Question

1.According to the quantity equation, if velocity is constant at 2 and real GDP is constant at 6000, then, if the money supply is increased from 4500 to 6000, the price level:

A. increases to 1.33

B. increases to 1.5

C. increases to 2

D. is constant at 1.5

2. If inflation does not adjust rapidly in the short run, then when the Reserve Bank increases the nominal interest rate, in the short run the real interest rate will:

A. increase

B. decrease

C. not change

D. equal the nominal interest rate

3.If planned aggregate spending in an economy can be written as PAE = 28 000 + 0.4Y – 40 000r, and potential output equals 44 000, what real interest rate must the Reserve Bank set to bring the economy to full employment?

A. 0.02

B. 0.03

C. 0.04

D. 0.06

4. If potential output equals 4000 and short-run equilibrium output equals 5500, there is a ______ gap and the Reserve Bank must _____ real interest rates in order to close the gap.

A. contractionary; raise

B. expansionary; lower

5. To eliminate a contractionary gap, the Reserve Bank _____ the nominal interest rate, _____ the real interest rate and ____ the money supply.

A. increases; increases; increases

B. increases; increases; decreases

C. increases; decreases; decreases

D. decreases; decreases; increases

C. expansionary; not change

D. expansionary; raise

Answer 1

Question 1

According to the quantity equation, if velocity is constant at 2 and real GDP is constant at 6000, then, if the money supply is increased from 4500 to 6000, the price level:

Answer

C. increases to 2

Reason

Equation of exchange = P*Y = M*V

M = Money supply = $6000

V = Velocity = 2

Y= Real GDP = $6000

P = Price level = ?

Equation of exchange => P*6000 = 6000*2

P*6000 = 12000

P = 12000/6000

P = 2

Question 2

If inflation does not adjust rapidly in the short run, then when the Reserve Bank increases the nominal interest rate, in the short run the real interest rate will:

Answer

A. increase

Reason

Whenever inflation is adjusted rapidly in the short run, when Reserve Bank decreases the nominal interest rate as a result the real interest rate will decrease. Contrary to this, when the Reserve Bank increases the nominal interest rate, the real interest rate will increase.

Question 4

If potential output equals 4000 and short-run equilibrium output equals 5500, there is a ______ gap and the Reserve Bank must _____ real interest rates in order to close the gap.

Answer

A. contractionary; raise

Reason

In order to close a gap between potential output and short run equilibrium output, the central bank raises the interest rates to close the gap.

Question 5

To eliminate a contractionary gap, the Reserve Bank _____ the nominal interest rate, _____ the real interest rate and ____ the money supply.

Answer

D. decreases; decreases; increases

Reason

In order to close a contractionary gap, the Reserve Bank has to decrease the nominal interest rate the real interest rate whinch in turn increases the money supply.