econ final exam practice questions

If it were not for the automatic stabilizers in the U.S. economy,

output and employment would probably be more volatile than they are now.

Other things the same, automatic stabilizers tend to

raise expenditures during recessions and lower expenditures during expansions.

From 2008-2009 the Federal Reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have

raised inflation and reduced unemployment.

In 2001, Congress and President Bush instituted tax cuts. According to the short-run Phillips curve, in the short run this change should have

raised inflation and reduced unemployment.

The aggregate quantity of goods and services demanded changes as the price level falls because

real wealth rises, interest rates fall, and the dollar depreciates.

By raising aggregate demand more than anticipated, policymakers

reduce unemployment for awhile.

Prime Minister Emma Bigshot urges passage of a bill to reduce unemployment benefits from very generous levels in her country. She also urges her country's central bank to raise the rate at which the money supply is increasing. In the long run which, if either, of these policies will reduce the unemployment rate?

reducing the generosity of unemployment benefits but not raising the rate at which the money supply is increasing

Stagflation exists when prices

rise and unemployment rises.

If the price level falls, the real value of a dollar

rises, so people will want to buy more. This response helps explain the slope of the aggregate demand curve.

Refer to Figure 33-8. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P3 and Y3 , then it must be the case that

short run aggregate supply has increased.

Liquidity preference theory is most relevant to the

short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess

supply of money equal to the distance between points a and b.

Which of the following events would shift money demand to the right?

supply of money equal to the distance between points a and b.

In 1968, economist Milton Friedman published a paper criticizing the Phillips curve on the grounds that

the Phillips curve did not apply in the long run.

If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer U.S. bonds,

the dollar would depreciate which would cause aggregate demand to shift right.

According to the long-run Phillips curve, in the long run monetary policy influences

the inflation rate but not the unemployment rate.

Critics of stabilization policy argue that

the lag problem ends up being a cause of economic fluctuations.

Which of the following is not an automatic stabilizer?

the minimum wage

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

the multiplier effect

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

the price level is higher than expected making production more profitable.

Imagine two economies that are identical except that for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $500 billion. It follows that

the price level, but not real GDP is lower in country B.

If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment is higher in

the short run but not the long run.

A change in expected inflation shifts

the short-run Phillips curve, but not the long run Phillips curve.

The most important automatic stabilizer is

the tax system

Economists who are skeptical about the relevance of "liquidity traps" argue that

a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.

Refer to Figure 33-4. If the economy starts at A and there is a fall in aggregate demand, the economy moves

to C in the long run.

The government of Blenova considers two policies. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A will lead

to a lower unemployment rate and a higher inflation rate than policy B.

An example of an automatic stabilizer is

unemployment benefits

As the aggregate demand curve shifts leftward along a given aggregate supply curve,

unemployment is higher and inflation is lower.

Monetary Policy in FlosserlandIn Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then

unemployment rises, but it would have risen more if people had been expecting 25% inflation.

Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is

vertical, which implies that monetary and fiscal policies cannot influence the level of unemployment in the long run.

Refer to Figure 34-7. The aggregate-demand curve could shift from AD1 to AD2 as a result of

a decrease in net exports.

Refer to Figure 34-4. Which of the following events could explain a shift of the money-demand curve from MD1 to MD2?

a decrease in the price level

An event that directly affects firms' costs of production and thus the prices they charge is called

a supply shock.

One way to express the classical idea of monetary neutrality is to draw

a vertical long-run Phillips curve.

Refer to Figure 33-8. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P1 and Y1 , then it must be the case that

aggregate demand has decreased.

Other things the same, an increase in the amount of capital firms wish to purchase would initially shift

aggregate demand right.

The initial impact of an increase in an investment tax credit is to shift

aggregate demand right.

The Stock Market Boom of 2015Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. Which curve shifts and in which direction?

aggregate demand shifts right

Which of the following events would shift money demand to the right?

an increase in the price level

Automatic stabilizers

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.

At the end of World War II many European countries were rebuilding and so were eager to buy capital goods and had rising incomes. We would expect that the rebuilding increased aggregate demand in

both the United States and Europe

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. What happens to the price level and real GDP in the short run?

both the price level and real GDP fall

Financial CrisisSuppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. What happens to the price level and real GDP in the short run?

both the price level and real GDP fall

According to the Phillips curve, policymakers can reduce inflation by

contracting aggregate demand. This contraction results in a temporarily higher unemployment rate.

If the sacrifice ratio is 2, reducing the inflation rate from 4 percent to 2 percent would

cost 4 percent of annual output.

Refer to Figure 33-5. The shift of the short-run aggregate-supply curve from SRAS1 to SRAS2

could be caused by a decrease in the expected price level.

The wealth effect stems from the idea that a higher price level

decreases the real value of households' money holdings.

The natural rate of unemployment

does not depend on the rate at which the Fed increases the money supply.

