ECON EXAM 3

In a certain economy, the components of planned spending are given by C = 300 + 0.60(Y − T) − 300r I P = 50 − 500r G = 150 NX = 20 T = 150 Given the information about the economy above, which expression also states planned aggregate expenditure (PAE)? (520 − 800r) + 0.60Y (430 − 200r) + 0.60Y (520 − 200r) + 0.60Y (430 − 800r) + 0.60Y

(430 − 800r) + 0.60Y PAE= 300 + 0.6(Y-150)-300r + 50 -500r + 150 + 20 PAE = 430 - 800r + 0.6Y

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, the mpcequals 0.90, and potential output (Y*) equals 11,500, then taxes be must be decreased by approximately ______ to eliminate any output gap. 90 167 135 1,500

167 gap/multiplier = initial spending 1500/10= 150 change in PAE / MPC = change in T 150/0.9 = 166.67 Y=PAE = 10000 multiplier = 10 MPC= 0.9 Y* = 11500 gap = -1500 recessionary gap

According to the Taylor rule, if there is a recessionary gap of 2 percent of potential output and inflation is 4 percent, what real interest rate will the Fed set? 1.5 percent 2 percent 2.5 percent 3 percent

2 percent r = 0.01 + 0.5 (( y-y*)/y*) + 0.5 (Ti) r = 0.01 + 0.5 (-0.02) + 0.5 (4) r = 0.02

If potential output equals $800 billion and actual output equals $820 billion, then this economy's output gap should be expressed as $20 billion. 20 percent. 2.5 percent. 2.44 percent.

2.5 percent. Y*= 800 Y=820 (820-800)/800

Suppose the natural rate of unemployment is 4 percent. What is the actual rate of unemployment if actual output is 2 percent above potential output? 0% 2% 3% 6%

3% (ch 12 question 9)

The economy of Alpha operates according to Okun's law. In Alpha, potential GDP equals $600 billion, actual GDP equals $582 billion, and the natural rate of unemployment is 5 percent. What is the actual rate of unemployment in Alpha? 3 percent 1.5 percent 3.5 percent 6.5 percent

3.5 percent (y-y*)/y* x 100 = -2 (u - u*) -3 = -2 ( u - 5) u = 3.5

If the Fed's policy reaction function equals r = 0.02 + π, where r is the real interest rate and π is the inflation rate, when the inflation rate is at the current target of 2 percent, then the real interest rate will be set at 6 percent. 0 percent. 2.02 percent. 4 percent.

4 percent r = 0.02 + PI r = 0.02 + 0.02

According to the Taylor rule, if inflation equals 3 percent and there is an expansionary gap equal to 3 percent of potential output, the Fed will set a real interest rate of _____ percent and a nominal interest rate of _____ percent. 4; 7 1; 4 1; 3 4; 6

4;7 r = 0.01 + 0.5 ((Y-Y*)/Y*)) + 0.5 (PI) r = 0.01 + 0.5 (0.03) + 0.5 (0.03) r = 0.04 (real) PI=inflation rate nominal = real + potential 4+3 = 7

Which of the following workers is most likely to lose his/her job during a recession? A construction worker A baker A farmer A barber

A construction worker non-essential jobs get cut during recession

Which of the following is not an example of an "unconventional" monetary policy tool available to the Fed when the federal funds rate is already at or close to zero? Forward guidance Interest on reserves Discount lending Quantitative easing

Discount lending

Fill in the missing information in the table below.

MPC = CHANGE IN C OVER CHANGE IN T row 2 = 0.8 row 3 = 0.75 row 4 = 10650 0.6 = ( x / 2000 ) x = 1200 row 5 = 15625 (2100 / x) = 0.8 x = 2625

Given below are data on real GDP and potential GDP for the nation of Anaziland for the years 2009-2013, in billions of 2009 currency. For each year, calculate the output gap as a percentage of potential GDP and state whether the gap is a recessionary gap or an expansionary gap. Also calculate the year-to-year growth rates of real GDP. Recessionary gap is identified during a. 2010-2011 b. 2009; 2012-2013 c. 2011-2012 d. 2009-2010; 2013

