Macroecon study guide 4

Refer to Figure 34-1. There is an excess demand for money at an interest rate of

2 percent.

Other things the same, which of the following would both make foreigners more willing to engage in U.S. portfolio investment?

U.S. interest rates rise, the default risk of U.S. assets fall

If the MPC is 0, then the multiplier is

1.

Other things the same, a decrease in the U.S. interest rate

induces firms to invest more.

The country of Sylvania has a GDP of $900, investment of $200, government purchases of $200, and net capital outflow of -$100. What is consumption?

$600

Refer to Table 31-1. What are Bolivia's net exports?

-$25 billion

Natural rate of unemployment - a × (actual inflation - Expected inflation) =

Unemployment rate.

If a central bank wants to counter the change in the price level caused by an adverse supply shock, it could change the money supply to shift

aggregate demand left.

The multiplier effect is exemplified by the multiplied impact on

aggregate demand of a given increase in government purchases.

Refer to Table 31-2. Which currency(ies) is(are) less valuable than predicted by the doctrine of purchasing- power parity?

baht

If the sacrifice ratio is 2, reducing the inflation rate from 4 percent to 2 percent would

cost 4 percent of annual output.

Fiscal policy affects the economy

in both the short and long run.

Friedman and Phelps concluded that

in the long run the Phillips curve is vertical, which is consistent with classical theory.

If the Federal Reserve increases the rate at which it increases the money supply, then unemployment is lower

in the short run but not the long run.

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases.

According to the theory of liquidity preference, an increase in the price level causes the

interest rate to rise and investment to fall.

If the Fed conducts open-market purchases, then which of the following quantities increase(s)?

investment spending, but not interest rates

Net capital outflow

is always equal to net exports.

The theory by which people optimally use all available information when forecasting the future is known as

rational expectations.

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates

the multiplier effect.

If the multiplier is 2.5, then the MPC is

0.6.

Suppose the real exchange rate is 5/4 of a Canadian textbook per U.S. textbook , a U.S. textbook costs $150, and a Canadian one costs 120 Canadian dollars. To the nearest penny, what is the nominal exchange rate?

1 Canadian dollar per U.S. dollar

If the MPC is 3/4 then the multiplier is

4, so a $100 increase in government spending increases aggregate demand by $400.

The price of a basket of goods is $2000 in the U.S. If purchasing power parity holds, and the dollar buys two units of some country's currency, then how many units of foreign currency does the same basket of goods cost in that country?

4000

If the sacrifice ratio is 2, reducing the inflation rate from 10 percent to 6 percent would require sacrificing

8 percent of annual output.

According to purchasing power parity, inflation in the U.S. causes the dollar to

depreciate relative to currencies of countries that have lower inflation rates.

Other things the same, if the exchange rate changes from 75 Algerian dinar per dollar to 72 Algerian dinar per dollar, the dollar has

depreciated and so buys fewer Algerian goods.

Suppose that a small economy that produces mostly agricultural goods experiences a year with exceptionally good conditions for growing crops. The good weather would

shift the short-run aggregate supply curve to the right, and the short-run Phillips curve to the left.

If the central bank increases the money supply, in the short run, output

rises so unemployment falls.

Ultimately, the change in unemployment associated with a change in inflation is due to

unanticipated inflation, not inflation per se.

Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is

vertical, which implies that monetary and fiscal policies cannot influence the level of unemployment in the long run.

According to liquidity preference theory, the money-supply curve is

vertical.

Other things the same, a country could move from having a trade surplus to having a trade deficit if either

saving fell or domestic investment rose.

Changes in the interest rate

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

Suppose that reducing inflation 2 percentage points would cost a country 4 percent of annual output. This country's sacrifice ratio is

2.

Refer to Figure 35-5. Curve 1 is the

long-run Phillips curve.

To decrease the interest rate the Federal Reserve could

buy bonds. The fall in the interest rate would increase investment spending.

A Ukrainian firm sells diesel locomotives to a U.S. railroad. Other things the same, these sales

decrease U.S. net exports and increase Ukrainian net exports.

According to liquidity preference theory, a decrease in the price level causes the interest rate to

decrease, which increases the quantity of goods and services demanded.

An American hardware chain sells dollars to obtain Indian rupees. It then uses the rupees to buy electrical generators manufactured by an Indian firm. This exchange

decreases U.S. net capital outflow because Indians obtain U.S. assets.

A Japanese bank buys U.S. government bonds this purchase

decreases U.S. net capital outflow, but increases Japanese net capital outflow.

People will want to hold less money if the price level

decreases or if the interest rate increases.

If the Federal Reserve increases the growth rate of the money supply, in the long run

inflation is higher while the unemployment rate is unchanged.

Refer to Figure 35-2. If the economy starts at C and 1, then in the short run, an increase in the money supply growth rate moves the economy to

B and 2

Refer to Figure 35-5. If the economy starts at C and the money supply growth rate decreases, in the short run the economy moves to

B.

Closely watched indicators such as the inflation rate and unemployment are released each month by the

Bureau of Labor Statistics.

Which of the following statements is correct?

Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium.

Which of the following would we not expect if government policy moved the economy up along a given short-run Phillips curve?

Eric gets fewer job offers

Suppose expected inflation and actual inflation are both relatively high, and unemployment is at its natural rate. If the Fed then pursues a contractionary monetary policy, which of the following results would be expected in the short run?

Expected inflation would exceed actual inflation, and unemployment would exceed its natural rate.

