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target exchange rate

* 1. Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is
a. .5%
b. 3.5%
c. 4.0%
d. 2.0%

* 2. With a steep short-run aggregate supply curve,
a. an increase in government spending will not have an impact on the price level.
b. fiscal policy will be an effective tool to reduce unemployment without raising prices too much.
c. an increase in taxes that does not change potential GDP will not decrease real GDP by much.
d. there is a large change in real GDP whenever the price level rises.

* 3. Monetary policy affects macroeconomics performance by
a. changing aggregate supply.
b. creating budget surpluses.
c. changing aggregate demand.
d. creating budget deficits.

* 4. Suppose that the Fed is using this feedback rule: Every time real GDP exceeds potential GDP, contractionary policy is used and whenever real GDP is less than potential GDP, expansionary policy is used. GDP equals potential GDP and then aggregate demand increases. As a consequence of the policy action taken the resulting
a. contractionary policy will lower the price level from what it otherwise would be.
b. contractionary policy will decrease unemployment from what it otherwise would be.
c. expansionary policy will decrease unemployment from what it otherwise would be.
d. expansionary policy will lower the price level from what it otherwise would be.

* 5. The Taylor Rule is an example of
a. a feedback-rule policy.
b. discretionary monetary policy.
c. a fixed rule.
d. an activist rule

* 6. Country A and country B both consume and produce only food and clothing. Both countries use only labor to produce these two products. A worker in country A can produce 6 units of clothing or 10 units of food each day while a worker in country B can produce 4 units of clothing or 8 units of food. Which of the following statements is true?
a. The opportunity cost of clothing production in country A is greater than that of country B.
b. The opportunity cost of food production in country A is greater than that of country B.
c. The opportunity cost of food production in country A is the same as that of country B.
d. The opportunity cost of clothing production in country B is less than that of country A.

* 7. Suppose the target exchange rate set by the Fed is 150 yen per dollar. If the demand for dollars permanently decreases the Fed
a. can permanently meet the target by selling dollars.
b. can permanently meet the target by buying dollars.
c. must violate both interest rate parity and purchasing power parity to permanently meet the target.
d. cannot permanently maintain the target rate.

Solution Preview

* 1. Suppose the tax rate on interest income is 25 percent, the real interest rate is 4 percent, and the inflation rate is 4 percent. In this case, the real after-tax interest rate is
a. .5%
b. 3%
c. 4.0%
d. 2.0%
(b. 4%*(1-25%) = 3%)

* 2. With a steep short-run aggregate supply curve,
a. an increase in government spending will not have an impact on the price level.
b. fiscal policy will be an effective tool to reduce unemployment without raising prices too much.
c. an increase in taxes that does not change potential GDP will not decrease real GDP by much.
d. there is a large change in real GDP whenever the price level rises.
(c. Since the aggregate supply curve is steep in the short run, a change in aggregate demand will only significantly affect the equilibrium price, but not the quantity. Thus, the GDP will not be decreased by much.)

* 3. Monetary policy affects macroeconomics performance by
a. changing aggregate supply.
b. creating budget surpluses.
c. ...

Solution Summary

The target exchange rate and other terms are embedded.

$2.19