OUTPUT GAP 2009 = -2.19% R 2010 = 2.78% E 2011 = 3.90% E 2012 = -1.90% R 2013 = -5.72% R OUTPUT GAP = (REAL GDP - POTENTIAL GDP) / POTENTIAL GDP GROWTH RATE OF REAL GDP 2010 = 4.39% 2011 = 3.65% 2012 = -1.15% 2013 = -1.71% GROWTH RATE OF REAL GDP = (CURRENT REAL GDP - LAST YEAR REAL GDP) / LAST YEAR REAL GDP b. 2009; 2012-2013

For the following economy, find autonomous expenditure, the multiplier, short-run equilibrium output, and the output gap. By how much would autonomous expenditure have to change to eliminate the output gap? C= 2,000 + 0.8 (Y − T ) Ip= 2,500 G= 3,500 NX= 300 T= 3,000 Y*= 29,000 Autonomous expenditure: _____ Multiplier: _____ Short-run equilibrium output: _____ Output gap: ______ Autonomous expenditure would need to _________ by _______ to eliminate the output gap. decrease increase

PAE = 2000 + 0.8 (Y-3000) + 2500 + 3500 + 300 PAE = 5900 + 0.8Y Autonomous expenditure: 5900 Multiplier: 5 1 / (1-MPC) 1 / (1-0.8) = 5 Short-run equilibrium output: 29500 1Y = 5900 + 0.8Y 0.2Y = 5900 Y = 29500 Output gap: 500 29500-29000 Autonomous expenditure would need to decrease by 100 to eliminate the output gap. 5900 / 5

For the following economy, find autonomous expenditure, the multiplier, short-run equilibrium output, and the output gap. By how much would autonomous expenditure have to change to eliminate the output gap? C= 500 + 0.5 (Y − T ) Ip= 200 G= 140 NX= 60 T= 100 Y*= 1,600 Autonomous expenditure: ______ Multiplier: ______ Short-run equilibrium output: _____ There is ______ output gap in the amount of ____ a recessionary an expansionary no Autonomous expenditure would need to _______ by _____ to eliminate the output gap. increase stay the same decrease

PAE = 500 + 0.5(Y-100) + 200 + 140 + 60 PAE = 850 + 0.5Y Autonomous expenditure: 850 Multiplier: 2 1/(1-0.5) = 2 Short-run equilibrium output: 1700 Y = 850 + 0.5Y 0.5Y = 850 Y = 1700 There is an expansionary output gap in the amount of 100 Y*-Y 1600-1700 Autonomous expenditure would need to decrease by 50 to eliminate the output gap. 100/2

An economy is described by the following equations: C= 60 + 0.8 (Y − T) Ip= 80 G= 140 NX= 20 T= 170 Y*= 780 The multiplier in this economy is 5. a. Find a numerical equation relating planned aggregate expenditure to output. PAE = _____ + ______ Y b. Construct a table to find the value of short-run equilibrium output. Short-run equilibrium output is ______. c. By how much would government purchases have to change in order to eliminate any output gap? By how much would taxes have to change? In order to eliminate any output gap, government purchases would have to be _________ by ______ increased reduced In order to eliminate any output gap, taxes would have to be ______ by ________ increased reduced d. If Y* = 880, then by how much would government purchases have to change in order to eliminate any output gap? By how much would taxes have to change? In order to eliminate any output gap, government purchases would have to be ______ by ______ increased reduced In order to eliminate any output gap, taxes would have to be ________ by ______- increased reduced

PAE = 60 + 0.8 (Y-170) + 80 + 140 + 20 a. PAE = 164 +0.8Y b. PAE. Y-PAE 660 -40 740 -20 820 0 900 20 980 40 Short-run equilibrium output is 820 c. reduced; 8 Y* - Y = -40 -40 / 5 = - 8 increased; 10 -0.8/(1-0.8) = -4 Y* - Y = -40 -40 / -4 = 10 d. increased; 12 Y* - Y = 60 60/5 = 12 reduced; 15 -0.8/(1-0.8) = -4 Y* - Y = 60 60/-4 = -15

