Chapters 7 10 11 12 Econ 410 Final Review

A favorable supply shock occurs when:

an oil cartel breaks up and oil prices fall.

An LM curve shows combinations of:

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

A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective.

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change __ in the short run and change ____ in the long run.

only output; only prices

In the Keynesian-cross model, the equilibrium level of income is determined by:

planned spending.

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

productivity

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case the interest rate __ and output ____.

rises; rises

The unemployment resulting from wage rigidity and job rationing is called ______ unemployment.

structural

The phrase "inflation is repudiation" applies only if:

the government is a debtor.

The interaction of the IS curve and the LM curve together determine:

the interest rate and the level of output.

The slope of the IS curve depends on:

the interest sensitivity of investment and the marginal propensity to consume.

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

the price level

When the LM curve is drawn, the quantity that is held fixed is:

the real money supply.

All of the following are suggested by the results of Alan Blinder's survey of firms except:

there is only one theory of price stickiness.

All of the following policies were adopted by the government in an attempt to reduce the natural rate of unemployment except:

unemployment insurance.

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

upward and to the right.

Leading economic indicators are:

variables that tend to fluctuate in advance of the overall economy.

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

zero.

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

Which of the following statements most closely describes the variation in unemployment rates across countries in Europe?

Countries with higher rates of unionization tend to have higher unemployment rates, but this is partially mitigated if wage negotiations are coordinated among employers.

The earned income tax credit:

does not raise labor costs.

The IS and LM curves together generally determine:

both income and the interest rate.

All of the following are costs of fully expected inflation except that expected inflation:

causes lower real wages.

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

changes income, which changes consumption, which further changes income.

The aggregate demand curve tells us possible:

combinations of P and Y for a given value of M.

If inflation is 6 percent and a worker receives a 4 percent wage increase, then the worker's real wage:

decreased 2 percent.

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes __ to the right and gets ____ as it moves farther to the right.

downward; flatter

Most hyperinflations end with _ reforms that eliminate the need for ___.

fiscal; seigniorage

Most economists believe that prices are:

flexible in the long run but many are sticky in the short run.

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will __ the demand for real money balances and will ____ the interest rate.

increase; increase

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

investment rises but consumption falls.

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out:

investment.

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

is horizontal.

The classical dichotomy:

is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money.

During the period from 1990 to 2006, in the United States, most spells of unemployment lasted:

less than one month, yet most of the weeks of unemployment occurred in spells lasting two or more months.

If the Fed accommodates an adverse supply shock, output falls __ and prices rise ____.

less; more

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

lower the interest rate.

Transitions into and out of the labor force:

make unemployment statistics difficult to interpret.

If the short-run aggregate supply curve is horizontal, then the:

money supply cannot affect prices in the short run.