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60 Cards in this Set

  • Front
  • Back
Which of the following constitute the fundamental questions every economic system must answer?
I. What goods and services will be produced
II.How will they be produced?
III.When will they be produced
IV. For whom will they be produced?
V. where will they be produced
E.) III and IV only
U.S. GDP is the total market value of all goods and services produced in a year within the United States. Because the movies and olive oil were produced elsewhere, they can be ruled out. GDP excludes imports but includes exports, so the blue jeans are included even though they are exported to Japan. The wine is included as well, because although Canada makes it, it fits the criteria of being produced within the United States.
Assume commercial banks save no excess reserves and the reserve requirement is 20%. How much money is created in new loans from all banks after this bank recieves a deposit of $1000

A. $8000
B.$1000
C.$4,000
D.$5,000
E.$20,000
C. $ 4,000
This Bank must keep 20%, which is $200, and can lend out the remaining 800$. The answer is C because the money multiplier is 5. When the money multiplier takes effect, 800x5= $4000
In a given period, the average price level in the country of Sherwood tripled, and Robin's income increased from 30,000 to 60,000. What happened to Robin's nominal and Real income?

A.N: Increased R:Decreased
B. N:increased R:increased
C. N:Decreased R:Decreased
D. N:Increased R:Stayed the Same
E. N: Decreased R:Increased
A. Nominal income: increased ; Real Income: decreased
Robin's nominal income is the number of dollarshe recieved, which has increased from 30,000 to 60,000. Robin's real income is the buying power of the dollars he recieves. Because prices have tripled while his nominal income doubled, prices have increased by more than income. He will be able to buy less with his 60,000 dollars now when he recieved less than half of his income but prices were 1/3 what they are now. Thus, real income has decreased
The upward sloping section of the aggregate supple curve can be explained by
C. wages and other input prices that adjust more slowly than output prices.

When output and price level increase at the same time, this results in an upward sloping section of the AS
Which of the following is a direct, accurate link within the circular flow?
C. Household expenditures result in revenues for firms via the product markets

~Goods and services are exchanged for $ in the product markets
~Wages and rents are exchanged for inputs in Factor Markets
~Household income funds expenditures , which result in revenues via the product market
~firms exchange revenues for goods and services
CORRECT: household expenditures do result in revenues
Which of the following would be an example of flat money?

A. Cigarettes used as money in prisons
B.Dollar Bills
C.Gold Coins
D.Arrowheads used as used as a medium of exchange
E.Chickens used for Bartering
B.Dollar Bills

Fiat money has no intristic value, value in exchange comes as the result of government order or "fiat"
Cigarettes, Gold, Arrowheads, and chicken all have value beyond their usefulness as money and cannot be considered Fiat
Assume Astobia and Bonavia excersize free trade. If the real interest reats in astobia decreases in comparison to Bonavia's real interest rate, than for bonavia which of the following would be true of

Capital Flow Currency Exports
A. Outflow Appreciation Decrease
B.outflow Appreciation increase
C.inflow depreciation decrease
D.inflow depreciation decrease
E.inflow appreciation decrease
E. Inflow, appreciation,decrease

Because Astobia's interest rate is now lower than Bonavia's, it would be more profitable for investors to invest in Bonavia's economy. Therefore, it would be inflow of capital as more money comes into the country. This will cause the money to appreciate, which will increase demand for bonavia's money. However, as it appreciates it will be more expensive for people from other countries to buy products from Bonavia.
Expansionary Fiscal Policy would best be prescribed to

A.eliminate a recessionary gap
B.Reduce inflation
C.Reduce the interest rate
D. Eliminate an inflationary group
E. Avoid crowding out
A.Eliminate the Recessionary Gap

Expansiionary fiscal policy will increase aggregate demand and aggregate expendatiure. It is thus likely to increase the price level and the interest rate, and causing crowding out. It will cause an inflationatory gap to get bigger, but it will help to eliminate a recessionary gap.
The Figure above illustrates a/ an

(figure is a curve with inflation rate on the Y axis and Unemployment rate on the X axis, sloping down)

A. Demand Curve
B.Phillips Curve
C.production possibilities frontier
D. Aggregate supply curve
E.Lorenz Curve
B. Phillip's Curve