An economy with zero net exports is described below: C= 80 + 0.75 (Y − T) Ip= 100 G= 150 NX= 0 T= 180 The multiplier in this economy is 4. a. Find short-run equilibrium output. Short-run equilibrium output:______ b. Economic recovery abroad increases the demand for the country's exports; as a result, NX rises to 100. Short-run equilibrium output _____ to _____ increases decreases c. Assume that foreign economies are slowing, reducing the demand for the country's exports, so that NX = −100. (A negative value of net exports means that exports are less than imports.) Short-run equilibrium output _____ to _____ increases decreases d. Which of the following best describes the tendency of recessions and expansions to spread across countries? a. Lower planned aggregate spending in one nation will reduce the amount of goods it exports abroad, thereby lowering the value of imports for its trading partners, which will reduce its short-term equilibrium output as well. b. Lower planned aggregate spending abroad means that fewer goods will be exported from a specific nation, leaving more goods available for domestic consumption (C) in that nation, which will increase its short-term equilibrium output. c. Lower planned aggregate spending abroad will reduce the amount of investment that flows into domestic industries from other countries, thereby reducing domestic short-term equilibrium output. d. Lower planned aggregate spending in a nation means less imports of foreign goods, thereby reducing the short-term equilibrium output of its trading partners through lower net export (NX) values in those nations.

PAE = 80 + 0.75 (Y-180) + 100 +150 + 0 PAE = 195 + 0.75Y a. 780 Y=195 +0.75Y 0.25Y = 195 Y = 780 b. increases; 1180 Y = 295 + 0.75Y 0.25Y = 295 Y = 1180 c. decreases; 380 Y = 95 + 0.75Y 0.25Y = 95 Y = 380 d. d. Lower planned aggregate spending in a nation means less imports of foreign goods, thereby reducing the short-term equilibrium output of its trading partners through lower net export (NX) values in those nations.

An economy is described by the following equations: C= 1,500 + 0.9 (Y − T) Ip= 1,000 G= 1,500 NX= 100 T= 1,500 Y*= 29,000 a. Find a numerical equation linking planned aggregate expenditure to output. PAE = _____ + _____ Y b. Find autonomous expenditure and induced expenditure in this economy Autonomous expenditure: _______ Induced expenditure: ________Y

PAE = C + IP + G + NX = 1500 + 0.9 (Y - 1500) + 1000 + 1500 + 100 a. PAE = 2750 + 0.97 Autonomous = 2750 Induced = 0.9 Y

In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output. a $5 billion increase a greater than $5 billion decrease no change a $5 billion decrease

a greater than $5 billion decrease

Given below is the the real GDP and potential GDP for the fictitious country "Alpha." a. Use the data to determine the year-to-year growth rates of real GDP and the output gap as a percentage of potential GDP, and state whether the gap is a recessionary gap or an expansionary gap. b. Use the data above to graph Alpha's real GDP between 2012 and 2019. ************* c. Alpha experienced a peak in the business cycle in the following year(s): 2014 and 2019 2019 2012 and 2019 2012 2014 d. Alpha experienced a trough in the business cycle in the following year(s): 2016 and 2019 2014 2016 2017 2012 and 2017

a. GROWTH RATE OF REAL GDP = (CURRENT REAL GDP - LAST YEAR REAL GDP) / LAST YEAR REAL GDP OUTPUT GAP = (REAL GDP - POTENTIAL GDP) / POTENTIAL GDP b. look at graph c. 2014 peak= beginning of a recession and high point of business cycle d. 2016 trough= end of recession and low point of business cycle

