Exam 4 macro

A fall in price level increases quantity of goods and services demanded because:

1. Consumers are wealthier: stimulates the demand for consumption goods 2. Interest rates fall: stimulates the demand for investment goods 3. Currency depreciates: stimulates the demand for net exports

List and explain the three reasons the aggregate-demand curve slopes downward.

interest rate effect, wealth effect, exchange rate effect

According to the Austrian School of Economic Thought, why wouldn't socialism work?

According to the Austrian School economist Ludwig von Mises, an economic system that does not utilize money, financial calculation and market pricing will be unable to effectively value capital goods and coordinate production and therefore socialism is impossible because it lacks the necessary information to perform economic calculation in the first place

Macroeconomic impact of trade policy (import quota)

Decrease imports • Increase in net exports • Increase in demand for dollars in the market for foreign-currency exchange • Real exchange rate appreciates, discouraging exports

What is capital flight? When a country experiences capital flight, what is the effect on its interest rate and exchange rate?

Capital flight is a large and sudden movement of funds out of a country. Capital flight causes the interest rate to increase and the exchange rate to depreciate.

A country has a net capital outflow of $200 billion and domestic investment of $150 billion. What is the quantity of loanable funds demanded? a. $350 billion b. $150 billion c. $50 billion d. $200 billion

a. $350 billion

Which of the following would cause stagflation? a. Aggregate supply shifts left. b. Aggregate supply shifts right. c. Aggregate demand shifts left. d. Aggregate demand shifts right.

a. Aggregate supply shifts left.

Which of the following would shift the long-run aggregate supply curve right? a. Both an increase in the capital stock and an increase in the price level b. Neither an increase in the money supply nor an increase in the capital stock c. An increase in the money supply, but not an increase in the capital stock d. An increase in the capital stock, but not an increase in the price level

a. Both an increase in the capital stock and an increase in the price level

In the open-economy macroeconomic model, the market for loanable funds identity can be written as a. S = I + NCO. b. S + I = NCO. c. S = NCO. d. S = I.

a. S = I + NCO.

If imports = 500 billion euros, exports = 700 billion euros, purchases of domestic assets by foreign residents = 600 billion euros, and purchases of foreign assets by domestic residents = 800 billion euros, what is the quantity of euros demanded in the market for foreign-currency exchange? a. 500 billion euros b. 200 billion euros c. 1,100 billion euros d. 600 billion euros

b. 200 billion euros

In 2002, the United States placed higher tariffs on imports of steel. According to the open-economy macroeconomic model this policy reduced imports a. into the United States and made U.S. net exports rise. b. of steel into the United States, but reduced U.S. exports of other goods by an equal amount. c. into the United States and made the net supply of dollars in the foreign exchange market shift right. d. of steel into the United States and increased U.S. exports of other goods by an equal amount.

b. of steel into the United States, but reduced U.S. exports of other goods by an equal amount.

A country has national saving of $50 billion, government expenditures of $30 billion, domestic investment of $10 billion, and net capital outflow of $40 billion. What is its supply of loanable funds? a. $20 billion b. $60 billion c. $50 billion d. $30 billion

c. $50 billion

Other things the same, which of the following would cause the real exchange rate to rise? a. An increase in the real interest rate, but not an increase in foreign demand for U.S. goods and services. b. Neither an increase in the U.S. real interest rate nor an increase in the demand for U.S. goods and services. c. Both an increase in the real interest rate and an increase in foreign demand for U.S. goods and services. d. An increase in foreign demand for U.S. goods and service, but not an increase in the U.S. real interest rate.

c. Both an increase in the real interest rate and an increase in foreign demand for U.S. goods and services.

Aggregate demand includes a. neither the quantity of goods and services the government, households, nor firms want to buy nor the quantity of goods and services customers abroad want to buy. b. the quantity of goods and services households and firms want to buy, but not the quantity of goods and services the government wants to buy. c. the quantity of goods and services the government, households, firms, and customers abroad want to buy. d. the quantity of goods and service the government wants to buy, but not the quantity of goods and services households, firms, or customers abroad want to buy.

c. the quantity of goods and services the government, households, firms, and customers abroad want to buy.

