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Free CFA-Level-I Exam Braindumps (page: 346)

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If the marginal propensity to consume (MPC) is .75 or 3/4, what is the expenditure multiplier?

  1. 0.25
  2. 4.0
  3. 3.0
  4. 2.0

Answer(s): B

Explanation:

The expenditure multiplier is found according to the equation M= 1/(1-MPC). Thus, M = 1/(1-3/4) = 4.



Which of the following would be an example of non-activist monetary policy?

  1. The Central Bank attempts to counter-act negative developments in the economy.
  2. Inflation is the only target for the Central Bank.
  3. The Central Bank tries to keep the money supply constant.
  4. The government keeps spending constant and allows tax revenues to rise or fall to compensate for changes in aggregate income.
  5. The Central Bank increases the money supply by 5% every year.

Answer(s): E

Explanation:

The classic non-activist monetary policy example is to increase the money supply by a particular level every year. Activist or discretionary monetary policy involves changing the supply of money to counteract negative developments in the economy.



"Counter-cyclical macroeconomic policy will be ineffective as a stabilization tool because people will undermine the policy by adjusting their choices once they expect a systematic policy response to recessions and booms." This statement most clearly reflects the

  1. Keynesian view.
  2. rational expectations view.
  3. supply-side view.
  4. 1960 view of the Phillips curve.

Answer(s): B

Explanation:

Rational agents will weigh all of the likely economic policies in their estimation of future inflation rates.
Therefore, once a systematic policy response to recessions and booms is established, counter-cyclical macroeconomic policy will be ineffective since it will be fully anticipated.



An economy which is experiencing substantial inflation and slow economic growth is said to be in:

  1. a contraction.
  2. a stagflation.
  3. a hyperinflation.
  4. a recession.

Answer(s): B

Explanation:

High and variable inflation rates have severe negative impact on an economy. At times, the economy spirals into a cycle of extremely slow growth and very high inflation. This stagnant state battered by rising prices is called "stagflation."






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