Question

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.

14. Growth in sustainable, or potential, real GDP is calculated roughly as the summation of: (a) personal consumption expenditures and gross private domestic investment; (b) productivity growth plus growth in the labor force; (c) productivity growth and money supply growth; (d) cyclically-sensitive output plus structurally-determined output.

15. Which of the following is not a component of aggregate savings? (a) private savings; (b) the government budget surplus; (c) foreign savings; (d) bank reserves.

16. A rise in interest rates can be associated with a decrease in investment, because: (a) businesses typically borrow in order to finance capital investment and interest is a cost; (b) businesses will invest when the marginal product of capital over time at least covers their interest expenses; (c) both (a) and (b) above; (d) a weakening economy and business outlook typically precedes a rise in interest rates.

17. If, over time, a relatively small change in interest rates becomes associated with a larger change in income, the IS curve likely: (a) flattened; (b) steepened; (c) shifted inward; (d) shifted outward.

18. Which statement best expresses the logic underlying the derivation of an LM curve? (a) for each level of interest rates, there is an income level that will equate transactions demand for money with speculative demand for money; (b) for each level of interest rates, there is a level of income that will make the level of aggregate demand for money equal to the aggregate supply of money; (c) for each income level, there is a range of interest rates that will equate the aggregate demand for money with the aggregate demand for goods and services (GDP); (d) none of the above.

19. We would expect that the level of income that would equate total demand for and supply of money would be: (a) roughly at the level of the Fed’s interest rate target; (b) lower the lower the interest rates; (c) equal to the level that would equate realized investment with realized savings; (d) higher the lower the interest rate (or lower the higher the interest rate).

Answer 1

Answer 10: Option b.

inflation tends to result in lower interest rates immediately, hurting savers. Inflation results in lower real interest on savings in the economy and this reduces purchasing power of money in the economy which hurts savers in the market.

Answer 11: Option a.

IS curve shows the the locus of all combinations of interest rates and incomes that will result in realized investment and realized savings being equal to one another. This is because IS curve shows goods market equilibrium in the economy.

Answer 12: Option b.

An increase in government expenditure leads to rightward shift of the IS curve of the economy.

Answer 13: Option d.

Investment is a function of interest rates and savings are a function of income. IS curve takes into consideration that investment is negatively related to rate of interest and savings are positively related to income in the economy.