For each statement, state whether it is TRUE| FALSE, or AMBIGUOS. You must justi
ID: 1137704 • Letter: F
Question
For each statement, state whether it is TRUE| FALSE, or AMBIGUOS. You must justify your answer either graphically or in wordS. a. "Suppose that the CPI in Japan in 2015 is equal to 180 and the CPI in the United States in 2015 is equal to 165. Then the inflation rate in Japan was higher than the U.S. inflation rate between 2014 and 2015." b. "In a closed economy if consumers become more optimistic about economic conditions and increase their level of consumption the equilibrium interest rate should increase." 29 c. "A reduction in the budget deficit increases investment in the short run."Explanation / Answer
A) False, CPI is Consumer Price Index
INFLATION is the rate of growth of CPI.
For ex. CPI 2015- CPI 2014 / CPI 2014 = Inflation Rate
Since we are only given the CPI of one year only for both countries we cannot calculate the Inflation rate and cannit compare both countries.
B) True, In a closed economy, if consumption increases it will lead a fall in savings . At equilibrium Savings are equal to Investment . Therefore Level of investment also falls.
As Interest rate is negatively related to Investment level.
When Investment falls interest rate rises. As there is more supply of loanable funds than demand.
Therefore when Consumption rises interest rate rises.
C. True. A reduction in the Budget deficit increases investment in the short run.
When deficit reduces there is a fall in the demand of loanable funds. At the given supply of loanable funds when demand falls , interest rate also falls.
When interest rate falls, Investment rises in the short run.
C) True. A reduction in budget deficit
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