Macro Final
factors that cause a shift in the LM curve
Change in money supply or money demanded
Demand-pull inflation
Inflation resulting from shocks to aggregate demand.
Sticky-price model
The model of aggregate supply emphasizing the slow adjustment of the prices of goods and services.
According to the IS - LM model, if the economy is in a recession, then the price level will _____, bringing the economy back to the natural rate.
adjust in the long run
The _____ postulates that the redistribution of wealth from debtors to creditors caused by unexpected deflation will decrease spending on goods and services because creditors have lower spending propensities than debtors.
debt-deflation theory
A difference between the economic long run and the short run is that:
demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:
does not change production
A decrease in the price level, holding nominal money supply constant, will shift the LM curve:
downward and to the right.
Shocks to IS curve
exogenous changes in the demand for goods and services shifts the AD curve changes in government spending changes in taxes shocks to investment shocks to consumption
How expansionary fiscal policy (FP) affects IS curve
expansionary fiscal policy shifts IS curve right, raises income, and shifts AD curve right
How expansionary monetary policy (MP) affects LM curve
expansionary monetary policy shifts LM curve right, raises income and shifts AD curve right
inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the
expected price level
The Pigou effect suggests that:
falling prices expand income.
Suppose that the Federal Reserve decreases the money supply in response to economic stimulus package that the president has signed into law. Together, both policies will cause equilibrium interest rates to:
increase
A decrease in the money supply causes a ___ shift in the LM curve
leftward
According to the text, the increased propensity of the U.S. Congress to allow budget deficits _____ the chances of another Great Depression to occur in the future.
may decrease
If the interest rate is above the equilibrium value, the:
supply of real balances exceeds the demand.
If the price level falls as the economy moves from its short-run equilibrium to the long-run equilibrium, then:
the LM curve shifts to the right, but the IS curve does not shift.
According to the text, the Federal Reserve's current monetary policy strategy is to target:
the desired interest rate, and allow the LM curve to fluctuate to determine the equilibrium interest rates in the economy.
In recent years, the Federal Reserve is MOST likely to use _____ as its short-term policy instrument.
the federal funds rate
_____ mortgages are made to borrowers with too little income or too few assets to qualify for a standard mortgage.
Subprime
A decrease in taxes will cause the _____ curve to shift _____, and the equilibrium gross domestic product to increase.
IS; right
The level of aggregate demand determines the equilibrium income in the _____ model.
Keynesian
A decrease in the money supply will cause the _____ curve to shift to the _____, and the equilibrium gross domestic product to decrease.
LM; left
LM curve
M/P = L(r, Y) This implies that r and Y are positively related: at higher levels of r, Y must be higher in order for money demand to equal money supply.
Imperfect-information model
The model of aggregate supply emphasizing that individuals do not always know the overall price level because they cannot observe the prices of all goods and services in the economy.
Sacrifice ratio
The number of percentage points of a year's real GDP that must be forgone to reduce inflation by 1 percentage point.
IS curve
Y = C(Y - T) + I(r) + G This implies that Y and r are negatively correlated: if r is high, planned investment is low, so Y is low.
The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run.
below
The IS and LM curves together generally determine:
both income and the interest rate.
In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.
falls; falls
The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate fell by 1 percentage point over a year, Okun's law predicts that real GDP would:
increase by 5 percent.
According to the text, the slowdown in the U.S. economy in 2001 can be explained by:
negative shocks to the IS curve.
Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.
negatively; positively
Does an increase in the price level cause the IS curve to shift?
no, never
The percentage of a year's real GDP that much be foregone to reduce inflation by 1 percentage point is called the
sacrifice ratio
Suppose that the Federal Reserve announces a higher target interest rate. To implement this higher target, the Federal Reserve will instruct Federal Reserve bond traders to _____ in order to shift the LM curve to the _____.
sell bonds in the open market; left
According to the text, nominal interest rates can almost never be less than zero because if nominal interest rates were negative, then:
an individual would never choose to make a loan.
The debt-deflation theory explains the ways in which income redistribution from _____ overall spending in the economy.
debtors to creditors will decrease
According to the debt-deflation theory, an unexpected fall in the price level transfers wealth from _____ aggregate spending.
debtors to creditors, and decreases
According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ΔT will:
decrease equilibrium income by (ΔT)(MPC)/(1 - MPC).
If the LM curve is vertical, then an increase in taxes MOST likely will:
decrease the interest rate, and leave income unchanged.
