Explain the income and substitution effects of an increase in the interest rate on savings
What will be an ideal response?
If the interest rate rises, the substitution effect will lead to an increase in saving because the relative cost of current consumption increases. The income effect will cause a decrease in saving because it will require less saving today to reach the target consumption level in the future. Therefore, the effect of an increase in the interest rate on saving is indeterminate.
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If the Federal Reserve lowers the Federal funds rate,
A) the price level falls. B) net exports decrease. C) other short-term interest rates rise. D) other short-term interest rates fall. E) Both answers A and C are correct.
If the economy is producing at potential GDP
A) the short-run aggregate supply curve must be vertical. B) inflation in the economy is at its natural rate. C) the Phillips curve must be positively sloped. D) unemployment is at its natural rate.
Which of the following is not a tool of fiscal policy?
a. Money supply b. Government purchases c. Taxes d. Social Security program e. Unemployment benefits
In an industry characterized by a natural monopoly, which of the following characteristics will be observed?
a. The long-run average cost curve will be upward sloping. b. The market price of the product will be very low. c. Competition is both impossible and inefficient. d. Number of producers operating in this market will be low.