If policymakers accommodate an adverse supply shock, then in the short run the unemployment rate

falls and the inflation rate rises.

Permanent tax cuts shift the AD curve

farther to the right than do temporary tax cuts

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

federal funds rate

Which of the following would not be included in aggregate demand?

government's tax collections.

According to the Philips curve diagram, if a central bank takes action to reduce the inflation rate, unemployment is

higher in the short-run only.

Most economists believe that classical macroeconomic theory is a good description of the economy

in the long run, but not in the short run.

​Imagine the U.S. economy is in long-run equilibrium. Then suppose the aggregate demand increases. We would expect that in the long-run the price level would

increase

The misperceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has

increased, so they increase production.

The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it

increases income and thereby increases consumer spending.

An increase in the MPC

increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

In the long run,

inflation depends primarily upon the money supply growth rate.

Refer to Figure 34-3. For an economy such as the United States, what component of the demand for goods and services is most responsible for the decrease in output from Y1 to Y2?

investment

According to the theory of liquidity preference, money demand

is negatively related to the interest rate, while the money supply is independent of the interest rate.

The equation, ​ Unemployment rate = Natural rate of unemployment - a × (Αctual inflation - Expected inflation),

is the equation of the short-run Phillips curve.

Which of the following would we not expect if government policy moved the economy up along a given short-run Phillips curve?

jackie gets fewer job offers

If the Fed announced a policy to reduce inflation and people found it credible, the short-run Phillips curve would shift

left and the sacrifice ratio would fall.

An adverse supply shock will shift short-run aggregate supply

left, making prices rise.

Changes in the interest rate bring the money market into equilibrium according to

liquidity preference theory, but not classical theory.

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a

liquidity trap.

Which of the following can explain the upward slope of the short-run aggregate supply curve?

nominal wages are slow to adjust to changing economic conditions

The sacrifice ratio is the

number of percentage points annual output falls for each percentage point reduction in inflation.

Refer to Figure 34-1. There is an excess demand for money at an interest rate of

2 percent

If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year, the sacrifice ratio is

5

Refer to Figure 33-4. In the short run, a favorable shift in aggregate supply would move the economy from

A to B

Refer to figure 35-5. In this order, which curve is a long-run Phillips curve and which is a short-run Phillips curve?

A,D

Some economists argue that

All of the above are correct

When they are confronted with an adverse shock to aggregate supply, policymakers face a difficult choice in that

All of the above are correct.

Refer to Figure 35-6. If the economy starts at C and the money supply growth rate decreases, in the short run the economy moves to

B

Refer to Figure 33-10. If the economy starts at point C, stagflation would be consistent with point

D

Other things the same, during recessions taxes tend to

Fall. the fall in taxes stimulates aggregate demand

Suppose that as a result of a stock market boom, consumers become less concerned about saving for retirement and increase their current consumption expenditures. Which of the following would you expect to occur as a result of this change?

In the short run, unemployment will decrease and inflation will rise

In the long run, an increase in the money supply growth rate

None of the above is correct.

Refer to Figure 33-9. Suppose the economy starts where LRAS = AD1 = SRAS1. A decrease in short-run aggregate supply would be consistent with the movement to

P2, Y1.

Which of the following claims concerning the importance of effects that explain the slope of the U.S. aggregate-demand curve is correct?

The exchange-rate effect is relatively small because exports and imports are a small part of real GDP.

Suppose that a drought significantly reduces agricultural production one year. Which of the following would likely occur as a result of the bad weather?

The short-run aggregate supply curve will shift to the left, and the short-run Phillips Curve will shift to the right.

Refer to Figure 33-7. Suppose the economy starts at Y. If aggregate demand increases from AD2 to AD3, then the economy moves to

V

Refer to Figure 33-7. If the economy starts at Y, then a recession occurs at

W

Refer to Figure 33-3. The natural rate of output occurs at

Y2

Refer to Figure 33-7. Suppose the economy starts at Y. If there is a fall in aggregate demand, then the economy moves to

Z in the long run.

The theory of liquidity preference illustrates the principle that

monetary policy can be described either in terms of the money supply or in terms of the interest rate.

Other things the same, an increase in the price level induces people to hold

more money, so they lend less, and the interest rate rises.

Refer to Figure 33-4. If the economy starts at A and moves to D in the short run, the economy

moves to C in the long run.

Refer to Figure 33-4. If the economy is at A and there is a fall in aggregate demand, in the short run the economy

moves to D

Government purchases are said to have a

multiplier effect on aggregate demand.

According to the Phillips curve, unemployment and inflation are positively related in

neither the long run nor the short run.

Monetary Policy in FlosserlandIn Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Flosserland. Suppose Flosserland has had the same inflation rate for a long time. Which, if either, of the following ideas imply that the unemployment rate in Flosserland would be above the natural rate.

neither the long-run Phillips curve nor the Classical dichotomy