Economics - Economics Section 1

47. Because of a sharp increase in real estate values, the household sector has decreased the fraction of disposable income that it saves. If output and investment spending remain unchanged, which of the following is the most likely scenario?

  • Option : B
  • Explanation : The fundamental relationship between saving, investment, the fiscal balance, and the trade balance is S = I + (G – T) + (X – M). Given the levels of output and investment spending, a decrease in saving (increase in consumption) must be offset by either a decrease in the fiscal deficit or a decrease in net exports. Decreasing the fiscal deficit is not one of the choices, so a decrease in net exports and corresponding decrease in net capital outflows (decreased lending to foreigners and/or decreased purchases of assets from foreigners) is the correct response.
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48. The curve that represents combination of income and the real interest rate at which planned expenditure equals income is most likely the:

  • Option : B
  • Explanation : The IS curve represents combinations of income and the real interest rate at which planned expenditure equals income.
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49. The curve that represents combinations of income and the interest rate at which the demand for real money balances equals supply is most likely the:

  • Option : B
  • Explanation : The LM curve represents combinations of income and the interest rate at which the demand for real money balances equals the supply.
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50. Which of the following best describes the relationship depicted by the IS curve?

  • Option : B
  • Explanation : IS curve shows an inverse relationship between income and the real interest rate. When interest rates are high, investments fall and therefore income must fall as well.
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