practice questions set 4

If the Fed conducts open-market purchases, the money supply

increases and aggregate demand shifts right.

When the Fed decreases the money supply, we expect

interest rates to rise and stock prices to fall.

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

interest rates, but not prices or investment spending

Recession come at

irregular intervals. During recessions investment spending falls relatively more than consumption spending.

Most economists believe that fiscal policy

primarily affects aggregate demand

Which of the following is not included in aggregate demand?

purchases of stock and bonds

If the real exchange rate between the U.S. and Argentina is 1, then

purchasing power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina.

The aggregate demand and aggregate supply graph has

quantity of output on the horizontal axis. Output can be measured by real GDP.

The model of short-run economic fluctuations focuses on the price level and

real GDP

Suppose the economy is in long-run equilibrium. Senator A succeeds in getting taxes raised. At the same time, Senator B succeeds in getting major new restrictions on logging enacted. In the short run

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

The aggregate quantity of goods and services demanded changes as the price level rises because

real wealth falls, interest rates rise, and the dollar appreciates.

Stagflation exists when prices

rise and output falls

Other things the same, if the price level rises, then domestic interest rates

rise, so domestic residents will want to hold fewer foreign bonds

Other things the same, when the price level rises, interest rates

rise, so firms decrease investment.

If there is a trade deficit, then

saving is less than domestic investment and Y < C + I + G.

In the long run, fiscal policy primarily affects

saving, investment, and growth. In the short run, it affects primarily aggregate demand.

Suppose there were a large increase in net exports. If the Fed wanted to stabilize output, it could

sell bonds to decrease the money supply

Suppose that the Federal reserve is concerned about the effects of rising stock prices on the economy. What could it do?

sell bonds to raise the interest rate

You are planning a graduation trip to Nepal. Other things the same, if the dollar appreciates relative to the Nepalese rupee, then

the dollar buys more rupees. Your purchases in Nepal will require fewer dollars

As the price level falls

the exchange rate falls, so net exports rise.

The discovery of a large amount of previously-undiscovered oil in the U.S. would shift

the long-run aggregate-supply curve to the right

If the exchange rate is 125 yen = $1, a bottle of rice wine that costs 2,500 yen costs

$20

The long-run aggregate supply curve shifts right if

All of the above are correct.

If the stock market crashes, then

aggregate demand decreases, which the Fed could offset by increasing the money supply.

The multiplier effect is exemplified by the multiplied impact on

aggregate demand of a given increase in government purchases

If Congress cuts spending to balance the federal budget, the Fed can act to prevent unemployment and recession by

buying bonds to increase the money supply

Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to desire

decreased consumption, shifting the aggregate-demand curve to the left

When taxes increase, consumption

decreases, so aggregate demand shifts left

Other things the same, if the exchange rate changes from 125 yen per dollar to 115 yen per dollar, the dollar has

depreciated and so buys fewer Japanese goods

Other things the same, during recessions taxes tend to

fall. The fall in taxes stimulates aggregate demand.

During recessions investment

falls by a larger percentage than GDP

A U.S. firm buys bonds issued by a technology center in India. This purchase is an example of U.S.

foreign portfolio investment. By itself it is an increase in U.S. holdings of foreign bonds and increases U.S. net capital outflow.

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

higher than desired prices which depresses their sales.

Fiscal policy affects the economy

in both the short and long run

When Claudia, a U.S. citizen, purchases a handbag made in France, the purchase is

a U.S. import and a French export

Which of the following shifts aggregate demand to the left?

a decrease in the money supply

Oceania buys $40 of wine from Escudia and Escudia buys $100 of wool from Oceania. Supposing this is the only trade that these countries do. What are the net exports of Oceania and Escudia in that order?

$60 and -$60

In an open economy, gross domestic product equals $2,450 billion, consumption expenditure equals $1,390 billion, government expenditure equals $325 billion, investment equals $510 and net capital outflow equals $225 billion. What is national saving?

$735 billion

If the exchange rate is 5 units of Peruvian currency per dollar and a hotel room in Lima costs 300 units of Peruvian currency, then how many dollars do you need to get a room?

60 and your purchase will increase Peru's net exports

In the United States, a three-pound can of coffee costs about $5. If the exchange rate is about 0.6 euros per dollar and a three-pound can of coffee in Belgium costs about 4 euros. What is the real exchange rate?

3/4 cans of Belgian coffee per can of U.S. coffee

The exchange rate is 1.5 Bosnian markas per U.S. dollar. The price of a refrigerator in Bosnia is 1,200 markas while in the U.S. it is $1,000. The real exchange rate is

5/4

Suppose a Starbucks tall-latte cost $4.00 in the United States and 3.20 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $3.50 in the United States and 2.45 euros in Euro area. If the nominal exchange rate is .80 euros per dollar, which goods have prices that are consistent with purchasing power parity?

Neither the tall-latte nor the Big Mac.

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

Short-run aggregate supply shifts right.

Which of the sentences concerning the aggregate demand and aggregate supply model is correct?

The aggregate supply curve shows the quantity of goods and services that households, firms, and the government want to buy at each price.

U.S. based John Deere sells machinery to residents of South Africa who pay with South African currency (the rand).

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

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

aggregate demand to the right.

Supply-side economists believe that changes in government purchases affect

both aggregate demand and aggregate supply

Bob, a Greek citizen, opens a restaurant in Chicago. His expenditures

decrease U.S. net capital outflow, but increase Greek net capital outflow

A depreciation of the U.S. real exchange rate induces U.S. consumers to buy

more domestic goods and fewer foreign goods

Other things the same, if a country saves less, then

net capital outflow falls, so net exports fall

The nominal exchange rate is the

nominal interest rate in one country divided by the nominal interest rate in the other country.

Which type(s) of economies interact with other economies?

only open economies

A decrease in the expected price level shifts

only the short-run aggregate supply curve right

Suppose the economy is in long-run equilibrium. In a short span of time, there is a decline in the money supply, a tax increase, a pessimistic revision of expectations about future business conditions, and a rise in the value of the dollar. In the short run, we would expect

the price level and real GDP both to fall.

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

the price level is higher than expected making production more profitable.

Aggregate demand includes

the quantity of goods and services households, firms, the government, and customer abroad want to buy.

The term crowding-out effect refers to

the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

the short run, but not the long run

When production costs rise,

the short-run aggregate supply curve shifts to the left.

The primary argument against active monetary and fiscal policy is that

these policies affect the economy with a long lag.

During periods of expansion, automatic stabilizers cause government expenditures

to fall and taxes to rise

Which of the following will both make people spend more?

wealth rises and interest rates fall.