Question

1) When aggregate price level in the economy falls, then the interest rate in the economy falls, which leads to an increase in investment expenditure in the economy. This phenomenon is called:

A) the wealth effect B) the interest rate effect C) the exchange rate effect D) the investment effect

2)The Quantity Theory of Money can be used to explain why:

A) SRAS curve is downward sloping B) SRAS curve is upward sloping C) AD curve is downward sloping, AD curve is upwards sloping

3) The Misperceptions Theory can be used to explain why:

A) SRAS curve is downward sloping B) SRAS curve is upward sloping C) AD curve is downward sloping, AD curve is upwards sloping

4) The _______ curve will shift ______ if there is a discovery of a new huge coal mine.

A) SRAS; right B) LRAS; right C) SRAS; left D) LRAS; left

5) Okun’s Law states that an extra unit of unemployment will lead to a 2 percent decrease in _______.

A) output B) price C) wages D) CPI

6) The Phillips curve is _____________ in the short-run:

A) upward sloping B) vertical C) horizontal D) downward sloping

Answer 1

1. When aggregate price level in the economy falls, then the interest rate in the economy falls, which leads to increase in investent in the economy . This phenomenon is called the interest rate effect. Because lower interest rate means lower mortgage payments ,which tends to increase investment ,therefore investment rises when the price falls. Hence, option(B) is correct.

2. The Quantity theory of money is used to explain why the AD curve is downward sloping.Because high output means people engage in more transactions and need higher real money balances (M/P). Therefore, for a fixed level of M ,higher M/P implies a lower price level. In other words. a lower P means M/P will be higher wihich allows greater volume of transactions , so more output is demanded. Hence, option(C) is correct.

3. The misperceptions theory can be used to explain why the SRAS curve is upward sloping. Hence, option(B) is correct.

4. The LRAS curve will shift right if there is a discovery of a new huge coal mine. Hence, option(B) is correct.

5. Okun's law states that an extra unit of unemployment will lead to a 2% decrease in output . Hence, option(A) is correct.

6. The Phillips curve is downward sloping in the short run that shows the inverse relationship between inflation and unemployment. Hence, option(D) is correct.