It’s just part of this formula:</p>
C(Total Consumption)=Autonomous Consumption+(MPC)(DI)
C(Total Consumption)=400+(.8)(1200)
C(Total Consumption)=400+960
C=1360</p>
The answer, however, is NOT B. B represents the total consumption, and we are trying to find the INCREASE in spending. Therefore, the answer is 1360-400=960, which is D.</p>
@shelley: Yep, it is C. This is why I am confused.</p>
So the $400 is not relevant? Why is none of this covered in PR…should’ve got 5 steps. But I’m getting most of the questions on the practice test right, hopefully to be in a 4 area.
Alright another FEM question I missed (ugh…I hope there’s not a major FRQ on this)</p>
Which of the following will cause the United States dollar to depreciate relative to the euro?
(A) An increase in household income in the United States
(B) An increase in interest rates in the United States
(C) An increase in household income in Europe
(D) A decrease in interest rates in Europe
(E) A decrease in price level in the United States</p>
@tenebrousNight: I’ve looked through all the notes my teacher gave me and your book must be flawed. When the government tries to reduce debt, the interest rate will rise.
It can’t be C. I’m certain the answer is actually E.</p>
What we are looking for here is something that will appreciate the euro. If household income is increased in the United States, people will spend and also save more. Therefore, spending will include spending on European goods, appreciating the euro. The answer is A.</p>
appleandrice: i believe it is A? the increase in household income in the US will mean US citizens will demand more European goods, shifting the demand for the Euro, thus appreciating the euro, leading a depreciation of the USD</p>
@shelley: It’s not a book. It’s the audit test online, and it clearly says that the answer is C.</p>
@appleandrice: The answer is A. Think of it this way, an increase in the household income in the US will mean that the US has more income to buy European goods. Therefore, the demand for Euros will increase and the Euros will appreciate. Therefore, the US dollar will depreciate. All the rest will cause the US dollar to appreciate.</p>
B–> An increase in interest rates in the US will make the US bond market more lucrative so Europeans will buy more US bonds, thus demanding more US dollars. USD appreciates.
C–> Well, if Europe has more income, they have more money to buy US goods. So the demand for US dollars will go up and US dollars will appreciate.
D–> This implies that US interest rates are higher. The US bond market will become more lucrative so ya de da, the US dollar will appreciate. I’m sure you understand the logic.
E–> If the price level is down, it means that US goods are cheaper to the Europeans so Europeans will buy more from here. So the demand for US dollars will increase and the US dollar appreciates. </p>
I hope this makes sense.</p>
Gotcha, it’s A. I think I may go over FEM on youtube, if you guys haven’t found it already gewalker94 has a channel that is full of AP Econ review (both macro and micro).
Another question I missed </p>
Suppose that the government decreases taxes andat the same time the central bank decreases the discount rate. The combined actions will result in
(A) an increase in unemployment and a decreasein the interest rate
(B) an increase in unemployment and an increasein the interest rate
(C) an increase in the real gross domestic productand a decrease in the interest rate
(D) an increase in the real gross domestic productand an increase in the interest rate
(E) an increase in the real gross domestic productand an indeterminate change in the interest rate</p>
I must seem really dumb to you all…</p>
response to 123
Appleandrice,
I love this type of question because it is just like minesweeper if you do not know the answer. The answer to what cause depreciation is lower r or higher PL in the country in question. Either you are experienceing an outflow from investers pursuing higher rates for higher returns on financial assets or consumers are purchasing more relatively less expensive foreign goods.</p>
This question is fun because it has many choices that are identical and therfore wrong: B and D are bothe functionally the same interest rate change. A and C are opposites and therfore the bomb, I mean answer is one of them. E is functionally the same as C so the answer is therefore A. Knowing the answer is nice, but minesweeper helps pass the time a bit better.</p>
Good Luck tomorrow, I have enjoyed your questions.</p>
It would be E I believe.</p>
Sophos I don’t know what you mean… Increasing unemployment and increasing Real GDP are opposites…</p>
response to 129:
It is E
Fiscal + Monetary multiple choice questions are almost always about how expansionary policies all move AD, PL, rGDP, UE, and E in the same direction, but have opposite effects and therfore indeterminate results on r. Fiscal accidently results in up r as an effect and Monetary purposefully reduces interest rates to induce interest sensitive expenditure.</p>
Lowering the discount rate causes GDP to increase and interest rates to decrease. Lowering taxes also causes the GDP to go up. So the answer should be C.</p>
Staller: I was too slow with my reply and responding to post 123 not 129</p>
I agree with simpson. I am saying that the answer is C.</p>
thesimpson90, thats not true. Monetary policy does decrease interest rates, but you don’t know how much the fiscal policy increased it to determine if it would decrease overall. So it would be indeterminate.</p>
But fiscal policy makes the interest rates go down as well. If investments go up, interest rates go down.</p>
No, expansionary fiscal policy makes interest rates increase. Thats the rational thoery, that since interest rates increase investment would decrease and counterbalance the government expenditures. When the government runs a deficit its borrowing money. If the government borrows all of the banks money, the banks will have to charge a higher interest rate to make up for the lower supply of money around. Or think of it like this, if htere is less money in the banks, then each loan will be a big risk since they have less of a failsafe. So to combat that interest rates rise.</p>
Crowding out effect would also increase interest rates</p>