EC-309 Exam 2 Yucel

Trade Balance Formula:

NX

In a small open economy model, if S - I is unchanged then:

NX (E)1 has a double exponential function

Which event would cause the real exchange rate to fall in a small open economy with perfect capital mobility?

a tax increase

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

above the equilibrium level

The relationship between the quantity of goods and services supplied and the price level is called:

aggregate supply

Stabilization policy:

aims at keeping output and employment at their natural rates

Stagflation—lower output and higher prices—is caused by:

an adverse shock to aggregate supply

S - I1

domestic investment

At first, subsidizing does what to NX?

increases

What happens to the exchange rate when the demand for money increases and S - I is unchanged?

it increases

NX1

net exports

Nominal Wage:

real wage x number

An increase to save causes the S - I to shift:

right

Leading economic indicators are:

variables that tend to fluctuate in advance of the overall economy

Change in Nominal GDP Formula:

% change in money supply + % change in velocity

Inflation Rate Formula using % change in Nominal GDP:

% change in nominal GDP = % change in price level + % change in real GDP

Unemployment Rate Formula:

(total unemployed / labor supply) x 100

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:

.08

In the United States, a bushel of wheat costs 9 U.S. dollars. In Russia, a bushel of wheat costs 400 Russian rubles. The exchange rate is 33 rubles per dollar. The real exchange rate is:

.7425 Russian wheat per U.S. wheat

Assume that three countries—the Czech Republic, Lichtenstein, and France—trade with one another. France exports 100 euros worth of wine to Lichtenstein, Lichtenstein exports 100 euros worth of chocolate to the Czech Republic, and the Czech Republic exports 100 euros worth of glass to France. If this is the only trade, net capital outflow for France is:

0

A small open economy has exports valued at 5,000 million pesos, imports valued at 7,000 million pesos, and investment valued at 3,000 million pesos. In this case, saving equals _____ million pesos.

1,000

Nicholas is traveling to Europe, and the exchange rate of euros to the U.S. dollar falls from 1.5 euros for a U.S. dollar to 1.2 euros for a U.S. dollar. The value of the euro in U.S. dollars has changed from 1 euro equals _____ U.S. dollars to 1 euro equals _____ U.S. dollars.

1. 0.67 2. 0.83

A small open economy is in equilibrium with ε = 3, NX = 1,000 − 100ε = 700, and S − I = 700. If the government increases its purchases by 200, then the new equilibrium real exchange rate is ε = _____, and net exports _____.

1. 5 2. decrease

An increase to S - I1 causes the real exchange rate to ________ on the graph and the trade balance to ________ on the graph.

1. appreciate 2. decrease

If the rate of separation is 0.02 and the rate of job finding is 0.08 but the current unemployment rate is 0.10, then the current unemployment rate is ______ the equilibrium rate, and in the next period it will move ______ the equilibrium rate:

1. below 2. toward

If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will ______ and output will ______.

1. decrease 2. increase

Consider a small open economy with balanced trade. If foreign countries increase investment in their own economies because of technological advances, then investment in the small open economy will _____, and the small open economy will run a trade _____.

1. decrease 2. surplus

A small open economy is in equilibrium with ε = 2, NX = 1,000 − 100ε , and S − I = 800. If the government increases government purchases by 100, then saving _____, investment _____, and the real exchange rate increases.

1. decreases 2. does not change

The Natural Rate of Unemployment _________ and the Average Spell of Employment _________ if the Rate of Job Separation decreases.

1. decreases 2. increases

Other things equal, an increase in government purchases of goods and services pushes the trade balance toward _______ and causes the currency to _______.

1. deficit 2. appreciate

An increase to S1 - I causes the real exchange rate to ________ on the graph and the trade balance to ________ on the graph.

1. depreciate 2. increase

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 further to the right.

1. downward 2. flatter

As the relative demand for unskilled workers falls, wages for unskilled workers _____, and unemployment compensation becomes a _____ attractive option.

1. fall 2. more

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

1. greater 2. outward

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.

1. higher 2. greater

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

1. higher 2. lower

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in _____ prices and _____ output in the short run.

1. higher 2. lower

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.

1. higher 2. greater

Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n)_______ in the money supply or a(n)_______ in velocity.

1. increase 2. increase

Expansionary fiscal policies in foreign countries will cause the world interest rate to _____ and the trade balance in the small open economy to _____.

1. increase 2. increase

Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) _____ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _____.

1. increase 2. left

Suppose that the nominal exchange rate between the United States and Japan, expressed as yen per dollar, increases by 5 percent. If the price level in the United States increases by 3 percent and the price level in Japan increases by 2 percent, the real exchange rate will _____, and U.S. goods and services will become relatively _____ expensive than Japanese goods.

1. increase by 6% 2. more

Inflation ______ the variability of relative prices and ______ allocative efficiency.

1. increases 2. decreases

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

1. less 2. more

An increase in taxes, all else equal, increases national saving, _____ the exchange rate, and pushes the trade balance toward _____.

1. lowers 2. surplus

__________ is on the x axis and _________ is on the y axis.

1. net exports 2. real exchange rate

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

1. only output 2. only prices

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

1. prices 2. output

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade _____ and _____ net capital outflow.