Consider the economy described by the following equations: C= 1,500 + 0.75 (Y − T) Ip= 800 G= 1,500 NX= 100 T= 1,500 Y*= 12,000 a. Complete the table shown below to find short-run equilibrium output. Consider possible values for short-run equilibrium output as they are given in the table below. b. Short-run level of equilibrium output: ______ c. What is the output gap for this economy? Output gap: _______ where Y* = 12,000 If the natural rate of unemployment is 6 percent, what is the actual unemployment rate for this economy (use Okun's law given Y* = 12,000). Actual unemployment rate: ______% ********

a. PAE = 1500 + 0.75 (Y - 1500) + 800 + 1500 + 100 PAE = 2775 + 0.75Y PAE Y-PAE 10800 -100 N 10950 -50 N 11100 0 Y 11250 50 N 11400 100 N b. 11100 where Y-PAE = 0 c. 900; 2.25% Y*-Y 12000-11100 = 900 ((Y*-Y)/Y*)) = -2 (u - 0.06) 0.075 = -2u + 0.12 -0.045 = -2u u = 0.0225 = 2.25% (ch 13 q 3)

In August of 2015, the Chinese central bank decided to reduce that nation's required reserve-deposit ratio from 18.5 percent to 18 percent. Assuming no change in the amount of cash held by the Chinese public, that commercial banks lend all their excess reserves, and that bank reserves was a constant 4,329 billion yuan both before and after the change. a. The value of Chinese banks deposits was _______ billion yuan before this change in the reserve-deposit ratio and ________ billion yuan after the change. b. Therefore the total change in deposits as a consequence of the change in the reserve-deposit ratio was _______ billion yuan.

a. 23400; 24050 total deposit = (100 / 18.5) x 4329 = 23400 change = (100 / 18.0) x 4329 = 24050 b. 650 24050-23400

Consider the information below. The students of a local college have gathered this hypothetical data on GDP for years 2008-2010. a. How many quarters of negative real GDP growth occurred during the period 2008-2010? 0 1 2 3 b. Which of the following is correct? a. There has to be at least three consecutive quarters of negative GDP growth to qualify as a recession. b. There has to be at least two consecutive quarters of negative GDP growth to qualify as a recession. c. There has to be at least one quarter of negative GDP growth to qualify as a recession. d. There has to be at least one year of negative GDP growth to qualify as a recession.

a. 3 any growth rate with a "-" including -0% b. b. There has to be at least two consecutive quarters of negative GDP growth to qualify as a recession. Recession= period in which real GDP falls for two or more consecutive quarters

a. If a country's natural unemployment rate is 4 percent and its actual unemployment rate is 7.5 percent, what is its cyclical unemployment rate? ______ percent b. According to Okun's law, this country would have ______________ output gap of _______ percent. an expansionary a recessionary

a. 3.5% cyclical unemployment = (actual unemployment rate - natural unemployment rate) b. a recessionary; 7% output gap = -2 x (actual unemployment rate - natural unemployment rate

An economy is initially at full employment, but a decrease in planned investment spending (a component of autonomous expenditure) pushes the economy into recession. Assume that the marginal propensity to consume (mpc) of this economy is 0.75 and that the multiplier is 4 a. How large is the recessionary gap after the fall in planned investment? The recessionary gap is _____ times the size of the fall in planned investment. b. By how much would the government have to change its purchases to restore the economy to full employment? The ________ increase decrease in purchases should be __________ greater than equal to less than the fall in planned investment. c. Alternatively, by how much would the government have to change taxes? The government would have to _______ reduce increase taxes by an amount that is _____ percent ______ less than greater than the decline in planned investment. d. Suppose that the government's budget is initially in balance, with government spending equal to taxes collected. A balanced-budget law forbids the government from running a deficit. Is there anything that fiscal policymakers could do to restore full employment in this economy, assuming they do not want to violate the balanced-budget law? a. Increase both government spending and taxes by the same amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget. b. Decrease taxes while increasing government spending by a greater amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget. c. Decrease government spending and increase taxes by the same amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget. d. Decrease both government spending and taxes by the same amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget.

a. 4 1/ (1-0.75) = 4 b. increase; equal to c. reduce; 33; greater than d. a. Increase both government spending and taxes by the same amount, which will result in a net increase in autonomous expenditure without offsetting the balanced budget. ************* (ch 13 q 8)