The curve describing the relationship between inflationand unemployment is called a phillip's curve.
The Aggregate Demand curve is

A.a horizontal summation of market demand curves
B. a horizontal summation of firm demand curves
C. a simple aggregation of demand curves for individual goods
D.a vertical Summation of firm demand curves
E.not found by adding product demand curves horizontally or vertically
E. not found by adding product demand curves horizontally or vertically

The aggregate demand curve is not simple aggregation of individual demand curves for goods and firms. These demand curves indicate what happens when the price of one good changes relative to other goods.
Assuming there is no statistical discrepency, a trade surplus must be offset elsewhere in the

A.Current-account balance only
B.Capital account balance only
C.merchandise balance of trade only
D.current account or capital account only
E.merchandise balance of trade or current account only
D

A trade surplus occurs in the merchandise balance of trade, which is part of the current-account balance. It must be offset elsewhere in the current-account or capital-account
Kevin wants shoes and grows turnips. Lisa wants turnips and makes sheet metal. Bob wants sheet metal and makes shoes. Which function of money will cater most directly to the situation at hand?

A.Store of Value
B. unit of account
C. Medium of Exchange
D.Means of deffered payment
E.Standard measure
C

The difficuclty of this situation is that there is a double choice of wants. that is, no one can get what they want by simply exchanging their products.Using money will solve the problem
Classical economists believe

A.in a quantity theory of money- that both the velocity and the quantity of goods and services sold per period are fairly stable
B.there is a serious risk of a liquidity trap because the demand curve for money is relativley flat
C. the the government should make every effort to fine-tune the economy
D.The aggregate supply curve is L-shaped
E.that an increase in the money supply has a small and indirect effect on total spending.
A

the liquidity trap concept is a concern of Keynesian economics. Classical economists worry that effort by the gov to fine tune the economy will backfire.The believe that aggregate supply is vertical, and that an increase in the money supply has a signififcant and direct effect on total spending.
The aggregate supply curve will shift to the right in response to

A.a decrease in the labor supply
B.an increase in investment capital
C.and increase in corporate taxes
D.a decrease in the availability of education and training
E.natural disasters
B

the aggregate supply curve will shift to the right when inputs become cheaper, more productive, or more plentiful. This would result from increase in labor force, edu and training, or investment,
A fixed output level in the long run at full-employment output corresponds with which of the following shapes of the long run phillip's supply curve?

A. horizontal
B.Convex to the origin
C.Concave to the origin
D.Vertical
E.Linear with slope of 1
D

if output in the long run is fixed at full employment output, this implies that the unemplyoment rate is the same regardless of price level. Thus, the phillips curve is vertical.
Every choice results in a foregone best alternative, which economics call the

A.Accounting cost
B.Switching cost
C.Inferior Cost
D.Average Cost
E.Opportunity Cost
E
the value of the next best alternative foregone when a choice is made is called opportunity cost. Switching the inferior costs are not common terms in economics, and the average cost is the total cost of producing a number of goods and services divided by that number
The aggregate demand curve has a negative slope in part because when the price level increases
A. The Value of cash increases
B.imports become relatively more expensive
C.the real quantity of money increases
D.the interest rate increases
E.exports increase
D
When the price level increases, the value of cash decreases and imports become relatively less expensive. Exports decrease because they become relatively less expenseive. exports decrease because they become relatively more expensive. The real quantity of money decreases, thus increasing the interest rate and decreasing investment and real GDP
When the value of the US dollar appreciates relative to other currencies which of the following is the most likely to occur?

A. imports into the United States will decrease
B.Exports from the United States will increase
C.Us residents will take more vacations in foreign countries
D.More foreign visitors will travel to the Us.
E. Investments in U.S. securities will increase
C
When the US dollar appreciates relative to other currencies, this means that each dollar will purchase more of other currencies and it takes more of other currencies to purchase a dollar.Thus, imports into the United States become more expensive and will decrease. Trips to the United States and US securities also become relativley more expensive. on the other hand, because dollars buy relatively more in other countries, US residents will take more vactions in foreign lands.
Among those hurt by inflation are
I.Borrowers at fixed interest rates
II.Individuals on fixed incomes
III.those with savings earning fixed interest rates
IV.restaurant owners.
E

