Intermediate macro test 3

c

A Nominal interest rate; real interest rate B Risk premium; discount rate C ex ante real interest rate; ex post real interest rate D Bond yield; real interest rate E ex ante nominal interest rate; nominal interest rate

a

A Policymakers aggressively increase the interest rate to combat inflation B Policymakers only slightly increase the interest rate to combat inflation C Policymakers only slightly decrease the interest rate to combat inflation D Policymakers aggressively decrease the interest rate to combat inflation

c

A The percentage deviation of potential output from current output B The difference between current output and potential output C The percentage deviation of current output from potential output D The difference between potential output and current output E The deviation of current output from potential output

a

A pi t B m-hat C None of these answers are correct. D b-hat E pi-hat

e

Consider Figure 11.3. If investment is interest rate sensitive, but not infinitely interest rate sensitive, the economy would be best characterized by: A IS 4 B IS 3 C Not enough information is given D IS 2 E IS 1

e

Consider Figure 11.5. If the economy initially is at its long-run equilibrium and the real interest rate decreases, the economy: A Moves from point d to point a B Moves from point c to point d C Moves from point d to point b D Moves from point b to point a E Moves from point d to point c Awarded Points 1

The U.S. government and the Federal Reserve desire to keep actual GDP as high as possible in order to reduce unemployment and increase per capita income. A True B False

b

The economy begins at its long-run values and the parameter b-hat increases, short-run output will increase A True B False

b

The mission of the Federal Reserve is to A foster maximum sustainable growth in output and employment B All of these choices are correct C promote a stable and efficient financial system D preserve price stability

b

The rate of inflation during the past year was 3 percent. If firms expect higher demand for their products, you expect inflation during the coming year to be ____________ during the past year because ____________. A Higher; firms are producing less than potential B Higher; firms are producing more than potential C Lower; firms are producing less than potential D Lower; firms are producing more than potential

b

The short-run model determines A Potential output and current inflation. B Current output and current inflation. C Potential output and current output. D Current output and long-run inflation.

b

Unlike fiscal policy, which often takes months to have substantial effects on the economy, the effect on economic activity of monetary policy is instantaneous. A True B False

b

Which of the following explains why an increase in the interest rate reduces short-run output? A The cost of borrowing increases for households B All of these choices are correct C The cost of borrowing increases for firms D Firms reduce business investment

b

f the economy is in a period of deflation, the Phillips curve implies that actual output is below potential output. A True B False

b

Firms alter their prices based on: A the previous period's aggregate supply B expected inflation C demand conditions D expected inflation and demand conditions E expected inflation and supply conditions

d

Generally speaking, the rate of inflation ________ during a recession. A Falls, then rises B Stays the same C Rises D Falls E None of these answers are correct.

d

If the central bank reduces the money supply, the: A nominal interest rate rises and individuals hold more money B unemployment rate rises and individuals hold less money C inflation rate rises and individuals hold more money D nominal interest rate rises and individuals hold less money E nominal interest rate falls and individuals hold no money

d

The Federal Reserve will lower short-run output by A Increasing the money supply B Lowering the real interest rate C Lowering the nominal interest rate D Decreasing the money supply

d

The aggregate demand curve slopes downward because A The price-setting behavior of firms is embodied in the Phillips curve B According to the monetary policy rule, the response of policymakers is to decrease the interest rate if inflation is high C Individual microeconomic demand curves slope downward D According to the monetary policy rule, the response of policymakers is to increase the interest rate if inflation is high

d

c

A 0.5 percent B 1 percent C 0.125 percent D 0.25 percent

b

A 2.25 percent B 3.25 percent C 4.25 percent D 1.25 percent

a

A 3 percent B 0.5 percent C 4.5 percent D 4 percent E 1 percent

b

A 3.25 percent B 2.25 percent C 1.75 percent D 2.50 percent E 3.50 percent

c

A Boom; −4.7 percent B Boom; 4.7 percent C Recession; −4.7 percent D Recession; −5 percent E Boom; 5 percent

b

A Country 1 will move from its long-run equilibrium to −1 percent below its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential B Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential C Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to −0.5 percent below its potential D neither country will move away from its long-run equilibrium E Country 1 will move from 0.5 percent below its potential to its long-run equilibrium and Country 2 will move from its long-run equilibrium to 2 percent above its potential

a

A Investment is extremely sensitive to real interest rate changes B Investment is somewhat sensitive to changes in the marginal product of capital C Investment is not very sensitive to real interest rate changes D Investment is sensitive to tax rate changes E The output gap is zero

d

A −0.15; has experienced a negative aggregate demand shock B 0.05; has experienced a positive aggregate demand shock C 1.05; has experienced a positive aggregate demand shock D 0; is in its long-run equilibrium E 0.45; has experienced a positive aggregate demand shock

