Econ Test 3

Which of the following would occur if the federal government increases its budget deficit?

Net Capital Outflow will tend to decrease. Net exports will decrease.

When the economy is booming and real GDP increases, which of the following tend to happen?

Personal incomes increase. Investment increases.

Suppose the marginal propensity to consume (MPC) is 0.7 and that there is no crowding-out effect. An initial expenditure increase of $300 billion will gradually shift the AD curve to the right by

$1,000 billion ($1 trillion).

When the Fed sets a new lower target for the Federal Funds Rate, it is because the Fed intends to make the

AD curve to shift to the right.

Suppose that the US economy offers wonderful new investment opportunities that appeal to foreign investors. Net Capital Outflow (NCO) will tend to _____ , causing the Real Exchange Rate to ______ and Net Exports (NX) to _______

Decrease Increases Decrease

Consider an economy with complete crowding out. If the government increases spending, this will cause consumption, investment and net exports to _____ by an amount _____ the government's increase in spending, so that the effect of the expansionary fiscal policy is ______ .

Decrease lesser amount to Diminish

The demand for loanable funds in an open economy is composed of which of the following:

Domestic investment and net capital outflow.

Suppose the U.S. government encourages savings by, say, instituting a consumption tax. This will cause domestic interest rates to _______ which would ________ the NCO, making the real exchange rate ______ and causing Net Exports to _____

Drop Increase depreciate increasing

Which of the following statements are true:

Expansionary fiscal policy increased the governments debt, while expansionary monetary policy does not. Fiscal policy creates a bias towards ever bigger government, wile monetary policy does not. Monetary policy is easy to decide upon and can be implemented quickly, while fiscal policy difficult to decide upon and takes a lot of time to implement.

The expenditure multiplier effect is the chain reaction on that occurs when the _____ spends more money, causing households' income to ____ , prompting people to spend more .

Federal Government increase more

Which of the following will cause the supply of dollars in the foreign currency exchange market to shift to the left?

Higher domestic interest rates. Favorable economic conditions in the US attract foreign investment.

Which of the following will occur if the money supply is increased?

Interest rates will drop in the economy Investment expenditure will increase in the economy. Aggregate demand will increase

Which of the following would tend to happen to prices in the long-run as the nation accumulates ever more factors of production, if the Fed were to increase the money supply at the same rate of growth of the economy?

Prices would be stable and there would be no inflation.

According to the interest rate effect, when the price level rises, this cause interest rates in the economy to ______ , motivating firms to borrow and invest ______

Rise Less Decrease

During a recession, government welfare spending automatically _____ and tax payments automatically ______ , both of which act as _____ the economy.

Rises Drop expansionary stabilize

Suppose the economy is currently in short-run equilibrium at point (s) in the diagram above. In such a situation, there will be a ______ in the labor market, causing wages to gradually _______ and eventually leading to a new long-run equilibrium at _________

Surplus Increase Point R

In the long-run, an economy accumulates more human capital, physical capital, technology, natural resources and labor. This increase in factors of production will tend to cause which of the following?

The LRAS will tend to gradually shift to the right The natural rate of output will tend to increase. The economy will tend to experience economic growth: Real GDP will tend to increase.

Which of the following will be true if the US's net capital outflow increases?

The supply of dollars in the foreign currency exchange market will shift to the right. The real exchange rate will depreciate, making US goods more competitive. The demand for dollars in the currency exchange market will shift to the right.

Which of the following are good arguments against a rule based monetary policy?

The way the Fed works today, it is too constrained, and might not be able to act in a crisis. Rules would limit the Fed's ability to act when needed.

In the short-run, the principle of monetary neutrality breaks down , which means that if the Fed changes makes changes in money supply have an effect over production and unemployment.

breaks down have

An increase in government spending will affect aggregate demand ____ while cutting taxes will affect aggregate demand ____ , making spending increases _____ powerful fiscal policy than tax cuts

directly indirectly more

When the government spends more, national savings _____ , and so interest rates _____ , which _____ investment.

decrease rise discourages

Consider an economy in long run equilibrium as in the graph above and suppose the stock market crashes. In the short-run this would cause

deflation and a decrease in Real GDP.

In order to stabilize an economy, policy makers should use _____ during recessions and ______ when the economy is growing unsustainably fast.

expansionary contractionary

When the Fed committed itself to reducing inflation in the early 1980s, economists believing in adaptive expectations worried that this could

help increase output in the economy but only briefly.

The Natural Rate Hypothesis argues that

in the long run, the unemployment rate returns to the natural rate, regardless of inflation

When a country experiences capital flight, its Net Capital Outflow _____ , causing the real exchange rate to _____ , thereby ____ Net Exports.

increases Depreciate increasing

An increase in interest rates ______ the cost of holding money, which makes people demand ______ money.

increases Less

Consider an economy in long run equilibrium as in the graph above when the US engages in a big and expensive arms race with China. In the short-run this would cause

inflation and an increase in Real GDP.

In the diagram above, if the interest rate is 5%, people will be holding ______ money than they want to. Because of this, they will want to ______ the difference, which will cause interest rates to drop.

more lend

The short-run Phillips curve will shift downwards whenever

people come to expect lower inflation

Suppose the NCO increases, shifting the NCO curve to the right. This will cause the demand for loanable funds curve to shift to the right resulting in higher domestic interest rates.

right, higher

Suppose that higher input prices cause production costs to rise. This will cause the ____ to shift to the______

short-run aggregate supply curve left

Movements down and to the right along the short-run Phillips curve occur because whenever the Fed increases the money supply more ____ than before, workers _____ inflation expectations.

slowly continue for a while having the same

The movement in the Aggregate Market diagram above from point (1) to point (2) would be the result of a Fed policy of unexpectedly _____ the rate of growth of money in the economy. In the short-run, this will cause a movement in the Phillips Curve diagram from point (c) to _____ . In the long-run, when expectations have had time to change, we would expect to end up at _____

speeding up point (d) point (f)

If the Fed raises the rate of inflation, this will have the effect of _____ unemployment.

temporarily decreasing

The aggregate demand curve tends to constantly shift to the right because ______ , while the short-run aggregate supply curve tends to constantly shift to the left because ______

the Fed keeps adding ever more money to the economy workers, expecting inflation, demand wage increases

Suppose households become generally optimistic about the economy. This will cause

the aggregate demand curve to shift to the right.

In the short-run _____ while in the long-run _____

there is a tradeoff between inflation and unemployment unemployment will be at its natural rate, no matter what the inflation rate is

One important argument against active discretionary stabilization policy is that

these policies affect AD with a substantial lag and so can end up destabilizing the economy.

The supply of money curve is _____ because the stock of money in the economy is determined by the _______

vertical Federal Reserve bank