Borrowers with fixed interest rates are helped by inflation because the value of what they must pay back goes down.
A difference between M1 and M2 is that

A.M1 is a first mortgage
B. M2 is M1 plus assets that are more liquid
C
M1 and M2 are different but overlapping measures of the money supply. M1 is the sum of currency , checking deposits, and travelers checks. M2 is M1 plus savings deposits and some other less-liquid assets. Because M1 is part of M2, M1 cannot be larger than M2. At the same time, there is no reason why M2 would always be double M1.
Which of the following will cause the aggregate demand curve to shift to the left?
A. Expectations of surpluses of goods in the future
B. A decrease in income taxes
C. An increase in government spending
D. An increase in foreign income
E. Expectations of inflation in the future
A.
Decreases in taxes, increases in government spending or foreign income, or expectations of future inflation will shift the AD curve to the right. If consumers expect surpluses of goods in the future, they will purchase less now--shifting AD to the left-- and purchase more in the future when the surpluses are expected to lead to lower price levels.
According to Keynesian economists,
A. the investment demand curve is relatively elastic
B. fiscal policy is more effective than monetary policy
C. the economy is inherently stable
D. inadequate supply is largely to blame for periods of stagnation
E. real GDP will naturally adjust to the full-employment level.
B.
Keynesian economists believe that investment demand is relatively inelastic, and thus unresponsive to changes in interest rates. They believe the economy is inherently unstable, that inadequate demand is largely to blame for periods of stagnation, and that real GDP needs a boost to reach the full-employment level. Money supply has little effect on interest rates due to a relatively flat money demand curve. They see little use for monetary policy and prefer fiscal policy instead.
Which of the following results from stagflation?
A. Unemployment decreases
B. the price level decreases
C. The aggregate supply curve shifts to the right
D. The Phillips curve shifts to the right
E. Real GDP increases
D.
Stagnation results from the aggregate supply curve shifting to the left, which increases unemployment and the price level and decreases real GDP. Because unemployment increases for given inflation rate, the Phillips curve shifts to the right.
Which of the following will shift the demand curve for the Mexican peso to the left?
A. Speculation that the peso will increase in value
B. An increase in interest rates in Mexico relative to other countries
C. A lower rate of inflation in Mexico relative to other countries.
D. An increase in incomes elsewhere relative to in Mexico
E. A decrease in the international demand for Mexican-made textiles
E.
Speculation that the peso will increase in value will increase the demand for the peso, shifting the demand curve to the right. If Mexico offers higher interest rates, investors will demand more pesos in order to put their funds in Mexican financial institutions. A lower rate of inflation in Mexico will draw additional consumption of Mexican goods, thus increasing peso demand.
Figure includes: (price level on y-axis and real GDP on x-axis. Aggregate demand shifted to the right.)
Which of the following is illustrated in the figure above? I. Stagflation II. Cost-push inflation III. Supply-side inflation IV. Demand-pull inflation
A. I and II only
B. II and III only
C. II and IV only
D. Iv only
E. I and IV only
D.
Stagflation is the combination of a rising price level and falling real GDP. This results from cost-push inflation, which is also called supply-side inflation because it results from a shift in the AS curve to the left. The figure in the question illustrates demand-pull inflation, which does not result in stagflation. With demand-pull inflation, the AD curve shifts to the right, raising equilibrium price level and fueling inflation.
The government of a country decides to increase government spending and taxes by the same amount in order to keep a balanced budget. The MPC is 0.75. Which of the following is true of this situation?
PolicyDirection ExpenditureMultiplier TaxMultiplier
A. expansionary 4 3
B. expansionary 4 -3
C. contractionary 4 3
D. contractionary 4 -3
E. contractionary 5 4
B.