Which of the following would shift the aggregate-demand curve to the left? a. A decline in the stock market b. An increase in taxes c. A decrease in government spending d. All of the above

d. All of the above

Refer to Figure 33-2. A decrease in taxes would move the economy from C to a. D in the short run and the long run. b. B in the short run and the long run. c. D in the short run and C in the long run. d. B in the short run and A in the long run.

d. B in the short run and A in the long run.

In 2009, Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right? a. Neither the increased funding for states nor the tax cuts b. Only the tax cuts c. Only the increased funding for states d. Both the increased funding for states and the tax cuts

d. Both the increased funding for states and the tax cuts

Other things the same, an increase in the U.S. real interest rate induces a. Americans to buy more foreign assets, which increases U.S. net capital outflow. b. foreigners to buy more U.S. assets, which increases U.S. net capital outflow. c. Americans to buy more foreign assets, which reduces U.S. net capital outflow. d. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.

d. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.

Other things the same, in the open-economy macroeconomic model, if the real exchange rate rises, the a. quantity of dollars demanded rises. b. demand for dollars shifts left. c. demand for dollars shifts right. d. quantity of dollars demanded falls.

d. quantity of dollars demanded falls.

Why are budget deficits and trade deficits sometimes called the twin deficits?

Government budget deficits and trade deficits are sometimes called the twin deficits because a government budget deficit often leads to a trade deficit. The government budget deficit leads to reduced national saving, causing the interest rate to increase, and reducing net capital outflow.

What are the "commanding heights" of the economy?

In Marxian economics, the "commanding heights of the economy" are certain strategically important sectors of private industry. Some examples of industries considered to be part of the "commanding heights" include public utilities, natural resources, and sectors relating to foreign and domestic trade.

Explain, in detail, the role of prices in ensuring efficiency in a free market economy.

The price of goods plays a crucial role in determining an efficient distribution of resources in a market system. Price acts as a signal for shortages and surpluses which help firms and consumers respond to changing market conditions. If a good is in shortage - price will tend to rise. Rising prices discourage demand, and encourage firms to try and increase supply. If a good is in surplus - price will tend to fall. Falling price encourage people to buy, and cause firms to try and cut back on supply. Prices help to redistribute resources from goods with little demand to goods and services which people value more. Adam Smith talked about 'the invisible hand' of the market. This 'invisible hand' relies on the fluctuation of prices to shift resources to where it is needed

In an open economy, why is the supply curve for dollars in the foreign-currency exchange market vertical?

Net capital outflow is determined by the real interest rate, not the real exchange rate.

Name two macroeconomic variables that decline when the economy goes into a recession. Name one macroeconomic variable that rises during a recession.

Two macroeconomic variables that decline when the economy goes into a recession are real GDP and investment spending (many other answers are possible). A macroeconomic variable that rises during a recession is the unemployment rate.

List and explain the three theories for why the short-run aggregate-supply curve slopes upward.

Sticky-wage theory: Nominal wages are slow to adjust to changing economic conditions due to long-term wage contracts Sticky-price theory: Prices of some goods and services slow to adjust to changing economic conditions due to menu costs Misperceptions theory: Changes in the overall price level can temporarily mislead suppliers about changes in individual markets

What might shift the aggregate-demand curve to the left? Use the model of aggregate demand and aggregate supply to trace the short-run and long-run effects of such a shift on output and the price level.

The aggregate-supply curve might shift to the left because of a decline in the economy's capital stock, labor supply, or productivity, or an increase in the natural rate of unemployment, all of which shift both the long-run and short-run aggregate-supply curves to the left.

Who were the leading names of the Austrian School of Economic Thought?

The two leading Austrian economists of the 20th century were Ludwig von Mises and Friedrich A. Hayek

Holding everything else constant, when the U.S. dollar appreciates against the Japanese yen, U.S. goods and services become _____to Japanese consumers, and Japanese goods and services become _______to U.S. consumers.

US goods become more expensive relative to Japanese goods and Japanese goods become less expensive relative to US goods.

Everything else equal, when U.S. interest rates increase, the U.S. exchange rate _____, causing U.S. net exports to______.

