Macro Test 3

The fictional country of Ubril has national saving of $200 billion, government expenditures of $50 billion, domestic investment of $120 billion, and net capital outflow of $70 billion. What is the quantity demanded for loanable funds in Ubril?

$190 billion

In a certain economy, when income is $200, consumer spending is $160. The value of the multiplier for this economy is 4. It follows that, when income is $300, consumer spending is

$235

The fictional country of Ublos has output of $750 billion, consumption of $400 billion, government expenditures of $100 billion and investment of $80 billion. What is the quantity of loanable funds supplied in Ublos?

$250 billion

During some year a country had $120 billion in domestic assets purchased by foreigners, had exports of $200 billion, and had imports of $70 billion. What was the value of foreign assets purchased by the country?

$250 billion.

Suppose the loanable funds market in country A is in equilibrium. Country A has domestic investment of $300 billion. Its citizens purchase $100 billion of foreign assets and foreign citizens purchase $50 billion of its assets. What is national saving?

$350 billion

The fictional country of Peclos has private saving of $80 billion, public saving of -$30 billion, domestic investment of $40 billion, and net capital outflow of $10 billion. What is the quantity supplied of loanable funds in Peclos?

$50 billion

The loanable funds market is in equilibrium for country A. Country A has national saving of $70 billion, government expenditures of $20 billion, domestic investment of $20 billion, and net capital outflow of $50 billion. What is the quantity supplied of loanable funds in country A?

$70 billion

Last year a country saved $120 billion during the year, had exports of $90 billion and imports of $60 billion. What was its domestic investment during the year?

$90 billion

If Ecuador purchases $20 billion in goods and $5 billion in services from abroad, while selling $10 billion in goods and $10 billion in services to foreign countries, Ecuador's net exports equal

-$5 billion.

Below are pairs of GDP growth rates and unemployment rates. Economists would not be shocked to see most of these pairs in the U.S. Which pair of GDP growth rates and unemployment rates is not realistic?

-2 percent; 2 percent

If the exchange rate is 0.60 British pounds per U.S. dollar, the price of a t-shirt in London is 12 British pounds and the price of the same t-shirt in the U.S. is $15, then what is the real exchange rate?

0.75

If a Starbucks Grande latte costs 3 Swiss francs in Switzerland and $4 in the United States, then purchasing-power parity implies the nominal exchange rate is how many Swiss francs per U.S. dollar?

0.75 If the exchange rate is less than this, it costs more U.S. dollars to buy a grande latte in Switzerland than in the U.S.

If the multiplier is 5, then the MPC is

0.8

A loaf of bread in the U.S. costs $2. The same loaf of bread in Sweden costs 10 kroner. If the exchange rate is 4 kroner per U.S. dollar, then the real exchange rate is

0.8 so the good is more expensive in Sweden

The multiplier for changes in government spending is calculated as

1/(1 - MPC).

Suppose the real exchange rate is 4/3 gallon of country A's milk per gallon of U.S. milk, a gallon of milk costs $4.00 in the U.S., and a gallon of milk in country A costs 10 units of their currency. What is the nominal exchange rate?

10/3 of a unit of country A's currency per U.S. dollar.

If the exchange rate is 2 Swedish kroner per U.S. dollar, a shirt that costs 12 US dollars costs

24 Swedish kroner

Suppose the price of a new car is $25,000 in the United States, and the nominal exchange rate between South African and the United States is 10 South African rand per U.S. dollar. If purchasing-power parity holds, the price of the same car in South Africa will be

250,000 rand

If imports = 300 billion yen, exports = 600 billion yen, purchases of domestic assets by foreign residents = 400 billion yen, and purchases of foreign assets by domestic residents = 700 billion yen, what is the quantity of yen demanded in the market for foreign-currency exchange?

300 billion yen

Which of the following shifts aggregate demand to the left?

A decrease in the money supply.

According to liquidity preference theory, which of the following is NOT true?

A decrease in the price level shifts money demand to the right.

Which of the following would not explain why the aggregate demand curve slopes downward?

A higher price level increases real wealth, which stimulates spending on consumption.

