The data below describe the economy of Econland:Business and household saving58Government transfers and interest payments12Government purchases of goods and services25Tax collections42Public saving in Econland equals:
A. 5
B. -5
C. 17
D. 16
Answer: A
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Theoretically, when a currency depreciates one can predict that
a. the price level will rise and real GDP will rise. b. the price level will fall and real GDP will fall. c. real GDP will rise, but price change is not predictable. d. the price level will rise, but real GDP change is not predictable.
When the economy experiences abnormally high unemployment,
A. There is macro instability. B. The economy is producing on the production possibilities curve. C. No market failure occurs. D. There is government failure.
The Fed can affect long-term interest rates by affecting the expectations of people.
Answer the following statement true (T) or false (F)
Suppose that bank reserves (res) are a function of the nominal interest rate (i): res = 0.3 - 3i.The money multiplier is (cu + 1)/(cu + res), where cu is the currency-deposit ratio. Initially, suppose the real interest rate (r) equals 0.03, the expected inflation rate (pe) equals 0.03, and the currency-deposit ratio equals: cu = 0.4 - (10 × pe).The real money demand function is L(Y,i) = 0.8Y - 1500i, where Y is the level of output. The monetary base equals 100. The price level equals 1.0 initially and will not change in the short run, but will adjust in the long run.(a)Calculate the currency-deposit ratio, the reserve-deposit ratio, the money multiplier, the money supply, and the equilibrium level of output. Assume that this level of output equals full-employment output, so
you are assuming that the economy is in general equilibrium with the price level equal to 1.0. Show your work.(b)Suppose financial innovation causes the reserve-deposit ratio to decline to res = 0.2 - 3i. Calculate the new currency-deposit ratio, the reserve-deposit ratio, the money multiplier, the money supply, and the equilibrium level of output in the short run, assuming a Keynesian model with the price level fixed in the short run. Show your work.(c)Calculate the equilibrium price level in the long run. Show your work. What will be an ideal response?