Practice Exam

Question 6

  • Purchase bond --> decrease the interest rate

    Figure 11-6 Decreasing Interest Rates Increases Invesment nvestment

  • Purchase bond --> bloat the economy = increase the inflation rate --> promote the employment

Question 7

  • Investment tax credits

    investment tax credit definition An amount that businesses are allowed by law to deduct from their taxes, reflecting an amount they reinvest in themselves. Note : Investment tax credits are structured to reward and encourage economic growth.

    which raises the equil ibrium interest rate and grea ter saving... Introduce Investment Tax Credits —Increase in demand LFO LFI An investment tax credit (makes investment like building new factories more attractive) increases the demand for loanable funds.. DLF ... which raises the equilibrium quantity of loana ble funds. Loanable Funds

Question 10

  • Consumer Price Index and Inflation

    A consumer facing inflation that occurs at the rate of 10% per year will able to buy 10% less goods at the end of the year if his or her income stays the same. Inflation can also be defined as a decline in the real purchasing power of the applicable currency. The CPI represents prices paid by consumers (or households). The Consumer Price Index & Inflation - Investopedia www.investopedia.com/exam-guide/cfa-level-l/.../consumer-price-index.asp

    We can then use the monthly CPI published by the Bureau of Labor Statistics to determine differences between two points in time and calculate inflation for that period. For example, let's compare the CPI of January 2000 with that of January 2010. The CPI of January 2000 was 168.800 with the index for January 2010 listed as 216.687. To make the calculations, we take the more recent CPI, subtract the oldest CPI, and then divide by the oldest CPI. Using our numbers shown above, it would be 216.687, minus 168.800, divided by 168.800. This equals .2837. Inflation is always considered as a percentage, so we take that number and multiply it by 100 toget 28.37%. Thus, the inflation rate from January 2000 to January 2010 was 28.37%. By looking at these calculations, it becomes easier to understand that the Consumer Price Index is a factor in determining inflation.

Question 12

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Federal Open Market Committee Federal Reserve Purchases Treasury Securities from Primary Dealers Reserves in the Banking System Increase Federal Funds Rate Declines Federal Reserve Sells Treasury Securities to Primary Dealers Reserves in the Banking System Shrink Federal Funds Rate Increases How the FOMC Controls the Federal Funds Rate

Fed Open Market Operations neecAS

Question 25

  • Budget deficit and interest rate

    Deficit Interest Rate 5% which raises the equilibrium interest rate ... $800 $1 ,200 Supply, S, 1. A budget deficit decreases the supply of loanable funds Demand Loanable Funds (in billions of dollars) and reduces the equilibrium quantity of loanable funds. copyrightezoca

    Budget Deficit In reality, government budget deficits affect the real interest rate. When the government reduces national savings by running a budget deficit, the interest rate rises, and investment falls. Because investment is important for long —run economic growth, government budget deficits reduce economy's growth rate.

Question 26

26. Which of the following will cause the United States dollar to depreciate relative to the euro? (A) (B) (D) (E) An increase in household income in the United States An increase in interest rates in the United States An increase in household income in Europe A decrease in interest rates in Europe A decrease in price level in the United States

  • Increasing household income in the U.S. results in more demand for foreign goods which appreciates that currency and depreciates the dollar.

Question 27

  • Causes of Stagflation

    • If the prices of raw material and labour increases, it will increase the cost of production prices will rise and output will fall.

    • Rapid rise in indirect taxes also increase the cost and price level. So output and employment falls.

    • Shortage of labour also affects the output adversely.

    Stagflation is often caused by a supply side shock. For example, rising commodity prices, such as oil prices, will cause a rise in business costs (transport more expensive) and short run aggregate supply will shift to the left. This causes a higher inflation rate and lower GDP. NOV 28, 2012 Stagflation I Economics Help www.economicshelp.org/blog/glossary/stagnation/

    DEFINITION OF STAGFLATION inflation when the general level ofprices in an economy increases stagnation when the production of goods and services in an economy slows down or even starts to decline t)Stu y.com

Question 34

30 Alpha Beta 10 20 30 STEEL (IN TONS)

  • Alpha is getting 1 S domestically for their 1 G, but now they can trade their 1 G for 1.5 S.