Which of the following statements is correct?

As a percentage of GDP, U.S. exports have tripled and U.S. imports have tripled since 1950.

Which of the following is NOT correct?

As the interest rate falls, the quantity of money demanded falls.

Which of the following Fed actions would increase the money supply?

Buying bonds

Suppose Jason believes that the government should follow an active stabilization policy when the economy is experiencing severe unemployment. Which of the following policies would he recommend in this case?

Decrease taxes.

A reduction in personal income taxes increases aggregate demand through an increase in private savings.

False

According to liquidity preference theory, the opportunity cost of holding money is the inflation rate.

False

During periods of expansion, automatic stabilizers cause government expenditures to rise and taxes to fall.

False

If the Fed conducts open-market purchases, the money supply decreases and aggregate demand shifts right.

False

If the real exchange rate between India and Thailand is 1 and purchasing-power parity holds, then 1 Indian rupee buys 1 Thai bhat.

False

Purchasing-power parity theory does not hold at all times because the same goods produced in different countries are perfect substitutes for each other.

False

Recessions occur at regular intervals and are possible to predict with much accuracy.

False

The Federal Funds Rate is the interest rate the Fed charges depository institutions for short-term loans.

False

The aggregate-demand curve shows the quantity of goods and services that firms choose to produce and sell at each price level.

False

The interest-rate effect stems from the idea that a higher price level decreases the real value of households' money holdings.

False

The logic of the wealth effect begins with a change in the price level changing the interest rate.

False

The multiplier effect states that there are additional shifts in aggregate supply from fiscal policy because it increases income and thereby increases consumer spending.

False

The theory of liquidity preference only attempts to explain the nominal interest rate.

False

True or False. A U.S. bank wants to buy yuan in order to buy Chinese bonds. In the open-economy macroeconomic model, this transaction would be part the supply of currency in the foreign exchange market, and part of the supply of loanable funds.

False

True or False: Capital flight from the United States decreases net capital outflow.

False

True or False: In the open-economy macroeconomic model, the key determinant of net capital outflow is the real exchange rate.

False

When output rises, unemployment also rises.

False

When the interest rate increases, the opportunity cost of holding money decreases, so the quantity of money demanded decreases.

False

Which of the following is NOT true according to classical macroeconomics theory?

For any given level of output, the interest rate adjusts to balance the supply of, and demand for, money.

Which of the following is true about the interest-rate effect?

It is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.

If the fictional country of Joplait experienced capital flight 10 years ago, what should have happened to Joplait's net capital outflow?

It should have increased.

In the short run, which of the following statements is true about the effects of an increase in the money supply?

It will raise the cost of borrowing.

If Mexican exports are $50 billion and Mexican imports are $10 billion, which of the following is correct?

Mexico has a trade surplus of $40 billion.

Which of the following is equal to net exports, provided there is an open economy with a loanable funds market at equilibrium? (Note: S=national saving, I=domestic investment, NCO=net capital outflow)

S - I.

Which of the following is always correct in an open economy?

S = I + NCO

Which of the following is correct?

Sometimes recessions are close together.

Sophie buys a coffee shop in Vancouver, Canada and reopens it as a branch of her Seattle coffee chain. Marlowe imports a Peruvian milling stone for her bakery in Los Angeles. Sophie and Marlowe are both U.S. residents. Whose action is an example of U.S. foreign direct investment?

Sophie's but not Marlowe's

The nominal exchange rate is 12 South African rand, 600 Chilean pesos, 7 Croatian kuna, or 60 Indian rupees per U.S. dollar. A fast food breakfast costs $5 in the U.S., 36 rand in South Africa, 3,000 pesos in Chile, 28 kuna in Croatia, or 240 rupees in India. According to these numbers, where is the real exchange rate between American and foreign goods the highest?

South Africa

A Swedish mutual fund buys stock issued by a Norwegian company. This purchase is an example of

Swedish foreign portfolio investment. It decreases Norway's net capital outflow.

Jason is a critic of stabilization policy. Which of the following statements would he NOT agree with?

The Fed should try to fine-tune the economy during times of economic fluctuations.

