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Free CFA-Level-I Exam Braindumps (page: 328)

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An economy is currently in a state of equilibrium, at full employment. If a sudden supply shock were to decrease aggregate supply, which of the following effects will occur in the short run?

  1. Real interest rates will increase.
    II. Prices will rise.
    III. Aggregate demand will remain unaffected.
    IV. The SRAS will shift to the left.
  2. II & III
  3. I & III
  4. I, II & III
  5. I, II & IV

Answer(s): D

Explanation:

The decrease in the aggregate supply curve will be represented by a movement of the short-run supply curve to the left. In the short run, this will cause an increase in prices since the demand curve does not move. Aggregate demand will fall, unemployment will rise above the natural rate and aggregate output will fall. The total disposable income in the economy will decrease and consumers will liquidate part of their savings to maintain stable consumption. This will decrease the supply of loanable funds, raising interest rates in the short run.



According to supply-side theory, an increase in marginal tax rates will

  1. all of these answers.
  2. encourage individuals to substitute less-desired, tax-deductible goods for more-desired, nondeductible goods.
  3. decrease the supply of capital and reduce its productive efficiency.
  4. decrease the supply of labor and reduce its productive efficiency.

Answer(s): A

Explanation:

Increasing marginal tax rates reduces the incentive to work since individuals keep a smaller percentage of their earnings. Additionally, increased marginal tax rates divert resources away from productive roles to roles designed to "shelter" capital owners from taxation. The final consequence is that efficiency is reduced since individuals choose deductible (and less desirable) goods over nondeductible goods. Efficiency is compromised because although the non-deductible goods are affordable and preferable to deductible goods, they are not consumed.



Which of the following statements about expected inflation are true?

  1. Interest rate volatility will increase
  2. Price increases will typically outpace increases in wages
  3. All of these answers are correct
  4. Lenders are not compensated for the loss of purchasing power when funds are repaid
  5. None of these answers is correct

Answer(s): E

Explanation:

Market participants will compensate for expected inflation. For example, when lenders make loans, they will price a certain inflation rate into the interest rate. If inflation is as expected, then the rate will adequately compensate the lender for lost purchasing power. Inflation is generally assumed to impact all prices, including wages, equally, therefore workers will demand wage increases in line with inflation.



Which of the following is an integral part of the Keynesian view of the business cycle?

  1. Equilibrium is a state of full employment without inflation.
  2. Multiplier effects magnify the impact of changes in aggregate demand (especially in investment) and thereby promote economic instability.
  3. Changes in private consumption are the major source of economic instability.
  4. Supply creates its own demand.
  5. Falling wage rates eventually lead the economy back to full employment.

Answer(s): B

Explanation:

The multiplier effect causes small changes in aggregate expenditures to result in much larger changes in income, leading to economic instability. This effect applies to all components of the aggregate expenditure model, and therefore none of the four components can be called "the major source of economic stability."






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