Macro Homework Finals Study Guide

(Ch. 12) 17. Refer to Figure 35-4: If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to ___________.

7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.

(Ch 10) 8. 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 _______.

depreciate which would cause aggregate demand to shift right.

(Ch. 12) 14. In 1980, the combination of inflation and unemployment the U.S. was experiencing _________________.

followed two supply shocks that were triggered by the Organization of Petroleum Exporting Countries.

(Ch 10) 17. Recessions occur

irregularly

(Ch 10) 19. One reason the short-run aggregate-supply curve slopes upward is that a higher price level _______.

reduces real wages if nominal wages are sticky.

(Ch. 11) 10. If the Federal Reserve decided to raise interest rates, it could ________.

sell bonds to lower the money supply.

(Ch. 11) 6. Changes in the interest rate __________.

shift aggregate demand if they are caused by fiscal or monetary, but not if they are caused by changes in the price level.

(Ch. 12) 12. If there is an increase in the price of oil, then __________.

unemployment rises. If the central bank tries to counter this increase, inflation rises.

(Ch. 11) 2. According to liquidity preference theory, the money-supply curve is ________.

vertical

(Ch 10) 11. Which of the following shifts the long-run aggregate supply curve to the left?

An increase in the price of imported natural resources and an increase in trade restrictions.

(Ch. 12) 18. Refer to Figure 35-5: Which of the following events could explain the shift of the aggregate-supply curve from AS1 to AS2?

An increase in the world price of oil

(Ch 10) 14. People 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 that employs. What could explain this?

Both sticky price theory and sticky wage theory

(Ch 10) 7. 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?

Both the increased funding for states and the tax cuts.

(Ch. 11) 12. Initially, the economy is in the long-run equilibrium. Aggregate-demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always 1/3 as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

By $30 Billion

(Ch. 12) 16. Refer to Figure 35-3: The inflation rate is greatest at ___________.

F (highest point vertically on the graph)

(Ch. 11) 20. Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Increase Taxes.

(Ch 10) 2. In 2008, the United States was in recession. Which of the following things would you not expect to have happened?

Increased real GDP

(Ch 10) 9. Scenario 33-1: Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they declare to purchase more U.S. assets. Refer to Scenario 33-1: What would happen to the dollar?

It would appreciate in foreign exchange markets making the U.S. goods more expensive compared to foreign goods.

(Ch 10) 3. Other things the same, as the price level decreases it induces greater spending on ______?

both net exports and investments

(Ch 10) 1. Which of the following is most commonly used to monitor short-run changes in economic activity?

Real GDP

(Ch. 11) 15. Using the liquidity-preference model, when the Federal Reserve decreases the money supply _____________.

The equilibrium interest rate rises.

(Ch. 11) 8. For the U.S. economy, which of the following is the most important reason for the downward slop of the aggregate-demand curve?

The interest-rate effect

(Ch 10) 10. The classical dichotomy and monetary neutrality are represented graphically by ________.

a vertical long-run aggregate-supply curve

(Ch. 11) 11. If the stock market booms, then ______.

aggregate demand increases, which the Fed could offset by selling bonds.

(Ch. 12) 11. If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run _________.

both the unemployment rate and the inflation rate would be lower.

(Ch 10) 20. A sudden increase in business pessimism shift the aggregate-______ curve leading to ________ input.

demand; lower

(Ch. 11) 9. If Taxes _____.

decrease, then consumption increases, and aggregate demand shifts rightward.

(Ch 10) 6. From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel wealthier, then it would have shifted aggregate_________.

demand right

(Ch. 12) 1. A basis for the slope of the short-run Phillips curve is that when unemployment is high there are ________.

downward pressures on prices and wages.

(Ch. 12) 6. A movement to the left along a given short-run Phillips curve could be caused by _____.

expansionary monetary policy, but not a reduction in the natural rate of unemployment.

(Ch. 12) 4. A favorable supply shock causes the price level to ____.

fall. To counter this a central bank could increase the money supply.

(Ch 10) 16. When the economy goes into a recession, real GDP ______ and employment ________.

falls; rises

(Ch. 11) 13. In recent years, the Federal Reserve has conducted policy by setting a target for the ______.

federal funds rate

(Ch. 11) 7. Fiscal policy affects the economy ________.

in both the short and long run.

(Ch. 12) 8. A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would ______.

increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate.

(Ch. 11) 16. When taxes decrease, interest rates ___________________.

increase, making the change in aggregate demand smaller.

(Ch. 11) 17. When the Fed buys government bonds, the reserves of the banking system _______.

increase, so the money supply increases.

(Ch. 11) 19. When the interest rate increases, the opportunity cost of holding money __________.

increases, so the quantity of money demanded decreases.

(Ch. 12) 13. If the unemployment rate is below the natural rate, then ________.

inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

(Ch. 11) 4. A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was _________.

likely smaller than if the cut had been permanent.

(Ch 10) 15. Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is temporarily _____.

low and so supply a smaller quantity of labor.

(Ch 10) 13. The sticky-wage theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms expecting it to rise by 2%, then some firms with high menu costs will have ___________.

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

(Ch. 12) 5. All else equal, country A has a higher money supply growth rate and a long run Phillips curve that is farther to the left than country B's. In the long run as compared to country B, country A will have _________.

lower unemployment rate and higher inflation.

(Ch. 12) 15. One determinant of the long-run average unemployment rate is the __________________________.

minimum wage, while inflation rate depends primarily upon the money supply growth rate.

(Ch. 12) 10. If an increase in inflation permanently reduced unemployment, then________.

money would not be neutral and the long-run Phillips curve would slope downward.

(Ch 10) 5. Other things the same, if the U.S. price level falls, then U.S. residents want to buy __________.

more foreign bonds. The real exchange rate falls.

(Ch 10) 12. The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, production is _________.

more profitable and employment and output rises.

(Ch. 12) 19. Refer to Figure 35-3: If the economy starts at C and the money supply growth rate increases, in the short run the economy ___________.

moves to D

(Ch. 12) 19. Refer to Figure 35-3: If the economy starts at C and the money supply growth rate increases, in the long run the economy ___________.

moves to F

(Ch. 11) 3. A goal of monetary policy and fiscal policy is to __________.

offset shifts in aggregate demand and thereby stabilize the economy.

(Ch. 11) 18. When the Federal Reserve decreases the federal funds target rate, the lower rate is achieved through ________.

purchases of government bonds, which reduces interest rates and causes people to hold more money.

(Ch. 12) 9. From 2008-2009 the Federal Reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have ________.

raised inflation and reduced unemployment

(Ch 10) 18. Which of the following would shift the aggregate-demand curve to the left?

stock market decline, rise in interest rates, decrease in government spending, increased taxes. recession overseas.

(Ch. 12) 2. According to the long-run Phillips curve, in the long run monetary policy influences________.

the inflation rate but not the unemployment rate.

(Ch. 11) 1. According to liquidity preference theory, if the price level decreases, then ______.

the interest rate falls because money demand shifts left.

(Ch. 12) 7. An improved functioning of the labor markets will shift ______.

the long-run Phillips curve to the left and the long-run aggregate supply curve to the right.

(Ch. 11) 14. The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates.

the multiplier effect

(Ch. 11) 5. As the interest rate falls to equilibrium in the market for money, _________.

the quantity of money demanded rises, which would reduce a surplus of money.

(Ch. 12) 3. A change in expected inflation shifts ________.

the short-run Phillips curve, but not the long run Phillips curve.

(Ch 10) 4. The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for ______?

the slope of the aggregate-demand curve