Intro Macro Midterm 2
You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the CPI rises from 200 to 204. In this case, the nominal interest rate is _____ percent, and the real interest rate is _____ percent. 1, 5 3, 3 3, 5 5, 1 5, 3
5, 3
In 1999, the CPI was 124.0 In 2000, it was 130.7. What was the rate of inflation over this period? 5.1% 5.4% 6.7% 7.4% 8.7%
5.4%
Which of the following would help explain why the aggregate demand curve slopes downward? -An unexpectedly low price level raises the real wage, which causes firms to hire fewer workers and produce a smaller quantity of goods and services. -A lower price level causes domestic interest rates to rise and the real exchange rate to appreciate, which stimulates spending on net exports. -A higher price level increases real wealth, which stimulates spending on consumption. -A lower price level reduces the interest rate, which encourages greater spending on investment goods. -none of the above.
A lower price level reduces the interest rate, which encourages greater spending on investment goods.
A negative supply shock raises production costs and increases the quantity producers are willing to supply at any given price level. (T/F)
False
An increase in the price of oil is likely to shift the short-run aggregate supply curve to the right. (T/F)
False
Between 1929 and 1933, the U.S. economy moved upward from left to right along its short-run aggregate supply curve. (T/F)
False
Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left. (T/F)
False
Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply. (T/F)
False
If borrowers and lenders agree on a nominal interest rate and inflation turns out to be greater than they had anticipated, lenders will gain at the expense of borrowers. (T/F)
False
If inflation turns out to be higher than people expected, wealth is redistributed to lenders from borrowers. (T/F)
False
In the short run, changes in the money supply changes interest rates but not real output and prices. (T/F)
False
It is impossible for real interest rates to be negative. (T/F)
False
Other things the same, as the price level falls, the exchange rate rises. A rise in the exchange rate leads to a decrease in net exports. (T/F)
False
Stagflation is the combination of inflation and rising aggregate output. (T/F)
False
The dollar amount of the wage paid is called the sticky wage. (T/F)
False
The producer price index (PPI) is constructed to measure the change in price of total production. (T/F)
False
The purchasing power of money increased during the oil crisis of 1979 because the aggregate price level increased but the growth rate of the money supply was faster than the increase in the price level. (T/F)
False
The term business cycle implies that economic fluctuations follow a regular, predictable pattern. (T/F)
False
There is a positive relationship between the quantity of investment spending and the interest rate. (T/F)
False
When the price level increases and people want to hold more money, interest rates decrease. (T/F)
False
Inflation can be measured by all of the following except the -GDP deflator. -Consumer price index. -Producer price index. -Finished goods price index. -All of the above are used to measure inflation.
Finished goods price index
Recessions occur at irregular intervals and are almost impossible to predict with much accuracy. (T/F)
True
The aggregate-demand curve shows the quantity of domestic goods and services that households, firms, the government, and customers abroad want to buy at each price level. (T/F)
True
The logic of the exchange-rate effect begins with a change in the price level changing the interest rate. (T/F)
True
The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left. (T/F)
True
Decreases in the stock market decrease aggregate demand by decreasing which of the following? a. the price level. b. the stock of existing physical capital. c. consumer wealth. d. interest rates. e. tax revenues.
consumer wealth
Decreases in the stock market decrease aggregate demand bydecreasing which of the following? 1 the price level 2 the stock of existing physical capital 3 consumer wealth 4 interest rates 5 tax revenues
consumer wealth
f your wage doubles at the same time as the consumer priceindex goes from 100 to 300, your real wage 1 doubles. 2 falls. 3 increases. 4 stays the same. 5 cannot be determined.
falls
Aggregate demand shifts left if -government purchases increase and shifts left if stock prices rise. -government purchases increase and shifts left if stock prices fall. -government purchases decrease and shifts left if stock prices rise. -government purchases decrease and shifts left if stock prices fall. -none of the above.
government purchases decrease and shifts left if stock prices fall.
