EC111 Practice Exam 4 Hasan

Scenario. Take the following information as given for a small economy:• When income is $10,000, consumption spending is $6,500.• When income is $11,000, consumption spending is $7,250. Refer to the scenario above. The marginal propensity to consume for this economy is

0.75

Refer to the Figure. There is an excess demand for money at an interest rate of

3.25%

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

60.75

shift aggregate demand from AD1 to AD3

An decrease in government purchases will

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall

In 2008, the United States was in recession. Which of the following things would you not expect to have happened?

Increased real GDP

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. What would happen to the dollar?

It would appreciate in foreign exchange markets making U.S. goods more expensive compared to foreign goods

Refer to the figure. Suppose the economy starts at R. Stagflation would be consistent with the move to

P3 and Y1

Refer to the Figure. Suppose the economy starts at Point R. If aggregate demand increases from AD2 to AD3, then in the short run the economy moves to

Point O

Refer to the Figure. If the economy is in long-run equilibrium, then an adverse shift in short-run aggregate supply would move the economy from

Q to R

The oil price increase that resulted from the war in Ukraine has shifted the U.S. ____________ curve to the left thereby causing a ____________.

SRAS; stagflation

what shifts the aggregate supply curve?

Technology, Increase in energy prices, and a decrease in capital stock

Which of the following will NOT cause the aggregate demand curve to shift leftward?

The deprecation of the Malaysia ringnnit

If Fed decreases money supply

The interest rate increases, which tends to reduce investment and therefor the aggregate demand

causes the economy to experience stagflation

The shift of the short-run aggregate-supply curve from SRAS2 to SRAS1

5.25 percent

There is an excess supply of money at an interest rate of

Refer to the figure. The natural level of output occurs at

Y2

Assuming "a" is positive, which represents short run relationship between price level and output?

Y=Yn+a(P-Pe)

Which of the following shifts aggregate demand to the left?

a decrease in the money supply

If the stock market crashes, then

aggregate demand decreases, which the Fed could offset by purchasing bonds

if the stock market grows more than expected, then

aggregate demand increases, which the fed could offset by selling bonds

Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift

aggregate demand left

Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%.Which curve shifts and in which direction?

aggregate demand shifts left

1. Imagine that in the current year the economy is in long-run equilibrium. Then the federal government INCREASES its purchases of goods by 50%.Which curve shifts and in which direction?

aggregate demand shifts right

Which of the following would cause stagflation?

aggregate supply shifts left

economic recessions in Canada would cause the U.S. price level

and real GDP to fall

Economic expansions (boom) in Canada would cause the U.S. price level

and real GDP to rise

What is aggregate demand made up of?

consumption, investment, government spending, and net exports

Refer to the Figure. The shift of the short-run aggregate-supply curve from SRAS1 to SRAS2

could be caused by a decrease in the expected price level

when the interest rate drops, the opportunity cost of holding money

decreases, so the quantity of money demanded increases

From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel wealthier, then it would have shifted aggregate

demand right

according to liquidity preference theory, the money-demand curve is

downward sloping

In recent years, the Federal Reserve has conducted policy by setting a target for the

federal funds rate

Aggregate demand shifts right if

government purchases increase and shifts left if stock prices fall.

Fiscal Policy refers to the idea that aggregate demand is affected by changed in

government spending and taxes

Quantity demanded be SMALLEST?

highest "r" value and lowest "P" value

The interest rate always increases

if the money supply decreases

To mitigate the effects of an unfavorable oil price shock, the Fed could __________ the money supply to shift the _________ curve to the right.

increase; AD

Suppose a stock market boom makes people feel wealthier. What are the effects of this increase in wealth?

increased consumption, which shifts the aggregate demand curve right

The economic boom of the early 1940s resulted mostly from

increased government expenditures

When the Fed buys bonds the supply of money

increases and so aggregate demand shifts right

When the interest rate increase, the opportunity cost of holding money

increases, so the quantity of money demanded decreases

the position of the long-run aggregate demand curve

is determined by resource usage and technology

if the Federal Reserve decided to lower interest rates

it could buy bonds to increase the money suppy

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied

Quantity demanded be LARGEST?

lowest "r" value and highest "P" value

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

Other things the same, if technology increases, then in the long run

output is higher and prices are lower

other things the same, if oil price increases, then in the long-run

output is lower and prices are higher

In which of the following cases would the quantity of money demanded be smallest?

r = 0.06, P = 1.0

Assume the MPC is 0.80. Assume there is a multiplier effect and that the total crowding-out effect is $14 billion. An increase in government purchases of $90 billion will shift aggregate demand to the

right by $436 billion

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would

rise which by itself would increase aggregate demand

when a country experiences capital flight, the interest rate

rises because the demand for loanable funds shifts right

an economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level

rises, shifting aggregate supply left

If the Federal Reserve decided to raise interest rates, it could

sell bonds to lower the money supply

Refer to the figure. An increase in government purchases will

shift aggregate demand from AD2 to AD1

Refer to the Figure. If the money-supply curve MS on the left-hand graph were to shift to the left, this would

shift the AD curve to the left

what happens to the aggregate demand curve if an investment tax credit is repealed?

shifts to the left thereby reducing the aggregate demand curve

P1 and Y1

suppose the economy starts at R. A stock market crash would be consistent with the move to

what are the determinants of human capital

technology, higher education, working intelligence

Using the liquidity-preference model, when the Federal Reserve increases the money supply,

the equilibrium interest rate decreases

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

the equilibrium interest rate increases

The Federal Open Market Committee is

the group at the federal reserve that sets monetary policy

If the Fed increases the money supply,

the interest rate decreases, which tends to increase investment and therefore the aggregate demand

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

the interest-rate effect

Which of the following is not a determinant of the long-run level of real GDP?

the price level

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

the slope of the aggregate demand curve

when there is an increase in human capital

there is an increase in the aggregate supply and potential GDP

Refer to the Figure. If the economy starts at O, a decrease in the money supply moves the economy

to Q in the long run

An example of an automatic stabilizer is

unemployment benefits

According to liquidity preference theory, the money-supply curve is

vertical

If people's expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve

will shift rightward because people will increase spending now