If the Federal Reserve decreases the money supply when there is a tax increase, then equilibrium income MOST likely will _____, and the equilibrium interest rate will _____.
decrease; increase, or decrease, or remain constant
The Pigou effect postulates that as prices _____, consumers spend _____ money.
decrease; more
Along an aggregate supply curve, if the level of output is less than the natural level of output, then the expected price level is
greater
According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the stock-price rule, the _____ the _______ in output in response to an unexpected price increase
greater; increase
Changes in the level of government purchases _____ the aggregate supply curve.
have no effect on
The aggregate supply curve is _____ in the short run, and _____ in the long run.
horizontal; vertical
The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases.
income
In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.
increase, but by less than 100
Suppose that the U.S. government increases its purchases while the Federal Reserve decreases the money supply. According to the IS - LM model, these policies together will cause the equilibrium interest rates to _____, and the equilibrium income to _____.
increase; increase, or decrease or remain constant
In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:
increases by more than 250.
In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.
increases; increases
A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:
interest rate.
In the context of the IS - LM model, the U.S. recession of 2001 is best characterized as caused by a _____ curve.
leftward shift in the IS
The _____ hypothesis places primary blame for the Great Depression on the Federal Reserve for allowing the money supply to decrease.
money
When the Federal Reserve was conducting quantitative easing after the recession of 2008, it was buying all of the following EXCEPT: corporate debt. foreign government bonds at discounted prices. mortgages. U.S. government bonds.
mortgages.
In the classical model, the equilibrium income in the economy _____ the natural rate.
must be exactly
The intersection of the IS and the LM curve determines the equilibrium:
national income and interest rate.
The IS-LM model is generally used:
only in the short run.
For the purposes of the Keynesian cross, planned expenditure consists of:
planned investment, government spending, and consumption expenditures.
In the short run an adverse supply shock causes:
prices to rise and output to fall.
money supply held constant, an increase in government spending causes a ___ shift in the LS curve
rightward
Suppose that the economy is at its long-run equilibrium and the government increases its purchases. the price level will _____ and the LM curve will shift _____.
rise; left
Suppose income is temporarily above the natural rate level. In the IS - LM model, long-run equilibrium is achieved when the price level:
rises, and the LM curve shifts leftward.
If the Federal Reserve targets a lower interest rate, then it may instruct Federal Reserve bond traders to buy bonds in the open market, causing the LM curve to:
shift to the right.
AD curve
shows relation between P and the ISLM models eq Y. Negative slope
The aggregate demand curve _____ because a higher price level will cause the real money supply to decrease, the interest rates to increase, and investment to decrease.
slopes downward
A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production.
slowdown; slowdown
According to the text, if the economy is undergoing more IS shocks than LM shocks, then the Federal Reserve is MOST likely to use policies that target:
the money supply rather than the interest rate.
The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:
the money supply.
The IS-LM model takes ______ as exogenous.
the price level
Suppose that a money demand shock hits the economy. According to the classical approach to determining the equilibrium income, the variable that will automatically adjust to move the economy back to equilibrium is:
the price level.
In the Keynesian model, _____ is fixed; in the classical model, _____ is fixed.
the price level; output
According to the Phillips curve, other things being equal inflation depends positively on
the unemployment rate
A higher price level will shift the LM curve:
to the left.
An example of an exogenous shock to the LM curve is:
tougher restrictions on credit card approvals that increase the demand for cash.
An increase in the price level will shift the LM curve:
upward.
Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.
weaker; stronger
The Federal Reserve Bank engaged in "quantitative easing" in _____ because it hoped this would lead to economic expansion.
2010
Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:
260
ISLM components
A downward sloping IS curve representing pairs of Y and r for which the goods market is in equilibrium. An upward sloping LM curve representing pairs of Y and r for which the money market is in equilibrium.
_____ a situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound.
A liquidity trap involves
Phillips curve
A negative relationship between inflation and unemployment; in its modern form, a relationship among inflation, cyclical unemployment, expected inflation, and supply shocks, derived from the short-run aggregate supply curve.
ISLM derivation, definition and slope
A theory of aggregate demand
Adaptive expectations
An approach that assumes that people form their expectation of a variable based on recently observed values of the variable.
Shocks to LM curve
Exogenous changes in the demand for money shifts the AD curve changes in the money supply shocks to money demand
In the Keynesian-cross model, actual expenditures equal:
GDP
Which BEST describes the differences between the Keynesian and the classical model with regard to the determination of equilibrium income?
In the Keynesian model, income is determined by aggregate demand; in the classical model, income is determined by long-run aggregate supply curve
Cost-push inflation
Inflation resulting from shocks to aggregate supply.
The "money hypothesis" explanation for the Great Depression argues that the Depression was caused by:
a decrease in the money supply.
The Federal Reserve's short-term policy instrument, the federal funds rate, is the interest rate that the:
banks charge other banks.
In the Keynesian model, the equilibrium income in the economy _____ the natural rate.
can be above, the same as, or below
The _____ model BEST depicts the behavior of the economy in the long run.
classical
The aggregate demand curve tells us possible:
combinations of P and Y for a given value of M.
If policymakers are interested in decreasing the interest rate in the economy, then they must conduct _____ fiscal policy,_____ monetary policy, or both.
contractionary; expansionary