Refer to Figure above. At point F, potential output is _____ than actual output and unemployment is _____. less; high less; low higher; high higher; low
higher; high
Most economists believe that classical theory describes the world -in the short run. -in the long run. -in both the short run and the long run. -in neither the short run nor the long run. -none of the above.
in the long run
The long run in macroeconomic analysis is a period: -in which wages and some other prices are sticky. -in which prices and nominal wages are flexible. -longer than one year. -in which the capital stock is held constant.
in which prices and nominal wages are flexible
If the aggregate price level rises, holding everything constant, consumers will: -need more money to purchase the same basket of goods, which will lead to an increase in the demand for money, hence to interest rate increases and a reduction in the quantity of aggregate output demanded via a decrease in investment demand. -find their purchasing power has increased and will purchase more goods and services, leading to an increase in the aggregate output demanded. -demand less aggregate output at all price levels, resulting in a shift right of the AD curve. -need less money to purchase the same basket of goods, which will lead to a decrease in the demand for money, hence to interest rate decreases and an increase in the quantity of aggregate output demanded via an increase in investment demand.
need more money to purchase the same basket of goods, which will lead to an increase in the demand for money, hence to interest rate increases and a reduction in the quantity of aggregate output demanded via a decrease in investment demand
Unexpectedly rising commodity prices lead to a _____ shock. positive supply positive demand negative supply negative demand
negative supply
f your nominal wage doubles at the same time as pricesdouble, your real wage will 1 increase. 2 decrease. 3 not change. 4 double. 5 be impossible to determine.
not change
According to the Figure: Shifts of the AD-AS Curves, and increase in wages in the short run is illustrated by panel: Panel (a) Panel (b) Panel (c) Panel (d) none of the above.
pandel (D)
If government increases income tax rates, the aggregate demand curve is likely to: shift to the right. shift to the left. remain constant. become positively sloped.
shift to the left
f inflation causes people to frequently convert their dollarsinto other assets, the economy experiences what type of cost? 1 price level 2 shoe-leather 3 menu 4 unit-of-account 5 monetary
shoe-leather
Menu costs refers to... -resources used by people to maintain lower money holdings when inflation is high. -resources used to price shop during times of high inflation. -the distortion in incentives created by inflation when taxes do not adjust for inflation. -the cost of more frequent price changes induced by higher inflation. -none of the above.
the const of more frequent price changes induced by higher inflation.
An increase in the aggregate price level will increase: -short-run aggregate supply. -the quantity of aggregate output supplied in the short run. -aggregate demand. -the quantity of aggregate output demanded.
the quantity of aggregate output supplied in the short run
If the price level doubles, -the quantity demanded of money falls by half. -the money supply has been cut by half. -nominal income is unaffected. -the value of money has been cut by half. -none of the above is true.
the value of money has been cut by half
The aggregate demand curve is negatively sloped in part because of the impact of: -the wealth effect on consumption. -the interest rate effect on government spending. -the stickiness of nominal wages and salaries. -the flexibility of nominal wages and salaries.
the wealth effect on consumption
If the CPI is 200 in year 1990 and 300 today, then $600 in 1990 has the same purchasing power as ________ today. $400 $500 $700 $800 $900
$900
Potential real GDP is $10,000 and the current level of real GDP is $9,000. The output gap is therefore _____%. -90 -110 -10 10
-10
If inflation is 8% and the real interest rate is 3%, then the nominal interest rate should be 3%. 5%. 11%. 15%. -5%.
11%
According to the Figure: Inflationary and Recessionary Gaps, in panel (a), and expansionary policy designed to move the economy from Y1 to YP would attempt to shift the: a) LRAS curve to the left. b) SRAS curve to the left. c) aggregate demand curve to the right by increasing aggregate demand. d) aggregate demand curve to the left by increasing aggregate demand. e) none of the above.
AD curve to the left by increasing aggregate demand
Refer to Figure above. If there is a significant increase in government spending, in the short run the _____ curve will shift to the _____. SRAS; left SRAS; right AD; left AD; right
AD; right
Which of the following statements is true if this economy is operating at P1 and Y1? (recessionary gap) I. The level of aggregate output equals potential output. II. It is in short-run macroeconomic equilibrium. III. It is in long-run macroeconomic equilibrium. 1. I only 2 II only 3 III only 4 II and III 5 I and III
II only
The "basket" on which the CPI is based is composed of -Raw materials purchased by firms. -Total current production. -Products purchased by the typical consumer. -Consumer production. -none of the above.
