Question

1. In an open-market purchase, the Reserve Bank ____ government bonds and the supply of bank reserves ______.

A. buys; increases

B. buys; decreases

C. buys; does not change

D. sells; increases

2. The Professor purchases a newly issued, two-year government bond with a principal amount of $4 000 and a coupon rate of 5% paid annually to pay for Berlin’s medical treatment. One year before the bond matures (and after receiving the coupon payment for the first year), The Professor sells the bond in the bond market. The price (rounded to the nearest dollar) the Professor will receive for his bond if the prevailing interest rate is 6% is:

A. Higher than $4000

B. Lower than $4000

C. $4200

D. Better pay the treatment right away before Berlin dies

3. The only component of planned aggregate expenditure for which planned spending is NOT always assumed to equal actual spending is:

A. consumption

B. investment

C. government purchases

4. Because of automatic stabilisers, when GDP fluctuates the:

A. government's budget remains in balance

B. government's deficit fluctuates directly with GDP

C. government's deficit fluctuates inversely with GDP

D. the economy will automatically go to full employment

Answer 1

1) Solution: buys; increases
Explanation: In open market operations the central increase the money supply with the purchase of the government bonds
2) Solution: Lower than $4000
Working: Previously issued bond pays = 4000 * 1.05 = 4200
Newly issued one-year bond pays = 4000 * 1.06 = 4240
Bond price * 1.06 = $4200
Bond price = 4200 / 1.06 = 3962
3) Solution: Investment
Explanation: The investment is only component where we cannot assume that the planned spending would be always equal to actual spending
4) Solution: government's deficit fluctuates inversely with GDP
Explanation: Because of automatic stabilisers the GDP fluctuations will not be more than it otherwise would, thus government's deficit will fluctuates inversely with gross domestic product

answered by: anonymous