Answer Happy

Question 7 Consider the neoclassical market clearing model where the price of goods is perfectly flexible, and where the demand for real money balances is of the form L(Y,i), where Y denotes income and i the nominal interest rate. An increase in the supply of money A)[ ] must increase the level of prices in the same proportion if the interest rate has no effect on the demand for money. B)[ ] need not increase the level of prices if the demand for money does not depend on income. C[] need not raise the level of prices if the interest rate is close to zero. D[ ] will necessarily increase output and the price level because the interest rate decreases. E)[ ] A and C. F)[ ] B and C. G[None of the above. [4 marks] Question 8 According to Barro and Gordon's model of rules versus discretion, the rate of inflation may ex- ceed the Bank of England's target because of A[ ] large government deficits. B[ ] a low concern for unemployment by the Bank. C[] limited foresight at the Bank. D[ ] All of the above. E)[ ] B and C. F[ ] None of the above. [4 marks]