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QUESTION 1
Increase in aggregate demand.
Decrease in aggregate demand.
Increase in aggregate supply.
Decrease in aggregate supply.
3 points
QUESTION 2
a.Aggregate demand increased, output and the price level increased, and output was above potential.
b.Aggregate demand decreased, output and the price level decreased, and output was above potential.
c.Aggregate demand decreased, output and the price level decreased, and output was below potential.
d.Aggregate supply increased, output and the price level decreased, and output was above potential.
e.Aggregate supply decreased, output and the price level decreased, and output was below potential.
3 points
QUESTION 3
a.Increase the discount rate to increase the money supply.
b.Decrease the discount rate to increase the money supply.
c.Increase the discount rate to decrease the money supply.
d.Decrease the discount rate to decrease the money supply.
3 points
QUESTION 4
a.A fall in oil prices and a decrease in government purchases.
b.An increase in investment spending and perfect weather for agriculture.
c.An increase in import spending and a decrease in export spending.
d.A rise in oil prices and an increase in consumer spending.
1 points
QUESTION 5
a.Aggregate demand will increase.
b.Aggregate demand will decrease.
c.Aggregate supply will increase.
d.Aggregate supply will decrease.
1 points
QUESTION 6
a.An increase in the bank reserve ratio leading to an increase in the money supply.
b.An increase in the bank reserve ratio leading to a decrease in the money supply.
c.A decrease in the bank reserve ratio leading to a decrease in the money supply .
d.A decrease in the bank reserve ratio leading to an increase in the money supply.
1 points
QUESTION 7
a.An increase in money supply.
b.A decrease in money supply.
c.An increase in money demand.
d.A decrease in money demand.
1 points
QUESTION 8
a.Output decreases below potential, prices decrease, interest rate decreases.
b.Output decreases below potential, prices increase, interest rate unchanged.
c.Output increases above potential, prices decrease, interest rate increases.
d.Output increases above potential, prices increase, interest rate increases.
2 points
QUESTION 9
a.Input costs increased, aggregate supply decreased, and output fell to potential.
b.Input costs decreased, aggregate supply increased, and output rose further above potential.
c.The interest rate spread increased, aggregate demand decreased, and output fell to potential.
d.The interest rate spread decreased, aggregate demand increased, and output rose further above potential.
2 points
QUESTION 10
a.Increase the discount rate to increase the money supply.
b.Decrease the discount rate to increase the money supply.
c.Increase the discount rate to decrease the money supply.
d.Decrease the discount rate to decrease the money supply.
2 points
QUESTION 11
a.Money demand increased, money supply was unchanged.
b.Money demand was unchanged, money supply decreased.
c.Money demand decreased, money supply decreased more.
d.Money demand was unchanged, money supply increased.
2 points
QUESTION 12
a.The decade saw an unstable economy. In several years output grew rapidly, but there was a recession at the decade’s beginning and a severe recession in the middle. Unemployment dropped early in the decade, then soared to high rates during the recession. Lenders became very pessimistic during the mid-decade recession, so riskier corporations had trouble borrowing. And, to top it all off, the decade saw the highest inflation of the past fifty years. There were some years when inflation and unemployment were both above average, the worst of all possible worlds.
b.The decade saw one of the longest expansions in U.S. history. After a mild recession at the start, output grew steadily, at above average rates towards the end of the decade. Unemployment peaked early, then declined to low levels by the end of the decade. In the money market lenders were confident through most of the decade, after a bit of trouble early. Inflation was troublesome early in the decade. Remarkably, though, despite steady growth and falling unemployment, inflation declined and remained below average during most of the decade.
c.The decade saw one of the longest expansions in U.S. history. After a mild recession at the beginning of the decade, output grew steadily, often rapidly. Unemployment rates declined to very low levels by the end of the decade. The money market was settled, as lenders remained confident throughout the decade. All was not as well as it seemed, though. Inflation was under control at the beginning of the decade. After a steady rise, by the end of the decade it had become a problem.
d.The decade began with the worst recession since the Great Depression. Output fell substantially and unemployment rose to the highest levels in decades. Inflation was high as well, the worst of all possible worlds. Money markets became severely pessimistic with the downturn, and lenders remained gloomy throughout most of the decade. The recovery saw rapid growth at first, but the unemployment rate fell to acceptable levels only by decade’s end. The recession helped bring down inflation, though, to very low levels by mid-decade. Inflation crept up again by the decade’s end, however.
2 points
QUESTION 13
a.Aggregate supply was increasing.
b.Aggregate supply was decreasing.
c.Aggregate demand was increasing.
d.Aggregate demand was decreasing.
2 points
QUESTION 14
a.Money demand was increasing.
b.Money demand was decreasing.
c.Money demand was increasing but money supply was increasing more.
d.Money demand was decreasing but money supply was decreasing more.
