Question

Suppose the CPI in 2012 was 210 and the CPI in 2013 was 215. Then the rate of inflation from 2012 to 2013 was:

Select one:

a. 5%

b. 2.38%

c. 4.67%

d. 15%

When the government uses protectionist policies like a tariff or a quota to protect domestic firms, the consumers

Select one:

a. Are considered winners because the up get more opportunities to buy local

b. Are considered losers because they end up with higher prices and less choices

c. Are not effected in either a positive or negative

Suppose an economy is experiencing a deep recession due to a drop in aggregate demand. The unemployment rate has climbed but to nearly 10% and the price level has plummeted into the range of deflation. What could the Federal Reserve do to try and stabilize the economy?

Select one:

a. Mandate that all banks increase lending or face financial penalties

b. Slow down the economy to stop the deflation

c. Increase interest rates by decreasing the supply of money

d. Create incentives for banks to make more loans by increasing bank reserves

Money Neutrality says:

Select one:

a. In the long run real GDP is determined by capital, labor, and technology. So changes in Money Supply will not change real GDP in the long run.

b. In the short run changes in inflation do not affect real growth

c. The rate of inflation is not affected by the actions of the central bank, like the Federal Reserve, only actions of firms

d. Money only changes real variables and does not affect nominal variables

Answer 1

1> B

The inflation rate is the growth rate in CPI

So, it will be (215-210)/210 = 2.38%

2> B

The consumers will be the losers since the international price is cheaper than the domestic price, so the consumers will have to pay a higher price to buy home-made product.

3> A

The country needs to increase the aggregate demand, this requires expansionary policy. This can be achieved if the banks more lending to people at a lower rate. Thus, that can be one solution to it.

4> A

Money neutrality says that money only changes the nominal variables and thus it can not change the long run real variables like real output which is determined by capital, labor and technology.