1. The Fed increased the supply of US dollars at an average rate of 6 percent per year over the 1980-2005 period. Based on the theory of production capacity, if the Fed had instead increased the money supply at the rate of 7 percent per year during that period, given other policies: (Select all that apply.)

The average inflation rate during 1980-2005 would have been one percentage point higher than it actually was in that period.

The price level in 2005 would have been about 28 percent higher than what it actually reached in that year.

The economy would have enjoyed a much higher level of output in the mid-2000s.

The output of the economy in the mid-2000s would not have been very different from the levels it actually reached.

2.At the time of its independence in 1947, India was a very poor country with a very small stock of physical capital. Between 1947 and 1980, the government of India believed that the best way to improve the standard of living in that country was to increase investment and create more jobs with the existing technology. Importing advanced technology and encouraging cost-saving innovations were seen as unnecessary because the government believed that such developments would reduce the need for labor and contribute to unemployment. Other things equal, the consequence of this policy for the long-run growth of the economy must have been:

Economic stagnation throughout the 1947-1980 period

Steady economic growth throughout the 1947-1980 period

Slowing economic growth throughout the 1947-1980 period

Accelerating economic growth throughout the 1947-1980 period

3.Country J's economy has been stagnant for some time. The government has now decided to stimulate the economy and achieve long-term growth by spending more and by running large budget deficits. Such a policy:

Can indeed bring about long-term growth

Can bring about growth in the short run, but not in the long run

Cannot bring about short-term or long-term growth under any circumstances

May not bring about growth in the short run, but lays the foundation for long-term growth

4.Venezuela's economy was operating at production capacity until political turmoil reduced the production capacity of the country. To deal with the drop in GDP and to return the aggregate output to its pre-crisis level, the government of Venezuela has decided to increase its expenditure and stimulate demand, but it has found it hard to sell bonds and fund its expenditures. To solve this problem, the government has forced the central bank to print money and buy the bonds directly from the government. In this situation, the equilibrium income in Venezuela determined by the crossing of IS and LM curves:

Must be above production capacity

Must be below production capacity

Must be equal to production capacity

Could be above or below production capacity

5.In the above question, what is likely to happen to the rate of inflation if the political turmoil continues and the government of Venezuela tries to keep the output level steady by continued fiscal and monetary expansion?

The rate of inflation will accelerate.

The rate of inflation will rise in the short run, but decline in the long run.

The rate of inflation will rise for a short while, but become steady afterwards.

The change in inflation rate is indeterminate in this situation.

6.In 1997, East Asian economies faced a major financial crisis, which reduced their incomes and their demands for US exports. Suppose the Fed believed that the negative impact of the crisis on the US economy would be sizable and would take a few years. Assume that before the crisis, the US economy was on its long-run equilibrium path. In that case, if the Fed wanted to stabilize the level of income and inflation in the US for the duration of the adverse demand shock, what should it have done?

The Fed should have increased money supply.

The Fed should have waited for a couple of years to assess the situation better before acting.

The Fed should have reduced money supply.

Nothing. The economy would have quickly adjusted to the shock and returned to stability by itself.

7. Your company wants to expand its production and needs to know the impact of a surge in East Asian incomes this year on the US economy. You know that East Asian economies have been growing at an average rate of 5 percent per year, and the US economy has been growing at 3 percent per year along its long-run equilibrium path. You hire a consultant who tells you that everyone believes that: (1) the faster pace of East Asian countries this year is a one-time jump in income level and those economies will return to their 5 percent growth rate after this year; (2) the (risk-free) interest rates in East Asia will remain constant; and (3) the economic policies in the US will not change as a result of the temporary increase in Asia's growth rate. If you believe these claims, you should conclude that by the end of this year, the developments in East Asia will tend to:

Leave GDP growth and the production capacity of the US economy unchanged

Temporarily raise GDP growth and the production capacity of the US economy

Temporarily lower GDP growth and the production capacity of the US economy

Temporarily raise GDP growth of the US economy, but leave the production capacity unchanged

Temporarily lower GDP growth of the US economy, but leave the production capacity unchanged

8.In the above question (Question 7), given the assumptions about the current and future conditions, you can also conclude that over the next couple of years, the events in East Asia will tend to:

Raise the inflation rate and the real exchange rate of the US economy

Lower the inflation rate and the real exchange rate of the US economy

Raise the inflation rate, but lower the real exchange rate of the US economy

Lower the inflation rate, but raise the real exchange rate of the US economy

Lower the inflation rate, but leave the real exchange rate of the US economy

9.Complete the following sentence.

"Accumulating capital without technological progress cannot generate long-term growth because as capital stock grows, its depreciation _____________, while total production rises at _____________ rate and _____________ portion of the savings that it generates has to be used for replacing depreciated capital, rather than being available for production capacity expansion."

Increases; a proportional; a diminishing

Diminishes; a proportional; an increasing

Rises proportionately; an increasing; a diminishing

Rises proportionately; a diminishing; an increasing

10.Which of the following are among the six major dimensions of governance as laid down by The Worldwide Governance Indicators? Select all that apply.

Government Effectiveness

Individualism

Secularism

Voice and Accountability

Rule of Law