Douglas and Josephine have different roles within the Federal Reserve, with Douglas being a demand-side economist and Josephine being a supply-side economist. During a conversation, Douglas mentioned that Josephine would likely agree with which of the following statements:
1. Real output and aggregate employment are primarily determined by tax rates.
2. Real income will rise when government expenditures and tax rates increase.
3. Real output and aggregate employment are primarily determined by aggregate demand.
4. Increasing the money supply will increase real output without causing higher inflation.
To determine which statement Josephine would most likely agree with, let's evaluate each option:
1. Real output and aggregate employment are primarily determined by tax rates.
This statement is not typically associated with supply-side economics. Supply-side economists focus more on factors such as technology, investment, and government regulations when discussing economic growth.
2. Real income will rise when government expenditures and tax rates increase.
This statement aligns more with demand-side economics. It suggests that increased government spending and lower tax rates can stimulate economic growth by boosting consumer demand.
3. Real output and aggregate employment are primarily determined by aggregate demand.
This statement is consistent with Keynesian economics, which emphasizes the importance of aggregate demand in driving economic activity. It suggests that increased demand for goods and services leads to higher output and employment.
4. Increasing the money supply will increase real output without causing higher inflation.
This statement is associated with monetarist economics, which focuses on the relationship between money supply and inflation. According to monetarists, increasing the money supply may lead to increased output in the short run but could also result in higher inflation in the long run.
Based on Josephine's role as a supply-side economist, she would most likely agree with the statement that real output and aggregate employment are primarily determined by aggregate demand (option 3). This aligns with the principles of demand-side economics.
Moving on to the next question about Subramayam, an investor with high risk aversion. The question asks which risk and return combination Subramayam would most likely prefer. Let's evaluate the options:
1. Expected return = 14%, historical standard deviation = 19%
2. Expected return = -15%, historical standard deviation = 22%
3. Expected return = -12%, historical standard deviation = 1799
4. Expected return = 16%, historical standard deviation = 21%
When assessing investment options, it's generally preferred to have a higher expected return and a lower standard deviation, as it indicates a higher potential return relative to the risk involved. Based on this, Subramayam would most likely prefer the option with the highest expected return and the lowest historical standard deviation, which is option 4 (expected return = 16%, historical standard deviation = 21%).
Finally, the question asks which professional investors would have return and risk objectives that depend on the life cycle of their existence. Let's evaluate the options:
1. Personal trusts
2. None of the above
3. Bank pension funds
4. Banks, personal trusts, and pension funds
In this case, the investors that would likely have return and risk objectives dependent on their life cycle of existence are bank pension funds. These funds are usually designed to provide long-term financial support for employees and retirees of banks. Their investment strategies and risk management would take into account the specific needs and obligations associated with the life cycle of the bank and its employees. Therefore, the correct answer is option 3 (bank pension funds).