When US interest rates rise, US assets yield higher returns. •Therefore, demand for US assets goes up, which increases demand for dollars to purchase these assets. •Hence, US exchange rates increases, causing US net exports to

Holding all else constant, when the U.S. price level increases, the quantity of U.S. imports______, and the quantity of U.S. exports______.

When US price level increases, American goods become more expensive relative to foreign goods. This means that the US will be able to export less but import more. US imports increase, US exports decrease.

Holding all else constant, when foreign real GDP decreases, domestic net exports_______, and as a result, domestic aggregate demand shifts______.

When foreign real GDP decreases, the foreign economy becomes poorer. Hence, the foreign economy cannot import as much as it used to from the domestic economy. •Hence, domestic economy's exports fall, meaning Net exports=(Exports-Imports) fall. •Since aggregate demand = C+I+G+Net exports, a fall in Net exports means a fall in aggregate demand. Hence, aggregate demand shifts to the left. decrease; left

Investment is a. a small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP. b. a small part of real GDP, so it accounts for a small share of the fluctuation in real GDP. c. a large part of real GDP, yet it accounts for a small share of the fluctuation in real GDP. d. a large part of real GDP, so it accounts for a large share of the fluctuation in real GDP.

a. a small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.

Refer to Figure 33-3. The shift of the short-run aggregate-supply curve from SRAS1 to SRAS2 a. could be caused by a decrease in the expected price level. b. causes the economy to experience an increase in the unemployment rate. c. causes the economy to experience stagflation. d. could be caused by an outbreak of war in the Middle East.

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

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 a. lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied. b. lower than desired prices, which leads to a decrease in the aggregate quantity of goods and services supplied. c. higher than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied. d. higher than desired prices, which leads to a decrease in the aggregate quantity of goods and services supplied.

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

Refer to Figure 33-3. Starting from point B and assuming that aggregate demand is held constant, in the long run the economy is likely to experience a a. rising price level and a falling level of output, as the economy moves to point A. b. rising price level and a rising level of output, as the economy moves to point C. c. falling price level and a falling level of output, as the economy moves to point C. d. falling price level and a rising level of output, as the economy moves to point A.

a. rising price level and a falling level of output, as the economy moves to point A.

When Mexico suffered from capital flight in 1994, Mexico's net capital outflow a. decreased while net exports increased. b. and net exports increased. c. increased while net exports decreased. d. and net exports decreased.

b. and net exports increased.

A sudden increase in business pessimism shifts the aggregate-________ curve, leading to ________ output. a. supply; higher b. demand; lower c. demand; higher d. supply; lower

b. demand; lower

The effect of an increase in the price level on the aggregate-demand curve is represented by a a. shift to the left of the aggregate-demand curve. b. movement to the left along a given aggregate-demand curve. c. movement to the right along a given aggregate-demand curve. d. shift to the right of the aggregate-demand curve.

b. movement to the left along a given aggregate-demand curve.

eople had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this? a. Sticky price theory but not sticky wage theory b. Neither sticky wage theory nor sticky price theory c. Both sticky price theory and sticky wage theory d. Sticky wage theory but not sticky price theory

c. Both sticky price theory and sticky wage theory

Which of the following would make both the equilibrium real interest rate and the equilibrium quantity of loanable funds decrease? a. The demand for loanable funds shifts right. b. The supply of loanable funds shifts left. c. The demand for loanable funds shifts left. d. The supply of loanable funds shifts right.

c. The demand for loanable funds shifts left.

Refer to Figure 32-3. Which curve is determined by net capital outflow only? a. The demand curve in graph (a). b. The demand curve in graph (c). c. The supply curve in graph (c). d. The supply curve in graph (a)

c. The supply curve in graph (c)

If business leaders in Great Britain become more confident in their economy, they will increase investment, causing the British pound to ________ and pushing the British trade balance toward ________. a. appreciate; surplus b. depreciate; deficit c. appreciate; deficit d. depreciate; surplus

c. appreciate; deficit

If U.S. speculators gained greater confidence in foreign economies so that they wanted to move more of their wealth into foreign countries, the dollar would a. appreciate which would cause aggregate demand to shift right. b. appreciate which would cause aggregate demand to shift left. c. depreciate which would cause aggregate demand to shift right. d. depreciate which would cause aggregate demand to shift left.

c. depreciate which would cause aggregate demand to shift right.

