ECO 119 Final
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 ______. A) falls; falls B) rises; falls C) rises; rises D) falls; rises
B) rises; falls
Policy is conducted by discretion if policymakers: A) Are free to size up the situation case and choose whatever policy seems appropriate at the time B) Announce and achieve a balanced government budget C) Announce and maintain a constant growth rate of the money supply D) Announce in advance how policy will respond to various situations and commit themselves to following through on this announcement
A) Are free to size up the situation case and choose whatever policy seems appropriate at the time
Based on the graph, if the economy starts from a short run equilibrium at D, then the long-run equilibrium will be at _______, with a _________ price level A) C; higher B) C; lower C) B; higher D) B; lower
A) C; higher
In the IS-LM model, changes in taxes initially affect planned expenditures through: A) Consumption B) Investment C) Government spending C) The interest rate
A) Consumption
The lag between the time that economic stimulus is needed and the time that a tax cut is passed by congress is an example of a: A) Fiscal inside lag B) Fiscal outside lag C) Monetary inside lag D) Monetary outside lag
A) Fiscal inside lag
The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth _______, and that creditors have a _______ propensity to consume than debtors A) From debtors to creditors; smaller B) From creditors to debtors; larger C) From creditors to debtors; smaller D) From debtors to creditors; larger
A) From debtors to creditors; smaller
Automatic stabilizers: A) Have no inside lag B) Have no outside lag C) Require congressional action before each time that they are put into effect D) Have long and variable inside lag
A) Have no outside lag
A given increase in taxes shifts the IS curve more to the left the: A) Larger the marginal propensity to consume B) Smaller the marginal propensity to consume C) Larger the government spending D) Smaller the government spending
A) Larger the marginal propensity to consume
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 A) Lower; raise B) Increase; lower C) Lower; lower D) Increase; raise
A) Lower; raise
If all past economic fluctuations resulted from inept economic policies, then the historical evidence would support using: A) Passive macroeconomic policy only B) Active macroeconomic policy only C) Neither active nor passive macroeconomic policy D) Either active or passive macroeconomic policy
A) Passive macroeconomic policy only
Policies that stimulate or depress the economy without deliberate policy changes are called: A) Rational expectations policies B) Automatic stabilizers C) Time-inconsistent policies D) Leading indicators
B) Automatic stabilizers
If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift: A) Neither the LM nor the IS curve B) Both the LM and the IS curves C) Only the IS curve D) Only the LM curve
B) Both the LM and the IS curves
All of the following could be considered automatic stabilizers except: A) A system of unemployment insurance B) Discretionary changes in taxes C) Transfer payments that increase during recessions D) The federal income tax
B) Discretionary changes in taxes
Suppose that a heightened risk of a terrorist attack reduces consumer confidence, inducing people to save more. To stabilize aggregate demand, the Fed should: A) Increase the money supply to raise the interest rate B) Increase the money supply to lower the interest rate C) Decrease the money supply to lower the interest rate D) Decrease the money supply to raise the interest rate
B) Increase the money supply to lower the interest rate
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 A) Higher; raises; reduces B) Lower; raises; reduces C) Higher; lowers; increases D) Lower; lowers; increases
B) Lower; raises; reduces
The political business cycle refers to the: A) Pattern of recession and expansion that follows every election B) Manipulation of the economy to win elections C) Cycle of electing US representatives every two years, the US president every four years, and US senators every six years D) Patterns of holding primaries, conventions, and general elections every four years
B) Manipulation of the economy to win elections
The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a: A) Monetary inside lag B) Monetary outside lag C) Fiscal outside lag D) Fiscal inside lag
B) Monetary outside lag
A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in aggregate demand curve corresponds to a change in income in the IS-LM model ______ A) Resulting from a change in fiscal policy; resulting from a change in monetary policy B) Resulting from a change in the price level; at a given price level C) At a given price level; resulting from a change in the price level D) Resulting from a change in monetary policy; resulting from a change in fiscal policy
B) Resulting from a change in the price level; at a given price level
The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to _________ spending on goods and services A) Unexpected; increase B) Unexpected; reduce C) Expected; reduce D) Expected; increase
B) Unexpected; reduce
Increasing government spending when the economy is in a recession is an example of: A) Active monetary policy B) Passive monetary policy C) Active fiscal policy D) Passive fiscal policy