For the economy described below: C= 2,600 + 0.9(Y − T) − 8,000r Ip= 2,200 − 8,000r G= 2,500 NX= 0 T= 3,600 a. Suppose that potential output Y* equals 32,600. What real interest rate should the Fed set to bring the economy to full employment? You may take as a given that the multiplier for this economy is 10. Real rate of interest: _____% b. Suppose that potential output Y* equals 29,400. What real interest rate should the Fed set to bring the economy to full employment? You may take as given that the multiplier for this economy is 10. Real rate of interest: _____% c. Show that the real interest rate determined in part a sets national saving equal to planned investment when the economy is at potential output. This result shows that the real interest rate must be consistent with equilibrium in the market for saving when the economy is at full employment. Planned investment Ip = _______ National saving S = ______

a. 5% PAE = 2600 + 0.9(Y-3600) -8000r + 2200 - 8000r + 2500 = 4060 - 16000r + 0.9Y 0.1Y = 4060 - 16000r Y = (4060 - 16000r)/0.1 Y = 40600 - 160000r 32600 = 40600 - 160000r 160000r = 8000 r = 0.05 b. 7% 29400 = 40600 - 160000r 160000r = 11200 r = 0.07 c. Ip = 1800 2200 - 8000(0.05) = 1800 S= 1800 NS = Y - C - G = 32600 - ((2600+0.9(32600-3600)-8000(0.05)) - 2500 = 1800

Suppose the economywide demand for money is given by: M = P(0.3Y − 25,000i). The price level P equals 3, and real output Y equals 10,000. a. At what value should the Fed set the nominal money supply if it wants to set the nominal interest rate at 5 percent? The nominal money supply should be set at $______ . b. At what value should the Fed set the nominal money supply if it wants to set the nominal interest rate at 7 percent? The nominal money supply should be set at $_______ .

a. 5250 M= P(0.3Y - 25000i) M = 3 (0.3(10000) - 25000(0.05) = 5250 b. 3750 M= P(0.3Y - 25000i) M = 3 (0.3(10000) - 25000(0.07) = 3750

Using Okun's law, fill in the four pieces of missing data in the table below. All of the following data are hypothetical. a. Actual unemployment rate in 2015: ____% b. Potential GDP in 2016: $_____ c. Real GDP in 2017: $_____ d. Natural unemployment rate in 2018: ___%

a. 6% output gap = -2 (actual - natural) -2 = -2 ( x - 5) x = 6 b. 8100 actual and natural unemployment rates equal so potential and real GDP remain the same c. 8282 (real GDP -potential GDP) / potential GDP = -2 (actual - natural) d. 5% 2 = -2 (4 - u) u = 5

Which one of the following statements is not correct? a. Output gaps are caused by inflationary pressures generated by the unintended side effects of government policy. b. When spending is high, output may rise above potential output. c. Low aggregate spending can cause output to fall below potential output. d. Government policies can help to eliminate output gaps.

a. Output gaps are caused by inflationary pressures generated by the unintended side effects of government policy.

An economy is described by the following equations: C= 2,600 + 0.8 (Y - T) − 10,000r IP= 2,000 − 10,000r G= 1,800 NX= 0 T= 3,000 The real interest rate, expressed as a decimal, is 0.10 (that is, 10 percent). a. Find a numerical equation relating planned aggregate expenditure to output. PAE = ___ + ____Y b. Using a table (or algebra if you have used the appendix to this chapter), solve for short-run equilibrium output. Short-run equilibrium output: _____

a. PAE = 2000 + 0.8Y =2600+0.8(Y-3000)-10000r +2000-10000r+1800+0 = 4000 - 20000 (0.10) +0.8Y = 2000 + 0.8Y b. PAE Y-PAE 9600 -100 9680 -80 9760 -60 9840 -40 9920 -20 10000 0 10080 20 10160 40 SHORT RUN = 10000

a. Which of the following statements is an example of some of the uncertainties that Fed policymakers face? a. At any given time, the Fed has only a rough idea of the size of output gaps. b. It is very hard for an economy to actually achieve its potential output. c. Monetary policy is fraught with political goals and alternative motivations such as bids for reelection. d. In order to have any effect, interest rates can only be changed in large increments of at least one percent at a time. b. According to the text, which of the following is true about monetary policymaking? a. Monetary policymaking is as much an art as a science. b. Monetary policymaking is an exact science. c. Monetary policymaking is highly political and widely viewed as irrelevant to the economy. d. Monetary policymaking has not been actively used since the 1990s.

a. a. At any given time, the Fed has only a rough idea of the size of output gaps. b. a. Monetary policymaking is as much an art as a science.