1. surplus 2. positive

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade _____ and _____ net capital outflow.

1. surplus 2. positive

Measures of average workweeks and building permits for new housing units are included in the index of leading indicators, because shorter workweeks tend to indicate _____ future economic activity and increased permits for new units tend to indicate _____ future economic activity.

1. weaker 2. stronger

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

1/k

An economy produces 50 widgets, which sell for $4 each, and has a money supply of $100. What is the velocity of money?

2

Under the law of one price, if the nominal exchange is e = 33 Pakistani rupees per dollar, and the price of a bushel of wheat in Pakistan is 9,900 rupees, then the price of a bushel of wheat in the United States is _____ dollars.

300

Suppose that NX = 1,000 − 100(ε). If S − I = 400, then the equilibrium real exchange rate is:

6

An economy with constant velocity of money has real GDP growth of 3%, money growth of 7%, and a real interest rate of 2%. The nominal interest rate is:

6%

If a pair of socks costs 28.50 krone in Denmark and $4.07 in the United States, then the law of one price predicts that the nominal exchange rate measured in krone per U.S dollar is _____ krone (rounded to the nearest integer).

7

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

A Swiss banker rents an apartment in London for 5,000 British pounds per month. At a nominal exchange rate of 1.5 Swiss francs per British pound, the Swiss franc price of the apartment is _____ francs per month.

7,500

Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

A

Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point:

A

Tomas purchases a wallet in a shopping mall in Salt Lake City, Utah. The wallet is made in China. The purchase of this wallet will impact the _____ part(s) of the national income accounts identity.

C and NX

6.18 Which event would cause the real exchange rate to fall in a small open economy with perfect capital mobility?

an increase in the world interest rate

A favorable supply shock occurs when:

an oil cartel breaks up and oil prices fall

No change in relative price level for an increase in S - I1 causes the nominal exchange rate to ________.

appreciate

No change in the real exchange rate and the foreign price level, a decrease in the price level causes the nominal exchange rate to _____________.

appreciate

If an import restriction does not influence domestic investment or saving, it causes a country's currency to:

appreciate, resulting in an unchanged trade balance

If the euro/dollar exchange rate is e = 0.90 euro per dollar, and a pair of jeans costs 50 euros in France and $40 in the United States, then:

arbitrage profits are possible

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 decrease in the velocity of money:

both Central Bank A and Central Bank B should increase the quantity of money

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

causes lower real wages

Recession:

decline in GDP for 2 consecutive quarters

If legislation makes it more difficult for firms to fire workers, the Rate of Job Finding would actually _________.

decrease

The version of Okun's law studied in Chapter 11 assumes that with no change in unemployment, real gross domestic product (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%

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

No change in relative price level for an increase from S1- I causes the nominal exchange rate to ________ on the graph.

depreciate

If the US government subsidizes American-made cars, import restrictions are influenced which:

does not affect S or I

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the:

expected inflation rate

NX (ε)

exponential function

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

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

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

falls, while the real exchange rate rises and net exports fall

Unemployment caused by the time it takes workers to search for a job is called ______ unemployment.

frictional

A spell of unemployment begins when a person leaves their job or:

has been without a job for at least four weeks

Empirical data shows that countries with high money growth tend to have _____ inflation.

high

According to the classical theory of money, inflation does not make workers poorer because wages increase:

in proportion to the increase in the overall price level

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

increasing taxes

The unemployment insurance system may be desirable because unemployment insurance:

induces workers to reject unattractive job offers

Total Employment Formula using Ld and Ls:

insert real wage to Ld or Ls

Business cycles are:

irregular and unpredictable

The real exchange rate:

is equal to the nominal exchange rate (measured in units of the foreign currency divided by units of home currency) multiplied by the domestic price level divided by the foreign price level

When Y < C + I + G, then S _____ I.

is less than

Over the business cycle, consumption spending _____ investment spending.

is less volatile than

When the demand for real money increases, equilibrium in the money market:

is restored by a fall in the price level

Assume that the economy of Agraria produces corn only and does not have a government but is open to trade with other countries. In Agraria, total output of corn is 5 million bushels, residents of Agraria consume 4 million bushels, and investment in terms of seed corn is 2 million bushels of corn. This implies all of these EXCEPT that Agraria:

is running a trade surplus

What happens to the dollar when the exchange rate increases to rebalance the supply and demand of dollars in the market for foreign exchange?

it appreciates

What happens to NX when the exchange rate increases?

it decreases

When a nation runs a trade deficit,

it experiences a capital inflow

What happens to the demand of money when NX increases?

it increases

If the Fed responds to an adverse supply shock by expanding the money supply, it will:

keep the economy closer to its natural levels of output and employment

Total Unemployed Formula:

labor supply - total employment

An increase to investment causes the S - I to shift:

left

Sectoral shifts:

make frictional employment inevitable

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

make loans to foreigners

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

menu costs

M in the Money Demand Function:

money supply

Inflation Rate Formula using Money Demand Function:

money supply growth - real income growth

Nominal GDP Quantity Equation Formula:

money x velocity

When insiders have a much greater impact on the wage bargaining process than do outsiders, the negotiated wage is likely to be ______ the equilibrium wage.

