Question

Q.1

In the medium run, which of the following expressions will represent the nominal interest rate?

a. r_n - π ^e.

b. r_n+ g_{m .}

c. r_n.

d. g_Y+ g_{m .}

e. r_n + π ^T.

Q.2

Suppose individuals expect that interest rates will fall in the future. Also assume that the RBA wants to prevent any change in current output. Given this goal of the RBA, the RBA should implement a policy in the current period that:

a. shifts the IS curve rightward.

b. shifts the IS curve leftward.

c. shifts the IS curve leftward and the LM curve upward.

d. shifts the LM curve downward.

e. shifts the LM curve upward.

Q.3

The ratio of a country's exports to its GDP must:

a. be larger than the ratio of imports to GDP.

b. be greater than one.

c. be less than one.

d. equal the ratio of imports to GDP.

e. None of the above.

Answer 1

1) Nominal Interest rate = Real Interest rate + Inflation rate

where real interest rate is "rn" and inflation rate is "pie". Option E is correct.

2) A fall in the interest rate in the future will reduce investment level now because investors will take loan when rate of interest is low such that it reduces the cost of borrowing. It will shift IS curve to its left. If RBA wants to keep output at same, it will shift LM curve downward. Option D is correct.

3) Ratio of country exports to its GDP can be more than imports and less than imports. Additionally, exports can be greater and less tha GDP. It makes option E correct.