MODEL UNIT 4 TEST

If the sacrifice ratio is five, a reduction in inflation from 7 percent to 3 percent would require a reduction in output of ___%. A. 35% B. 20% C. 15% D. 5%

20%

How is contractionary monetary policy shown in the Phillips Curve Model? A. A movement up along a given short-run Phillips Curve B. A movement down along a given short-run Phillips Curve C. An upward shift in the short-run Phillips Curve D. A downward shift in the short-run Phillips Curve

A movement down along a given short-run Phillips Curve

In the model in Chapter 16, and increase in the money supply causes which of the following? A. A rightward shift in both the money demand curve and the aggregate demand curve B. A movement down along the money demand curve and a rightward shift in the aggregate demand curve C. A rightward shift in the money demand curve and a movement down along the aggregate demand curve. D. A movement down along both the money demand curve and the aggregate demand curve.

A movement down along the money demand curve and a rightward shift in the aggregate demand curve

If the Fed were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long-run result would be A. A permanently lower unemployment rate B. An accelerating inflation rate C. Both A and B D. Neither A nor B

An accelerating inflation rate

Which of the following changes would cause the aggregate demand curve to shift to the left? A. A depreciation of the exchange rate B. An increase in the interest rate C. Both A and B D. Neither A nor B

An increase in the interest rate

Tax reform that encourages saving tends to A. increase the rate of growth of output B. shift the tax burden away from high-income people towards low-income people C. Both A and B D. Neither A nor B

Both A and B

Which of the following are examples of automatic stabilizers? A. Personal income taxes B. Unemployment benefits C. Both A and B D. Neither A nor B

Both A and B

According to Professor Flanders and the textbook, which of the following statements about fiscal policy multipliers is correct? A. The multiplier effect in the textbook model of AD/AS refers to the change in aggregate demand, NOT the change in real output. B. Starting from full employment, the multiplier effect of an increase in G on real output is 0. C. Both A and B. D. Neither A nor B.

Both A and B.

According to those who favor requiring the government to balance its budget every year, which of the following is true about government budget deficits? A. Budget deficits reduce national saving. B. Budget deficits shift some of the burden of current spending onto future generations. C. Both A and B. D. Neither A nor B.

Both A and B.

Which of the following is an argument for why policymakers should try to stabilize the economy? A. Left on its own, the private economy is unstable, experiencing substantial booms and bust which stabilization policy can reduce or eliminate. B. Recessions have no benefit for society - they are a sheer waste of resources. C. Both A and B. D. Neither A nor B.

Both A and B.

Which of the following is an argument made for the central bank not aiming for zero inflation? A. The loss in income during the recessions caused by trying to reduce inflation fall disproportionately on workers with lower skills and incomes. B. The costs of living with a correctly anticipated moderate inflation seem to be small. C. Both A and B. D. Neither A nor B.

Both A and B.

According to the textbook both the adverse supply shocks of the 1970s and the favorable supply shock of the 1980s were the result of which of the following? A. Bad weather events B. Political turmoil C. Changes in oil prices D. Climate change

Changes in oil prices

Which of the following would be a reform of the tax laws that would encourage more saving? A. Eliminate the double-taxation of corporate income. B. Make the personal income tax more progressive. C. Both A and B D. Neither A nor B

Eliminate the double-taxation of corporate income.

Which of the following is an argument for using government spending to stimulate the economy rather than tax hikes? A. Government purchases are a more potent tool than tax cuts because some of the extra disposable income from a tax cut is saved. B. Government spending will stimulate the economy faster than a cut in taxes implemented via reduced withholding. C. Both A and B. D. Neither A nor B.

Government purchases are a more potent tool than tax cuts because some of the extra disposable income from a tax cut is saved.

The natural-rate hypothesis argues that A. Unemployment is always above the natural rate. B. Unemployment is always below the natural rate\ C. Unemployment is always equal to the natural rate D. In the long-run, the unemployment rate always returns to the natural rate, regardless of the rate of inflation

In the long-run, the unemployment rate always returns to the natural rate, regardless of the rate of inflation

Economists who support a zero inflation target for monetary policy make all of the following arguments except: A. The costs of reducing inflation to zero are temporary while the benefits are permanent. B. Even small levels of inflation impose permanent costs on the economy such as shoeleather and menu costs. C. Inflation erodes people's income and zero inflation eliminates this problem. D. The cost of reducing inflation to zero could be eliminated if a zero inflation policy were credible.

