it is True or False and carefully explain your response. (1 point for correctly stating T or F, 2 points for explanation) (15 pts)

a) According to classical theory, in the long run, a decrease in the growth rate of the money supply leads to an increase in the real interest rate, but no change in the nominal interest rate.

b) An increase in workers’ unions will likely increase frictional unemployment.

c) An increase in discouraged workers increases the unemployment rate

d) A country with negative net exports has a trade surplus.

e) If the Fed buys bonds under open market operations, the money supply increases.

Answer 1

A) false. Decrease in the growth rate of money supply will increase the nominal rate of interest in the long run so that the real interest rate remains unchanged

B) false. It will result in structural unemployment because those with less skills will be unemployed

C) true. number of discouraged workers will increase the number of unemployed and the labour force. This will increase the rate of unemployment

D) false. Negative net exports means trade deficit

E) true. this is because it increases the reserves in the banking system which increases its lending capacity