Part 2: True or False questions with justification (20 points)

Evaluate carefully each of the following statements. Decide if they are True, or False. You must explain clearly the reason(s) why the statement is true or false. You should provide a precise justification, including the transmission mechanisms using words and graphs if needed. Your mark will depend on the quality of your response.

1. In a closed economy, the Central Bank can counteract the decrease of the interest rate induced by a fiscal expansion policy by increasing the reserve ratio of private banks.

2. An increase in government spending will, in the medium run, cause no change in unemployment.

3. Suppose there are two countries that are identical in every way with the following exception. Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible exchange rate regime. Suppose government spending in both countries rises by the same amount. Given this information, we know that the change in output in A will be greater than in B.

4. The aggregate supply curve is upward sloping because an increase in price leads to an increase in output.

5. In a closed economy, a policy mix of contractionary monetary policy and expansionary fiscal policy leads to an increase in the interest rate.