e

Consider Figure 11.3. If investment is interest rate insensitive, the economy would be characterized by: A Not enough information is given B IS 4 C IS 1 D IS 2 E IS 3

e

Consider Figure 12.7. You are chairman of the Federal Reserve in 1975. You believe potential output follows the dotted line after 1973, but in actuality, it follows the line denoted "True potential output." The current state of the economy is given by the curve "Actual output." Given the information in the figure, you ________, because you believe the economy is in a ________, but your advice instead ________. A Not enough information is given B Raise interest rates; recession; accelerates inflation C Keep interest rates the same; boom; accelerates inflation D Lower interest rates; boom; increases unemployment E Lower interest rates; recession; accelerates inflation

b

Consider Figure 13.1. Holding inflation constant, if the interest rate increases, the economy would move from point e to point: A a B g C d D b E c

e

Consider Figure 13.1. Holding inflation constant, if there is a negative aggregate demand shock, the economy would move from point e to point: A d B b C a D c E g

b

Consider Figure 13.3. If there is a positive inflation shock, ceteris paribus, the economy would move from point ________ to point ________. A Not enough information is given B c; e C c; b D b; e E c; d

c

Consider Figure 13.3. Over the past few years the "Arab Spring" has caused radical political and economic changes, particularly Syria, Egypt, and Libya. These events can be characterized in the aggregate supply curve as a movement from point ________ to point ________. A a; d B e; b C d; a D c; a E c; b

b

Consider Figure 9.1. The dashed line is potential output and the solid line is current output; therefore: A The economy is in neither a recession nor a boom in areas a and b B Area a represents an economic boom, and area b is a recession C Areas a and b are expansions D Area b represents an economic boom, and area a is a recession E Areas a and b are booms

c

Consider the economy presented in Figure 12.2. If the stock market drops sharply, there is a loss in consumer and investor confidence and the economy moves from ________. To prevent a ________, the Fed ________, and the economy moves from ________. A Point a to d; recession; lowers interest rates; point d to c B Point a to d; recession; lowers interest rates; point d to b C Point d to c; recession; lowers interest rates; point c to b D Not enough information is given E Point c to b; bubble; raises interest rates; point b to c

d

In the short run, because financial markets do not respond immediately to interest rate changes: A Investment is less volatile than output B The marginal product of capital never deviates to the real interest rate C Prices are very volatile D The marginal product of capital deviates from the real interest rate E The marginal product of capital always is greater than the real interest rate

Taxes, oil price changes, government spending, interest rate changes, new technologies, and disasters are examples of: A Monetary policy B Short-term economic shocks C Fiscal policy D Political unrest E Long-term economic shocks

b

d

Which of the following best describes movement along the AD curve? A A change in monetary policy B A change in the inflation rate causes the federal government to reduce discretionary spending C A sudden increase in the tax rate D A change in the inflation rate causes the central bank to change interest rates, thereby causing a corresponding proportional change in investment E A change in unemployment causes the federal government to reduce discretionary spending

According to Okun's law, if the Federal Reserve wants to reduce unemployment, it should ________ interest rates, which would ________ output. A Reduce; increase B Increase; increase C Reduce; reduce D Not change; increase E Reduce; not change

a

According to the Phillips curve presented in the text, a negative macroeconomic shock: A Decreases the rate of inflation B Has a negative effect on the unemployment rate C Has a positive effect on the unemployment rate D Has no effect on the rate of inflation E Increases the rate of inflation

a

An implication of adaptive expectations and sticky inflation is that the Federal Reserve must push output below potential to lower inflation. A True B False

a

If an economy has actual output equal to potential output, then the aggregate demand shock equals 0. A True B False

a

In the IS curve, consumption is represented as a constant fraction of _____________, and, therefore, is _____________ than current output. A Potential output; smoother B Short-run fluctuations; smoother C Short-run fluctuations; more volatile D The interest rate differential; smoother E Potential output; more volatile

a

Potential output is $100 in 2010. Actual output is $110 in 2010. Actual output in 2009 was $105. Short-run output for 2010 is A 10 percent B $10 C $5 D 5 percent

a

Suppose an economy exhibits a large unexpected decrease in productivity growth that lasts for a decade; however, monetary policymakers are slow to recognize that the change is to potential, not current, output, and they interpret the decrease in output as a recession that leads current to fall below potential output. In this scenario, policymakers believe that ____________ pressures are building and incorrectly respond by ______________ interest rates, sending the economy into a(n) _____________ gap. A Recessionary; reducing; inflationary B Inflationary; reducing; inflationary C Inflationary; raising; inflationary D Not enough information is given E Inflationary; raising; recessionary

