An indirect effect of an increase in the price level works through
A. changes in trade balances as domestic goods become more expensive, causing interest rates to move in the opposite direction from the change in the exchange rate.
B. people substituting out of domestic goods and into foreign goods as exchange rates rise.
C. interest rates as people borrow to maintain their money balances, bidding up interest rates and reducing total planned real expenditures.
D. interest rates as people save more as the higher prices make their money balances less attractive.
Answer: C
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Goldie is indifferent between option A, which gives her $9,000 for sure, and option B, which gives her $3,000 with probability 1/3 or $18,000 with probability 2/3. Goldie's cost of risk for option B is
A) zero. B) $1,000. C) $3,000. D) $4,000.
According to real business cycle theory, an increase in taxes
a. would significantly reduce labor supply, increase employment, and decrease output. b. a decline in employment but not in output. c. would significantly reduce labor supply, and decrease employment and output. d. no change in output and employment.