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- c. Assume that the economy of Xenobia is at full employment. Explain how an increase in net investment will affect each of the following.i. Aggregate demandii. Long-run aggregate supplyiii. OutputHyperinflation occurs when the government runsa large budget _________, which the central bankfinances with a substantial monetary _________.a. deficit; contractionb. deficit; expansionc. surplus; contractiond. surplus; expansionThe slope of the ADTT curve is determined by: O a. The monetary policy of targets and instruments of the central bank O b. All of the above O c. The expenditure multiplier O d. The changes in and aggregate expenditure when interest rates change
- Other things being equal, a decrease in the money supply will: A. decrease both investment spending and aggregate demand. B. decrease investment spending and increase aggregate demand. C. increase both consumption spending and aggregate demand. D. increase both investment spending and aggregate demand. E. increase investment spending and decrease aggregate demandQuestion 4. Use the IS-LM diagram to describe the short-run and long-run effects of the following changes on national income, the interest rate, the price level, consumption, investment andreal money balance. a. An increase in taxes b. An increase in money supply4. In the IS-LM framework, all others remain the same, the decline in investment spending is illustrated by the movement of the __________ curve to __________. a. IS; left b. LM; left c. LM; right d. IS; right 5. Monetary policy will have a large impact on output if ___________. a. the LM curve is horizontal b. the IS curve is horizontal c. the LM curve is steep d. the IS curve is steep 6. The interest rate paid by a commercial bank when borrowing from a central bank is known as __________. a. currency rates b. discount rate c. overnight policy rate d. base rate/base lending rate
- Strong regularities in the comovements between money supply measures and real GDP A. cannot be explained. B. were observed by Friedman and Schwartz after the 2008–2009 recession. C. were once a strong regularity in Canadian data, but is no longer. D. were observed by Friedman and Schwartz in the historical Canadian data. E. were not historically a strong regularity in Canada, but now it is.A fiscal contraction will lead toa. no change in output if the Fed simultaneously pursues contractionary monetary policy.b. a reduction in the interest rate and a reduction in investment.c. a reduction in the interest rate and an upward shift in the LM curve.d. a reduction in the interest rate and an ambiguous effect on investment. Explain..2. Macro economy, diagram is the IS-LM using the four- quadrant diagrams. a. Show what will happen if the money supply is doubled using the diagram. b. How is the IS-LM framework used to obtain the AD function and why it is not the same as a market demand curve. c. Show a diagrammatic example of AS-AD and its equilibrium. What does this equilibrium mean?
- 1. Which of the following is concerned with changing the aggregate demand of thenation?A) External balanceB) Internal balanceC) Expenditure-changing policiesD) Expenditure-switching policiesAnswer: 2. Which of the following is an example of an expansionary monetary policy?A) Increase in TaxesB) Increase in the nation's money supplyC)Increased government expendituresD) Reduction in taxesAnswer:One of the business cycle factsis that “the nominal money supply is a pro-cyclicaland leading variable”. Traditional Keynesian theory explains this fact with the transmissionmechanism of money. The New Classical approach uses misperceptions theory explanation. TheRBC theorist try to explain the relationship with reverse causation theory.a. According to Keynesian theory, under what conditions money would be effective to havereal effects? If money is effective to have real effects, explain the transmission mechanism thatshows the causation from money to output.b. According to the “misperceptions theory of business cycles”, how and why an increase innominal money supply causes an increase in real output in the short run by affecting thebehavior of producers? Does your answer change if the monetary shock is anticipated orunanticipated? Explain by using the IS-LM-FE and AD-AS Frameworks.c. Explain how reverse causation could occur and what is the explanation from RBC theoristthat money is…II. Illustrate cach of the following situations with a graph showing IS curve: An increase in government spending a. b. An increase in taxes III. Illustrate each of the following situations with a graph showing Fed rule curve: a. An increase in Z factors b. A decrease in the price level IV. Illustrate each of the following situations with a graph showing AS and AD curve and show the changes in cquilibrium values of the price level and aggregate output: a. An increase in the capital stock and decrease in taxes b. A decrease in energy prices and increase in Government spending