For each of the following scenarios, define the effects on the nominal interest rate if the Fed takes the following monetary policy actions: a. The Fed lowers the discount rate and increases discount lending. Nominal interest rates will __________ decrease increase stay the same . b. The Fed increases the reserve requirement for commercial banks. Nominal interest rates will __________ decrease increase stay the same . c. The Fed conducts open market sales of government bonds to the public. Nominal interest rates will __________ decrease increase stay the same . d. The fed decreases the reserve requirement for commercial banks. Nominal interest rates will __________ decrease increase stay the same .

a. decrease b. increase c. increase d. decrease

Data on the unemployment rate for workers aged 16-19 and for workers aged 20 and over are listed in the table below. How do they differ? a. Workers aged 16-19 have unemployment rates that are __________ adult (above 20) unemployment rates. lower than higher than the same as b. The reason for this is a. young workers are less likely to be structurally unemployed as they have more experience with Information Communication Technology. b. older workers are more likely to be cyclically unemployed, as they lack the skills required in the contemporary labor market. c. younger workers are more likely to be frictionally unemployed, as they change jobs more often. d. younger workers are more likely to be cyclically unemployed, as they change jobs more often. c. If the share of the labor force aged 16-19 falls, we would expect the average rate of unemployment across the whole workforce to be lower higher the same

a. higher than 6+6 = 12 < 14.8 b. c. younger workers are more likely to be frictionally unemployed, as they change jobs more often. frictional = short-term unemployment structural = long-term chronic unemployment in normal conditions (skills may be outdated) cyclical = result of fluctuations in the economy c. lower

During the heavy Christmas shopping season, sales of retail stores, online sales firms, and other merchants rise significantly. a. What would you expect to happen to the market for money during the Christmas season? b. If the Fed took no action, what would happen to nominal interest rates around Christmas?Nominal interest rates would ________ rise stay the same fall c. In reality, nominal interest rates do not change significantly in the fourth quarter of the year, due to deliberate Fed policy. Explain how the Fed can ensure that nominal interest rates remain stable around Christmas. The Fed can ensure that nominal interest rates remain stable by keeping the money supply constant decreasing the money supply increasing the money supply .

a. rise ( look at graph) if fed does nothing, MS stays and interest rate rises b. increasing the money supply increase the MS to counter the heavy money demand

One potential problem with using fiscal policy to close recessionary output gaps is that a. sustained government deficits can be harmful to long-run economic growth. b. decreased government spending can cause inflationary pressure to build. c. reductions in interest rates can reduce savings and, therefore, investment. d. it may be offset by automatic stabilizers.

a. sustained government deficits can be harmful to long-run economic growth.

Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy can affect ______ as well as aggregate demand and that fiscal policy is _______. a. consumption; too flexible b. potential output; not flexible enough c. consumption; offset by automatic stabilizers d. potential output; offset by automatic stabilizers

b. potential output; not flexible enough

Which of the following explain why an increase in interest that banks receive from the Fed on the required and excess reserves that banks hold with the Fed, would also increase the interest rates that commercial banks charge their borrowers? a. If the interest paid to commercial banks from the Fed is increased, banks will deposit more of their excess reserves with the Fed. This will increase the rates for households and businesses that borrow from the Fed directly too. b. Because the interest rate that banks receive from the Fed on reserves and the interest rate that banks charge borrowers must legally be the same, a higher rate from Fed must equal a higher reward for banks when lending to consumers and businesses. c. Since the interest that banks receive from the Fed on excess reserves represents an opportunity cost for banks when lending to their borrowers, a higher rate from Fed will require a higher reward for banks when lending to consumers. d. Since the interest that banks receive from the Fed on excess reserves represents the reward for banks when lending to their borrowers, a higher rate from Fed equals a higher reward for banks when lending to consumers.