  • Beta is having to give up 2 S to get 1 G domestically, but if they trade they only have to give up 1.5 S to get 1 G.

Question 35

From the Short Run to the Long Run Aggregate price level (a) Leftward Shift of the Short-Run Aggregate Supply Curve LUS SRAS2 SRASI A rise in nominal wages shifts SRAS leftward. Real GDP Aggregate price level (b) Rightward Shift of the Short-Run Aggregate Supply Curve susl SRAS2 A fall in nominal wages shifts SRAS righ tward. Real GDP In panel (a), the initial short-run aggregate supply curve is SRA\*. At the aggregate price level, PI, the quantity of aggregate output supplied, Yl, exceeds potential output, Yp. Eventually, low unem- ployment will cause nominal wages to rise, leading to a leftward shift of the short-run aggregate supply curve from SRA\* to SRA$. In panel (b), the reverse happens: at the aggregate price level, PI, the quantity of aggregate output supplied is less than po- tential output. High unemployment eventually leads to a fall in nominal wages over time and a rightward shift of the short-run ag- gregate supply curve.

  • Short-Run to Long-Run: Y1 > YP

    • Initial equilibrium is E1. Eventually, low unemployment will cause nominal wages to rise and leads to a leftward shift of the SRAS curve, so the new equilibrium is at E2

    Aggregate price IRAS SRAS2 El SRASI A rise in nominal wages shifts SuS leftward. AD Real GDP

  • Short-Run to Long-Run: Y1 < YP

    • Initial equilibrium is E1. Eventually, high unemployment will cause nominal wages to fall and leads to a rightward shift of the SRAS curve, so the new equilibrium is at E2

    Aggregate price level PI IRAS SRASI SRAS2 A fall in nominal wages shifts SRAS rightward. AD Real GDP

Question 37

Types of unemployment (1) • Unemployment related to the process of changing Frictional jobs, which may involve a period out of work. Improve by: increasing flow of information — job centres • The category of unemployed whose number Cyclical varies according to the business or economic cycle. Demand-deficient / Keynesian AS Macro Economics March 2014 NB: Not just in a recession (e.g. in a boom, bankruptcy lawyers have no business\!)

Types of unemployment (2) Structural Hidden AS Macro Economics March 2014 • When there is a mis-match between the skills of those unemployed and the skills that new jobs require. Improve by: supply-side policies such as retraining • Unemployment which is known to exist but is not included in the official government figures Especially amongst illegal immigrants — evaluation on official figures

Types of unemployment (3) Classical / The more they push wages up, depending on the elasticity of labour supply and demand, the more unemployment Seasonal AS Macro Economics March 2014 • This type of unemployment occurs when trade unions bargain for higher wages, which leads to fall in the demand for labour. • A type of unemployment that occurs due to the seasonal nature of the job is known as seasonal unemployment. E.g. tourism tutor2u

Question 40

40. Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to encourage greater investment. Which of the following combinations of monetary and fiscal policies would best achieve this goal?

  • Expansionary monetary policy would result in lower interest rates, causing more investment in real capital.

  • To keep prices from going up, policymakers could cut G or raise taxes [contractionary] to prevent this.

Question 42

  • Lower production costs --> more profits + shifts the AS to the right --> lower price level + increase in real output

Question 43

43. An economy is in a short-run equilibrium at a level of output that is less than full-employment output. If there were no fiscal or monetary policy interventions, which of the following changes in output and the price level would occur in the long run ?

With no intervention in this recession, the surpluses would result in lower prices

  • Workers would then accept lower wages. As more are hired back, output would increase.

Question 47

  • Decreasing taxes would increase C, increase AD and real GDP. Assuming a balanced budget before the decrease in T means the G would have to borrow, pushing up interest rates.

  • Decreasing the discount rate would also lead to more real GDP but would result in a lower interest rate.

  • With interest rates moving in opposite directions with the two policies, this make them indeterminate.

