1. Section I: Multiple Choice Questions If diminishing returns to capital set in slower and the demand for investment goods is independent of the real interest rate, then: (a) the output supply curve is steeper and output demand curve is atter. (b) both the output supply curve and the output demand curve are atter. (c) the output supply curve is atter and output demand curve is steeper. ((1) both the output supply curve and the output demand curve are steeper. . At the zero lower bound, under a liquidity trap, all of the following monetary policy tools might work in affecting the price level except: (a) the use money to purchase long-term government debt. (b) the use money to purchase shortrterm government debt. ((3) a negative nominal interest rate. (d) quantitative easing. . According to the Permanent Income Hypothesis, a temporary increase in taxes will: (a) have no effect on current and future consumption but will reduce savings. (b) reduce both current and future consumption, and may increase savings. (0) increase future consumption, reduce current consumption, and may increase savings. (d) reduce current consumption, future consumption, and savings. . According to the Ricardian Equivalence result, the equilibrium real interest rate of 5% will not change if a current tax increase of 120 units is accompanied by: (a) a future tax increase of 126 units. (b) a future tax decrease of 126 imits. (c) a future tax increase of 114.3 units. ((1) a future tax increase of 114.3 units