In a closed economy an increase in the public sector

Question

Practice Questions 7

1. Identifications: define and give a brief statement about the significance of each of the following terms:

Full employment
Frictional unemployment
Structural unemployment
Cyclical unemployment
Seasonal unemployment
Natural rate of unemployment
Hyperinflation
Intermediate targets
Operating targets
Real bills doctrine
Free reserves

2. True/False/or Uncertain: for each of these statements decide whether you think the answer is TRUE, FALSE, OR UNCERTAIN and then briefly explain your answer.

1. An increase in the excess reserve ratio will cause an increase in the interest rates for Loans.
2. An increase in the required reserve ratio will cause an increase in the funds available to loan out.
3. An increase in the required reserve ratio will cause an increase in the aggregate demand.
4. An increase in the required reserve ratio will cause an increase in the level of prices.
5. If there is an increase in the monetary base and at the same time there is an increase in the {C/D} ratio there will be a decrease in the aggregate demand.
6. An increase in the {C/D} ratio will lower aggregate demand and increase the level of income and prices.
7. An increase in the public sector deficit financed with public debt will cause a decrease in the level of excess reserves maintained by the financial institutions and therefore a decrease in the Money Supply.
8. An increase in the public sector expenditure, ceteris paribus, will cause an increase in the deficit of the public sector of an equal magnitude.
9. The public sector budget is an automatic stabilizer because provided the public sector expenditure remains constant, it changes with the business cycle, with deficits when there is an economic expansion and surpluses when there is an economic contraction.
10. If there is an increase in the required reserve ratio, a sell-OMO and a decrease in the {C/D} ratio, it is likely that the economy will enter into a recession.
11. A budget deficit financed with bonds will cause an increase in the economic activity.
12. A budget deficit financed with taxes will have no effect on the economic activity.
13. A budget deficit financed with taxes will have no effect on the level of prices.
14. The rate of unemployment will remain constant if there is a sudden increase in the {C/D} ratio.
15. The unemployment rate and the rate of inflation are always negatively correlated.
16. The Federal Reserve has the power to control at the same time the quantity of monetary base and the interest rate on discount loans to the financial institutions, so economic theory is wrong, since as the monopolist of monetary base the Federal Reserve can control at the same time quantity and prices.
17. Taxes are a stock because they are a liability.
18. Government expenditure is a stock variable.
19. Inventories maintained by firms are a stock variable.
20. Changes in inventories are a stock variable.
21. Private Savings plus Public Savings (in a closed economy) can be different from zero.
22. In a closed economy an increase in the public sector deficit implies that the private sector is demanding more bonds.