An economy is currently in equilibrium at full employment. If there is an anticipated decrease in demand, whichof the following effects can be seen in the short run?
Answer(s): D
If the buyers and sellers in the resource market completely anticipate the effects of a decrease in demand, then they will correctly forecast the lower future inflation. This will prompt buyers to postpone current consumption and wait till prices drop. On the other hand, suppliers would prefer to sell today,while prices are high, instead of waiting till the prices fall. The demand curve will therefore quickly move to the left and the supply curve will move to the right. An equilibrium will be reached at a lower price which leaves the real quantities unaffected, changing only the nominal variables.
Employment is the number of persons employed divided by the number of persons
Answer(s): A
The employment/population ratio is the number of persons aged 16 years and over employed as civilians divided by the total civilian population 16 years of age and over. The ratio is expressed as a percentage. This rate does not make a subjective judgment as to whether a person is actually "available for work" or "actively seeking employment."
Which economic model supports the theory that budget deficits cause inflation?
Answer(s): B
The crowding out model indicates that, when the supply of money is constant, budget deficits will simply lead to higher real interest rates and a fall in net exports, which will crowd out private spending and thereby dampen the stimulus effect of the deficit.
An unfortunate consequence of ________ and monetary instability is that people spend less time producing and more time trying to protect their wealth.
Since failure to anticipate the rate of inflation has substantial effects on one's wealth, individuals divert scarce resources away from the production of goods and services and apply them into the acquisition of business decision makers to forecast the price changes. Thus, speculative practices are encouraged while productive activities are discouraged.
An economy is currently operating at full employment, with an inflation rate of 6%. The Central Bank adopts an inflationary measure consistent with an inflation rate of 8% but people anticipate an inflation of 7%. Then, the unemployment in the short run will be ________ the natural rate, as predicted by the Rational Expectations Model.
Answer(s): C
The short-run equilibrium is affected by the accuracy of the predictions made by decision-makers.Since workers under-estimate the future inflation resulting from the changed policy, they will settle for lower wages than those consistent with the actual inflation. Consequently, the Rational Expectations Phillips curve predicts that unemployment will decrease in the short run. With the economy currently at full employment, the unemployment rate will fall below the natural rate, temporarily expanding the real GDP beyond the potential level. Over the long run, people will correct their erroneous predictions and wages will rise to a level where full employment will prevail once again.
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