1

The most important reason for the slope of the aggregate demand curve is that as the price level _______.
1) increases, interest rates decrease, and investment increases
2) decreases, interest rates decrease, and investment decreases
3) increases, interest rates increase, and investment decreases
4) decreases, interest rates increase, and investment increases

2
When there is an adverse supply shock _______.
1) unemployment rises and the short-run Phillips curve shifts left
2) unemployment falls and the short-run Phillips curve shifts left
3) unemployment rises and the short-run Phillips curve shifts right
4) unemployment falls and the short-run Phillips curve shifts right

3
Suppose a bank has a 10 percent reserve requirement, $4,000 in deposits, and has loaned out all it can given the reserve requirement.
1) It has $400 in reserves and $3,600 in loans.
2) It has $40 in reserves and $3,960 in loans.
3) It has $800 in reserves and $3,200 in loans.
4) It has $444 in reserves and $3,556 in loans.

4
Whitney puts money in a savings account at her bank earning 3.5%. One year later she takes her money out and notes that while her money was earning interest, prices rose 1.5%. Whitney earned a nominal interest rate of _______.
1) 3.5% and a real interest rate of 5%
2) 5% and a real interest rate of 2%
3) 5% and a real interest rate of 3.5%
4) 3.5% and a real interest rate of 2%

Do a little research, then take a shot.

Hints 1) interest rates and investments move is opposite directions.
2)http://en.wikipedia.org/wiki/Phillips_curve
3) 10% of 4000 is 400.
4) Nominal interest rate is equal to the real rate plus inflation.

1) The correct answer is 1) increases, interest rates decrease, and investment increases.

To understand why, we need to consider the relationship between the price level, interest rates, and investment. When the price level increases, it leads to higher costs for businesses, including higher wages and raw material prices. As a result, businesses may reduce their investment spending because it becomes more expensive to produce goods and services.

Additionally, an increase in the price level typically leads to an increase in the demand for money. People need more money to purchase the same quantity of goods and services at a higher price level. To satisfy this increased demand for money, the central bank might increase the money supply, which leads to a decrease in interest rates.

Lower interest rates make it cheaper for businesses to borrow money for investment purposes, stimulating their investment spending. Therefore, when the price level increases, interest rates decrease, and investment increases. This relationship is captured by the downward slope of the aggregate demand curve.

2) The correct answer is 3) unemployment rises and the short-run Phillips curve shifts right.

An adverse supply shock refers to a sudden decrease in the availability or increase in the cost of inputs used in production, such as raw materials or labor. This shock negatively affects the economy's ability to produce goods and services, leading to a decrease in aggregate supply (AS).

As a result of the adverse supply shock, businesses face higher production costs and may reduce their output. This reduction in output leads to a decrease in the demand for labor, which results in higher unemployment.

The short-run Phillips curve shows the relationship between unemployment and inflation in the short run when supply shocks like the adverse supply shock occur. An adverse supply shock causes a decrease in aggregate supply, which shifts the short-run Phillips curve to the right, indicating higher unemployment and higher inflation.

Therefore, when there is an adverse supply shock, unemployment rises, and the short-run Phillips curve shifts right.

3) The correct answer is 3) It has $800 in reserves and $3,200 in loans.

A reserve requirement is the percentage of deposits that a bank must hold in reserve and cannot lend out. In this case, the bank has a 10 percent reserve requirement, and it has loaned out all it can given this requirement.

To determine the amount of reserves and loans the bank has, we need to calculate 10 percent of the deposits.

10 percent of $4,000 = $4,000 * 0.10 = $400

The bank must have $400 in reserves and can lend out the remaining amount.

Therefore, the bank has $800 in reserves ($400 to meet the reserve requirement and an additional $400) and $3,200 in loans.

4) The correct answer is 2) 5% and a real interest rate of 2%.

To calculate the nominal interest rate, we need to add the inflation rate to the real interest rate. The real interest rate is the interest rate adjusted for inflation, while the nominal interest rate is the interest rate before adjusting for inflation.

Whitney earned a 3.5% nominal interest rate on her savings account, and prices rose by 1.5% during the year. Subtracting the inflation rate from the nominal interest rate gives us the real interest rate.

Nominal interest rate - Inflation rate = Real interest rate
3.5% - 1.5% = 2%

Therefore, Whitney earned a nominal interest rate of 5% (3.5% + 1.5%) and a real interest rate of 2%.