QUESTION: 1313

What incentives does inflation create in consumers and producers?

Consumers will save less and producers will invest more.
Consumers will spend more and producers will produce more.
Consumers will save more and producers will produce more.
Consumers will spend more and producers will sell off inventories.
Consumers will spend less and producers will lay off workers.

Answer(s): B

Explanation:

Inflation causes consumers to spend now, because goods will be more expensive in the future.
Conversely, producers will produce goods now, because wages and raw materials prices are expected to rise.
Producers will also build up inventories in anticipation of higher future prices.

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QUESTION: 1314

"Rapid growth in the money supply is the primary cause of inflation. The time period between acceleration in the growth rate of the money supply and an acceleration in inflation is often lengthy (for example, from 12 to 36 months) and difficult to predict." These two statements are

basic tenets of the Keynesian doctrine.
normative economic statements.
basic tenets of the Monetarist doctrine.
internally inconsistent.

Answer(s): C

Explanation:

Monetarists believe that monetary instability is the major cause of fluctuations in real GDP and rapid growth of the money supply is the major cause of inflation.
Monetarists cite lengthy and unpredictable time lags between the implementation of a monetary policy change and the observation of its primary effects as a justification for not using discretionary monetary policy as a stabilization tool.

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QUESTION: 1315

The Central Bank increases the money supply by 5%. This was not anticipated by economic participants. The economy is operating below potential. In the long-run, this will cause the aggregate supply curve to _______, the aggregate demand curve to ________, and the price level to ________.

shift left, shift right, increase
not change, shift right, increase
not change, shift left, increase
not shift, not shift, not change
shift right, shift left, increase
shift right, shift right, not change

Answer(s): A

Explanation:

In order to determine how each curve changes, think of the effects independently. First the demand curve. The new money supply is effectively new income for consumers, it is irrelevant for this exercise whether this is real or nominal income. An increase in income shifts the demand curve to the right.
Next the supply curve. If producers anticipate inflation, this is effectively an increase in their costs. Again, whether this is a nominal or real cost increase is irrelevant. Higher costs cause the supply curve to shift to the left.
The directional shift in both curves indicates a higher price level. Note that the quantity demanded/produced is the same. This is because while the increase in income shifts the demand curve, the increase in prices offsets the effect. Similarly, the increase in revenues (due to higher prices) offsets the higher costs for suppliers.

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QUESTION: 1316

According to the Keynesian model, if the marginal propensity to consume were 0.80, an independent increase in investment expenditures of $20 billion would cause the equilibrium aggregate nominal income to rise

$80 billion.
$16 billion.
$100 billion.
$20 billion.
$50 billion.

Answer(s): C

Explanation:

The expenditure multiplier is found by M = 1/(1-MPC). Thus, here M = 1/(1-.8) = 5. Therefore the $20 billion increase in aggregate expenditures is magnified five times to $100 billion.

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QUESTION: 1315

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QUESTION: 1316

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