On CB’s macroeconomics audit exam:
<a href=“http://jsher.myclassupdates.com/sitebuildercontent/sitebuilderfiles/apmacauditexam.pdf[/url]”>http://jsher.myclassupdates.com/sitebuildercontent/sitebuilderfiles/apmacauditexam.pdf</a></p>
can someone explain multiple choice # 12, 21, 26, 31, 34, 45, 55 for me?
THANK YOU.</p>
<h1>12. You know that for open market operations the Fed’s selling or buying bonds. To cut inflation, GDP must decrease. To do this, you can cut investment by raising interest rate. Business Investment’s a part of GDP (from the GDP equation= C+I+G+Xn (I is investment)). To raise interest rate, you must increase money supply.</h1>
D’s the answer.
A) is wrong becasue interest rate must increase.
B) is wrong because bank reserves must increase to cut the money supply.
C) is wrong cause gov deficit usually has to do with fiscal policy and open market operation is a monetary policy
E) has nothing to do with OMO.</p>
“To raise interest rate, you must increase money supply.”</p>
doesn’t an increase in the money supply DECREASE the interest rate??</p>
Oh, I meant decrease money supply.
Okay so would the answer be E?
Decrease in inflation means domestic goods are cheaper to foreigners. Thus the demand for exports increase.</p>
<h1>21 Remember the formula real = Nominal - Price Level(inflation)</h1>
For Real output to stay the same, when price level increase by 10% NOMINAL output must increase by 10% too. Remember that output of a country equals its income. So the answer is B) Nominal National Income.</p>
<h1>26 its best to draw the foreign exchange graph.</h1>
Or even just visualise a demand and supply graph. For the price to decrease, either demand must fall or supply increase.</p>
in the foreign exchange graph for the dollar. The price is the “foreign price of one dollar” Basically the price of the dollar. Demand curve shows the demand for the dollar. And supply curve shows the supply of dollar in the exchange market. Simple.</p>
Keep in mind the things I’ve just said and go through the answer choices.
a. Increase in US income means more americans have money to buy stuff. i.e demand more imports. To fund this, americans supply (sell their dollars to the exchange market to buy foreign currrency) Thus supply increase. decreasing price (dollar depreciate) </p>
b. Increase in US interest rates means the Us investments are more profitable. Europeans will want to buy US investments eg. bonds. They demand more dollar to invest (you can only use US dollars to buy US bonds). Thus demand increase. Causing dollar to appreciate (increase price)</p>
c. wrong. Look at a.</p>
d. Decrease in europe’s interest rates has no direct impact on US.</p>
e. Decrease in US price level means US goods are cheaper to europeans. So demand for dollar increase (to get US dollar and buy the cheaper US goods). Price increase. Dollar appreciate. </p>
Did I make any mistakes? :)</p>
<h1>31. Monetary multiplier = 1/reserve ratio = 5</h1>
My teacher said buying bonds (securities) has no reserve requirements. So it’s just Amount x monetary multiplier. $400Bn x 5= 2000Bn.</p>
C)</p>
ohhhh okay thank you!
yeah everything you’ve said makes sense
except number 12…
the answer key says the answer is B</p>
LOL. So do we have to assume that the reserve requirement didn’t decrease, but instead the amount of deposits decreased, less required reserves are taken in, and the loanable funds decrease? Then, money supply decrease???</p>
Wait, that makes no sense. That has to be an effect of OMO…o.o lol :)</p>