Question

33. Demand shocks move unemployment and inflation in

A) the same directions, as the Phillips Curve suggests.

B) opposite directions, as the Phillips Curve suggests.

C) the same directions, which is not what the Phillips Curve suggests.

D) opposite directions, which is not what the Phillips Curve suggests.

E) circles.

34. When Komal gathers up all of her loose change and deposits it in her chequing account, the immediate effect is

A) both M1+ and M2+ increase.

B) M1+ increases and M2+ is unchanged.

C) M2+ increases and M1+ is unchanged.

D) both M1+ and M2+ are unchanged.

E) both M1+ and M2+ decrease.

35. Suppose you deposit $2,000 cash in your bank. The bank desires to hold 20 percent of all deposits as reserves. What amount of new loans will your bank create immediately after you make the deposit?

A) $400.

B) $8,000.

C) $1,600.

D) $2,000.

E) $10,000.

40. Interests rates

A) are usually higher on short-term bonds than on long-term bonds.

B) are usually lower on low-risk bonds and higher on high-risk bonds.

C) for short-term bonds tend to fall when interest rates for long-term bonds rise.

D) are usually higher on low-risk bonds and lower on high-risk bonds.

E) for short-term bonds tend to rise when interest rates for long-term bonds fall.

Answer 1

Answer to the question no. 33:

Option b: Opposite directions, as the Phillips Curve suggests.

Explanation: In AD-AS framework, a positive demand shock shifts the AD curve to the right. This raises the aggregate demand and thus, the price and output is increased in the economy. In real term, the increase in output = increase in employment. So, a positive demand shock causes the employment (fall in unemployment) and price to increase. The phillips curve also suggests that rise in the emploment (or fall in the unemployment) is go together with the higher inflation rate (rise in the price level).

Answer to the question no. 34:

Option a: Both M1 and M2 increase.

Explanation: The M1 component of money supply includes the currency with public and all the demand deposits with bank (current and saving account). All the deposits made in the chequing account fall in the M1 component of money supply and thus, M1 will go up when Komal deposits in her chequing account. Angain the M2 includes M1 and short- and medium-term savings notice deposits and money market funds. Thus, this will raise the M2 also by same amount.

Answer to the question no. 35:

Option c: $1600.

Explanation: The 20% reserve requirement implies that the bank will loaned out 80% of its total deposits and also keeps 20% cash with the itself as reserve. Thus, when I doposits $2000 in a bank, with 20% reserve requirement, the bank will lend out 80% of its excess reserve (total deposite-required reserve). 80% of $2000 is $1600.

Answer to the question no. 36:

Option b: Are usually lower on low-risk bonds and higher on high-risk bonds.

Explanation: The rate of interest in the high risk bond is generally high. Since the risk element is high thus, the investor will invest only if the rreturn is high. If the rate of interest of the high risk asset is equal with the low risk asset, then the investors will buy the low risk assets instead. So, generally we see that the arte of interest of the high risk asset is higher than that of the low risk assets (bonds).

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