Products purchased by the typical consumer
A change in the money supply changes only nominal variables in the long run. (T/F)
True
A decrease in the money supply causes the interest rate to rise so that investment falls. (T/F)
True
A decrease in the price level makes consumers feel wealthier, so they purchase more. This logic helps explain why the aggregate demand curve slopes downward. (T/F)
True
Although wages, incomes, and interest rates are most often discussed in nominal terms, what matters most are their real values. (T/F)
True
An increase in the price of imported cars is captured by the CPI but not by the GDP deflator. (T/F)
True
High and persistent inflation is caused by excessive growth in the quantity of money in the economy. (T/F)
True
If not all prices adjust instantly to changing economic circumstances, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and these higher-than-desired prices depress sales and induce firms to reduce the quantity of goods and services they produce. (T/F)
True
If workers and firms agree on an increase in wages based on their expectations of inflation and inflation turns out to be less than they expected, workers will gain at the expense of firms. (T/F)
True
In long-run macroeconomic equilibrium, actual aggregate output equals potential output. (T/F)
True
Which of the following will shift the aggregate demand curveto the right? 1 a decrease in wealth 2 pessimistic consumer expectations 3 a decrease in the existing stock of capital 4 contractionary fiscal policy 5 a decrease in the quantity of money
a decrease in the existing stock of capital (room for more investment)
Which of the following events shifts the short run aggregate supply curve to the right? -an increase in government spending on military equipment. -an increase in price expectations. -a drop in oil prices. -a decrease in the money supply. -none of the above.
a drop in oil prices
Which factor will shift the short-run aggregate supply curve to the right? -a widespread decrease in commodity prices -an increase in nominal wages -a decrease in productivity -a decrease in government purchases of goods and services
a widespread decrease in commodity prices
Which of the following will shift the short-run aggregate supply curve? A change in a. profit per unit at any given price level. b. commodity prices. c. nominal wages. d. productivity. e. all of the above.
all of the above
Which of the following will shift the short-run aggregatesupply curve? A change in 1 profit per unit at any given price level. 2 commodity prices. 3 nominal wages. 4 productivity. 5 all of the above.
all of the above
Which of the following causes a positive demand shock? 1 an increase in the existing stock of capital 2 pessimistic consumer expectations 3 a decrease in government spending 4 an increase in taxes 5 an increase in wealth
an increase in wealth
Which of the following causes a positive demand shock? 1 an increase in wealth 2 pessimistic consumer expectations 3 a decrease in government spending 4 an increase in taxes 5 an increase in the existing stock of capital
an increase in wealth
Which of the following cost of inflation does not occur when inflation is constant and predictable? -shoe-leather costs. -menu costs. -arbitrary redistribution of wealth. -cost due to confusion and inconvenience. -none of the above.
arbitrary redistribution of wealth
The horizontal intercept of the long-run aggregate supplycurve is 1 at the origin. 2 negative. 3 at potential output. 4 equal to the vertical intercept. 5 always the same as the horizontal intercept of the short-runaggregate supply curve.
at potential output
the horizontal intercept of the long-run aggregate supply curve is a. at the origin. b. negative. c. at potential output. d. equal to the vertical intercept. e. always the same as the horizontal intercept of the short-run aggregate supply curve.
at potential output
Suppose the economy is in an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to: -lower tax rates. -decrease government purchases. -increase the investment tax credit. -lower the real interest rate. -none of the above.
decrease government purchases
A decrease in the money supply is likely to cause a(n) _____ in borrowing, a(n) _____ interest rates and a(n) _____ in aggregate demand. decrease; increase; decrease decrease; increase; increase increase; decrease; decrease increase; decrease; increase
decrease; increase; decrease
According to the Figure: Short-Run Equilibrium, if the economy is at equilibrium at Y1 and P1(above potential output), the appropriate policy to return the economy to potential output would be a(n): -increase in transfer payments. -increase in government spending. -increase in taxes. -decrease in taxes.
increase in taxes
Refer to Figure above. If the economy is at point X(below potential output), the appropriate monetary policy is to: -increase taxes and decrease government spending. -decrease taxes and increase government spending. -increase the money supply and decrease interest rates. -decrease the money supply and increase interest rates.
increase the money supply and decrease interest rates.
