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If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level.
decrease; LM
The percentage of a year's real GDP that must be foregone to reduce inflation by 1 percentage point is called the:
sacrifice ratio
If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the:
yen will appreciate by 3 percent against the dollar
Assume that an economy has the Phillips curve π = π -1 - 0.5(u - 0.06). How many percentage point-years of cyclical unemployment are needed to reduce inflation by 5 percentage points?
10
(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level.
B; lower
The money hypothesis suggests that the Great Depression was caused by a:
Leftward shift in the LM curve
The spending hypothesis suggests that the Great Depression was caused by a:
Leftward shift in the LS curve
(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies?
P1>P2 and M1<M2
In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:
-10 billion
Assume that an economy has the Phillips curve π = π -1 - 0.5(u - 0.06). Then the natural rate of unemployment is:
.06
If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall:
12 percent
If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss goods per U.S. good.
2.5
Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year's GDP.
20
If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1, then a Big Mac in Cancun, Mexico, should cost:
20 pesos
(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____ with a _____ price level.
C; higher
A country's exports may be written as equal to:
GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services.
An increase in consumer saving for any given level of income will shift the:
IS curve downward to the left
According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.
Increase
In the IS-LM model, a decrease in the interest rate would be the result of a(n):
Increase in the money supply
The monetary transmission mechanism works through the effects of changes in the money supply on:
Investment
If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:
Investment rises but consumption falls
(Exhibit: Short-run Phillips Curves) As the short-run Phillips curve shifts from A to B to C to D, policymakers face:
a lower rate of inflation for any level of unemployment
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy if the world interest rate is r3, then the economy has:
a trade deficit
(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy if the world interest rate is r1, then the economy has:
a trade surplus
If the equation for a country's Phillips curve is π = .02 - .8(u - .05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (.04)?
above 2 percent (.02)
Inflation inertia is represented in the aggregate supply and aggregate demand model by continuing upward shifts in the:
aggregate demand and short-run aggregate supply curves
According to the natural-rate hypothesis, the levels of output and unemployment depend on:
aggregate demand in the short run, but not in the long run
The adoption of an investment tax credit in a small open economy is likely to lead to:
an increase in domestic investment but no change in domestic saving in the small open economy
An increase in the trade deficit of a small open economy could be the result of:
an increase in government spending
Which of the following will shift the aggregate supply curve up to the left?
an increase in the expected price level
Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate:
and net exports with both fall
According to the imperfect-information model, when the price level is greater than the expected price level, output will _____ the natural level of output
be greater than
The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.
buy; LM
When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.
buy; LM
A shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will ______ in the long run, as compared to a short-run equilibrium.
decrease the output but increases prices
If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports ______ and net capital outflows ______.
decrease; decrease
Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to ______ in the short run, and in the long run the expected price level will ______, causing the level of output to return to the natural level.
decrease; decrease
According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer:
decreases production
In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow.
deficit; negative
The currencies of countries with high inflation rates relative to the United States have tended to ______, and the currencies of countries with low inflation rates relative to the United States have tended to ______.
depreciate; appreciate
According to the imperfect-information model, when the price level rises and the producer expects the price level to rise, the producer:
does not change production
When exports exceed imports, all of the following are true except:
domestic investment exceeds domestic savings
The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:
equals the inflation rate
Both models of aggregate supply discussed in Chapter 12 imply that if the price level is higher than expected, then output ______ natural rate of output.
exceeds the
Along any aggregate supply curve, there is only one:
expected price level
Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase:
exports by the small open economy
In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate:
falls and net exports rise
In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate:
falls and net exports rise
In the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.
falls; rises
According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase.
greater; increase
The idea that the natural rate of unemployment is increased following extended periods of unemployment is called:
hysteresis
If the real exchange rate decreases, then net exports will _____.
increase
If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:
increase by 4 percent
In a small, open economy, if the world interest rate increases, then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____, holding all else constant.
increase; decrease
If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______ and net capital outflows ______.
increase; increase
In a small, open economy, if the world interest rate falls, then domestic investment will _____ and the real exchange rate will _____, holding all else constant.
increase; increase
Starting from trade balance, if the world interest rate falls, then, holding other factors constant, in a small, open economy the amount of domestic investment will _____ and net exports will _____.
increase; increase
In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______.
increases; depreciates
If the demand for real money balances does not depend on the interest rate, then the LM curve:
is vertical
In the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending.
less than
Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:
less than the expected price level
An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates.
lower; raise
If only unanticipated changes in the money supply affect real GDP, the public has rational expectations, and everyone has the same information about the state of the economy, then:
monetary policy cannot be used to systematically stabilize output
If a country has a high rate of inflation relative to the United States, the dollar will buy:
more of the foreign currency over time
The nominal exchange rate between the U.S. dollar and the Japanese yen is the:
number of yen you can get for one dollar
According to the sticky-price model, deviations of output from the natural level are _____ deviations of the price level from the expected price level.
positively associated with
Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except:
prices do not adjust when there is perfect competition
The government can lower inflation with a low sacrifice ratio if the:
public believes that policymakers are committed to reducing inflation
reduce national saving and lead to a trade deficit
reduce national saving and lead to a trade deficit
In a small open economy, when the government reduces national saving, the equilibrium real exchange rate:
rises and net exports fall
In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.
rises; falls
When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.
sell; LM
In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.
sell; rises; decrease
Each of the two models of short-run aggregate supply is based on some market imperfection. In the sticky-price model, the imperfection is that:
some firms do not adjust their prices instantly to changes in demand.
If the short-run aggregate supply curve is steep, the Phillips curve will be:
steep
In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and ______ net capital outflow.
surplus; positive
All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:
the 25-percent reduction in the money supply between 1929 and 1933
(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant:
the aggregate demand curve will shift to the left
The Phillips curve depends on all of the following forces except:
the current exchange rate
1. The interaction of the IS curve and the LM curve together determine:
the interest rate and the level of output.
According to the sticky-price model, output will be at the natural level if:
the price level equal the expected price level
In the sticky-price model, the relationship between output and the price level depends on:
the proportion of firms with flexible prices
According to the Phillips curve, other things being equal, inflation depends positively on all of the following except:
the unemployment rate
(Exhibit: Short-run Phillips Curves) As the short-run Phillips curve shifts from A to B to C to D:
there is a lower-expected rate of inflation at every level of employment
(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant:
this represents a movement down the aggregate demand curve
Based on the Phillips curve, unexpected movements in inflation are related to ______ and based on the short-run aggregate supply curve, unexpected movements in the price level are related to ______.
unemployment; output