a

Suppose the Federal Reserve decreases interest rates from 4 percent to 3 percent, which leads to an increase in short-run output of 1.5 percent. If there are no other shocks to the economy, and the resulting change in inflation is +0.375 percent, what is the value of the parameter "v-hat"? A 0.25 B 0.66 C 1.5 D 4

a

Taken together, the Phillips curve and Okun's law imply there is a short-term ________ relationshipbetween ________ and inflation. A Negative; unemployment B Negative; interest rates C Not enough information is given D Positive; unemployment E Positive; interest rates

a

The AS curve slopes upward because firms raise their prices by more than usual when they are faced with actual output above potential output. A True B False

a

The Great Depression stimulated ________ to write ________, which is considered to be the birth of modern macroeconomics. A John Maynard Keyes; The General Theory of Employment, Interest, and Money B John Hicks; Value and Capital C Karl Marx; Das Kapital D David Ricardo; Principles of Political Economy and Taxation E Milton Friedman and Anna J. Schwartz; A Monetary History of the United States, 1867-1960

a

The long-run model determines _____________ and ______________, while the short-run model determines _____________ and ______________. A Potential output; long-run inflation; current output; current inflation B Potential output; unemployment; current output; long-run inflation C Potential output; unemployment; unemployment; current inflation D Current output; unemployment; potential output; current inflation E Current output; long-run inflation; unemployment; current inflation

a

The simple monetary policy rule we have specified in the text implicitly responds to changes in output. A True B False

a

All economies are open. A recession in Europe decreases demand for U.S. goods. The U.S. economy will have A Initially higher short-run output and inflation, but lower short-run output and inflation in the long run B Initially lower inflation and short-run output, but in the long run will have the same long-run steady state as before the shock C Initially lower short-run output and inflation, but higher short-run output and inflation in the long run D Initially higher inflation and short-run output, but in the long run will have the same long-run steady state as before the shock

b

An economy starts at its long-run values. A recession will then cause A The inflation rate to decrease, because firms seek to sell less B The inflation rate to decrease, because firms seek to sell more C The inflation rate to increase, because firms seek to sell less D The inflation rate to increase, because firms seek to sell more

b

An increase in the aggregate demand parameter for imports will shift the IS curve in the same direction as an increase in the aggregate demand parameter for consumption. A True B False

b

During a recession, the inflation rate increases. A True B False

b

Economists today believe that the Phillips curve demonstrates that the level of inflation is related to economic activity and that there is a permanent trade-off between inflation and economic performance. A True B False

b

If the inflation rate is high and the Federal Reserve seeks to best lower the inflation rate, the Federal Reserve should A Lower interest rates B Raise interest rates C Do nothing D Raise interest rates and request Congress run larger deficits

b

If the marginal product of capital decreases, what happens to the IS curve? A There is movement along the curve B It shifts inward C It shifts outward D It remains the same

b

In a weakening economy, you might expect producers to: A Raise wages to hire more productive workers B Lower prices to increase quantity demand for their output C Increase prices to increase quantity demand for their output D Lower wages to increase quantity demand for their output E Lower prices to reduce quantity demand for their output

b

In the LC/PI model, do individuals prefer a smooth consumption path (corresponding to their permanent income) to a fluctuating consumption path (corresponding to their actual income)? A Yes, they do, because the utility of every additional unit of consumption is larger. B Yes, they do, because the utility of every additional unit of consumption is smaller. C No, they don't, because the utility of every additional unit of consumption is smaller. D No, they are indifferent because the utility of every additional unit of consumption does not change. E No, they don't, because the utility of every additional unit of consumption is larger.

b

In the short-run model, potential output is endogenously determined. A True B False

b

Price-setting behaviors become more sensitive to demand conditions. This results in A The IS curve becoming steeper B A smaller recession occurring to change the inflation rate by a given amount C The IS curve becoming flatter D A larger recession occurring to change the inflation rate by a given amount

b

Suppose the United States is currently at its trend level of potential output. All economies are open. Europe enters into a recession. Short-run output in the United States will be A Unchanged because European fluctuations do not impact the United States B Negative C Positive D Uncertain

b

Suppose the government increases discretionary spending. Ricardian equivalence implies that consumption will be higher today if the government announces that taxes will be increased next year as opposed to if it announces taxes will be increased in two years. A True B False

b

If the aggregate demand parameter increases and the central bank wishes to stabilize output at potential, it should A Buy government bonds B Lower the nominal interest rate C Raise the nominal interest rate D expand the money supply

c

If the change in inflation is positive, we know that A The economy is in a recession, and actual unemployment is greater than the natural rate of unemployment. B The economy is in a recession, and actual unemployment is less than the natural rate of unemployment. C The economy is in a boom, and actual unemployment is less than the natural rate of unemployment. D The economy is in a boom, and actual unemployment is greater than the natural rate of unemployment.

