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Free CFA-Level-I Exam Braindumps (page: 345)

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Which economic model supports the theory that budget deficits cause inflation?

  1. The supply-side model
  2. The crowding-out model
  3. None of these models support the theory
  4. The new classical model
  5. The Keynesian model

Answer(s): B

Explanation:

The crowding out model indicates that, when the supply of money is constant, budget deficits will simply lead to higher real interest rates and a fall in net exports, which will crowd out private spending and thereby dampen the stimulus effect of the deficit.



An unfortunate consequence of ________ and monetary instability is that people spend less time producing and more time trying to protect their wealth.

  1. unemployment
  2. all of these answers
  3. monetary contraction
  4. inflation
  5. none of these answers

Answer(s): D

Explanation:

Since failure to anticipate the rate of inflation has substantial effects on one's wealth, individuals divert scarce resources away from the production of goods and services and apply them into the acquisition of business decision makers to forecast the price changes. Thus, speculative practices are encouraged while productive activities are discouraged.



An economy is currently operating at full employment, with an inflation rate of 6%. The Central Bank adopts an inflationary measure consistent with an inflation rate of 8% but people anticipate an inflation of 7%. Then, the unemployment in the short run will be ________ the natural rate, as predicted by the Rational Expectations Model.

  1. could be above or below.
  2. same as
  3. below
  4. above

Answer(s): C

Explanation:

The short-run equilibrium is affected by the accuracy of the predictions made by decision-makers.
Since workers under-estimate the future inflation resulting from the changed policy, they will settle for lower wages than those consistent with the actual inflation. Consequently, the Rational Expectations Phillips curve predicts that unemployment will decrease in the short run. With the economy currently at full employment, the unemployment rate will fall below the natural rate, temporarily expanding the real GDP beyond the potential level. Over the long run, people will correct their erroneous predictions and wages will rise to a level where full employment will prevail once again.



Which of the following would increase GDP?

  1. Mercedes-Benz begins to produce and sell cars in Alabama.
  2. An American investor buys 100 shares of Ford stock.
  3. Ford Motor Company begins to produce and sell cars in Japan.
  4. An American investor purchases 100 shares of Mercedes-Benz stock.

Answer(s): A

Explanation:

Since GDP represents the total market value of all final goods and services produced domestically during a specific period, GDP would rise if a foreign company starts to produce cars domestically.






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