Which of the following statements is true about the Kennedy administration in the early 1960s?

The Kennedy administration made considerable use of fiscal policy to stimulate the economy.

Which of the following is an example of an increase in government purchases?

The government builds new bridges.

If purchasing-power parity did not hold, which of the following could NOT be true?

The real exchange rate equals 1.

According to the theory of liquidity preference, which of the following is NOT true?

The supply of money depends on the interest rate.

According to liquidity preference theory, the money-supply curve would shift if the Fed engaged in open-market operations.

True

Because some economists do not understand what things change GDP, they cannot predict recessions with a fair amount of accuracy.

True

If the Fed decreases the money supply, the interest rate increases.

True

If the interest rate is below the Fed's target, the Fed should sell bonds to decrease the money supply.

True

Keynes would agree with the statement that irrational waves of pessimism cause aggregate demand to be unstable.

True

Purchasing-power parity theory does not hold at all times because many goods are not easily transported.

True

Stagflation results from continued decreases in aggregate supply.

True

The multiplier effect amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effect.

True

The recessions associated with the business cycle come at irregular intervals.

True

The tax system is the most important automatic stabilizer.

True

True or False: An increase in real interest rates in the United States encourages both U.S. and foreign residents to buy U.S. assets.

True

True or False: An increase in the budget deficit reduces net capital outflow and domestic investment.

True

True or False: If the U.S. were to impose import quotas the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable funds would not.

True

True or False: Import quotas do not alter the trade balance because they cannot alter the national saving or domestic investment of the country that implements them.

True

True or False: In the open-economy macroeconomic model, if the U.S. interest rate rises, then U.S. net capital outflow falls, so the supply curve of dollars in the market for foreign exchange shifts left.

True

True or False: Net capital outflow is a part of the demand for loanable funds, and the source of the supply of dollars in the foreign exchange market

True

If U.S. residents purchase $200 billion worth of foreign assets and foreigners purchase $400 billion worth of U.S. assets,

U.S. net capital outflow is -$200 billion; capital is flowing into the U.S.

In the fictional country of Ubos, the amount of Ubosian capital assets purchased by foreign countries exceeds the amount of foreign assets purchased by the residents of Ubos. This means that

Ubos has a positive net capital outflow, which adds to its demand for domestically generated loanable funds.

Which of the following is not correct?

When real GDP expands, the rate of unemployment rises.

If saving is less than domestic investment, then

Y < C + I + G and there is a trade deficit

Juergen, a German resident, purchases some grapes grown in France. This purchase is an example of

a German import and a French export

Negative public saving and a decreased national saving are a result of

a budget deficit

Which of the following policy actions does NOT shift the aggregate-demand curve?

a change in the price level

All else equal, which of the following would cause Americans to buy more foreign assets, resulting in an increase in U.S. net capital outflow?

a decrease in the U.S. real interest rate

Which of the following shifts short-run aggregate-supply curve to the right?

a decrease in the expected price level

The term "capital flight" refers to

a large and sudden movement of funds out of a country.

An import quota is

a limit on the quantity of a good produced abroad that can be purchased domestically.

A country buys more from foreign countries than it sells to them. It has

a trade deficit and negative net exports.

In the open-economy macroeconomic model, the purchase of a foreign capital asset by a domestic resident

adds to the demand for loanable funds

In the open economy macroeconomic model, the real exchange rate

adjusts to balance quantity supplied and demanded in the market for foreign-currency exchange.

Which of the following does fiscal policy not primarily affect in the long run?

aggregate demand

Which of the following would cause prices and real GDP to fall in the short run?

aggregate-demand curve shifts to the left

If businesses in general decide that they have underbuilt and so now have too little capital, their response to this would initially shift

aggregate-demand curve to the right.

The quantity of goods and services that firms produce and sell at each price level is shown on the

aggregate-supply curve.

Suppose the real exchange rate is such that the market for foreign-currency exchange has a shortage of dollars. This shortage will lead to

an appreciation of the dollar, a decrease in U.S. net exports, and so a decrease in the quantity of dollars demanded in the foreign exchange market.

