Question

Principles of Macroeconomics

Q.1 In the short run, firms expand their production when the price level rises because

A.the higher prices allow the firm to hire more workers by offering higher wages, thereby increasing productivity and profits.

B. each firm must keep its production up to the level of its rivals, and some firms will expand production as the price level increases.

C.firms can increase their profits by increasing their maintenance.

D.the money wage rate remains constant so the higher prices for their products makes it profitable for firms to expand production.

Q.2 In the current interest rate on a 1-year bond is 4% and the interest rate on the 1-year bond is expected to be 5% next year, the interest rate on a 2-year bond will be

A.4.5%

B. 5%

C.4%

D.can not be determined

Q.3 Suppose that the equilibrium real interest rate is 2 percent per year, inflation is 2.5 percent, the target rate of inflation is 2 percent and the output gap is +1 percent. Using the Taylor rule with weights of 0.5 and 0.5, what is the federal funds rate?

A.3 percent

B.5.25 percent

C.5.5 percent

D.3.5 percent

Q.4 The term "crowding out" relates to the decrease in

A.consumption expenditure from an increase in investment.

B.private investment from a government budget deficit.

C.the real interest rate from a government budget deficit.

D.saving from an increase in disposable income.

Q.5 Which of the following are a limitation of fiscal policy?
I. There is a lag between recognizing that fiscal policy might be needed and when it actually takes effect.
II. It is difficult to know where the economy is in relation to potential GDP.
III. The size of the multiplier is uncertain..

A.I and II

B. I only

C. I and III

D. I, II and III

Q.6 Once you account for __________, the multiplier effect of an increase in government purchases is __________.

A.price level effects; weakened

B.the MPC; weakened

C.the MPC; strengthened

D.price level effects; strengthened

Answer 1

Question 1 option D.the money wage rate remains constant so the higher prices for their products makes it profitable for firms to expand production.

because in a short run, the nominal wage rate remains fixed. So when the price of a product is increases, the margin of profit also increases. So in higher price condition, when firm expand its production, it maximize the profit of the firm. so every firm enjoy the higher price situation and expand production to earn more profit