Inflation and Large Open Economy
ECONOMICS 102 PRACTICE MIDTERM #2
Covered:
Chapter 5 Large Open Economy
Chapter 7 (No velocity or elasticity)
Chapter 9 (No AD/AS model)
A. Multiple choice
1. The nominal demand for money is proportional to
a. real income.
b. the nominal interest rate.
c. the nominal interest rate on money.
d. the price level.
e. None of the above.
2. Lower interest rates increase the real quantity of money demanded
a. by changing the distribution of wealth toward the poor, who have a lower demand for money.
b. by decreasing government interest payments, which in turn increase taxes, lowering disposable income.
c. by making alternative, nonmonetary assets look relatively less attractive to wealth holders.
d. by causing a decrease in the issuance of corporate debt.
e. None of the above.
3. An increase in expected inflation causes demand for money to
a. fall because of a higher return on alternative assets.
b. fall because of a lower return on alternative assets.
c. rise because of a lower return on alternative assets.
d. rise because of a higher return on alternative assets.
e. None of the above.
4. A large open economy increases its investment demand. This causes the world real interest rate to __________ and the country’s current account balance to __________?
a. Rise; fall.
b. Remain unchanged; rise.
c. Rise; rise.
d. Remain unchanged; fall.
e. Remain unchanged; remain unchanged.
5. If the Bank of Canada undertakes open market sales, then
a. the LM-curve will shift to the right
b. the LM-curve will shift to the left
c. interest rates will decrease and income will increase
d. bond prices will increase
e. both A) and C)
6. The IS curve would unambiguously shift up and to the right if there were
a. an increase in both government purchases and corporate taxes.
b. an increase in both government purchases and investment.
c. an increase in investment and a decrease in expected future output.
d. a decrease in both
Covered:
Chapter 5 Large Open Economy
Chapter 7 (No velocity or elasticity)
Chapter 9 (No AD/AS model)
A. Multiple choice
1. The nominal demand for money is proportional to
a. real income.
b. the nominal interest rate.
c. the nominal interest rate on money.
d. the price level.
e. None of the above.
2. Lower interest rates increase the real quantity of money demanded
a. by changing the distribution of wealth toward the poor, who have a lower demand for money.
b. by decreasing government interest payments, which in turn increase taxes, lowering disposable income.
c. by making alternative, nonmonetary assets look relatively less attractive to wealth holders.
d. by causing a decrease in the issuance of corporate debt.
e. None of the above.
3. An increase in expected inflation causes demand for money to
a. fall because of a higher return on alternative assets.
b. fall because of a lower return on alternative assets.
c. rise because of a lower return on alternative assets.
d. rise because of a higher return on alternative assets.
e. None of the above.
4. A large open economy increases its investment demand. This causes the world real interest rate to __________ and the country’s current account balance to __________?
a. Rise; fall.
b. Remain unchanged; rise.
c. Rise; rise.
d. Remain unchanged; fall.
e. Remain unchanged; remain unchanged.
5. If the Bank of Canada undertakes open market sales, then
a. the LM-curve will shift to the right
b. the LM-curve will shift to the left
c. interest rates will decrease and income will increase
d. bond prices will increase
e. both A) and C)
6. The IS curve would unambiguously shift up and to the right if there were
a. an increase in both government purchases and corporate taxes.
b. an increase in both government purchases and investment.
c. an increase in investment and a decrease in expected future output.
d. a decrease in both