Suppose that there is a negative aggregate demand shock and the central bank commits to an inflation rate target. If the commitment is credible, then A) the public’s expected inflation will remain unchanged. B) the short-run aggregate supply curve will rise. C) over time inflation will fall. D) all of the above. E) both A […]
Which of the followings is NOT true about the word “autonomous” that economists use? A) Changes in autonomous components are associated with movements along a curve. B) Changes in autonomous components are associated with shifts of a curve. C) The autonomous component of a variable is exogenous. D) The autonomous component of a variable is […]
What is the relationship between unemployment and the price level in the short run? What will be an ideal response? ANSWER In the short run, there is a trade-off between the unemployment rate and the inflation rate. As the economy moves closer to full employment, there will be upward pressure on both wages and […]
The major criticism of the view that expectations are formed adaptively is that A) this view ignores that people use more information than just past data to form their expectations. B) it is easier to model adaptive expectations than it is to model rational expectations. C) adaptive expectations models have no predictive power. D) people […]
Distinguish between implicit and explicit costs and give examples of each. In addition, explain how explicit and implicit costs affect the distinction between economic profit and accounting profit. What explains the distinction between the two measures of profit? ANSWER Explicit costs are those that a firm pays out of pocket, i.e., for which monetary […]
Another name for a consol is a ________ because it is a bond with no maturity date. The owner receives fixed coupon payments forever. A) perpetuity B) discount bond C) municipality D) high-yield bond ANSWER A
In the short-run along the horizontal portion of the aggregate supply curve, an increase in the budget deficit and an expansionary monetary policy would: A) increase the price level only. B) increase both the price level and real income. C) increase real income only. D) none of the above. ANSWER C
Economies of scale enable financial institutions to A) reduce transactions costs. B) avoid the asymmetric information problem. C) avoid adverse selection problems. D) reduce moral hazard. ANSWER A
If a banker expects interest rates to fall in the future, her best strategy for the present is A) to increase the duration of the bank’s liabilities. B) to buy short-term bonds. C) to sell long-term certificates of deposit. D) to increase the duration of the bank’s assets. ANSWER D
In the market for reserves, if the federal funds rate is between the discount rate and the interest rate paid on excess reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant. A) decreases; lowering B) increases; lowering C) increases; raising D) decreases; raising […]