If the Fed decreases the quantity of money in circulation, interest rates _____, investment spending _____, and the aggregate demand curve shifts to the _____. decrease; increases; right decrease; decreases; left increase; decreases; left increase; decreases; right
increase; decrease; left
The aggregate-demand curve shows that a decrease in the price level -decreases the dollar value of goods and services demanded in the economy. -decreases the real value of goods and services demanded in the economy. -increases the dollar value of goods and services demanded in the economy. -increases the real value of goods and services demanded in the economy. -none of the above.
increases the real value of goods and services demanded in the economy
Which of the following statements is true regarding the long run aggregate supply curve? The long run aggregate supply curve -shifts left when the natural rate of unemployment falls. -is vertical because an equal change in all prices and wages leaves output unaffected. -is positively sloped because price expectations and wages tend to be fixed in the long run. -shifts right when the government raises the minimum wage. -none of the above.
is vertical because an equal change in all prices and wages leaves output unaffected.
A simultaneous rise in productivity and nominal wages would shift the short-run aggregate supply curve to the: -right if the rise in nominal wages is larger than the rise in productivity. -right if the cost per unit of output rises. -left if the cost per unit of output falls. -left if the rise in nominal wages is larger than the rise in productivity.
left if the rise in nominal wages is larger than the ride in productivity
When inflation rises, people will desire to hold -less money and will go to the bank less frequently. -less money and will go to the bank more frequently. -more money and will go to the bank less frequently. -more money and will go to the bank more frequently. -none of the above.
less money and will go to the bank more frequently
During the Great Depression, the United States experienced a the short run aggregate supply curve; during the 1970s oil crisis, the United states experiences a in the short run aggregate supply curve. -movement down along; a leftward shift -movement up along; a leftward shift -movement up along; a rightward shift -movement down along; a rightward shift -none of the above.
movement down along; a leftward shift
Suppose the economy is initially in long run equilibrium. Then suppose there is a reduction in military spending due to the end of the Cold War. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? -Prices rise; output rises. -Prices rise; output falls. -Prices fall; output falls. -Prices fall; output rises. -No change will occur.
prices fall; output falls
A decrease in which of the following will cause the short-runaggregate supply curve to shift to the left? 1 commodity prices 2 the cost of health care insurance premiums paid by employers 3 nominal wages 4 productivity 5 the use of cost-of-living allowances in labor contracts
productivity
Refer to Figure above. The level of income associated with Y1 in panel (b):(is above Yp) -is equal to potential output. -reveals an inflationary gap compared with Yp. -is a long-run equilibrium. -is caused by flexible wages and prices.
reveals an inflationary gap compared with Yp
If there is an inflationary gap, nominal wages _____, and the _____ curve shifts _____ until the economy reaches long-run equilibrium.an increase in government spending on military equipment. fall; aggregate demand; left rise; aggregate demand; right fall; short-run aggregate supply; right rise; short-run aggregate supply; left
rise; short-run aggregate supply; left
As the price level rises, the exchange rate a. falls, so exports rise and imports fall. b. falls, so exports fall and imports rise. c. rises, so exports rise and imports fall. d. rises, so exports fall and imports rise. e. none of the above.
rises, so exports fall and imports rise
In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to -shift short run aggregate supply to the right. -shift short run aggregate supply to the left. -shift aggregate demand to the right. -shift aggregate demand to the left. -shift long run aggregate supply to the left.
shift aggregate demand to the right
Which of the following is not a reason why the aggregatedemand curve slopes downward? 1 the wealth effect 2 the interest-rate effect 3 the classical dichotomy/monetary neutrality effects 4 the exchange-rate effect 5 all of the above
the classical dichotomy/monetary neutrality effects
Nominal wages are sticky because: -wages are slow to rise when there are labor shortages and slow to fall even when the level of unemployment is significant. -wages remain fixed in the long run, increasing the profitability of the firms. -wages are slow to fall when there are labor shortages and slow to rise even when the level of unemployment is significant. -in the long run all wages are adjusted for inflation.
wages are slow to rise when there are labor shortages and slow to fall even when the level of unemployment is significant.
When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This, the _____ effect, is a reason the _____ curve slopes _____. interest rate; aggregate demand; downward wealth; aggregate demand; downward interest rate; investment demand; downward wealth; short-run aggregate supply; upward
wealth; aggregate demand; downward