c. Since the interest that banks receive from the Fed on excess reserves represents an opportunity cost for banks when lending to their borrowers, a higher rate from Fed will require a higher reward for banks when lending to consumers. holding excess reserves is more attractive to banks because the cost of doing so is lower now that the fed pays interest

If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000, then this economy has a(n) ______ gap that can be closed by _________. a. expansionary; decreasing taxes b. expansionary; increasing transfer payments c. expansionary; decreasing government purchases d. recessionary; increasing government purchases

c. expansionary; decreasing government purchases Y* - Y = -5000 short-run is greater than potential so expansionary potential is greater than short-run to recessionary

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, taxes must be a. increased by $1 billion. b. decreased by $1 billion. c. increased by $1.33 billion. d. decreased by $1.33 billion.

c. increased by $1.33 billion. tax multiplier = -0.75 / (1-0.75) = -3 multiplier = 1 /(1-0.75) = 4 -3 = 4 billion/ T T = 1.33 billion ********** (ch13 q 10)

Maria has the assets and liabilities shown in the accompanying table. Credit card balance $ 1,000 Cash 200 Government bonds 3,000 Checking 1,500 Car loan balance 10,000 Car 15,000 Which of the following actions would increase Maria's money demand by $100? a. Maria writes a check for $100 to pay down her credit card balance. b. Maria writes a check for $100 to pay down her car loan balance. c. Maria pays $100 cash for a new lamp. d. Maria sells a $100 government bond and puts the proceeds in her checking account.

d. Maria sells a $100 government bond and puts the proceeds in her checking account.

One reason why banks might increase their reserve-deposit ratio above the minimum level in times of economic uncertainty is that banks a. are initiating quantitative easing. b. may have insufficient required reserves. c. are most profitable when new loans are issued. d. may find only limited lending opportunities that seem sufficiently safe.

d. may find only limited lending opportunities that seem sufficiently safe.

If all prices adjusted immediately to balance the quantities supplied and demanded for all goods and services a. output gaps would be positive more often than they would be negative. b. cyclical unemployment would be positive. c. potential GDP would rise much more quickly. d. output gaps would not exist.

d. output gaps would not exist. immediately = no room for gaps

The aging of the labor force in the United States is likely to ________ the natural rate of unemployment; an increase in the efficiency of the labor market is likely to ________ the natural rate of unemployment. decrease; decrease increase; increase increase; decrease decrease; increase

decrease; decrease (ch 12 question 10)

If the income-expenditure multiplier equals 5, and a 1 percent increase in the real interest rate reduces autonomous spending by 250 units, then a 2,000 unit recessionary gap can be eliminated by ______ the real interest rate by ______ percent. increasing; 8 increasing; 1.6 decreasing; 1.6 decreasing; 5

decreasing; 1.6 gap/multiplier = initial change 2000/5 = 400 400/250 = 1.6% decrease multiplier = 5 gap = -2000 decrease by 1% the 250 u increase

A fiscal policy action to close a recessionary gap is to increase taxes. increase transfer payments. decrease government purchases. decrease the marginal propensity to consume.

increase transfer payments. recessionary gap = increase government spending or decreases taxes ( increase transfers)

According to Okun's law, if a country's recessionary output gap grows by 4 percent, then its cyclical unemployment rate will _________ by _____ percent. decrease increase

increase; 2% recessionary = increase by half , expansionary = decrease by half growing output gap = cyclical increases by half

In reality, the Fed's information is fairly imprecise in regards to unemployment. inflation rates. actual real GDP. potential GDP.

potential GDP.

The money demand curve will shift to the left if the nominal interest rate increases. the nominal interest rate decreases. the price level increases. real income decreases.

real income decreases.

If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap. recessionary; raise recessionary; reduce recessionary; not change expansionary; raise

recessionary; reduce Y* = 4000 Y = PAE = 3500

Because the Fed determines the money supply, the money supply curve is downward-sloping. upward-sloping. vertical. horizontal.

vertical. money demand = downward sloping