Increase in government spending is expansionary; however, the increase in taxes is contractionary. A change in government spending will change aggregate expenditure by that amount. The increase in taxes will cause a decrease consumption; however, consumption based on the MPC. In this case, consumption will only change by 75 percent of the amount of tax change. Thus, the overall effect is expansionary. The equation for the expenditure multiplier is 1/1-MPC, which equals 1/.25, or 4. The tax multiplier is always one less than the expenditure multiplier and negative, so it is -3.
Having a fractional reserve banking system means that
A. no single loan can be larger than 20 percent of the bank's holdings
B. the central bank reserves the right to audit any bank at any time
C. the central bank holds a certain fraction of GDP on reserve at all times
D. the central bank must approve loans over $1 million
E. a bank cannot lend out all of its deposits
E.
Under a fractional reserve banking system, a fraction of total deposits must be held on reserve and the rest can be lent out. This prevents a bank from lending out all of its deposits.
If technology makes production less expensive and at the same time exports decrease, which of the following will result with certainty?
A. Real GDP will increase
B. Real GDP will decrease
C. The price level will increase
D. The price level will decrease
E. Real output will remain the same
D.
The improvment in technology will shift the AS curve to the right, which decreases the price level and increases real GDP. The decrease in exports will shift the AD curve to the left, decreasing the price level and decreasing real GDP. Because the two events have opposing influences on real GDP, the net result is uncertain. However, both events decrease the price level, so it is certain that the price level drops.
Which of the following must exist to allow for mutual benefit from specialization and trade between two countries?
A. Comparative advantages in the production of a good or service
B. Absolute advantage in the production of a good or service
C. Increasing marginal returns in production
D. Absolute and comparative advantage in the production of a good or service
E. Absolute advantage and increasing marginal returns in production
A.
Neither an absolute advantage nor increasing marginal returns in the production of a good are necessary to allow mutual benefit from specialization and trade. The opportunity for two countries to benefit from specialization and trade rests only on the existence of a comparative advantage in the production of a good or service.
The GDP Deflator differs from the CPI in that the GDP Deflator
A. is thought to slightly overestimate the inflation rate
B. uses base year quantities in its calculations
C. incorporates both current year prices and base year prices
D. incorporates current year quantities in its calculations
E. is the favored price index of the U,S. government.
D.
It is the CPI that uses base year quantities, is favored by the U.S. government, and is thought to slightly overestimate the inflation rate. Both indexes incorporate both current year and base year prices. The GDP Deflator differs from the CPI in its use of current year quantities in its calculations.
It is a monetarist point of view that
A. monetary policy should be used to fine-tune the economy
B. crowding out is not a problem
C. the money supply should be increased steadily
D. the velocity of money is unstable
E. the economy is inherently unstable
C.
Monetarists suggest that the use of monetary policy to fine-tune the economy could be destabilizing. They also believe that the crowding out of private investment due to increased interest rates substantially weakens fiscal policy. They see velocity and the economy in general to be relatively stable. Rather than active fiscal or monetary policy, they favor a steady increase in the money supply at a rate equal to the growth in real output.
which group of people will suffer the most from a rising price level?
A. Debtors with fixed interest rates
B. People with fixed money incomes
C. investors in gems, coins, and stamps
D. property owners
E. lenders of adjustable-rate mortgage loans
B.
People with fixed money incomes will suffer because the purchasing power of their fixed incomes will fall as the price level rises. Debtors will benefit because the purchasing power of the money they must pay back falls as the price level rises. Investors in gems, coins, stamps, and property can expect the prices of the items they own to increase with the price level. Lenders of adjustable-rate mortgages are protected from inflation because the interest rates they receive increase with the price level.
Droughts, technical guides, and restrictions on the use of resources can all result in
A. a vertical Phillip's Curve
B.Supply Shocks
C.structural shocks
D.Demand-pull inflation
E.Deflation
B.