Inflation erodes people's income and zero inflation eliminates this problem.

Which of the following statements about stabilization policy is true? A. In the short run, a decision by the Fed to increase the targeted money supply is essentially the same as a decision to increase the targeted interest rate. B. Congress has veto power over the monetary policy decisions of the Fed. C. Long lags enhance the ability of policymakers to "fine-tune" the economy. D. Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policy.

Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policy.

The long-run aggregate supply curve would shift to the right as a result of which of the following? A. Many workers leave to pursue more lucrative careers in foreign countries. B. For environmental reasons, the government forces the shut-down of all nuclear power plants. C. Both A and B D. Neither A nor B

Neither A nor B

How is the Phillips Curve model from Chapter 17 similar to the aggregate demand/aggregate supply model of Chapter 16? A. The unemployment rate is on the horizontal axis in both models. B. The inflation rate is on the vertical axis in both models. C. Both A and B D. Neither A nor B.

Neither A nor B.

What would cause the long-run Phillips Curve to shift to the right? A. An increase in the minimum wage B. An increase in the Fed's target federal funds rate C. Both A and B D. Nether A nor B

Nether A nor B

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? A. Output falls; prices are unchanged from the initial value. B. Output and the price level are unchanged from their initial values. C. Prices rise; output is unchanged from its initial value. D. Prices fall; output is unchanged from its initial value.

Prices fall; output is unchanged from its initial value.

Policymakers are said to "accommodate" an adverse supply shock if they A. fail to respond to the adverse supply shock and allow the economy to adjust on its own. B. Respond to the adverse supply shock by increasing aggregate demand, which further raises prices. C. Respond to the adverse supply shock by decreasing short-run aggregate supply. D. Respond to the adverse supply shock by decreasing aggregate demand, which decreases prices

Respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

Stagflation occurs when the economy experiences A. Rising prices and rising output B. Rising prices and falling output C. Falling prices and rising output D. Falling prices and falling output

Rising prices and falling output

Economists who argue that policymakers should not try to stabilize the economy make all of the following arguments except: A. The first rule of policymaking should be "do no harm." B. Since stabilization policies affect the economy only with a lag, well-intentioned policy could be destabilizing. C. Stabilization policy has no effect of the economy in the short-run or the long-run. D. Since forecasting the economy is difficult, well-intentioned policy could be destabilizing.

Stabilization policy has no effect of the economy in the short-run or the long-run.

Which of the following is not an argument in support of using tax cuts to fight recessions? A. Tax cuts decentralize spending decisions by allowing households to spend money on things they value. B. Cuts in marginal tax rates can shift aggregate supply to the right, relieving inflationary pressures. C. Cuts in marginal tax rates can provide incentives for the unemployed to find work and for those with jobs to work more hours. D. Tax cuts have a more direct impact on aggregate demand than government spending.

Tax cuts have a more direct impact on aggregate demand than government spending.

All of the following would cause the short-run aggregate supply curve to shift to the left except: A. People expect inflation to go up B. Taxes on productive activity increase C. The price level goes up D. Burdensome regulations increase

The price level goes up

Which of the following statements regarding taxes is correct? A. The tax multiplier is opposite in sign and smaller in absolute value than the spending multiplier. B. A temporary change in taxes will have a bigger effect on spending than a permanent change in taxes. C. Both A and B. D. Neither A nor B.

The tax multiplier is opposite in sign and smaller in absolute value than the spending multiplier.

Which of the following statements about short-run fluctuations in the economy is correct? A. They are referred to as the business cycle. B. They follow a consistent, predictable pattern. C. Both A and B D. Neither A nor B

They are referred to as the business cycle.

According to Professor Flanders, when it comes to evaluating government budget deficits, the only thing that really matters is A. The ratio of the national debt to GDP B. What the government is doing with the money being spent. C. How much will be borrowed from foreign countries. D. Whether future generations will be richer than the current generation.

What the government is doing with the money being spent.