Refer to Figure 35-5. The money supply growth rate is greatest at

F

Which of the following actions might we logically expect to result from rising stock prices?

Jim increases his consumption spending.

Suppose a Starbucks tall latte cost $4.00 in the United States, 5.00 euros in the euro area and $2.50 Australian dollars in Australia. Nominal exchange rates are .80 euros per dollar and 1.4 Australian dollars per U.S. dollar. Where does purchasing power parity hold?

Neither the euro area or Australia.

Suppose a central bank announced that it was going to make a serious effort to fight inflation. A few years later the inflation rate is lower, but there had been a serious recession. We could conclude with certainty that

None of the above is certain.

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?

None of the above is correct.

If a country has Y>C+I+G, then

S > I and it has a trade surplus.

A Japanese bank buys bonds sold by Minnesota Manufacturing. Minnesota Manufacturing then uses these funds to buy machinery from Canada. Which of the following decreases?

U.S. net exports and U.S. net capital outflow

If the interest rate increases

or if the price level decreases, then people will want to hold less money.

Which of the following shifts aggregate demand to the left?

a decrease in the money supply

Suppose foreigners find U.S. goods and services more desirable for some reason other than a change in the exchange rate. Which policies could be used to offset the resulting change in output?

a decrease in the money supply and an increase in taxes

Which of the following would cause the price level to rise and output to fall in the short run?

an adverse supply shock

If the long run, which of the following would shift the long-run Phillips curve to the right?

an increase in the minimum wage

Purchasing-power parity describes the forces that determine

exchange rates in the long run.

On a given short-run Phillips curve which of the following is held constant?

expected inflation

An increase in U.S. sales of movies to other countries raises U.S.

exports and so raises the U.S. trade balance.

Other things the same, during recessions taxes tend to

fall. The fall in taxes stimulates aggregate demand.

A favorable supply shock causes the price level to

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

If the exchange rate is 70 Bangladesh taka per dollar and a bushel of rice costs 200 taka in Bangladesh and $3 in the United States, then the real exchange rate is

greater than one and arbitrageurs could profit by buying rice in Bangladesh and selling it in the United States.

Bob traps lobsters in Maine and sells them to a restaurant in Mexico. Other things the same, these sales

increase U.S. net exports and decrease Mexican net exports.

Refer to Figure 35-8. Subsequent to the shift of the Phillips curve from PC1 to PC2, the curve will soon shift back to PC1 if people perceive the

increase in the inflation rate as a temporary aberration.

U.S- based Dell sells computers to an Irish company that pays with previously obtained U.S. currency. This exchange

increases U.S. net capital outflow because the U.S. acquires foreign-owned assets.

In the long run, an increase in the money supply growth rate

increases inflation and shifts the short-run Phillips curve right.

A country's trade balance

is greater than zero only if exports are greater than imports.

People might deposit more money into interest-bearing accounts,

making the interest rate fall, if there is a surplus in the money market.

The theory of liquidity preference illustrates the principle that

monetary policy can be described either in terms of the money supply or in terms of the interest rate.

Most economists believe that a tradeoff between inflation and unemployment exists

only in the short run.

When the interest rate is below the equilibrium level,

people respond by selling interest-bearing bonds or by withdrawing money from interest- bearing bank accounts.

Disinflation is like

slowing a car down, whereas deflation is like putting the car into reverse gear.

Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess

supply of money equal to the distance between points a and b.

You are staying in London over the summer and you have a number of dollars with you. If the dollar depreciates relative to the British pound, then other things the same,

the dollar would buy fewer pounds. The depreciation would discourage you from buying as many British goods and services.

Using the liquidity-preference model, when the Federal Reserve increases the money supply,

the equilibrium interest rate decreases.

According to the long-run Phillips curve, in the long run monetary policy influences

the inflation rate but not the unemployment rate.

If a government redesigned its unemployment insurance programs so that the unemployed had greater incentives to quickly find appropriate jobs, then which of the following curves would shift right?

the long-run aggregate supply curve but not the long-run Phillips curve

Refer to Figure 34-2. What is measured along the horizontal axis of the left-hand graph?

the quantity of money

Which of the following are effects of an increase in government spending financed by a tax increase?

the tax increase reduces consumption; the change in the interest rate reduces residential construction

If saving is less than domestic investment, then

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

If saving is greater than domestic investment, then

there is a trade surplus and Y>C+I+G.

A favorable supply shock will cause the price level

to fall and output to rise.

Gabrielle, an Italian citizen, uses some previously obtained dollars to purchase a bond issued by a U.S. company. This transaction

does not change U.S. net capital outflow.

In recent years, the Federal Reserve has conducted policy by setting a target for the

federal funds rate.

Which of the following is not a reason the aggregate-demand curve slopes downward? As the price level increases,

firms may believe the relative price of their output has risen.

The economist A.W. Phillips published a famous article in 1958 in which he showed a

negative correlation between the rate of unemployment and the rate of inflation.

If the inflation rate is zero, then

neither the nominal interest rate nor the real interest rate can fall below zero.

If Japan's national saving exceeds its domestic investment, then Japan has

positive net capital outflows and positive net exports.

If a country exports more than it imports, then it has

positive net exports and positive net capital outflows.

There is a temporary adverse supply shock. Given the effects of this shock, if the central bank chooses to return unemployment closer to its previous rate it would

raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right.

A favorable supply shock causes output to

rise. To counter this a central bank would decrease the money supply.

When there is an increase in government expenditures, which of the following raises investment spending?

the investment accelerator but not crowding out