Question

1. According to the neutrality of money property, how does once-and-for-all increase in the aggregate quantity of money affect the interest rate i in the long run?

Select one:

a. Not enough information to answer the question.

b. i increases

c. It does not affect i

d. i decreases

2. In the Solow Model with no technological changes, when capital depreciates faster than it is accumulated we may conclude that the capital stock per worker:

Select one:

a. will rise if no changes in population

b. will rise if population increases.

c. will remain the same

d. will fall

3. In the extended IS-LM model which includes a role for expectations, consider the following four statements:

I.       The IS curve in this model is steeper relative to the basic IS-LM model without expectations.

II.     If expectations about future output improve, the IS curve shifts to the right.

III.    If expectations about future output improve, the LM curve shifts to the right.

IV.  If expectations about future output improve unexpectedly, stock market prices increases under the efficient market hypothesis.

     Which of the above statements are correct?

Select one:

a. Statements I, II and IV

b. Statements I and II

c. Statements II and III

d. Statements I, II and III

Answer 1

1) Money neutrality refers to that In long run there is no change in real variable,only nominal variable changes.

So Increase in Money supply will decrease interest rate in short run Increase gdp.

In long run pricr adjustment lead to decrease in gdp and increase in price level and thus Decrease real money supply and thus increase interest rate to its Initial Level.

OPTION C is correct

2) change in capital per worker= saving/ capital accumulation - Depreciation- population growth

So it will decrease if depreciation is higher than capital accumulation.

3) option B is correct

Statement 1,2 are Right

Statement 4 is not related to IS LM model.