Answer Key for Practice Questions 6
Spring 2001

I. Concepts

Refer to your textbook.

II. True/False Questions:

1. TRUE
2. FALSE: If wage rates (and other costs) rise as the same rate as the general price level, producer profits do not rise. There is no incentive for producers to expand output.
3. FALSE: Any point on an aggregate demand curve is based on there being equilibrium in both the goods and the money (financial) markets.
4. TRUE
5. TRUE
6. TRUE
7. FALSE: An economist would think the value John places on the best alternative use of his time exceeds $20 per hour.
8. TRUE
9. FALSE: Economists who hold to the classical view of the labor market think that neither monetary nor fiscal policy has much influence on the level of aggregate output (income).
10. TRUE

III. Multiple Choice Questions

1. Both changes would reduce aggregate demand.
2. An economic boom in Europe
3. A decrease in the expected rate of inflation.
4. temporary increase in output and a permanent increase in prices.
5. output
6. resource prices will fall and short-run aggregate supply will increase.
7. A substantial increase in the minimum wage for young workers.
8. an increase short-run aggregate supply and higher output.
9. increase short-run aggregate supply.
10.decrease in aggregate demand or aggregate supply.
11. all of the above
12. a decrease in the real interest rate and a decrease in resource prices.
13. the aggregate demand curve to shift to the left and the short-run aggregate supply
      curve to shift to the left..

IV. Short Answer Question:
 
a. MS = MD ==> 10 =70 – 200r  M = 10  r = 0.3 or 30%
b. Y= C + G + I = 250 +0.6(Y-100) +200+50-100(0.3)===>Y=1025
c.  MS = MD ==> 20 =70 – 200r  M = 10  r = 0.25 or 25%
d.  Y= C + G + I = 250 +0.6(Y-100) +200+50-100(0.25)===>Y=1037.5
e. After the Fed increases the MS to 20 (new MS = 20), the new equilibrium level of income (Y) in the output market of the classical model will not change  the new equilibrium price (P) will increase.  Y = 500,  P = 45  ==>  P’ = 61.25
f. Change in G = 460  P=45 (P is constant)
Y = C + I + G ==> 1500 = 250 + 0.6(1500-100 – 0.1(1500)) – 4(45) + 50 – 100(0.3) + 200+ Change in G