Question

True, False or uncertain?  Explain whether each of the following statement is true, false or uncertain. Start your answer by selecting one of the three statements – “True”, “False” and “Uncertain” and then provide arguments to justify your selection (be brief and concise in less than 100 words). You need to make assumption clear, reasonable and explicit if making any.

a. Nominal interest rates are always higher than real interest rates. Answer

b. If the lockdown measure due to a further spread of COVID-19 pandemic is extended to international flows of goods and services across the Australian border, saving in the national income account must be equal to the investment in Australia. Answer

c. The price of cars produced in Australia sold to consumers in the United States (US) goes up. This means that GDP deflator and the CPI rise in the US. Answer

d. An increase in the money multiplier (M) and a decrease in the reserve ratio (R) occur during the financial crisis. Answer

Answer 1

a)

False statement.

Real interest rate = Nominal interest rate - inflation rate

When inflation rate is zero, the real interest rate becomes equal to the nominal interest rate.

b)

True statement:

Since there will not be inflow or outflow of fund, thus there will be equality between domestic saving and investment.

c)

False statement.

The GDP deflator will not include the production that is done outside the domestic boundary.

d)

True statement

Money multiplier = 1/rr

Central bank reduces the Reserve ratio during the financial crisis, thus multiplier would rise.