    Tax lever of fiscal policy I Aggregate demand and aggregate supply I Macroeconomics I Khan Academy \* AscoQ Lea-.\&CLIQ..S 2:38 / 2:39 Tube

Question 53

53. In the long run, if aggregate demand decreases, real gross domestic product (GDP) and the price level will change in which of the following ways?

  • The decrease in AD resulted in surpluses & caused prices to drop.

  • Workers would now accept lower wage increases which moved the SRAS curve right, increasing real GDP.

    Aggregate price level 1. An initial positive demand shock... RAS P3 P2 PI Potential —Yl output ADI 3. ...until an eventual rise in nominal wages in the long run reduces short-run aggregate supply and moves the economy back to potential output. SRAS2 susl 2. ...increases the aggregate price level and aggregate output and reduces unemployment in the short run... Real GDP Inflationary gap

    ![Aggregate price level 2. ...reduces the aggregate price level and aggregate output and leads to higher unemployment in the short run...

  • An initial negative demand shock... IRAS ADI AD2 Potential output SRASI SRAS2 3. ...until an eventual fall in nominal wages in the long run increases short-run aggregate supply and moves the economy back to potential output. Real GDP Recessionary gap ](./media/image30.png)

Question 56

Gross Private Domestic Investment (I) I = the purchase of new capital goods or total investment by the private sector. It includes the purchase of new housing, plants, equipment, & inventory by the private sector. Nonresidential investment includes expenditures by firms for machines, tools, plants. Residential investment includes expenditures by households & firms on new houses. Change in inventories computes the amount by which firms' inventories change during a given period. Inventories are the goods that firms produce now but intend to sell later.

Question 57

  • The Relationship Between the Phillips Curve and AD

    The Phillips Curve Aggregate Demand and Aggregate Supply b 2% 4% (Output = $8 0 trillion) -J 8 a Phillips Curve 7% (Output = $7.5 trillion) 106 100 (Unemployment = a 7.5 7%) SRAS ADHigh ADL0w Unemployment Rate (Percent) . so the inflation rate rises. audio off pause 8.0 (Unemployment = 4%) Real GDP ($Trillions) text off

    The Phillips curve shows the inverse trade-off between rates of inflation and rates of unemployment. If unemployment is high, inflation will be low; if unemployment is low, inflation will be high. The Phillips curve and aggregate demand share similar components. The Phillips curve is the relationship between inflation, which affects the price level aspect of aggregate demand, and unemployment, which is dependent on the real output portion of aggregate demand. Consequently, it is not far-fetched to say that the Phillips curve and aggregate demand are actually closely related. To see the connection more clearly, consider the example illustrated by . Let's assume that aggregate supply, AS, is stationary, and that aggregate demand starts with the curve, ADI. There is an initial equilibrium price level and real GDP output at point A. Now, imagine there are increases in aggregate demand, causing the curve to shift right to curves AD2 through AD4. As aggregate demand increases, unemployment decreases as more workers are hired, real GDP output increases, and the price level increases; this situation describes a demand-pull inflation scenario.

    110 108 106 Q) Q) 104 Q- 102 100 0 Aggregate Demand and Aggregate Supply AD4 o Phillips Curve 10 8 e AD, 5 6 7 8 Real GDP (in millions of dollars) 9 10 0 2 Phillips curve 4 6 8 10 12 Unemployment rate (percent)

Question 59

  • Business taxes are determinants of both AD and AS.

  • The decrease in business taxes means they have more profits and will invest more, increasing AD.

  • As far as the legal-institutional environment with the government, it is more favorably so that will result in an increase in AS

Question 60

  • The budget deficit means the government is borrowing more, which pushes up the interest rate.

  • The higher interest rate attracts more foreign investors, increasing demand for the dollar and appreciating the dollar.

  • The stronger dollar makes our exports more expensive and imports cheaper, therefore increasing the trade deficit.

    The twin deficits hypothesis, also called the double deficit hypothesis or twin deficits anomaly, is a macroeconomic proposition that there is a strong link between a national economy's current account balance and its government budget balance. Twin deficits hypothesis - Wikipedia https://en.wikipedia.org/Wiki/Twin\_deficits\_hypothesis

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