Short answer questions - answer all 1. Explain how reducing marginal income tax rate can increase aggregate supply.

1.    Explain how reducing marginal income tax rate can increase aggregate supply.

2.    Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.

3.    Describe the effects on the money supply when the Fed decreases the discount rate.

4.    Suppose a country experiences a change in weather patterns that makes farming more difficult. Which curve(s) in the aggregate demand and aggregate supply model would be affected, and which way would it (they) shift?

5.    If asset prices fall and inflation expectations remain unchanged, what happens to inflation and unemployment? Defend your answer.

6.    Suppose that a U.S. dollar buys more gold in Australia than it buys in Russia. What does purchasing-power parity imply should happen?

7.    Economists agree that increases in the money-supply growth rate increase inflation and that inflation is undesirable. So why have there been hyperinflations and how have they been ended?

8.    Suppose that the government spends more on a missile defense program. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, taxes, and investment-accelerator effects?

9.    In a fractional reserve economy where the required reserve ratio is 10%, must it be the case that an initial deposit of $100 increases the total money supply by $1,000? Explain.

10. Suppose tax policies are changed to encourage saving. Explain how the income effect and substitution effect influence the amount saved.

11. Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.

12. Suppose a bottle of wine costs 20 euros in France and 25 dollars in the United States. If the exchange rate is .80 euros per dollar, what is the real exchange rate?

13. Are the effects of an increase in aggregate demand in the aggregate demand and aggregate supply model consistent with the Phillips curve? Explain.

14. Suppose technology advances within a nation. Which curves in the aggregate demand and aggregate supply model would be affected, and which way would they shift?

15. How does a reduction in the money supply by the Fed make owning stocks less attractive?