Which of the following is NOT an automatic stabilizer?

an increase in money supply

Which of the following events would cause the Fed to stabilize output through decreasing the money supply?

an increase in net exports

Suppose a change in the stock market makes people feel wealthier, increases consumption, and shifts the aggregate-demand curve right. The change in the stock market must have been

an increase in stock prices.

Which of the following events would cause the Fed to stabilize output through increasing the money supply?

an increase in taxes

Suppose the exchange rate rises. All else equal, which of the following could cause this in the open-economy macroeconomic model?

an increase in the demand for net exports

Which of the following would lower net capital outflow, thereby decreasing the quantity of loanable funds demanded?

an increase of the U.S. real interest rate

National saving equals domestic investment plus net capital outflow in

an open economy.

As recessions begin, employment

and income both fall.

A U.S. manufacturing company borrows money to buy a forklift from a U.S. company and a conveyer belt from a company in Japan. Which of the following is true regarding the money borrowed for these capital asset purchases?

borrowing both capital asset purchases are included in the demand for loanable funds in the U.S.

Which of the following increases in response to the interest-rate effect from a decrease in the price level?

both investment and consumption

Which of the following rise during a recession?

both losses and unemployment

If the Federal Reserve decided to lower interest rates, it could

buy bonds to raise the money supply.

If the dollar buys more rice in Thailand than in the United States, then traders could make a profit by

buying rice in Thailand and selling it in the United States, which would tend to raise the price of rice in Thailand.

Fluctuations in real GDP are caused

by changes in aggregate demand and/or changes in aggregate supply.

The belief by most economists that real and nominal variables are essentially determined separately in the long run is characteristic of the ________ model.

classical

The best description of the economy in the long run comes from which macroeconomic theory?

classical

Other things the same, continued losses in technological ability and continued decreases in the money supply would unambiguously lead to

declining real GDP only.

Which of the following policies would Keynes's followers support when a decrease in business optimism shifts the aggregate-demand curve away from long-run equilibrium?

decrease taxes

According to purchasing-power parity, if a country's central bank wanted the country's currency to appreciate relative to other currencies in the world, it would have to

decrease the money supply, which would also cause the country's price level to fall

When U.S. net exports rise, which increases the aggregate quantity of goods and services demanded, the dollar must have

depreciated

Other things the same, if the exchange rate changes from 6 Danish krone per dollar to 5 Danish krone per dollar, the dollar has

depreciated and so buys fewer Danish goods.

The separation of real and nominal variables is referred to as the classical

dichotomy.

If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as

e(P/P*).

The long-run aggregate-supply curve shifts left if

either emigration abroad increases or important technology is outlawed.

Suppose the U.S. exchange rate increases relative to foreign currencies. This means that U.S. citizens pay

fewer dollars for foreign bonds and also get fewer dollars from interest payments.

Mark is having a policy debate with his cousin Gina. Gina points out that the political process is mostly responsible for the lag in implementing

fiscal policy

If Vietnam has a trade surplus,

foreign countries purchase more Vietnamese assets than Vietnam purchases from them. This makes Vietnamese saving greater than Vietnamese domestic investment.

The purchase of U.S. government bonds by Saudi Arabian residents is an example of

foreign portfolio investment by Saudi Arabian residents.

Dmitri, a Canadian resident, buys $10,000 worth of olives from Cyprus. By itself this purchase

increases Canadian imports by $10,000 and decreases Canadian net exports by $10,000.

A Mexican company sells oil drilling equipment to a Colombian company, which pays with Colombian currency. This transaction

increases Mexican net capital outflow because Mexico acquires foreign assets.

Other things the same, a decrease in the foreign price level

increases the real exchange rate. This increase could be offset by a decrease in the nominal exchange rate.

In the context of the aggregate-demand curve, when the price level increases, households increase their holdings of money, interest rates increase, and spending on investment goods decreases because of the ________ effect.

interest-rate

Arbitrage may not eliminate a price difference for a haircut in Paris versus a haircut in New York because ____

international travel would be too costly.