C) Active fiscal policy
The Pigou effect suggests that falling prices will increase income because real balances influence _______ and will shift the _______ curve A) Money demand; LM B) Government spending; IS C) Consumer spending; IS D) The money supply; LM
C) Consumer spending; IS
An argument in favor of allowing discretionary macroeconomic policy is that: A) The objectives of policymakers may be in conflict with the well being of the public B) Uninformed policymakers may choose incorrect policies C) Giving policymakers flexibility will allow them to respond to changing conditions D) Policymakers may make erratic shifts in policy in response to changing political situations
C) Giving policymakers flexibility will allow the to respond to changing conditions
According to the IS-LM model, when the government increases taxes and government purchases by equal amounts: A) Income, the interest rate, consumption, and investment all rise B) Income and the interest rate fall, whereas consumption and interest rate rise C) Income and the interest rate rise, whereas consumption and investment fall D) Income, the interest rate, consumption, and investment are unchanged
C) Income and the interest rate rise, whereas consumption and investment fall
One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______. A) IS; Left B) LM; Left C) LM; Right D) IS; Right
C) LM; Right
What are two types of tools that economists use to forecast economic developments? A) Monetary instruments and fiscal instruments B) Visual assessment and global positioning C) Leading indicators and macroeconomic models D) Direct imputations and indirect attributes
C) Leading indicators and macroeconomic models
The money hypothesis suggests that the Great Depression was caused by a: A) Leftward shift in the IS curve B) Rightward shift in the LM curve C) Leftward shift in the LM curve D) Rightward shift in the IS curve
C) Leftward shift in the LM curve
A change in income in the IS-LM model resulting from a change in the price level is represented by _________ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ________ aggregate demand curve A) Shift in the; movement along the B) horizontal; vertical C) Movement along the; shift in the D) Vertical; horizontal
C) Movement along the; shift in the
Starting from a short run equilibrium greater than the natural rate of output, as the economy returns to a long run equilibrium: A) Output will increase, but the price level will decrease B) Both output and the price level will increase C) Output will decrease, but the price level will increase D) Both output and the price level will decrease
C) Output will decrease, but the price level will increase
The time between when government spending increases and when aggregate demand starts to increase is an example of an: A) Outside lag of monetary policy B) Inside lag of monetary policy C) Outside lag of fiscal policy D) Inside lag of fiscal policy
C) Outside lag of fiscal policy
Active economic policy seeks to to all of the following except: A) Use monetary and fiscal policy to shift aggregate demand B) Respond to changing economic conditions C) Take a hands off approach to macroeconomic policy D) Offset fluctuations in GDP
C) Take a hands off approach to macroeconomic policy
In the IS-LM analysis, the increase in income resulting from a tax cut is ______ the increase in income resulting from an equal rise in government spending A) Sometimes less sometimes greater than B) Usually greater than C) Usually less than D) Usually equal to
C) Usually less than
Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income: A) r3, Y2 B) r3, Y3 C) r2, Y3 D) r2, Y2
C) r2, Y3
Which of the following is an example of a fiscal policy that has no inside lag? A) A decrease in income tax rates B) A reduction in the age at which people become eligible for retirement benefits C) An increase in government spending for job training D) An ongoing unemployment insurance program
D) An ongoing unemployment insurance program
During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as an: A) Contractionary shift in the LM curve B) Expansionary shift in the IS curve C) Expansionary shift in the LM curve D) Contractionary shift in the IS curve
D) Contractionary shift in the IS curve
Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Federal Reserve should ______ the money supply, shifting to ______ A) Increase; LM3 B) Increase; LM2 C) Decrease; LM2 D) Decrease; LM3
D) Decrease; LM3
According to the Lucas critique, when economists evaluate alternative policies they must take into consideration: A) The stage of the political business cycle in which the policy is to be implemented B) Whether the policy will offset the impact of automatic stabilizers C) The length of the inside lags associated with the policies D) How the policies will affect expectations and behavior
D) How the policies will affect expectations and behavior
A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______ A) IS; Shifts to the right B) IS; Does not shift C) LM; Shifts to the right D) LM: Does not shift
D) LM; Does not shift
A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called an: A) Active policy rule B) Rational expectation C) Outside lag D) Time-inconsistency policy
D) Time-inconsistency policy