Each of these events would shift the AS curve to the left, increasing inflation and unemployment.
Phillips curve ruled out bc it states constant employment, Demand-pull is caused byu aggregate supply, not demand
all of these are supply shocks
On a bank's balance sheet, which of the following is considered liability?
D.
Reserves are assets of the bank, as are loans, which must be repaid to the bank. Because depositors and not the bank own deposits, deposits are liabilities that must eventually be returned to owners
Suppose yesterday the euro was trading on the foreign exchange market at $1.36 US and today it is trading at 1.40 US Which of the following is true?
A. he US dollar has appreciated
B.The euro has depreciated
C.Interest rates in the US have decreased
D.The demand for US products has decreased
E. The euro has apprecciated
E.
Because the Euro is now worth more, it has appreciated.
In order to reduce or eliminate crowding out, expansionary fiscal policy can be accompanied by
A.an increase in gov spending
B.a decrease in investment
C.expansionary monetary policy
D.contractionary monetary policy
E.an increase in the interest rate
C
Expansionary monetary policy relieves upward pressure on the interest rate and diminish crowing out
in order to go from national income to GDP, one must
A.add depreciation expenses
B.Add indirect Taxes
C.subtract subsidies
D.add the net income of foreigners
E.all of the above
E
All
Which of the following creates the tradeoff depicted on the phillips curve
A. a rightward shift in the aggregate supply curve
B.an increase in input costs that corresponds with an increase in unemployment
C.An increase in output that corresponds with a decrease in the price level
D.A leftward shift in the aggregate supply curve
E.A rightward shift in the aggregate demand curve
E
A shift in the AD level, again no trade-off between inflation and unemployment results. it is a shift in the AD curve that causes inflation to increase and unemployment to decrease, and vis versa
The natural rate of unemployment
A. Includes structural and frictional unemployment
B. Includes cyclical and frictional unemployment
C. Includes structural and cyclical unemployment
D.includes structural, fritcional, and cyclical unemployment
E. is around 1 percent
A
The natural rate of unemployment, which is around five percent, is the sum of structural and frictional unemployment
According to Say's Law
A. When price goes up, supply goes up
B.it is better to give than receive
c.demand creates its own supply
D. demand and supply are mutually independent
D
Classical economicts believe in Say's Law, which suggests that when supplying goods, workers earn money to spend or save, and savings end up being borrowed and spent. thus, they say that supply creates its own demand.
A budget deficit exists when
A. the total amount that the government owes at a given time is positive
B.Government spending exceeds tax collections for a given period
C.exports exceed imports
D.imports exceed exports
E. the total amount that the government owes at a given time is negative
B
The total amount that the government owes at a given time has to do with the national debt, not the balance of the budget. Exports compared with imports have to do with thetrade surplus or defecit. It is the comparison of government spending and tax collectons for a given period (usually a year) that determines whether or not a budget defecit exists
The Money supply will increase as a result of which of the following?
A. A decrease in the required reserve ratio
B.an increase in the discount rate
C. the selling of bonds by the federal reserve
D.an increase in the fraction of deposits that must be held by banks
E.An increase in income taxes
A
Each of the other actions will decrease the money supply, with the exception of income tax increase, which results in transfer of money from individuals to the government
According the the aggregate expenditure graph above, what is the value of the expenditure multiplier? (see page 221)
A.2
B.2.25
C. 3
D. 4
E. 5
E
The multiplier says that when a component of aggregate expenditure is increased, the real national income/output will increase by more, according to the multiplier.
A professional singer who loses his voice may have a hard time finding employment because he or she has no marketable skills. This is an example of which of the following?
A. Fricitional
B.Structural
C.Cyclical
D.Seasonal
E.Discouraged Workers
B
Structural unemployment is the result of a skills mismatch, as would occur if a singer could no longer sing and had no other marketable skills
Country A has a current account surplus; this means that

