Question

1. Perhaps the most fundamental relationship in all of economics is which of the following? (a) spin rates and curves; (b) human capital accumulation and the performance of the VIX index; (c) real disposable income and personal consumption expenditures; (d) money supply growth and in-flow of immigrants.

2. When increases in the money supply are said to have no lasting impact upon the level and composition of output, we say that money is: (a) neutral; (b) inflationary; (c) green; (d) transitory.

3. According to the relative income hypothesis: (a) consumption is a function of current income only; (b) consumption depends most importantly on the income of your brothers, sisters, aunts and uncles; (c) attempts to maintain living standards at their previous, highest level result in ratchet effects; (d) consumption depends mainly on your current income relative to your future expectations for it.

4.Which of the following represents a snapshot used commonly to represent the relationship between inflation and the unemployment rate over time? (d) a consumption function; (b) a Lorenz Curve; (c) the long-run aggregate supply curve; (d) the Phillips Curve.

5. A so-called “normal” Treasury yield curve most commonly tends to be: (a) flat; (b) downward sloping; (c) sloped monotonically positive; (d) shaped like a “W”.

Answer 1

1. (c) real disposable income and personal consumption expenditures

  Disposable income is personal income that remains after direct taxes and government charges have been paid. Real disposable income is the post tax and benefit income available to households after an adjustment has been made for price changes. Whereas Personal consumption expenditures is a measure of national consumer spending. It tells you how much money Americans spend on goods and services. As real disposable income increases personal consumption expenditures also increases. There is a positive relation.

2. (a) neutral

The neutrality of money explains why changes in the money supply only affect nominal variables and not real variables. The neutrality of money theory is based on the idea that money is a “neutral” factor that has no real effect on economic equilibrium. In other words, the amount of money printed by the Federal Reserve (Fed) and central banks can impact prices and wages but not the output or structure of the economy.

3. (c) attempts to maintain living standards at their previous, highest level result in ratchet effects

Relative income hypothesis states that current consumption or saving is not a function-of current income but relative income. There is a lack of symmetry in people’s consumption behaviour. People find it more difficult to reduce their consumption level than to raise it. This asymmetrical behaviour of consumers is known as the ratchet effect. So in the long run people will maintain MPC=APC

4. (d) the Phillips Curve

The Phillips curve is a single-equation economic model, describing an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy.

5 (c) sloped monotonically positive

A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time and it points to economic expansion.