Macroeconomics Final Exam Test Questions – Flashcards

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Total income households have after paying taxes and receiving government transfers
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disposable income
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Market failure may occur because
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individual actions have side effects that are not properly taken into account by the market
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A graphical representation of the relationship between the total quantity of goods and services demanded and the price level
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aggregate demand curve
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If banks were required to keep 100% of deposits in reserves, they could
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make no loans
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The point on a business cycle when real GDP stops falling and begins rising
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business cycle trough
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In the long run, changes in the money supply
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affect only the price level but they do not change aggregate output
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The double coincidence of wants problem can be solved by
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money
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An inflationary gap can be closed with
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a decrease in government purchases
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Monetary policy affects GDP and the price level by
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changing aggregate demand
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The short-run aggregate supply curve is positively sloped because
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wages are sticky or don't readily adjust to changes in economic conditions in the short run
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nominal GDP
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that year's output times same year price
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real GDP
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base year price times that year's output
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The money spent on domestically produced final goods and services
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is the GDP, appears as income to someone, and appears in the circular flow model
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Diminishing returns to physical capital means that as more and more physical capital is combined with a fixed amount of human capital with a fixed technology, eventually
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additions to aggregate output or real GDP declines
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The most important factor affecting a household's consumer spending is
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current disposable income
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A contractionary fiscal policy is a policy that
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reduces aggregate demand by decreasing government purchases
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The CPI is used for calculating payments from the U.S. government to individuals. To the extent it is biased upward, this index
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raises government expenditures
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Physical capital would include
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the tools a worker has to work with
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In the "paradox of thrift"
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increased saving by individuals increases their chances of becoming unemployed
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Long-run growth is the sustained upward trend in
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aggregate output per person over several decades
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When the value of a nation's imports exceeds the value of that nation's exports, the nation is said to have
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a trade deficit
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Deflation
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can cause decreases in output
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Among the assets of a bank are
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loans
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The marginal propensity to save is
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the fraction of an additional dollar of disposable income that is saved
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The process of bringing down inflation that has been embedded into expectations is called
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disinflation
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Technological improvements will
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shift the production possibility frontier outward
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Which of the following is included in GDP
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the purchase of a ticket to a Rolling Stones concert
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A key insight into macroeconomics is that in the short run the combined effect of individual decisions is
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very different from what any one individual intended
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The short-run Phillips curve represents the relationship between the unemployment rate and the rate of change in
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aggregate price level
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Which of the following demonstrates how people respond to incentives to make themselves better off?
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more students major in economics when they hear that salaries for economists are rising
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In the classical model, it is thought that the long-run
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and short-run aggregate supply curves are both vertical
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When banks borrow and lend reserves from each other, they are participating in the ______ market
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federal funds
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The models used in economics
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emphasize basic relationships by abstracting from complexities in the everyday world
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Conditional convergence suggests
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poor countries' growth rates may not catch up to those of richer countries without changes in education and infrastructure
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An increase in the supply of money will lead to ___ in equilibrium real GDP and ___ in equilibrium interest rate
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an increase; a decrease
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A liquidity trap is a situation in which
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using expansionary monetary policy is not effective because, the nominal interest rate is almost zero
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Contractionary monetary policy involves
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decreasing the money supply, increasing interest rates, and decreasing aggregate demand
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Medicaid, Medicare and Social Security are examples of
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transfer payments
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When a local factory closes, why does it spell bad news for the local restaurants?
