Chapter 5,7,10,11 of Econ 402

The natural rate of unemployment is:

the average rate of unemployment around which the economy fluctuates.

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is

-4%

If the steady-state rate of unemployment equals 0.125 and the fraction of unemployed workers who find jobs each month (the rate of job findings) is 0.56, then the fraction of employed workers who lose their jobs each month (the rate of job separations) must be:

0.08

Frictional unemployment is inevitable because:

the demand for different goods always fluctuates

If the quantity of real money balances is kY, where k is a constant, then velocity is:

1/k

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by

100

Making use of Okun's law, if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:

2.5 percent in the short run but will return to its natural rate in the long run

Consider the money demand function that takes the form (M / P)d = Y / (4i), where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy

4i

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ______ times per year.

5

Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is ______ percent

6

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance.

6-9 month

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent.

7

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ______ percent (rounded to the nearest percent).

9

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

the government-spending multiplier is larger than the tax multiplier

The natural level of output is:

the level of output at which the unemployment rate is at its natural level.

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

the long run but not in the short run

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:

the money supply

One efficiency-wage theory implies that firms pay high wages because

the more a firm pays its workers, the greater their incentive to stay with the firm.

In the classical model, according to the quantity theory of money and the Fisher equation, an increase in money growth increases

the nominal interest rate

According to the classical dichotomy, when the money supply decreases, _____ will decrease

the price level

The IS-LM model takes ______ as exogenous

the price level

In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP.

the productive capability of the economy; the money supply

The inconvenience associated with reducing money holdings to avoid the inflation tax is called

the shoeleather cost

The right of seigniorage is the right to:

to print money

All of the following are reasons for frictional unemployment except:

unemployed workers accept the first job offer that they receive.

All of the following are causes of structural unemployment except

unemployment insurance

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

unplanned inventory investment

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left

Workers unemployed as a result of wage rigidity are:

waiting for a job to become available.

Discouraged workers are individuals who:

want a job but have given up looking for one

A policy that increases the job-finding rate _____ the natural rate of unemployment.

will decrease

Percentage change in P is approximately equal to the percentage change in:

M minus the percentage change in Y plus the percentage change in velocity

Unions contribute to structural unemployment when collective bargaining results in wages:

above the equilibrium level

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run and long-run aggregate supply

Entry into and exit from the labor force are important to the determination of the unemployment rate because:

almost one-half of all spells of unemployment end in the unemployed person's withdrawal from the labor market.

Real money balances equal the:

amount of money expressed in terms of the quantity of goods and services it can purchase.

A favorable supply shock occurs when

an oil cartel breaks up and oil prices fall.

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

between zero and one

Along any given IS curve:

both government spending and tax rates are fixed.

The IS and LM curves together generally determine:

both income and the interest rate

Based on the graph, if the interest rate is r1, then people will ______ bonds, and the interest rate will ______.

buy; fall

In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy

changes income, which changes consumption, which further changes income

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income

decreases; downward

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

demand for real balances per unit of output.

The Keynesian-cross analysis assumes planned investment

depends on the interest rate, and so does the IS analysis

The short run refers to a period:

during which prices are sticky and cyclical unemployment may occur

Equilibrium in the market for goods and services determines the ______ interest rate, and the expected rate of inflation determines the ______ interest rate

ex ante real; ex ante nominal

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will:

fall, and in the long run prices will fall

Short-term unemployment is most likely to be ______ unemployment, while long-term unemployment is mostly likely to be _____ unemployment

frictional; structural

Public policy to increase the job finding rate includes _____, and public policy to decrease the job separation rate includes _____.

government employment agencies; 100 percent experience-rated unemployment insurance

. In the case of unions, the conflict of interest between different groups of workers results in insiders wanting ______, while outsiders want ______.

high wages; more hirings

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are ______, generating a ______ quantity of output demanded.

higher; greater

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate but with a ______ price level or allow the price level to return to its original level but with a ______ level of output in the short run.

higher;lower

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

The tax multiplier indicates how much ______ change(s) in response to a $1 change in taxes

income

If wage rigidity holds the real wage above the equilibrium level, an increase in the supply of labor will ______ the number unemployed.

increase

Across countries of Europe, greater spending on unemployment insurance tends to _____ unemployment, and more "active" labor-market policies tend to _____ unemployment.

increase; decrease

Holding output, Y, fixed, a reduction in the demand for money is the equivalent of a(n) _______ in velocity and will shift the aggregate demand curve to the _____.

increase; right

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income

increases; increases

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in

inflation of 1 percent and the nominal interest rate of 1 percent

An IS curve shows combinations of:

interest rates and income that bring equilibrium in the market for goods and services.

An LM curve shows combinations of:

interest rates and income, which bring equilibrium in the market for real money balances

Business cycles are

irregular, unpredictable

Over the business cycle, investment spending ______ consumption spending.

is more volatile than

One reason for unemployment is that:

it takes time to match workers and jobs

When firms experience unplanned inventory accumulation, they typically

lay off workers and reduce production

When people want to hold _____ money, the income velocity of money increases, and the money demand parameter k ______ .

less; decreases

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers ______ raises

less; smaller

John Maynard Keynes wrote that low income and high unemployment in economic downturns should be blamed on:

low aggregate demand

Earlier retirement in Europe than in the United States contributes to:

lower employment-to-population ratios in Europe than in the United States.

Changes in fiscal policy shift the:

planned expenditure

Wage rigidity

prevents labor demand and labor supply from reaching the equilibrium level.

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.

prices; output

According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium wages because worker _____ increases.

productivity

Paying efficiency wages helps firms reduce the problem of adverse selection by

providing an incentive for the best-qualified workers to remain with the firm

An example of a real variable is the

quantity of goods produced in a year

To end a hyperinflation, a government trying to reduce its reliance on seigniorage would:

raise taxes and cut spending

Stabilization policy refers to policy actions aimed at

reducing the severity of short-run economic fluctuations

If consumption depends positively on the level of real balances and real balances depend negatively on the nominal interest rate, then the nominal interest rate

rises less than 1 percent for each 1 percent rise in the money growth rate

Most spells of unemployment are ______ term, and most weeks of unemployment are attributable to ______-term unemployment.

short; long

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

technological progress; variations in labor-market utilization

The costs of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$2 billion; $8 billion

In this graph, initially the economy is at point E, with price P0 and output aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______.

C; B

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

Central Bank A should decrease the quantity of money, whereas Central Bank B should increase it

In this graph, assume that the economy starts at point A, and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium, and point ______ represents long-run equilibrium.

E;A

The short-run aggregate supply curve is horizontal at:

a fixed price level.

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:

decrease by 1 percent

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level

decrease; increase

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage

decreased 2 percent.

The theory of liquidity preference states that, other things being equal, an increase in the real money supply will

lower the interest rate

Sectoral shifts

make frictional unemployment inevitable

Government policies directed at reducing frictional unemployment include

making unemployment insurance 100 percent experience rated

The ex ante real interest rate is equal to the nominal interest rate

minus the expected inflation rate

The characteristic of the classical model that the money supply does not affect real variables is called:

monetary neutrality

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income

need more information to determine.

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's:

need to generate revenue to pay for spending

The theory of liquidity preference states that the quantity of real money balances demanded is:

negatively related to the interest rate and positively related to income

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

negatively; positively