Question

6. A persistent increase in the actual growth rate of real GDP in excess of the growth rate of potential real GDP likely will most result eventually in: (a) accelerating inflation; (b) a recession; (c) stagflation (rising inflation and falling real economic growth); (d) a looser monetary policy from the Federal Reserve.

7. For the most part, rising U.S. inflation is associated with: (a) a much stronger U.S. dollar in foreign exchange markets; (b) growth in aggregate demand at a pace faster than growth in aggregate supply; (c) the persistent increase in the size of the federal budget deficit; (d) Chinese tariffs on U.S. exports.

8. If growth in nominal GDP from one quarter to the next was 5.9% and prices, on average, went up by 2.0% during the same period, then real GDP likely: (a) increased by 3.9%; (b) increased by 7.9%; (c) increased by 11.8%; (d) cannot be determined with the information provided in this question.

9. Suppose a worker gets a 3% annualized wage increase and, over the year ahead, inflation averages 3%. Which of the following statements best describes the likely outcome for this worker? (a) the worker clearly is better off at the end of the year because that worker’s buying power is now 5% greater; (b) the worker clearly is better off because the 3% inflation likely overstates how much the prices paid by that worker went up; (c) the worker is less well off because inflation wiped out the worker’s increased spending power and the wage gain was subject to income taxes; (d) the worker is less well off because the wage increase increased costs to his/her employer, putting jobs at risk.

10. One oft-cited negative side effect of inflation is that: (a) inflation favors price takers; (b) inflation tends to result in lower interest rates immediately, hurting savers; (c) inflation contributes to a redistribution of wealth arbitrarily; (d) inflation reduces the real level of debt, making debt repayment over time more difficult for most borrowers.

11. An IS curve shows: (a) the locus of all combinations of interest rates and incomes that will result in realized investment and realized savings being equal to one another; (b) that realized savings are most likely a function of interest rates, because changes in interest rates result in changes in precautionary demand for money; (c) the combinations of investments and incomes that result in the supply and demand for money being equal to one another; (d) that increases in output typically are caused by increases in interest rates.

12. Suppose Congress passes legislation that will fund a $100 billion dollar effort to improve U.S. infrastructure. The likely short-run outcome will be: (a) shift to the left by the IS curve; (b) a shift to the right by the IS curve; (c) a flattening of the IS curve; (d) a movement down the IS curve a level consistent with lower interest rates and higher national income.

13. Which two relationships are most fundamental to the derivation of an IS curve? (a) inflation is a function of money supply and consumption is a function of disposable income; (b) real interest rates are a function of money supply and nominal interest rates are a function of the monetary base; (c) demand for money is a function of income and investment is a function of interest rates; (d) investment is a function of interest rates and savings are a function of income.

Answer 1

1 - Option A

Acceleraing inflation

In this case the real GDP growth is more than the potential GDP. In recession and stagflation ,real GDP is less than potential

2 - Option B

Growth in aggregate demand at a much faster rate than growth in AS.

This is the main reason for the growth of inflation and not the other options are correct.

3 - Option A

Increased by 3.9 %

This is because real GDP growth = Nominal - Inflation rate

Real GDP growth = 5.9-2.0

= 3.9 %

Hence Option A will be correct

4 - Option C

The worker is less well off because the inflation wiped off the increase in wages effect and the increased wage is subject to income tax

He would be better off only when the inflation rare will be less than rate of increase in wages. Hence Option C will be correct.