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Free CFA-Level-I Exam Braindumps (page: 350)

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According to Say's law, there cannot be overproduction of goods and services because

  1. overproduction will lead to higher unemployment, which will reduce production.
  2. demand creates its own supply.
  3. less fortunate countries will always buy the excess output.
  4. producing goods generates enough income to buy the total output.

Answer(s): D

Explanation:

Say's Law is the view that production creates its own demand. Demand will always be sufficient to purchase the goods produced because the income payments to the resource suppliers will equal the value of the goods produced.



The crowding-out model implies that a

  1. budget surplus will be highly effective against inflation.
  2. budget deficit is likely to stimulate aggregate demand and trigger a multiplier effect that will lead to inflation.
  3. budget deficit will increase the real interest rate and thereby retard private spending.
  4. budget surplus will retard aggregate demand and throw the economy into a downward spiral.

Answer(s): C

Explanation:

The crowding out theory implies that government borrowing drives up real interest rates and thus crowds out" private investment. Private investment falls under higher interest rates because the cost of investment (the real interest rate) rises if the government borrows heavily. Under the usual law of supply and demand, the government causes the interest rate to rise under deficit spending because there is a limited supply of loanable funds. The government competes with the private sector for these resources and thus drives up the price (i.e., the interest rate).



Within the Keynesian model, equilibrium output takes place ________.

  1. when actual and expected rates of inflation are equal
  2. when the nominal interest rate and real interest rate are equal
  3. when spending equals output
  4. at full employment

Answer(s): C

Explanation:

Equilibrium is defined in this model as when aggregate expenditures are equal to output. Thus, the sum of planned consumption, investment government purchases and the difference between exports and imports must equal GDP.



If a broad increase in the price of stocks causes an increase in the real wealth of individuals, then the

  1. aggregate demand curve will shift to the left.
  2. aggregate demand curve will shift to the right.
  3. general price level will fall.
  4. aggregate quantity demanded must rise.

Answer(s): B

Explanation:

As the real wealth of households increases, people demand more goods and services. This causes the entire aggregate demand curve to shift to the right.






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