much greater than

S1 - I

national saving

Small open economy models are only for:

national savings and domestic investment problems

Graphing the relationship NX = NX(ε), with ε on the vertical axis and NX on the horizontal axis, shows a:

negatively sloped curve

Looking at the aggregate demand curve alone, one can tell:

neither the quantity of output nor the price level

In a large open economy, the real exchange rate adjusts so that net exports equal:

net capital outflow

The real exchange rate is determined by the equality of:

net capital outflow and the demand for net exports

If Nominal Wage is lower than Equilibrium Nominal Wage:

no affect in labor market

Change in price level:

no effect on any real variables

Real exchange rate on a graph is the same as:

nominal exchange rate

Real Interest Rate Formula using %:

nominal interest rate - inflation rate

The real interest rate is equal to the:

nominal interest rate minus the inflation rate

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

output and employment will increase in the short run

The rate of inflation is the:

percentage change in the level of prices

Wage rigidity:

prevents labor demand and labor supply from reaching the equilibrium level

Which of the following would most likely be called a hyperinflation?

price increases averaged 300% per year

Aggregate supply is the relationship between the quantity of goods and services supplied and the:

price level

P in the Money Demand Function:

price level

Nominal GDP Formula:

price level x real GDP

The definition of the transactions velocity of money is:

prices multiplied by transactions divided by money

In the short run, a favorable supply shock causes:

prices to fall and output to rise

National Saving Formula:

public saving + private saving

Natural Rate of Unemployment Formula:

rate of job separation (s) / s + rate of job finding (f)

ε1

real exchange rate

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

real interest rate is constant

Nominal Wage Formula:

real wage / price level

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:

return to the old level and output will be restored to the natural rate

When there is structural unemployment, the real wage is:

rigid at a level above the market-clearing level

In an open economy, if Y > C + I + G, this country:

runs a positive trade balance

Economists call the changes in the composition of demand among industries and regions:

sectoral shifts

Maria lives in an economy with hyperinflation. Each day after being paid, she runs to the store as quickly as possible so she can spend her money before it loses value. Select the cost of inflation that best describes this scenario:

shoeleather costs

Unemployment insurance increases the amount of frictional unemployment by:

softening the economic hardship of unemployment

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by ______ the rate of growth of the money supply.

temporarily decreasing

A Brazilian company exports 5 million reais (Brazilian currency) worth of granite to the Arizona Tile company in the United States. The Brazilian company is paid in U.S. dollars, with which Brazil purchases U.S. Treasury bonds. As a result:

the United States experiences a capital inflow

A depreciation of the real exchange rate in a small open economy could be the result of:

the expiration of an investment tax-credit provision

If money supply growth is unchanged and real income growth is lower, then:

the inflation rate is higher

If money supply growth is unchanged, real income growth is unchanged, and velocity is higher, then:

the inflation rate is higher

If money supply growth is unchanged and real income growth is higher, then:

the inflation rate is lower

The natural level of output is:

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

Along an aggregate demand curve, which of the following are held constant?

the money supply and velocity

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 a steady state:

the number of people finding jobs equals the number of people losing jobs

What is the relationship between the parameter k and the velocity of money?

the parameter k is inversely related to velocity

Parameter kY in the Money Demand Function:

the proportion of nominal income people wish to hold in the form of money

Which of the following events would cause a currency to depreciate?

a rise in the price level

Equilibrium:

Ld = Ls

Labor Formula:

Lm + Ls = labor supply

Total Employment Formula using Ls and Lm:

Ls + Lm

The Quantity Equation Formula:

M+V = P+Y

Public Saving Formula:

T - G

A U.S. company sells $8 million worth of power generation equipment to China and is paid in U.S. dollars by China. In this case:

U.S. net exports increase, and U.S. net capital outflows increases

Real Wage:

W

What axis is Labor Demand and Labor Supplied on?

X

What axis is Real Wage on?

Y

Private Saving Formula:

Y - C - G

Equilibrium Exchange Rate Formula:

Y = C + I + G + NX

Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely?

a decline in the slope of the yield curve

According to recent estimates produced by economists, the trade restrictions announced by the US government at the beginning of 2018 had this effect:

a decrease in the overall volume of trade

Which event would cause the real exchange rate to rise in a small open economy with perfect capital mobility?

a domestic investment boom

The short-run aggregate supply curve is horizontal at:

a fixed price level

Which will cause a fall in the trade balance in a small open economy?

a lower world interest rate

Frictional unemployment is unemployment caused by:

the time it takes workers to search for a job

In the classical model of a small open economy, trade policies such as import tariffs or export subsidies will affect:

the volume of trade

Net exports on a graph is the same as:

trade balance

The macroeconomic problem that affects individuals most directly and severely is:

unemployment

All of these are causes of structural unemployment EXCEPT:

unemployment insurance

A variable rate of inflation is undesirable because:

variable inflation leads to greater uncertainty and risk than under constant inflation

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

will decrease