When actual inflation exceeds expected inflation, the unemployment rate is _____ its natural rate and people will adjust their expected rate of inflation _____. A. above . . . upwards B. above . . . downwards C. below . . . upwards D. below . . . downwards

below . . . upwards

In the model of aggregate demand and aggregate supply, the initial impact of a decrease in aggregate demand is to cause the price level to _______ and the level of output to _______. A. decrease . . . decrease B. decrease . . . increase C. increase . . . decrease. D. increase . . . increase

decrease . . . decrease

The initial impact of an increase in taxes is to shift the aggregate ______ curve to the _______. A. demand . . . right B. supply . . . right C. demand . . . left D. supply . . . right

demand . . . left

A decrease in expected inflation shifts the short-run Phillips Curve _________ and the unemployment-inflation rate tradeoff is ______ favorable. A. upward . . . more B. upward . . . less C. downward . . . less D. downward . . . more

downward . . . more

Starting from a point of long-run equilibrium, the short-run effect of a decrease in the money supply is a(n) _______ in the interest rate and the long-run effect is an) _______in the price level. A. decrease . . . decrease B. decrease . . . increase C. increase . . . decrease D. increase . . . increase

increase . . . decrease

The discrepancy between policy announcements and policy actions is known as the A. political business cycle B. time inconsistency of policy C. discretionary effect D. inside lag

inside lag

According to the textbook, for the United States, the most important source of the downward slope of the aggregate-demand curve is the A. exchange rate effect B. fiscal effect C. interest rate effect D. wealth effect

interest rate effect

Economists who argue that monetary policy should be made by a rule make all of the following arguments except that a policy rule: A. limits the incompetence of policymakers. B. eliminates the time inconsistency problem. C. limits the abuse of power by policymakers. D. is more flexible than discretionary policy.

is more flexible than discretionary policy.

If, in the long run, people adjust their price expectations so that all prices and incomes move proportionately to an increase in the price level, then the long-run aggregate supply curve A. is positively sloped. B. has a slope that is determined by how fast people adjust their expectations. C. is vertical. D. is negatively sloped

is vertical.

According to the interest-rate effect, the aggregate demand curve slopes downward (negatively) because A. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases. B. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls. C. lower prices decrease the value of money holdings and consumer spending decreases D. lower prices increase the value of money holdings and consumer spending increases.

lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases.

Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the A. misperceptions theory of the short-run aggregate-supply curve. B. sticky-price theory of the short-run supply curve C. sticky-wage theory of the short-run supply curve D. classical dichotomy theory of the aggregate supply curve

misperceptions theory of the short-run aggregate-supply curve.

An increase in the marginal propensity to consume (MPC) A. has no impact on the value of the multiplier B. lowers the value of the multiplier C. raises the value of the multiplier D. seldom happens because the MPC is set by congressional legislation

raises the value of the multiplier

Along a short-run Phillips curve, a higher ________ is associated with a ________. A. rate of growth in output . . . higher unemployment rate. B. rate of inflation . . . higher unemployment rate C. rate of growth in output . . . lower unemployment rate. D. rate of inflation . . . lower unemployment rate

rate of inflation . . . lower unemployment rate

If people have rational expectations, a monetary policy contraction that is announced and is credible could A. reduce inflation with little or no increase in unemployment B. increase inflation with little or no decrease in unemployment C. reduce inflation, but it would increase unemployment by an unusually large amount D. reduce inflation, but it would decrease unemployment by an unusually large amount

reduce inflation with little or no increase in unemployment

When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level shifts money demand to the ______ and ______ the interest rate. A. left . . . decreases B. left . . . increases C. right . . . decreases D. right . . . increases

right . . . increases

Suppose the government increases its purchases by $16 billion. If the multiplier effect exceeds the crowding-out effect, then the aggregate demand curve shifts to the ______ by _______ than $16 billion. A. right . . . more B. right . . . less C. left . . . more D. left . . . less

right . . . more

When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of A. supply-side economics B. the investment accelerator C. the multiplier effect D. the crowding-out effect

the investment accelerator

Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by A. the supply and demand for money B. aggregate supply and aggregate demand C. the supply and demand for labor D. the supply and demand for loanable funds

the supply and demand for money

The misery index, which some commentators suggest measures the health of the economy, is the sum of ________ and the _________. A. Dow Jones Industrial average . . . federal funds rate B. growth rate of output . . . inflation rate C. bankruptcy rate . . . suicide rate D. unemployment rate . . . inflation rate

unemployment rate . . . inflation rate

An increase in the price of foreign oil shifts the short-run Phillips Curve _____ and the unemployment-inflation tradeoff becomes _____ favorable. A. downward . . . more B. upward . . . less C. upward . . . more D. downward . . . less

upward . . . less

The natural level of output is the amount of real GDP produced A. when the economy is at the natural level of investment. B. when the economy is at the natural level of aggregate demand. C. when the economy is at the natural rate of unemployment. D. when there is no unemployment.

when the economy is at the natural rate of unemployment.