Question

1.	In the IS-LM model we studied, a cut in tax will make consumption ____ and investment ____.
	rise, not change fall rise, not change, rise rise, rise fall, fall rise, fall

2.	In the AS-AD model of chapter 10, a rise in velocity leads to a ___ in the short run and a ____ in the long run.
	rise in output, rise in price fall in output, rise in price rise in output, fall in price rise in price, fall in output fall in output, fall in price fall in price, rise in output
3.	Which of the following would increase the nominal money supply?
	The required reserve-deposit ratio imposed on banks is increased. People deposit less cash in banks, preferring to hold it in cash form. There is a fall in price level. The central bank purchases bonds in the open market.

Answer 1

Ans 1. rise, fall

A cut in taxes will increase disposable income of household inducing consumption. Thus, consumpttion spending rises. This will increase demand for money increasing the interest rate which will increase the cost of borrowing decreasing the investment.

Ans 2. rise in output, rise in price

An increase in velocity of money means people are spending more frequently leading to increase in consumption and investment. This will increase aggregate demand leading to increase in prices and output in short run. In long run, aggregate supply wilm decrease leading to further increase in prices. Thus, in short run output rises and in long run prices rise.

Ans 3. Central bank purchase bonds in the open market

In an open market purchase, a central bank will buy government securities from the market in exchange for money increasing monetary base and hence, nominal money supply.

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