Question

1. When interest rates are artificially lowered through expansionary monetary policy,

a) longer-term investment projects appear to be more profitable, and production of capital goods increases.

b)the economy experiences an unsustainable boom phase.

c)the economy will likely fall into a recession in the longer run.

d) all of the above tend to occur.

2.The democratic political process is weighted in a manner that favors

		contractionary over expansionary fiscal and monetary policies because changes in aggregate demand tend to affect output before they affect the price level.
		contractionary over expansionary fiscal and monetary policies because changes in aggregate demand tend to affect the price level before they affect output.
		expansionary over contractionary policies because changes in aggregate demand tend to affect the price level before they affect output.
		expansionary over contractionary policies because changes in aggregate demand tend to affect output before they affect the price level.

3. Which of the following is NOT one of the three primary ways that a manufacturer could use extra profits earned from implementing a new cost-saving machine?

		Expand operations by buying more machines to produce more output
		Invest the profits in some other industry
		Spend the extra profits on increasing his personal consumption
		All of the above are ways that extra profits could be used

Answer 1

1(D)

reason lower the interest rate artificially following the expansionary momentary policy will incur investment opportunity as demand will increase , it will also give pace to production of capital goods. but we will have to face unsustainable boom but soon this situation might worse the condition as unsustainable boom situation start decline in the long run and create a situation of recession when people are exhausted with available resources.

2 (D) expansionary over contractionary policies because changes in aggregate demand tend to affect output before they affect the price level.

reason democratic political process will choose expansionary over contractionary as expansion is more attractive to votes or consumer as they see no affect on output and more expenditure on account of government and less tax will always be attractive for consumer as they have more purchasing power and least affect by the prices.

3. (C)

reason profit earned by implementing new cost saving machine can not be spend for personal use as it will not increase further profit as it will not considered as investment