Economics-Q50 Online Services


  1. Explain how unanticipated inflation is likely to impact on (a) creditors (b) nonunionized workers and (c) retirees on fixed income.
  2. Japan has now been stuck in a recession for close to two decades now. While the Japanese central bank has cut interest rates down to zero, consumers and businesses are still reluctant to borrow. Why might that be?  Explain
  3. Put ‘X’ marks against the correct answers in the table below


Description Crowding out effect Interest effect Foreign purchases effect Wealth effect
Deflation fear makes borrowers reluctant to borrow    


Public sector expansion shrinks private sector        
Inflation triggers bigger trade deficit        
Unexpected inflation reduces consumer spending        



  1. The difference between full employment GDP and current GDP is called a “GDP gap”. Economist Arthur Okun had discovered that an increase in the GDP of 2% tends to bring unemployment down by approximately 1%.  If 4% unemployment is considered full employment and today’s unemployment happens to be 4.25% then what is the size of the GDP gap in our $18 trillion economy?




  1. From the following list, identify the economic indicators as leading, lagging or coincident (meaning it reacts immediately to changes in the economy)

Economic indicator Leading indicator Coincident indicator Lagging indicator
Consumer spending      
Exchange rate      
Building permits for private homes      




  1. An economy has a consumption function given by C = 800 + (4/5)Yd; autonomous investment  held at 200, government spending equals 400, exports are constant at 60 and imports constant at 80.  There is also a lump sum tax of 50.  (a) Find the equilibrium income (b) Is the budget of the government balanced at equilibrium?





  1. If economic growth tends to create a balanced budget, would might dedicated efforts to balance the federal budget not be conducive to producing economic growth?




  1. What is so special about the “neoclassical synthesis” presented by economist Paul Samuelson? What was it meant to accomplish?



  1. It is often said that the stag flationary 1970s (inflation and unemployment rising in tandem) caused Keynesian policies to fail. Why should that be?


  1. Explain how an expansionary fiscal policy in the US might affect bond prices and interest rates in the market. What effect might that have on the value of the dollar in international exchange?


  1. What is the likely impact of an expansionary monetary policy if all the assumptions of the policymakers are valid?  Circle (or highlight) the right answers in the table below

Money supply RISE FALL
Interest rate RISE FALL
Investment demand RISE FALL
Gross domestic product RISE FALL
Unemployment RISE FALL




  1. Indicate which of the essential functions of money may be fulfilled by the different items of value listed in the table below:
  Medium of exchange Store of value
Credit card    
Personal jewelry items    
Traveler’s check    
Shares of Google    



  1. Keynesian economists often say that monetary policy suffers from “cyclical asymmetry” in the sense that it may work well in bringing down inflation but not so well in creating growth. Can you offer a reasonable explanation for this anomaly?




  1. Explain how investor expectations can easily frustrate the best intentions of policymakers (e.g. fiscal expansion to cure a recession).





  1. What is the difference between a bull market and a bear market? Does it have anything to do with investor expectations regarding interest rates?



  1. Let’s say the U.S. government aggressively brings down inflation by engaging in open market operations (in particular, by selling bonds). What kind of impact is that likely to have on the value of the dollar in global exchange? Why?


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  1. It is now widely anticipated that interest rates in the U.S. will slowly begin their upward climb after being at record lows for close to a decade. Should this trigger a change in one’s financial portfolio made up of stocks and bonds? Explain.




  1. Let’s take the classical view of money (i.e. quantity theory of money: MV = PY; consider the velocity of turnover V to be unchanged, calculate (a) the rate of inflation if the money supply is increasing at the rate of 5% per year and  GDP grows at an annual rate of only 2% (b)  the rate of growth in GDP if inflation is 3% per year while money supply grows at an annual rate of 3% as well.





  1. Let’s say you paid $987.60 for a government bond with a face value of $1000 and an annual interest of 4%. What is the actual rate of return that you earn?  If the market rate of interest happens to be 4% as well would you still consider the bond to be a worthwhile investment?  Why or why not?





  1. Assume that the Federal Reserve is selling  government bonds in the open market.  Should  this be interpreted as an expansionary or a contractionary move (in terms of the money supply)?   Why?  What does it suggest about how the Federal Reserve is reading the economic situation?





  1. Let’s say the U.S. Treasury decides to finance government spending by selling bonds to the Federal Reserve. How might the Fed pay for these bonds?  What kind of an impact will that have on the domestic money supply?



  1. Explain why exporter of farm products in the U.S. might hope for a weak dollar while importers of luxury foreign cars hope for a strong dollar.



  1. Match up each definition given below with the appropriate interest rate (i.e. discount, federal funds, short-term, long term, prime, LIBOR)

Definition Type of interest rate
Interest rate on interbank  overnight loans  
Interest rate on Treasury bills  
Interest charged by big banks on loans to big corporations  
Overseas interbank lending rate  
Interest rate Fed charges member banks  




  1. Explain why in a healthy financial market the rates on U.S. Treasuries is likely to be lower than the interest rate on long term government bonds (this is called an upward sloping yield curve).



  1. In a simple demand supply model, an excess supply of any product is eliminated by lowering its price. Why can’t the same logic hold for reducing unemployment by cutting back wages?
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