Determine whether the following statements are True or False and explain.

1. The wealth, trade, and interest rate effects explain why the short run AS curve slopes upward.

2. The short run Phillips Curve shifts vertically upward during stagflation.

3. The nominal interest rate is greater than the real interest rate when there is deflation.

4. M2 contains coins, paper currency held by non-bank public, demand deposits (checking deposits) and travelers checks.

5. Expansionary monetary policy would be ineffective if banks chose not to lend out excess reserves.

1. The statement is true. It is because the short run aggregate supply curve slopes upwards due to diminishing marginal returns and increasing cost. The quantity supply increases when the price rises which leads to upward sloping supply curve. Therefore, wealth, trade and rate of interest affect the upward sloping supply curve.

2. The statement is true. It is because stagflation refers to when the inflation rises but the output falls or remains constant. Both the inflation and unemployment is increases in the economy. There is a negative relation between the inflation and output due to change in the short run supply curve because of expected inflation. The short run Phillips curve move upwards because people expect inflation.

3. The statement is false. It is because real interest rate is the rate which is received by the lenders or investors. It takes into account the rate of inflation in the economy. On the other hand, nominal rate of interest which do not take into consideration the rate of inflation. Real interest rate is derived by deducting inflation rate from the nominal rate of interest. For instance, suppose the nominal rate of interest is 5 % and prices started falling by 2% (deflation). The real interest rate will be 7%. Thus, deflation tends to put upward pressure on the real rate of interest.

4. The statement is true. M2 is a measure of money which includes coins, currency, demand deposit, traveler?s check. It also includes saving deposits and time deposits.

5. The statement is true. It is because when the central adopts the expansionary policy in order to increase the supply of money and reduce the rate of interest in the economy. On the other hand, if the commercial banks do not lend the excess reserves out of the expansionary policy, it will lead to a failure of the policy. It is because the money is not lent out in the circular flow of money in the economy and the supply does not get increased.