QUESTION: 1293

A new payroll tax on businesses results in an increase in cost for each unit of production. Assuming no change in income or in the production mix, would this cause inflation?

Yes, because producers would pass new costs onto consumers.
No, because firms would choose to use more capital and less labor.
Yes, because government spending would increase aggregate demand.
Yes, because higher costs result in less production and lead to higher prices.
No, because firms are "price takers" and will be unable to increase prices.

Answer(s): D

Explanation:

When firms face generally higher unit costs they decrease production. Assuming no change in income, there would be too many dollars (i.e. income) chasing too few goods (i.e. production). Although it may be tempting to say that costs are being "passed on" to consumers, this explanation is not economically viable. If demand for the product would support a higher price, then firms would have been charging a higher price prior to the oil shock and reaping higher profits. Even if we assume firms are "price takers," the new tax will take the firm's zero economic profit and turn it into an economic loss. The result will be fewer firms in the industry and less production overall.

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QUESTION: 1294

Which of the following determine(s) the demand curve for a good?

Disposable income.
II. Price of the good demanded.
III. Availability of substitutes.
IV. Consumer tastes and preferences.
I & III
I, III & IV
I, II & III
II only

Answer(s): B

Explanation:

You should be careful about distinguishing between a movement of the demand curve and a movement along the demand curve. When the demand curve moves, the price for every quantity that may be demanded changes. Such a move can come about when people's disposable income changes. An increase in income moves the demand curve to the right, since for every given price, the quantity demanded is higher at higher incomes. Similarly, an increase in the availability of substitutes moves the demand curve to the left, since for every given price, the quantity demanded is now lower. Further, as the consumers' tastes and preferences evolve over time, so will the demand curve for a good. However, a simple change in the price of the good demanded will only lead to an adjustment in the quantity demanded, without moving the demand curve. After all, that is the definition of a demand curve!

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QUESTION: 1295

The actual rate of unemployment could fall below the natural rate of unemployment during which of the following?

An economic boom.
II. An economic expansion, where the economy is trying to extricate itself from a recession.
III. A war.
IV. Never. The natural rate of unemployment is a lower limit on unemployment rate in a given economy, depending on its structural features.
II & III
I & III
I, II & III
IV only

Answer(s): B

Explanation:

If the economy is in a recession, that means the unemployment rate is quite high, far above the natural rate.
Hence, II is incorrect. IV is also incorrect since the natural rate of unemployment prevails in a healthy economy operating at maximum sustainable efficiency. However, in times of high demand like economic booms or war, it is possible that the unemployment rate temporarily dips below the natural rate, causing the output to rise above the sustainable GDP.

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QUESTION: 1296

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.

increase; appreciate
increase; depreciate
decrease; appreciate
decrease; depreciate

Answer(s): C

Explanation:

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.

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Free CFA-Level-I Exam Braindumps (page: 324)

QUESTION: 1293

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QUESTION: 1294

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QUESTION: 1295

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QUESTION: 1296

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