1.In 2004, Ecuador replaced its currency, the sucre, with the U.S. dollar as its official currency. The hope was that this would end record inflation running at 104 percent a year. This action prevented the government from printing excessive money to meet its budgetary needs.. As long as Ecuador maintains the U.S. dollar as its official currency, what will happen to the monetary policy of Ecuador?

A/It will become both more powerful and more flexible.

B/It will become more powerful but less flexible.

C/It will become less powerful but more flexible.

D/It effectively will cease to exist.

2.In most developing (i.e. Somalia) countries, an effective fiscal policy is:

A/easier to conduct than in developed economies because politicians tend to be more socially-minded.

B/harder to conduct because fiscal policy is discretionary in developing countries, unlike developed countries.

C/easier to conduct than in developed economies because there are fewer institutional checks and balances.

D/harder to conduct because taxes are difficult to collect.

3.Development refers to an increase in:

A/output brought about by an increase in inputs.

B/output with no change in productive capacity.

C/output brought about by a change in the production function.

D/productive capacity with no change in output.

4.

Phillips Curve article

Inflation has been a puzzle in the U.S. economy for years, failing to move up much when the unemployment rate tumbled.

To resolve the discrepancy, it helps to look at the U.S. as two economies rather than one.

On one hand is the goods economy, where products like computers, gasoline and hair dryers are made and purchased, and where Americans spend roughly one-third of their money. On the other hand is the services economy, where cable guys, nurses and bus drivers jostle for the bulk of consumer spending.

The goods economy has been transformed by trade and technological innovation over several decades, giving consumers access to inexpensive products made in foreign countries or automated factories. The services economy has been more sheltered from international competition and technological change. You can't hire cheap Chinese labor to serve you pizza or a robot to teach your ninth-grader English.

Because of those differences, inflation behaves differently in the two economies.

"You can have technological innovations that lower the price of TVs, but our technology for, you know, haircuts doesn't change as much," says Michael Feroli, the chief U.S. economist at JPMorgan.

The divergence between goods and services price inflation is especially important now because of the unusual behavior of consumer prices.

But the theoryknown as the Phillips curve, after 20th century economist William Phillipshasn't held up very well in the past decade. Since 2009, the unemployment rate has fallen from a peak of 10% to an 18-year low of 3.9% in April, yet overall inflation has remained stubbornly low, running under the Fed's 2% target for most of the expansion.

A number of current and former Fed officials have wondered if the Phillips curve is dead. At a Federal Open Market Committee rate-setting meeting this year, "a couple" of participants "questioned the usefulness" of the model, "citing the limited ability of such frameworks to capture the relationship between economic activity and inflation,"according to the minutes(Links to an external site.)

.

Look at the two economies separately, however, and a more complete picture emerges.

The conventional relationship appears to be holding up in the services economy but not in the goods economy.So far in this expansion, services inflation as measured in the consumer-price index has moved up from near 0.5% to near 3%, a trend that theory suggests should happen as unemployment falls.Something different is happening in the goods economy,where prices have been falling formuch of the past five years as if disconnected from the overall unemployment rate.

"You're going to find that (labor market) slack matters a lot more for services because they tend to be domestically produced," Mr. Feroli said. Other factors, including the value of the dollar or commodities prices matter more for goods, he said, "because they're globally traded."

At the same time, the services economy has been the source of most U.S. job creation in this expansion, growing payrolls by 14% since 2010 to 128 million workers.Employment in the goods economy has yet to return to its precrisis levels.

"Services inflation is good evidence that the Phillips curve process still works, that the domestic economy is still generating some inflation pressure," says Eric Winograd, a senior economist atAllianceBernstein L.P(Links to an external site.)

."That, I think, guided [the Fed] to begin the process of raising rates even while the official headline index had been well below their target."

The Fed's preferred inflation measure, the personal consumption expenditure price index, is now right at its goal of 2%. The Fed seeks 2% inflation as a level consistent with a healthy, growing economy.

Falling unemployment suggests that inflation in services will continue as slack gets wrung out of the domestic economy. One challenge for the Fed: Prices for services tend to be "sticky," meaning they're slow to respond to changes in monetary policy or the broader economy. That means turning them around, should inflation exceed the Fed's target, could become a challenge. Fed officials see inflation rising above 2% in their own projections.

If goods prices remain weak, inflation may not advance much beyond the Fed's target. But if goods prices pick up, the Fed might be staring at an inflation overshoot for the first time in years.

"That would be messy," said Vincent Reinhart,a former Fed official and the chief economist at Standish Mellon Asset Management."They should actually now be concerned about too much inflation because the thing that is costly to adjust (services inflation)...is already above the goal."

Question: According to the article, which group will have more inflationary pressure/effects?

A/the goods market

B/the service market

5.Use the Phillips Curve article above to derive the concept for this question.

Your company is located in the U.S. and the product being sold is a regular school bag (competition is fierce) for elementary school children. Based off from what you've read in the article, it would be very _____________________ to raise the price of your school bag product.

A/hard

B/easy

6.If inflation is correctly anticipated, those who buy government bonds will:

A/not suffer losses because they will be compensated by higher interest payments.

B/suffer losses because they will be compensated by lower interest payments.

C/not suffer losses because inflation does not affect the purchasing power.

D/suffer losses regardless of inflation because interest paid on government bonds is set by Congress.

7.Suppose inflation in 2015, 2016, and 2017 was 2 percent in each year and that the economy operated at potential output in each year. Now suppose that the government announces that it will pursue much more expansionary monetary and fiscal policies in the year 2018. If people form their expectations rationally, basing them on economic models, and if the government's policy announcement is credible, then it is likely that expected inflation for the year 2018:

A/will fall

B/could rise or fall

C/will rise

D/will not change

8.Economists who accept the quantity theory of money argue that inflation is always and everywhere a monetary phenomenon.

A/True

B/False

9.Budget deficits contribute to higher debt.

A/True

B/False

10.From the U.S. point of view, a fall in a foreign country's income will most likely cause:

A/a reduction in U.S. exports, so the U.S. aggregate demand curve shifts left.

B/an increase in U.S. exports, so the U.S. aggregate demand curve shifts right.

C/an increase in U.S. exports, so the U.S. aggregate demand curve shifts left.

D/a reduction in U.S. exports, so the U.S. aggregate demand curve shifts right.

11.The value of intermediate goods is:

A/included in both GDP and GNP.

B/included in GDP but not GNP.

C/included in GNP but not GDP.

D/excluded from both GDP and GNP.

12.Deficits may be desirable in the short run if they:

A/increase savings necessary for future consumption and demand

B/increase savings necessary for future investment and growth

C/help to stabilize the economy when output is above its potential.

D/help to stabilize the economy when output falls below its potential.

13.Deficits and surpluses are best viewed as:

A/a summary measure of a nation's monetary policy.

B/comprehensive measures of government's budget.

C/a summary measure of the financial health of the economy.

D/a summary measure of a nation's fiscal policy.

14.An expansionary fiscal policy increases:

A/long-run aggregate supply.

B/aggregate demand.

C/potential output.

D/short-run aggregate supply.

15.A government budget deficit occurs when government revenues exceed government expenditures.

A/True

B/False