A. Country A has a capitall account surplus
B. Country A has a capital account defecit
C.Country A must borrow from its foreign reserves
D. Country A is operating in a recessionary gap
E. Country A is operating in an inflationary gap
B
Current amount and capital account must always be balanced, therefore if one is positive, the other must be negative by the same amount.
Which of the following is most likely to be a deterrent to growth in the economy?
A. spending on education and training
B. increases in capital
C. Increases in the interest rate
D. expenditures on research and development
E. Increased capacity utilization
C
Increases in interest rate deter investment in capital among other sources of growth
Julia would spend $30 per week even if she made no income. Her weekly income is 1,000 and her marginal propensity to consume is .5, how much does Julia save per week?

A.$500
B.$35
C.$530
D. $80
E.$470
C

After an increase in price level, a given amount of a currency will purchase fewer goods and services, so its purchasing power has decreased. The purchasing power is thus inversely related to the price level
Classical Economsts generally believe that

I.wages fluctuate quickly
II.Say's law does not hold
III.input and output prices will stay in line with eachother
IV. the government should not worry about maintaining aggregate demand at an adequate level

A> II, IV
B.I, III, IV
C. I, IV
D.II,III
E. I , II, III
E
Julia's autonomous comsumption is $30 and she spends half of each add dollar she earns, so she spends a total of $30 + $500= $530. this leaves 1000-530=470 for her savings
When a bank's balance sheet shows that the bank has excess reserves
A. the bank's reserves exceed the bank's assets
B. the bank can make additional loans
C. the bank's actual reserves are less than its required reserves
D.the bank is required to change its interest rate
E. the bank has fallen below the required reserve ratio
B
B

When a bank has excess reserves, it can make additional loans because the bank's actual reserves are greater than its required reserves, In other words, it has exceeded the required reserve ratio. The amount by which actual reserves exceed required reserves can be lent out to bank customers
# 49 is actually # 50
sorry
The real interest rate is

A. What one sees when looking at bank literature
B. the nominal interest rate divided by the inflation rate
C. nominal interest rate + the anticipated inflation rate
D. nominal interest + compound interest rate
E. nominal- anticipated
E

What one sees in bank literature is the nominal interest rate. The effective annual yield, which accounts for compound interest, is also a nominal rate. The real interest rate is the nominal interest rate minus anticipated inflation.
The formula for the money multiplier is

A. 1/1- Mpc
B. 1/1- reserve ratio
C. MPC/ required reserve ratio
D.1/ rr
E. (1-MPC)/MPC
D
The money multiplier does not involve the marginal prop to consume.
1/ reserve ratio
Which of the following would shift the aggregate supply curve to the right?

A.an increase in the price level
B. depreciation in the international value of the dollar
C. An increase in personal income taxe rates
D. An increase in interest rates
E. A decrease in the price level
B
An increase in interest rate, increase in personal taxes are components of demand
Which of the following is true when expansionary fiscal and expansionary monetary policy are used at the same time?

A. unemployment will increase
B. Real GDP will decrease
C.Interest rates will remain relatively constant
D. INflation will decrease dramatically
E. investment will be crowded out
C

Expansionary fiscal policy will increase interest rates by increasing transaction demand for money in money market accounts, or decreasing the supply of loanable funds market while increasing demand for them
Suppose an economy is in long-run equilibrium at the full-employment level of output. if gov spending increases,

A. an inflationary gap is created because the aggregate demand curve shifts to the right
B. an inflationary gap is created because the aggregate supply curve shifts to the right
C inflationary because potential GDP goes left
D.recessionary because aggregate supply shifts left
E.recessionary demand shifts left
A

an inflationary gap exists when the short-run equilibrium of aggregate supply and aggregate demand falls to the right of full-employment output. an increase in gov spending would create an increase aggregate demand and bring short-run equilibrium to the right
Suppose that Tiger Woods buys a golf ball in England for 1$ and the marginal prop to consume in England is .75. What is the total increase in England's real GDO resukting from the purchase?

A.$1
B$1.25
C. $1.75
D.$4
E.$7.50
D
The autonomous spending multiplier by which an initial amount of new autonomous spending should be multiplied to find the resulting increase in GDP
If prices are expected to rise more slowly in the future,

A.phillips curve will shift right
B. actual rate of inflation will increase
C.actual inflation rate will remain steady unless there is supply shock
D.gov will carry out contractionary fiscal policy to prevent occurrence
E. the expectations will become reality
E

If individuals expect price levels to rise more slowly, then they will build these expectations into their wages
A decrease in real investment stemming from higher interest rates due to government purchases is most commonly called
A.Crowding Out
B. zero policy effectiveness
C. laffer effect
D.fiscal defeat
E.fiscal imbalance
A

Crowding out occurs when the demand for funds to to finance government purchases increases the interest rate and decreases real investment
According to rational expectations, an increase in gov spencing to increase AD in the figure (see p 223)
will be met with

A. increase in GDP
B. increase in AS
C.countervalling decrease in AD
D. decrease in AS
E.apathy and inaction
D

The net result of gov policy is inflation w/out increase in real GDP
A use of easy money policy by the Fed could result in which of the following?

A. increase in Net exports
B.decrease in net exports
C. increase in real interest rate
D.increase in the nominal interest rate
E.Crowded out investment
b

Expansionary monetary policy will decrease interest rates which will induce a capital inflow and increase investment and consumption