Section A.

True or False questions. Provide economic intuition or draw relevant diagrams to justify your answers. No marks are awarded if you merely state True or False as your answer.

1. Financial innovation that increases the velocity of money increases aggregate demand, prices and output in the short-run. [Hint: show your answer with a diagram]

2. In a large open economy, the expansionary fiscal policy brings about a deterioration in the net exports as worse off as the closed economy. [Hint: show your answer with a diagram]

3. The assumptions of free capital mobility and a small open economy dictate that the world real interest rate is equal to the domestic real interest rate.

4. Lenders and borrowers are equally worse off with inflation.

5. If the velocity of money is constant, money supply increases by 5%, output growth rate is 3%, and nominal interest rate is 5% then real interest rate is 3%.