Suppose the Fed sells $25 million worth of Treasury bonds in the open market. This action will serve to________ the consumption of interest-rate sensitive goods like home mortgages. The U.S. dollar will ________ against the other currencies.
Answer(s): C
The sale of bonds implies that the Fed takes out money from the economy. This reduces the monetary base and the total money supply in the economy, causing the real interest rates to rise in the short run. This makes the opportunity cost of consuming interest rate sensitive goods like homes and cars more expensive, leading to a decrease in the consumption of these goods. The high real rates will attractforeign funds into the U.S., causing the demand for U.S. dollars to increase. The U.S. dollar will thus appreciate in the short run.
Which of the following statements is false?
Answer(s): E
The change in nominal GDP usually exceeds that of real GDP because inflation is usually positive.However, in a flat or declining price environment real GDP would exceed nominal GDP change.
Which of the following is not an example of an inflationary change in prices?
Answer(s): F
Prices for goods can increase for reasons other than inflation. Inflationary price increases are the result of too many dollars chasing too few goods. These examples are price increases that are the result of improvements in the good being purchased.
During periods of rapid growth in output
Answer(s): D
During a business expansion, business sales tend to rise, GDP grows rapidly and the rate of unemployment declines.
Which of the following would be considered an automatic stabilizer?
Answer(s): B
An automatic stabilizer is anything that would decrease the government budget surplus during slow economies and increase the surplus during strong economic periods. Federal Reserve policy is not automatic, its directed.Government payrolls do not inherently increase or decrease during economic periods. Similarly, public works projects would not automatically increase due to an economic slowdown.
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