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Free CFA-Level-I Exam Braindumps (page: 341)

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According to Keynesians, which of the following is/are true?

  1. Wages and prices are flexible and automatically direct an economy toward full employment.
    II. Changes in output rather than changes in prices direct an economy toward equilibrium.
    III. An economy can be in equilibrium even if there isn't full employment prevailing.
  2. I, II & III
  3. III only
  4. I & II
  5. II & III

Answer(s): D

Explanation:

Keynesian economics maintains that businesses produce only the quantities consistent with anticipated demand. Thus, expected aggregate expenditures are crucial to determining the state of the economy. If the planned expenditures exceed the anticipated demand, then the economy will expand and vice versa.
Equilibrium will be attained where output equals the spending level. Hence, in Keynesian economics, equilibrium can occur at any level of output and employment rate, even if that level is less than the potential GDP. Further, only changes in demand will fuel changes in output; changes in prices will not be capable of moving an economy toward equilibrium.



If the Fed starts following a contractionary monetary policy:

  1. the U.S. trade deficit with other countries rises.
    II. the unemployment rate increases.
    III. real interest rates increase.
  2. I, II & III
  3. I & III
  4. II only
  5. II & III

Answer(s): B

Explanation:

When the Fed institutes a contractionary monetary policy, the real interest rates rise because money supply falls. This makes the opportunity cost of current consumption higher, reducing consumer demand and spending. This lower demand leads to lower production and higher unemployment. Further, the U.S. dollar tends to strengthen because foreign investments in U.S. increase due to higher real interest rates. The exports fall due to this. The effect on imports is more ambiguous since reduced consumer spending decreases imports but a stronger dollar increases them. The net effect is usually seen to be an increase in trade deficit due to a larger fall in exports.



In the aggregate demand/aggregate supply model, an increase in a country's sustainable potential output is represented by an increase in

  1. actual unemployment.
  2. prices.
  3. aggregate demand.
  4. long-run aggregate supply.

Answer(s): D

Explanation:

Changes in long run aggregate supply affect the economy's long run potential output. Changes in short run aggregate supply do not affect the long run potential of the economy.



An increase in the discount rate makes it more expensive for banking institutions to fall below the ________ ratio.

  1. none of these answers
  2. discount
  3. reserve
  4. federal funds
  5. required reserve

Answer(s): E

Explanation:

The required reserve ratio is the ratio of reserves to deposits that the Fed requires all banks to meet. If a bank fails to meet its required reserve ratio is must borrow funds from the Fed or from the federal funds market to meet the ratio. The bank can borrow funds from the Fed at the discount rate; thus if this rate increases, it becomes more expensive for banks to fail to meet the required reserve ratio.






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