Which of the following macroeconomic variables is a small part of real GDP, yet accounts for a large share of the fluctuation in real GDP?

investment

Which of the following is the source of demand for loanable funds in an open economy?

investment + net capital outflow

Recessions occur at ________ intervals and are ________ to predict with much accuracy.

irregular; almost impossible

If a government has a budget deficit, then public saving

is negative and decreases national saving.

If the fictional country of Joplait experienced capital flight 10 years ago, what should have happened to Joplait's real interest rate?

it rose and the peso depreciated.

From 1970 to 1998 the Italian lira

lost value compared to the U.S. dollar because inflation was higher in Italy

Other things the same, if the money supply rises by 5% and people were expecting it to rise by 2%, then some firms have

lower than desired prices, which increases their sales.

One reason purchasing-power parity is not completely accurate is that ____

many goods are not easily tradable.

When analyzing the economy as a whole, ________ substitution from one market to another is impossible.

microeconomic

Steve is having a policy debate with his brother Brian. He points the fact that business firms make investment plans far in advance. This is a lag problem associated with

monetary policy.

When the price level rises less than expected, a firm with a sticky price will sell its output at a price that is

more than the firm desires and decrease its production.

The government builds a new recycling plant. The manager of the company hires workers and pays them an annual salary. These workers then increase their spending. The firms that sell the goods these workers buy also increase their output. This type of effect on spending illustrates the

multiplier effect

In the open-economy macroeconomic model, the source of the supply of loanable funds is

national saving

If Canadian purchases of foreign assets are less than purchases of Canadian assets by foreigners, then Canada has a

negative net capital outflow and negative net exports.

If the value of the goods and services that the U.S. purchases from Canada are greater than the value of goods and services that Canada purchases from the U.S., the U.S. has

negative net exports with Canada and a trade deficit with Canada.

A basket of goods costs $500 in the U.S., 2,000 Swedish kroner in Sweden, and 3,500 Argentinean pesos in Argentina. The exchange rates are 5 Swedish kroner per U.S. dollar and 8 Argentinean pesos per U.S. dollar. Which country has purchasing-power parity with the U.S?

neither Argentina nor Sweden

An Australian firm buys pineapples from Indonesia with Indonesian rupiah it got in exchange for Australian dollars. Indonesian residents then use these dollars to purchase wool from Australia. Which of the following increases?

neither Indonesia's net exports nor Indonesia's net capital outflow

From 2000 to 2012 the U.S. had a large

net capital inflow and a trade deficit

In the open-economy macroeconomic model, the amount of dollars supplied for the purpose of buying foreign assets is represented by

net capital outflow

In the open economy macroeconomic model, if a country's interest rate increases, then its

net capital outflow and its net exports fall.

The horizontal axis of the aggregate demand and aggregate supply graph has the

output of goods and services.

In the short run a decrease in the costs of production makes

output rise and prices fall.

Other things the same, according to purchasing-power parity, if over the next few years Nigeria has a lower money supply growth rate than South Africa, then

prices in Nigeria will rise by a smaller percentage than in South Africa. So, the Nigerian naira will appreciate against the South African rand.

Net capital outflow occurs when

purchases of foreign assets by domestic residents is greater than the purchase of domestic assets by foreign residents

If the government institutes an investment tax credit and decreases income taxes,

real GDP and the price level rise.

Suppose the economy is in long-run equilibrium. If there is a decrease in the supply of labor as well as a decrease in the money supply, then we would expect that in the short run,

real GDP will fall and the price level might rise, fall, or stay the same.

During recessions, changes in investment spending are the biggest contributor to changes in

real GDP.

Suppose you observe Japan's net capital outflow increase. Based on the open-economy macroeconomic model, which of the following could have caused this?

real interest rates in the U.S. increase.

The sticky-wage theory of the short-run aggregate-supply curve says that when the price level is higher than expected,

relative to prices wages are lower and employment rises.

Assume the MPC is 0.6. Assume there is a multiplier effect and that the crowding-out effect is $10 billion. An increase in government purchases of $20 billion will shift aggregate demand to the

right by $40 billion

An increase in U.S. net exports would shift U.S. aggregate demand

rightward. In an attempt to stabilize the economy, the government could decrease expenditures.