When the economy goes into a recession, real GDP ________ and unemployment ________. a. rises; rises b. falls; falls c. falls; rises d. rises; fallsc.

c. falls; rises

The value of net exports equals the value of a. public saving. b. national saving - net capital outflow. c. national saving - domestic investment. d. national saving.

c. national saving - domestic investment.

One reason the short-run aggregate-supply curve slopes upward is that a higher price level a. raises real wages if nominal wages are sticky. b. raises nominal wages if real wages are sticky. c. reduces real wages if nominal wages are sticky. d. reduces nominal wages if real wages are sticky.

c. reduces real wages if nominal wages are sticky.

If the supply of dollars in the market for foreign-currency exchange shifts left, then the exchange rate a. rises and the quantity of dollars exchanged for foreign currency does not change. b. rises and the quantity of dollars exchanged for foreign currency rises. c. rises and the quantity of dollars exchanged for foreign currency falls. d. falls and the quantity of dollars exchanged for foreign currency does not change

c. rises and the quantity of dollars exchanged for foreign currency falls.

According to classical macroeconomic theory and monetary neutrality, changes in the money supply affect a. the unemployment rate. b. real GDP. c. the GDP deflator. d. none of the above.

c. the GDP deflator.

If the United States were to impose import quotas a. neither the demand for loanable funds nor the demand for dollars in the market for foreign-currency exchange would increase. b. the demand for loanable funds and the demand for dollars in the market for foreign-currency exchange would both increase. c. the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable funds would not. d. the demand for loanable funds would increase, but the demand for dollars in the market for foreign-currency exchange would not.

c. the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable funds would not.

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would shift a. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange right. b. the demand for loanable funds left and shift the supply of dollars in the market for foreign-currency exchange right. c. the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left. d. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange left.

c. the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left.

A change in which of the following would shift the short-run aggregate-supply curve but not the long-run aggregate-supply curve? a. the capital stock b. the state of technology c. the expected price level d. the labor force

c. the expected price level

Refer to Figure 32-4. The initial effect of an increase in the budget deficit in the loanable funds market sown in graph (a) can be illustrated as a move from

d. a to b

Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Scenario 33-2. In the long run, the change in price expectations created by the stock market boom shifts a. long-run aggregate supply left. b. short-run aggregate supply right. c. long-run aggregate supply right. d. short-run aggregate supply left.

d. short-run aggregate supply left.

Refer to Figure 32-3 . National saving is represented by the a. demand curve in graph (a). b. supply curve in graph (c). c. demand curve in graph (c). d. supply curve in graph (a).

d. supply curve in graph (a).

An increase in the expected price level shifts a. neither the long-run aggregate supply curve nor the short-run aggregate supply curve to the left. b. the long-run aggregate supply curve to the left but does not affect the short-run aggregate supply curve. c. both the short-run and long-run aggregate supply curves to the left. d. the short-run aggregate supply curve to the left but does not affect the long-run aggregate supply curve.

d. the short-run aggregate supply curve to the left but does not affect the long-run aggregate supply curve.

The AD curve shifts right when

• Consumption (C) increases• Investment (I) increases • Government purchases (G) increases • Net exports (NX) increases

Higher real interest rate

• Encourages people to save: increases quantity of loanable funds supplied • Discourages investment: decreases quantity of loanable funds demanded • Discourages Americans from buying foreign assets: reduces U.S. net capital outflow • Encourages foreigners to buy U.S. assets: reduces U.S. net capital outflow

If trade surplus, NX > 0

• Exports > Imports: Net sale of goods and services abroad • Americans use the foreign currency to buy foreign assets: Capital is flowing abroad, NCO > 0

If trade deficit, NX < 0

• Imports > Exports: Foreign capital is flowing into U.S., NCO < 0

Government budget deficits (when government spending exceeds government revenue):

• Negative public saving • Reduces national saving • Reduces supply of loanable funds • Increase in interest rate• Reduces net capital outflow