When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the
A) substitution effect.
B) income effect.
C) price effect.
D) output effect.
Answer: C
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In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will ________ capital inflows and ________ the equilibrium domestic real interest rate.
A. increase; decrease B. decrease; increase C. decrease; decrease D. increase; increase
Higher expected profits and business confidence ________ investment spending
A) decrease B) increase C) do not affect D) none of the above.
Given the following formula for the Taylor rule:Target federal funds rate = natural rate of interest + current inflation + 1/2(inflation gap) +1/2(output gap) if the current rate of inflation is 5%, the natural rate of interest is 2%, and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:
A. 6.5%. B. 10%. C. 2.5%. D. 3.5%.
In an economy with a fixed exchange rate, when the market forces try to change the exchange rate, the government:
A. often has to deal with an unhappy domestic population who are constantly dealing with shortages or surpluses of their currency. B. declares it can't change, and holds it constant. C. must buy or sell its currency using its own reserve to bring equilibrium in the market to where it has "fixed" it. D. None of these statements is true.