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Unemployed factory workers have lower incomes and are less likely to dine out
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Human capital is
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the improvement in labor created by education and knowledge that is embodied in the work force
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Sources of funds for investment spending are
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savings by households, government, and foreigners
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The inflation tax is
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the decrease in the real value of money held by the public caused by inflation
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Long-run economic growth is
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higher in countries when it has a strong rule of law and political stability
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According to the liquidity preference model, if the Fed increases the money supply, the equilibrium interest rate ____, and this leads to ____ in the quantity demanded of nonmonetary interest-bearing financial assets
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falls; a decrease
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When the output gap is ____, reflecting an inflationary gap, the unemployment rate is ____ the natural rate of unemployment
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positive; below
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Among the losers with unexpected deflation are
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borrowers
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In the simplest circular-flow model, households supply ____ and demand ____
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factors of production; goods and services
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Decisions about monetary policy are made by
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the Federal Open Market Committee
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Examples of bank regulations designed to prevent bank runs are
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capital requirements, deposit insurance, and reserve requirements
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Labor productivity growth can be attributed to
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improvement in technological process
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The reserve ratio is the
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fraction of deposits the banks hold in their vaults plus their deposits at the Federal Reserve
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Inflation is a situation where
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the average price level increases
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An economy is said to have a comparative advantage if it
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has the lowest cost for producing a particular good
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The value of MPC is
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greater than 0 and less than 1
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A recession leads to
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reduced output, income and living standards, and higher unemployment
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The best currently available measure of the standard of living in a country is
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the real GDP per capita
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Money whose value derives entirely from its official status as a means of exchange is known as
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fiat money
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Suppose a panel of economists is predicting that a nation's real GDP per capita will double in approximately 20 years. Based upon the Rule of 70, what must be the predicted annual growth rate of real GDP per capita?
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3.5%
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A recessionary gap can be closed with
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expansionary fiscal policy
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Among the public goods important for economic growth are
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political stability
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The long-run aggregate supply curve is vertical because in the long run
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all prices are flexible
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A cut in taxes will have a greater impact on aggregate demand if it is given to
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people with a high MPC
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The opportunity cost of holding money is
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the difference between interest rates on monetary assets and on nonmonetary assets
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A choice made___ is a choice whether to do a little more or a little less of something
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at the margin
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Gains from trade arise because of
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specialization in production
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Monetary policy is similar among wealthy countries because the central banks of most countries
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try to keep inflation between 2% and 3% per year
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The idea that a 1 percentage point increase in the output gap will decrease the unemployment rate by 1/2 of a percentage point is known as
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Okun's law
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An increase in the aggregate price level
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increases the demand for money
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Gross domestic product is defined as
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consumer spending + government purchases + investment spending + exports - imports
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Which of the following combination of assets are considered to be money?
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currency in circulation, checkable bank deposits, and travelers' checks
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Economists generally believe that a country should specialize in the production of a good or service if
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they can produce the product while forgoing fewer alternative products than any other country
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The amount of money that people demand is
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negatively related to the interest rate
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Growth accounting enables us to
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estimate the effects of technological progress on economic growth
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As a consequence of the existence of a nonaccelerating-inflation rate of unemployment, or NAIRU
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there is no long-run tradeoff between unemployment and inflation
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Which of the following would shift the aggregate demand curve to the left?
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an increase in the interest rate
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If the Fed wants to decrease interest rates, it can
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increase the money supply by buying Treasury bills
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If the multiplier is 4, and investment spending falls by $100 billion, the change in equilibrium income will be
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-$400 billion
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When the economy is in a recession
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tax receipts decrease but unemployment insurance payments increase
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To ____ the money supply, the Fed could ____
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increase; lower the discount rate
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We have to make choices because
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resources are scarce and because choices involve a trade-off
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Real GDP is nominal GDP adjusted for
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changes in prices
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a shift to the left of the AD curve could be cause by
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increased government purchases, increased government transfers and by decreased taxes
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The purpose of macroeconomic policy is to
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bring unemployment closer to the natural rate and to reduce the severity of recessions
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Treasury bills
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usually pay lower interest rates than other short-term assets because they are less risky than other assets
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Which of the following is a tool used by the Fed in the conduct of monetary policy?
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buying and selling federal government bonds
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If the short-run macroeconomic equilibrium is ____ of the economy's potential output, then there is a(n) _____ and the aggregate price level is expected to ____
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to the left; recessionary gap; fall
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The convergence hypothesis helps explain why
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high-income countries tend to have slower growth rates compared to lower-income countries
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Monetary base is
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the sum of reserves held by the banks and currency in circulation
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An upward shift in the consumption function can be caused by
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an increase in consumer wealth
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If the money supply increases by 10%, in the long run
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the price level increases by 10%
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