Uncertainty may cause banks to hold larger excess reserves. Other things constant, this will
Answer(s): B
The money supply is reduced when banks hold larger excess reserves through the work of the deposit expansion multiplier. Since banks extend fewer loans when they hold larger excess reserves, the money supply falls.
Which of the following is a definition of inflation:
Answer(s): C
Inflation is a pervasive increase in prices which is caused by too many dollars chasing too few goods.A price increase that has some other cause (such as an improvement in a product) is not inflationary.Therefore these two ideas are inseparable from the definition of inflation. Since prices are increasing, each unit of currency can buy fewer goods. Hence, a general decline in the value of money.
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?
Answer(s): D
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.
Which of the following determine(s) the demand curve for a good?
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!
The actual rate of unemployment could fall below the natural rate of unemployment during which of the following?
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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