Question 1

A decline in expected inflation will likely lead to

Accepted Answer

A decline in expected inflation typically leads to lower interest rates as central banks may ease monetary policy in response, which can stimulate investment and consumption, thereby increasing GDP. Conversely, lower expected inflation makes holding money more attractive relative to borrowing, contributing to the decrease in interest rates.

Question 2

Suppose that George is dissatisfied with the proportion of his wealth that is held in money. Is he likely to be satisfied with his nonmoney asset holdings of savings in bonds and stocks?

Accepted Answer

The answer of Suppose that George is dissatisfied with the...

Question 3

Suppose that the Fed is concerned that a decline in investment spending by businesses is likely to take place. In order to offset the effects of the decline in investment spending, the Fed increases the nominal money supply. If the decline in investment spending does not take place, what will be the impact of the Fed's action on the economy in the short run? What will be the impact of the Fed's action in the long run?

Accepted Answer

The answer of Suppose that the Fed is concerned that...

Question 4

In the long run, a rightward shift of the FE line will result in

Accepted Answer

The answer of In the long run, a rightward shift...

Question 5

Analyze the effect of the rise of retailing on the Internet in terms of the long-run equilibrium in the IS-LM-FE model.

Accepted Answer

The answer of Analyze the effect of the rise of...

Question 6

Many economists believe that changes in the money supply

Accepted Answer

Changes in the money supply are generally believed to affect the real economy in the short run due to price and wage stickiness, but in the long run, these effects are neutralized as prices and wages adjust, leaving only the impact on the price level (inflation or deflation) without affecting real output or employment.

Question 7

Suppose that computer hackers are able to steal the credit card numbers of a large number of people from the Internet. How is the LM curve likely to respond if the money supply doesn't change?

Accepted Answer

The answer of Suppose that computer hackers are able to...

Question 8

In the long run, a permanent increase in government spending will

Accepted Answer

In the long run, a permanent increase in government spending is likely to lead to a permanently higher price level due to the increased demand in the economy. This can result in inflationary pressures as the aggregate demand increases, but it does not necessarily lead to a permanently higher level of real output or investment spending, as these can be affected by other factors such as productivity and interest rates.

Question 9

In a large open economy, an increase in government spending will lead in the long run to

Accepted Answer

An increase in government spending in a large open economy typically leads to higher interest rates due to increased demand for loanable funds. Higher interest rates appreciate the domestic currency, making exports more expensive and imports cheaper, thus decreasing net exports.

Question 10

In a large open economy, an increase in productivity will lead in the long run to

Accepted Answer

An increase in productivity leads to an increase in the production capacity and output of the economy. This, in turn, leads to an increase in exports and a decrease in imports as the country becomes more competitive in the international market. This increase in net exports leads to an increase in the current account balance. Therefore, the correct answer is B.

Question 11

In the long run, a permanent increase in the nominal money supply will

Accepted Answer

According to the quantity theory of money, a permanent increase in the nominal money supply will lead to a proportional increase in the price level in the long run, assuming that real output and velocity of money are constant. Therefore, choice B is the most accurate answer.

Question 12

When seeking to explain the low interest rates in 2005, the article "Excess Savings or Excess Liquidity?" makes the case that

Accepted Answer

DA) Excess liquidity can lead to lower interest rates and higher GDP by increasing the money supply, which shifts the LM curve downward. This is because with more liquidity in the economy, banks are more willing to lend, which can reduce interest rates and stimulate investment and consumption, leading to higher GDP.D) Excess savings can lead to lower interest rates through a different mechanism. When there is excess savings, it means that there is more supply of loanable funds than demand. This excess supply can cause the interest rate to fall. The shift in the IS curve downward reflects a decrease in investment demand due to lower consumption and higher savings, leading to lower interest rates. However, the impact on GDP can be complex; while lower interest rates can stimulate investment, higher savings can reduce consumption, potentially leading to lower GDP in the short run.

Question 13

The neutrality of money refers to

Accepted Answer

The neutrality of money concept suggests that changes in the money supply only affect nominal variables (like the price level) in the long run, not real variables (like real GDP). Thus, a percentage increase in the money supply is expected to lead to an equal percentage increase in the price level, according to this theory.

Quiz 24: Linking the Financial System and the Economy: the Is-Lm-Fe Model