c

In the AS/AD model, an economy is in its steady state if A The endogenous variables are growing at a positive constant rate, and there are shocks to the economy B The endogenous variables are growing at a positive constant rate, and there are no shocks to the economy C All the endogenous variables are constant, and there are no shocks to the economy D The endogenous variables are constant, and there are shocks to the economy

c

Suppose an economy is hit with a positive oil price shock in one period that raises the level of oil prices permanently. If adaptive expectations hold, this will A Shift the AS curve up permanently B Shift the AS curve down permanently C Shift the AS curve up initially and gradually shift the AS curve back to original position over time D Shift the AS curve up initially and then shift the AS curve back to original position in the following period

c

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 7 percent, according to Okun's law, Y(squiggle) is: A −2 percent B 2 percent C −4 percent D Not enough information is given E 4 percent

c

Suppose that last year the investment parameter, a-hat, was equal to 0.12 but this year it fell to 0.1. This change can be explained by A Firms being optimistic about the future and willing to invest more at any level of the interest rate B A decrease in the marginal product of capital C Firms being pessimistic about the future and willing to invest less at any level of the interest rate D A decrease in the real interest rate

c

The natural rate of unemployment is 5 percent. Cyclical unemployment is 2 percent. The level of short-run output is A 6 percent B -6 percent C -4 percent D 4 percent

c

The unemployment rate is 6 percent and the natural rate of unemployment is 3 percent. If potential output is $100, what is actual output? A $106 B $90 C $94 D $100

c

When a central bank targets the money supply, it adopts a policy to adjust ________ to accommodate ________. A Interest rates; money supply B Interest rates; tax changes C Interest rates; money demand shocks D Money demand; government debt E Money demand; money supply shocks

c

Which of the following is not an example of an automatic stabilizer? A Medicaid B Welfare transfer payments C Discretionary spending on highways D Unemployment insurance

c

Which of the following is the mission of the Federal Reserve Bank? i. Preserve price stability ii. Foster economic growth and employment iii. Ensure taxes are fair A i and iii B ii only C i and ii D iii only E i only

c

An advantage of explicit inflation targeting is that A It helps make it easier for the central bank to stabilize output B It makes firms less tempted to deviate from standard price-setting behavior C It helps to anchor inflation expectations D All of these choices are correct

d

According to the life-cycle and permanent-income hypotheses, if future income rises permanently, current consumption: A Changes in proportion to interest rate changes B Does not change C Falls D Not enough information is given E Rises

e

An increase in the interest rate by the Federal Reserve will affect only real interest rates because: A Contracts apply only in the very short run B we are in the long run C prices are flexible in the short and long runs D of the quantity theory of money E Inflation is sticky in the short run

e

Defining "u" as the unemployment rate, and "u-hat" as the natural rate of unemployment, we can write Okun'su law as the following equation: A y= -2 x u B y= 2 x (u- "u-hat") C y= -2 x (u x u-hat) D y= -2 x(u-hat x u) E y= -2 x ( u- "u-hat")

e

If Y(squiggle)t is greater than 0, the macro economy is: A Not enough information is given B At its potential level of output C In a recession D None of these answers are correct E In an expansion

e

If the change in Pi is less than 0, the macroeconomy is: A In an expansion B None of these answers are correct C At its potential level of output D Not enough information is givenn E In a recession

e

Policy is conducted by discretion if policymakers: A Announce in advance how policy will respond to various situations and commit themselves to following through on this announcement B Maintain a constant growth rate of the money supply without making their decision public C Announce and achieve a balanced government budget D Announce and maintain a constant interest rate E Size up the economy and choose whatever policy seems appropriate at the timea

e

Recent energy legislation that dictates increased use of ethanol as automobile fuel might ________ overall inflation because corn prices ________, affecting all downstream industries that use corn ________. A Increase; will rise; as a final good B Not enough information is given C Decrease; will rise; as a final good D Not change; will stay constant; as a final good E Increase; will rise; as an input

e

The IS curve describes short-run movements in an economy via which of the following? A ↑Interest rate ⇒ ↑Investment ⇒ ↑Output B ↑Interest rate ⇒ ↑Investment ⇒ ↓Output C ↑Tax rate ⇒ ↓Consumption ⇒ ↓Output D ↑Tax rate ⇒ ↑Governmentexpenditure ⇒ ↑Output E ↑Interestrate ⇒ ↓Investment ⇒ ↓Output

e

When economists say "sticky inflation," they mean: A Taxes do not react to changes in prices B Inflation does not react directly to changes in fiscal policy C Inflation never responds to monetary policy D Inflation adjusts quickly E Inflation does not immediately react to changes in monetary policy

e