Final exam

Question 1

does monetary expansion affects Y in the long run?

Answer 1

No, it only affects it in the Short run

Question 2

what happens to price expectations, AD and AS when there is a contractionary fiscal policy in the short run?

Answer 2

Pe increses as AS decreases. and AD decreases

Question 3

What happens in the long run during a Contractionary fiscal policy with Pe, AD, P, I, G, Y if Pe is greater than price

Answer 3

prices might fall to less than Pe. This will continue with a decrease in AD because people expect prices to continue rising. However, due to de decrease in prices, interest rates also decrease, which leads to an increase in investments. this ultimately offsets the decrease in government spending. In consequence, both forces “neutralize” each other and there will be no change in output.

Question 4

What is an AS shock recession (stagflation)

Answer 4

is when output decreases while prices increase

Question 5

What do unanticipated changes can do

Answer 5

they can stimulate the production

Question 6

what does anticipated changes can do

Answer 6

increase nominal interest rates and produce no stimulus

Question 7

what does adaptative expectations mean?

Answer 7

it means that people always follow the same patron without learning from past experiences

Question 8

what do rational expectations mean?

Answer 8

it means that people take in account all of the . information available before makind decisions. they leant from past experiences so to avoid negative patrons from repeating.

Question 9

what happens when price expectations increase

Answer 9

there is an increase in wages and a subsequent increase in prices to cover the increase in cost production.

Question 10

what is the wealth effect

Answer 10

when prices increase, people have more power of purchase so consumption increase as well as output

Question 11

what is an interest rate effect

Answer 11

when prices decrease, there is less money needed so less money demanded, fewer interest rates, more investment, and more output

Question 12

what is the exchange rate effect

Answer 12

when prices decrease, interest rates decrease, there are capital outflows (there is not a good return for capital investment), the currency depreciates and net exports increase

Question 13

what happens during a monetary expansion

Answer 13

money supply increases, interest rates decrease, AD increases and Y increases

Question 14

what is a fiscal expansion

Answer 14

G increases, T decreases, AD increases.

Question 15

what values involve counter-cyclical and procyclical policies

Answer 15

borrowing and spending

Question 16

why do governments don’t take advantage of the booms to strengthen the budget?

Answer 16

over optimism during boom periods.

Question 17

what can governments do to prevent excess debt

Answer 17

create a limit budget deficit to GDP ratio.

Question 18

what are the pros of globalization?

Answer 18

1. Helps lower prices
2. more product variety
3. allows exporting extra resources so that they don,t go to waste
4. lower cost in the funding of the health care system
5. Technology

Question 19

what are the cons of globalization

Answer 19

1. loss in employement due to eplacement of labour from other places
2. grow in trade deficits.

Question 20

when did financial liberalization happened for the developped and the developping countries respectively?

Answer 20

1980 and 1990 respectively

Question 21

what are the points of the Washington consensus?

Answer 21

1. Fiscal policy discipline
2. redirect public spending away from subsidies and toward pro groth pro poor services (education, health infraestructure)
3. Tax reform:broaden tax base/moderate marginal tax rates
4. Market determinate interest rates: positive but moderate real rates
5. Competitive exchange rates: neither fixed nor free floating
6. Liberalize trade
7. Facilitate foreign direct exchange.

Question 22

what are the types of economies based on their industrial structure?

Answer 22

1. subsistance economies (supply only for the internal market)
2. Primary goods exporting economies
3. emerging industries
4. industrialized

Question 23

what are the trade offs of economic policy

Answer 23

An icrease in productivity but a decrease in employemrnt

Question 24

what is th objective of the economic policy

Answer 24

make economy more liberal

Question 25

reasons for desestabilisation of fiscal policies

Answer 25

1. politic cycles

2. overoptimism in economic growth

Question 26

why do rich countries get richer

Answer 26

because people trust mrein rich bank’s countries. therefore they invest in them.

Question 27

what is the relationship between bank independence and inflation.

Answer 27

the more there is independence the less inflation there is

Question 28

what are the three central bank objectives

Answer 28

1. price stability
2. financial stability (avoid bank panics)
3. economic stability (avoid recessions )