From 2001 to 2005 there was a dramatic change in the price of houses. This change made people feel wealthier and shifted aggregate demand curve to the right. The price of houses must have

risen

If the nominal exchange rate remains at 30 Thai bhat per U.S. dollar while prices in Thailand rise more slowly than in the United States, then the real exchange rate of Thai goods for U.S. goods

rises

People will want to buy fewer bonds and the interest rate will rise, as the price level

rises

If U.S. residents want to buy fewer foreign bonds, then in the market for foreign-currency exchange the equilibrium exchange rate

rises and the quantity of dollars traded falls.

If money demand shifted to the left and the Federal Reserve desired to return the interest rate to its original value, it could

sell bonds to decrease the money supply.

To stabilize interest rates, the Federal Reserve will respond to a decrease in money demand by

selling government bonds, which decreases the supply of money.

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.

One reason purchasing-power parity is not completely accurate is that ____

some goods are not perfect substitutes when produced in different countries.

When prices and unemployment rise, such an event is sometimes called

stagflation.

To calculate the value of a country's net exports,

subtract the value of goods and services imported from the value of goods and services exported.

U.S. exports and U.S. imports both decrease if

the U.S. imposes import quotas on foreign imports.

Suppose the government in country A decreases government expenditures while keeping government revenue the same. This would cause

the domestic real interest rate to fall and investment to rise.

Which of the following would not shift the supply of dollars in the market for foreign-currency exchange of the open-economy macroeconomic model?

the exchange rate rises

Suppose that more Americans decide to vacation in France and that Americans purchase more French government bonds. Ignoring how payments are made for these purchases,

the first action by itself lowers U.S. net exports, the second action by itself raises U.S. net capital outflow.

The supply of loanable funds shifts right and increases investment spending. Which of the following could cause this result?

the government begins running a budget surplus.

According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes

the interest rate to rise, so aggregate demand shifts left.

The fraction of extra income that a household consumes rather than saves is called

the marginal propensity to consume.

If purchasing-power parity holds, all of the following are true except

the nominal exchange rate is the ratio of U.S. prices to foreign prices

Suppose the economy is in long-run equilibrium. In a short span of time, there is a large emigration of skilled workers, a major depletion of oil fields, and a major new regulation limiting electricity production. In the short run, we would expect

the price level to rise and real GDP to fall.

All else equal, a decrease in the domestic real interest rate causes

the quantity of loanable funds supplied to fall because national saving falls.

If the exchange rate is 7 Argentinian pesos per U.S. dollar, a side of beef costs 6,000 Argentinian pesos in Argentina, and a side of beef costs $1,000 in the U.S., then

the real exchange rate is greater than one and arbitrageurs could profit by buying beef in Argentina and selling them in the U.S.

If a dollar buys less wheat in Russia than in the U.S., then

the real exchange rate is less than 1; a profit may be made by buying wheat in the U.S. and selling it in Russia.

A U.S. box factory wants to build a new box assembly facility in China. In the open economy model, this is included

the supply of U.S. dollars in the market for foreign-currency exchange.

Which of the following is an example of an automatic stabilizer?

the unemployment compensation system

Suppose that the real rate of return from operating clothing stores in Brazil falls relative to the real rate of return in the United States. Other things the same,

this will decrease U.S. net capital outflow and increase Brazilian net capital outflow.

A policy that directly influences the quantity of goods and services that a country imports or exports is known as a

trade policy

The decline in investment spending accounts for how much of the decline in output during a recession?

two-thirds

The idea that nominal wages are slow to adjust to changing economic conditions can explain the ________ slope of the short-run aggregate-supply curve.

upward

The classical view that money does not matter is sometimes described by the saying, "Money is a

veil."

What could cause U.S. goods to become less attractive to consumers in the U.S. and abroad?

when the U.S. real exchange rate increases.

Suppose foreign citizens want to buy more U.S. goods and services at every given exchange rate. This

will shift the demand for dollars in the market for foreign currency exchange to the right