Question

Can you please check my answers and if I am wrong correct me.

Thank you!

A. In today's interconnected world, many central banks communicate regularly and frequently with the public about the state of the economy, the economic outlook, and the likely future course of monetary policy. Communication about the likely future course of monetary policy is known as "forward guidance.". If the central bank increases the reserve ratio, as the market has perfectly expected, which of the following will surely happen?

1. The short run economic output will be deviating from its potential output

2. The prevailing price level of goods and services in that country will fall

3. The level of potential output will be shifting to the left

4. None of the following will happen for sure

B. What actually helps to determine the slope of short-term aggregate supply curve?

1. The rate at which the level of technology increases

2. The rate at which the country’s capital stock is depreciating

3. How responsive is the actual short run level of output to the deviation of actual price level of the economy from its expected price level

4. How sensitive is the economy towards changes of nominal interest rate

C.  During a recession the economy experiences:

1. rising employment and income.

2. rising employment and falling income.

3. rising income and falling employment.

4. falling employment and income.

D. Most economists believe that in the short run

1. real and nominal variables are determined independently and that money cannot move real GDP away from its long-run trend.

2. real and nominal variables are determined independently but that money can temporarily move real GDP away from its long-run trend.

3. real and nominal variables are highly intertwined but that money cannot move real GDP away from its long- run trend.

4. real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend.

E. The Central Bank of Wiknam increases the money supply at the same time the Parliament of Wiknam passes a new investment tax credit. Which of these policies shift aggregate demand to the right?

1. both the money supply increase and the investment tax credit

2. the money supply increase but not the investment tax credit

3. the investment tax credit but not the money supply increase

4. neither the investment tax credit nor the money supply increase

F. The long-run aggregate supply curve would shift right if the government were to

1. reduce the minimum-wage.

2. make unemployment benefits more generous.

3. raise taxes on investment spending.

4. All of the above are correct.

G. Sticky nominal wages can result in

1. lower profits for firms when the price level is lower than expected.

2. a decrease in real wages when the price level is lower than expected.

3. a short-run aggregate-supply curve that is vertical.

4. a long-run aggregate-supply curve that is upward-sloping.

H. In which case can we be sure aggregate demand shifts left overall?

1. people want to save more for retirement and the Fed increases the money supply.

2. people want to save more for retirement and the Fed decreases the money supply.

3. people want to save less for retirement and the Fed increases the money supply.

4. people want to save less for retirement and the Fed decreases the money supply.

I. In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

1. the real value of money decreases; in turn, the real value of the dollar increases in foreign exchange markets, which decreases net exports.

2. the real value of money decreases; in turn, interest rates increase, which decreases net exports.

3. households increase their holdings of money; in turn, interest rates decrease, which reduces spending on investment goods.

4. households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.

J. Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this

1. it is only necessary that long-run aggregate supply shifts right over time.

2. it is only necessary that aggregate demand shifts right over time.

3. both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther.

4. None of the above cases would produce rising prices and growing real GDP over time.

Answer 1

A. The prices of goods and services will fall. This is because if the reserve ratios are high, then there will be lesser loans and hence lesser investment, this will reduce output and per-capita income and hence, less purchasing power of the people. Demand would fall and hence, the prices will also fall.

B. The slope of the short-run AS curve is determined by how responsive the supply is to the deviation of the price from the expected level. This is because the supply curve is plotted with quantity in the x-axis and price on the y-axis and any other factor will only influence the shifting of the curve but not its slope.

C. During recessoin, the economy experiences falling employment and income. Output reduces, hence income reduces. People's purchasing power reduces because of which demand reduces. Since demand reduces, the price reduces and thus output futther reduces, which causes lay-off and unemployment.

D. Most economists believe that in the short run, real and nominal variables are determined independently and that money cannot move real GDP away from its long-run trend. This is because nominal variables are at current prices and that real variables depend on actual production and output and not on nominal variables.

E. The money supply increase will shift the demand curve to the right but not the investment tax credit. This is because the investment tax credit will increase more investment and will actually negatively affect current consumption demand.

F. The long-run aggregate supply curve would shift right if the government were to reduce the minimum-wage. This will increase labour demand by firms and hence more workers will get jobs, more output will be created and aggregate supply will rise.

G. Sticky nominal wages can result in lower profits for firms when the price level is lower than expected. This is because even as prices reduce, the firms cannot cut back on their costs by reducing labour wages and hence will earn lower profits.

H. People want to save more for retirement and the Fed decreases the money supply. In this case, the demand curve will definitely shift to the left because both consumption expenditure as well as money supply has reduced.

I. Interest rate effect when price level increases is that households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods. This is because people want to spend less money when prices rise, and hence the supply of loanable funds reduces and interet rates rise.

J. Both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther. When both AD and AS move, it means both income as well as production of goods and services are increasing. The AD curve has to move farther than the AS curve because if both move the same amount, the there will not be a price rise but only inrcease in GDP.