How does inflation impact interest rates, all else equal?
Answer(s): C
The real rate of interest is simply the nominal rate less inflation. Therefore, the real rate is not directly effected by inflation, while the nominal rate would rise as inflation rises.
If the economy is producing less than the full-employment output level, which of the following would most likely direct the economy back to long-run equilibrium?
Answer(s): A
To understand this question, note that the price of resources is simply a function of supply and demand. This question is implying that demand for resources (i.e. labor) is weak. Holding supply constant, if demand for a good falls, prices must fall as well. Eventually some equilibrium will be reached.
The goal of an ideal inflation policy would be
Anticipated inflation, even at relatively high levels, is generally not problematic. Therefore an ideal inflation policy would attempt to keep inflation as predictable and as stable as possible. Of course, theideal inflation rate would be zero, but minimizing average inflation, with no attention paid to the variability, would not be helpful. In the U.S., for example, the Federal Reserve and the Treasury department are careful to broadcast the money supply, so that market participants can make as accurate an estimate of inflation as possible.
Recent data reveal that the ratio of inventories to sales has risen sharply, suggesting that businesses are experiencing an unplanned build-up in inventories. According to the Keynesian model, these findings indicate that
Answer(s): D
Actual inventories exceed planned inventories only when actual expenditures fall short of expected expenditures. Thus, producers anticipated a certain level of expenditure and produced output accordingly.Thus, output exceeded expenditure and national output (i.e., income) will decline.
The multiplier effect refers to the fact that an autonomous change in spending (aggregate demand) will
Answer(s): E
The multiplier explains why small changes in investment, government or consumption spending triggers much larger changes in output.
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