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Free CFA-Level-I Exam Braindumps (page: 366)

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PDF with 3963 Questions

Within the AD/AS model, an unanticipated increase in short-run aggregate supply will cause real output to

  1. decline and prices fall.
  2. decline and prices rise.
  3. expand and prices rise.
  4. expand and prices fall.

Answer(s): D

Explanation:

An unanticipated increase in aggregate supply decreases the price level and increases current output. The long run aggregate supply of the country is not affected.



Within the Keynesian model, if an economy operates below full employment,

  1. reducing wage rates and resource prices will quickly restore full-employment equilibrium.
  2. reducing government expenditures will direct the economy back to full- employment equilibrium.
  3. an increase in the real interest rate will soon restore full-employment equilibrium.
  4. output will tend to remain below full-employment capacity unless aggregate expenditures increase.
  5. reducing the real interest rate will soon restore full-employment equilibrium.

Answer(s): D

Explanation:

An economy operating below its full employment level can only reach its full employment capacity by increasing aggregate expenditures. This can be achieved only by inducing consumers, investors, governments and foreigners to increase their expenditures.



When an economy operates well below its full-employment capacity and the marginal propensity to consume is 3/4, a $20 billion increase in autonomous investment will cause the equilibrium income to rise

  1. $80 billion.
  2. $40 billion.
  3. $20 billion.
  4. $15 billion.

Answer(s): A

Explanation:

The expenditure multiplier is found by M = 1/(1-MPC). Thus, here M = 1/(1-3/4) = 4. Therefore $20 billion increase in aggregate expenditures is magnified four times to $80 billion.



Government borrowing to fund current spending tends to cause _________ to rise. Subsequently, the local currency will _________ causing the trade deficit to rise.

  1. savings rate, depreciate
  2. national income, depreciate
  3. inflation, depreciate
  4. marginal propensity to consume, appreciate
  5. interest rates, appreciate

Answer(s): E

Explanation:

Government borrowing creates demand for loanable funds, and therefore increases the price of such funds, i.e.
the interest rate. When interest rates rise versus foreign rates, the value of the local currency rises on the foreign exchange market. This causes imports to be less expensive locally and exports to be more expensive abroad, and therefore tends to cause the current account trade deficit to widen.






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