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Free CFA-Level-I Exam Braindumps (page: 334)

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If the money velocity is 5, the amount of money in circulation $200 million and real GDP $10 million, then prices are ________.

  1. 4
  2. 400
  3. 42
  4. 100

Answer(s): D

Explanation:

According to the equation of exchange which is defined as MV = PY we must solve for P in the following way:
($200 million x 5) = ($10 million x P). This implies that P=100.



In the 1980s, the government cut back on the tax rates in an effort to spur the economy. This led to a significant decrease in real tax revenues. A breakdown of this decrease indicated that most of the decrease came from the lower tax brackets. Tax revenues from top tax bracket actually increased despite the cut. There was a modest growth in the GDP during this period, though amongst all the industrialized nations, only Japan matched this rate. This empirical evidence indicates that:

  1. The supply side effects are not as potent as hypothesized by economists.
  2. The supply-side response of tax payers can have a strong effect on a nation's growth.
  3. The Rational Expectations model is a fair description of how people respond to fiscal policy.
  4. The tax avoidance behavior governing the demand side has a significant impact on the economy.

Answer(s): B

Explanation:

The important part in this empirical observation is the effect of a change in marginal tax revenues. Marginal tax rates are central to the effects postulated by Supply-side economists. According to this theory, a reduction in marginal tax rates increases the incentive to work and save more by increasing the disposable income. This causes people to shift away from leisure and toward more productive work, enlarging the effective resource base and improving the efficiency with which it is utilized. The empirical evidence in the study indicate that supply-side effects can be quite important in directing the growth of an economy.



How does inflation impact interest rates, all else equal?

  1. increases the real rate; increases the nominal rate
  2. has no direct impact on interest rates
  3. has no effect on the real rate; increases the nominal rate
  4. increases the real rate; has no effect on the nominal rate
  5. impossible to determine

Answer(s): C

Explanation:

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?

  1. a decrease in resource prices
  2. an increase in the real rate of interest
  3. an increase in resource prices
  4. an increase in technology

Answer(s): A

Explanation:

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.






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