Question

In a closed economy, what happens in the short run as a result of an increase in taxes?

	both investment and output increase.
	money demand and output increase.
	the change in the interest rate increases money demand and the change in output decreases money demand.
	investment decreases and output increases.
	the change in the interest rate decreases money demand and the change in output increases money demand.

Which of the following would decrease real wages in the medium run?

	expansionary monetary policy
	expansionary fiscal policy
	an increase in the markup
	a decrease in the price of oil
	a decrease in unemployment insurance

Based on price setting behaviour, we know that a decrease in the price markup will cause:

	an increase in the real wage.
	a downward shift of the PS curve.
	no change in the real wage.
	no shift on the PS curve.
	a reduction in the real wage.

Which of the following policies would increase output (Y) and improve the trade balance (NX) simultaneously?

	an increase in government spending and a reduction in the real exchange rate
	a real appreciation
	a decrease in the interest rate
	an increase in government spending
	more than one of the above

If producers become more competitive, we would expect to observe:

	a downward shift in the PS curve.
	an upward shift in the PS curve.
	a downward shift in the WS curve.
	an upward shift in the WS curve.
	a movement along the WS curve.

Answer 1

(1) The change in the interest rate increases money demand and the change in output decreases money demand.....In a closed economy, tax reduction reduce interest rate so that people will hold money in their hand ( send for money increases) and investment falls leads to a reduction in the output.

(2) an increase in the markup will increase unemployment in the economy and at the same time reduce the real wage rate in the medium run... Fiscal and monetary policy expansions will increase price in the medium run.. But real wage will fall when markup goes up.

(3).  A decrease in the price markup will increase real wage rate... Because real wage rate is determined by dividing the nominal wage rate with price level...if price mark up is greater, the real wage will be smaller and vice versa..

(4) A decrease in the rate of interest leads to an increase in the investment of capital thereby production will go on and lower exchange rate causes exports to increase and imports to decrease which will improve the trade balance and output simultaneously..

(5) if producers become more competitive, we would expect to observe an upward shift in the PS curve..the price markup will be lower which reduce the unemployment and increase the real wage in the economy... So that PS curve shifts to the upward....