2 points
QUESTION 15
a.There was no clear counter-cyclical monetary policy, because output rose above potential but the inflation rate was falling.
b.Increase the money supply to decrease the real interest rate, and so increase aggregate demand.
c.There was no clear counter-cyclical monetary policy, because output fell below potential but the inflation rate was rising.
d.Decrease the money supply to increase the real interest rate, and so decrease aggregate demand.
2 points
QUESTION 16
a.The effects of a severe recession early in the decade were still being felt at the beginning of this period. Output was less than potential, and financial markets remained pessimistic. As financial markets gained confidence, however, borrowing costs fell for more-risky businesses, which increased investment spending. Tax cuts for households added to consumer spending, and the government increased spending on military purchases.
b.At the beginning of this period the economy was expanding and output approached potential. Then a war helped cause large increases in oil prices, which increased business costs. Businesses cut back on production and passed higher costs to consumers in higher prices, as much as they could. High inflation increased money demand, and financial markets became pessimistic, which further contributed to the economy’s problems.
c.The effects of recession early in the decade had faded by the beginning of this period. Rapid technological advance helped cause steady growth in output. These new technologies along with falling oil prices caused inflation to decrease, even though output rose above potential. Financial markets were optimistic throughout this period. They increased lending enough to hold interest rates stable despite rising incomes.
d.At the beginning of this period the U.S. President decided to expand Federal social spending and fight a war against U.S. enemies at the same time. A large tax reduction that had been proposed by a previous President took effect. After that, consumer and government spending increased rapidly. Financial markets were generally optimistic, but increasing demand for money raised borrowing costs, especially for more-risky businesses.
4 points
QUESTION 17
a.The decade saw an unstable economy. In several years output grew rapidly, but there was a recession at the decade’s beginning and a severe recession in the middle. Unemployment dropped early in the decade, then soared to high rates during the recession. Lenders became very pessimistic during the mid-decade recession, so riskier corporations had trouble borrowing. And, to top it all off, the decade saw the highest inflation of the past fifty years. There were some years when inflation and unemployment were both above average, the worst of all possible worlds.
b.The decade saw one of the longest expansions in U.S. history. After a mild recession at the start, output grew steadily, at above average rates towards the end of the decade. Unemployment peaked early, then declined to low levels by the end of the decade. In the money market lenders were confident through most of the decade, after a bit of trouble early. Inflation was troublesome early in the decade. Remarkably, though, despite steady growth and falling unemployment, inflation declined and remained below average during most of the decade.
c.The decade saw one of the longest expansions in U.S. history. After a mild recession at the beginning of the decade, output grew steadily, often rapidly. Unemployment rates declined to very low levels by the end of the decade. The money market was settled, as lenders remained confident throughout the decade. All was not as well as it seemed, though. Inflation was under control at the beginning of the decade. After a steady rise, by the end of the decade it had become a problem.
d.The decade began with the worst recession since the Great Depression. Output fell substantially and unemployment rose to the highest levels in decades. Inflation was high as well, the worst of all possible worlds. Money markets became severely pessimistic with the downturn, and lenders remained gloomy throughout most of the decade. The recovery saw rapid growth at first, but the unemployment rate fell to acceptable levels only by decade’s end. The recession helped bring down inflation, though, to very low levels by mid-decade. Inflation crept up again by the decade’s end, however.
2 points
QUESTION 18
a.A
b.B
c.C
d.D
2 points
QUESTION 19
a.E
b.F
c.G
d.H
2 points
QUESTION 20
a.There was no clear counter-cyclical monetary policy, because output rose above potential but the inflation rate was falling.
b.Increase the money supply to decrease the real interest rate, and so increase aggregate demand.
c.There was no clear counter-cyclical monetary policy, because output fell below potential but the inflation rate was rising.
d.Decrease the money supply to increase the real interest rate, and so decrease aggregate demand.
2 points
QUESTION 21
Here is the macro mode! so far. Use these diagrams to sketch changes in the goods and money markets, Ifthat hefiosyon answer questions. Goods Market P AS aggregate Demand l (r, exp) 3X6) aggregate Suggly Input oosts (labor, machinery, materials}TechnologyNatural conditions Second Shifts1. Goods to goods, when outputdiffers from potential, aggregate Money Market supply shifts towards potentialoutput 2. Money to goods, through realMoney Demand interest rate effects on investment ‘“90’113 3. Goods to money, through inoome Prices (output) and price changes tomoney demand Money Supply Lender Expectations Federal Reserve Policy QM Here are some data fiom three periods of U.S. economic history. You ’1’! need these data to answer thequestions 3 through 2}. After World War I BAA-AAA CPI InterestReal GDP Unemploy- Inflation Rate Year Growth ment Rate Rate Spread1919 0.4% 2.3% 14.6% 1.8%1920 -1.5% 5.2% 15.6% 2.1%1921 -2.4% 11.3% 40.5% 2.4%1922 6.0% 8.6% -6.1% 2.0%
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