1. 1. If the Fed buys bonds in the secondary market that will cause a both the p
ID: 1098309 • Letter: 1
Question
1. 1. If the Fed buys bonds in the secondary market that will cause
a both the price level and real GDP to decline in the short run, but, in the long run, only the price level will fall as real GDP returns to its initial level.
b both the price level and real GDP to increase in the short run, but, in the long run, only the price level will rise as real GDP returns to its initial level.
c the price level to fall in the short run, but, in the long run the price level will return to its initial level.
d the price level to fall and real GDP to rise in both the short run and the long run.
2. Farmer McConnell has 20 sheep which he purchased last year for $10 each. These sheep, when sheared, yield 20 tons of wool. McConnell then sells the wool to Umbeck for $5 per ton. Umbeck processes the wool, dyes it and makes it into 400 balls which his sister buys from him at a dollar per ball. With the 400 balls she is able to knit 30 sweaters which she sells to boutiques for $20.00 each. When you walk down to the mall, however, they are priced at $30 each. By how much has the GDP increased as a result of these transactions?
a. $1100
b. $600
c. $300
d. $900
3. Suppose that Tom borrows $100 from Pat for one semester. They agree upon a 5% rate of interest per semester and neither anticipates any inflation during the period.
a. If there is a 5% inflation, then income is redistributed from Pat to Tom as a result.
b. If there is a 5% inflation, then Pat must pay Tom $110 at the end of the semester.
c. If there is a 5% inflation, then income is redistributed from Tom to Pat as a result.
d. If there is a 5% inflation, then Pat need pay Tom only $100 at the end of the semester.
Explanation / Answer
1).b both the price level and real GDP to increase in the short run, but, in the long run, only the price level will rise as real GDP returns to its initial level.
2).c. $300
3).a. If there is a 5% inflation, then income is redistributed from Pat to Tom as a result.
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