1. For a given aggregate demand curve, the specificed rate of spending growth is
ID: 1163070 • Letter: 1
Question
1. For a given aggregate demand curve, the specificed rate of spending growth is the growth rate of money: (a)demand plus the growth in velocity, (b)supply minus the rate of growth in velocity, (c)demand minus the rate of growth in velocity, (d)supply plus the growth in velocity.
2. An aggregate demand shock is a: (a)rapid and expected shift in spending, (b)rapid and unexpected shift in spending, (c)slow and expected shift in spending, (d)slow and unexpected shift in spending.
3. If the reserve ratio is 10%, then a $100 increase in bank deposits can potentially lead to: (a)a decrease of 90% in the money supply, )b)an increase of $1000 in the money supply, (c)an increase of $90 in the money supply, (d)a decrease of $1000 in the money supply.
4. The economy is growing at its long run potential growth rate of 3% w/ an inflation rate of 4%. If a positive aggregate demand shock occurs and the fed responds by decreasing money growth, but fails to offset the aggregate demand shock, then in the short run: (a)the real growth rate will be lower than 3%, and the inflation rate will be lower than 4%. (b)the real growth rate will be higher than 3% and the inflation rate will be lower than 4%. (c)the real growth rate will be higher than 3% and the inflation rate will be higher than 4%. (d)the real growth rate will be 3% and the inflation rate will be 4%.
5. In the short run, if the federal reserve responds to a negative real shock w/ an increase in money supply growth, output growth will increase bc of: (a)real shock only (b)both real shock and increase in money growth (c)some reason other than the real shock and the increase in money growth (d)the increase in money growth only
Explanation / Answer
1.
Growth rate of spending = Growth rate of money supply+The growth in velocity
Where growth rate of spending is the rate of increase of amount spent by individuals
Growth rate of money supply is the rate of increase of the money pumped into the market and
Growth of velocity is the rate at which the money in the system changes hands
Hence option (d) is the right answer.
2.
An aggregate demand shock by definition is a sudden/rapid and suprise/unexpected shift in spending.
Hence option (b) is the right answer.
3.
Reserve ratio or Cash reserve ratio (CRR) is the percentage of deposits to be held with the central bank of the country which means banks do not have access to that amount for any economic or commercial activity.
So with 10% CRR out of an increase of $100 deposits the bank has to keep $10 with the central bank and so is left with only $90 increase for commercial activities.
Hence option (c) is the right answer.
4.
A positive aggregate demand shock is when there is a sudden increase in demand which Kindles the economic activity and so the growth rate increases and the fed's (central bank) response of decreasing money growth to control the demand shock was found ineffective leaving a shortage of money in market therefore inflation decreases.
Hence option (b) is the right answer.
5.
A negative real shock will cause a decrease in growth due to less demand and hence less economic activity increasing the inflation as money being pumped in is left in the pockets of individuals causing stagflation. Increasing the money supply will increase aggregate demand and real growth, but lead to a higher inflation.
Since both of them are constructively overlapping ,the growth is driven by both the phenomenon while increasing money supply intiates the growth process the change in sentiment from real shock help boost the growth further.
Hence option (b) is the right answer.
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