Section 3 quizzes

Which of the following equations is correct?

S = I + NCO

The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?

3 percent

If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate?

4 percent

If there is a surplus in the U.S. loanable funds market, then

NCO + I < S

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

NX = NCO NX = S - I NX = Y - C - G - I

Which of the following helps to explain why the inflation fallacy is a fallacy?

Nominal incomes tend to rise at the same time that the price level is rising

The supply of money is determined by

the Federal Reserve System.

Which of the following can explain a decrease in the U.S. real exchange rate?

the U.S. government budget deficit falls

A decrease in the budget deficit causes domestic interest rates

to fall and investment to rise.

An increase in the budget deficit causes domestic interest rates

to rise and investment to fall.

Line X is

unemployment rate.

With the value of money on the vertical axis, the money supply curve is

vertical.

On average, over the last 50 years, real GDP has grown by about

​3 percent per year

Many macroeconomic variables

​fluctuate together and by different amounts.

Hyperinflation can be explained by

​the quantity theory of money.

If people thought that many banks in a certain country were at or near the point of bankruptcy, then that country's interest rate

and net exports would rise.

If there is capital flight from the United States, then the demand for loanable funds

and the supply of dollars in the foreign-exchange market shift right.

The classical dichotomy refers to the idea that the supply of money

determines nominal variables, but not real variables.

Most economists believe that money neutrality

does not hold in the short run.

If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?

e = P*/P

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*)

There was hyperinflation during the

early part of the current century in Zimbabwe.

A country has private saving of $100 billion, public saving of -$30 billion, domestic investment of $50 billion, and net capital outflow of $20 billion. What is its supply of loanable funds?

$70 billion

If domestic residents of other countries purchase $600 billion of U.S. assets and U.S residents purchase $500 billion of foreign assets, then U.S. net capital outflow is

-$100 billion and the U.S. has a trade deficit.

Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs in the U.S. Which pair of GDP growth rates and unemployment rates is realistic?

-1 percent, 8 percent

If M = 6,000, P = 3, and Y = 3,000, what is velocity?

1.5

If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?

2

During recessions declines in investment account for about

2/3 of the decline in real GDP.

If the price level increased from 120 to 144, then what was the inflation rate

20 percent.

If M = 2,000, P = 2.25, and Y= 6,000, what is velocity?

6.75.

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?

80 florin

The classical theory of inflation

All of the above are correct.

Which of the following is correct?

Economic fluctuations are easily predicted by competent economists. Recessions have never occurred very close together. Spending, income, and production do not fluctuate closely with real GDP. ****None of the above is correct.***

An associate professor of physics gets a $200 a month raise. She figures that with her new monthly salary she can buy more goods and services than she could buy last year.

Her real and nominal salary have risen.

Which movie is an allegory about late 19th century monetary policy?

The Wizard of Oz

When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You compute the price of jeans relative to tee-shirts.

The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable.

If M = 12,000, P = 3, and Y = 32,000, then velocity =

Velocity will rise if money changes hands more frequently.

A farmer in Mexico purchases a tractor made in the U.S. This purchase is an example of

a U.S. export and a Mexican import

The law of one price states that

a good must sell at the same price at all locations.

Capital flight refers to

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

Her real and nominal salary have risen.

a period of very high inflation.

During the last half of 2012, the U.S. unemployment rate was just under 8 percent. Historical experience suggests that this is

above the natural rate, so real GDP growth was likely low.

In 2009 Greece's budget deficit rose and people became worried about the ability of the Greek government to continue to make payments on its debt. Which of these events raise a country's interest rates?

an increase in the budget deficit and increased concerns about the ability of the government to pay back its debt

On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. Which of the following events could explain a shift of the money-supply curve from MS 1 to MS 2?​

an open-market purchase of bonds by the Federal Reserve

Suppose a McDonalds Big Mac costs $4.40 in the United States and 3.30 euros in the euro area and 5.72 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing-power parity hold?

both the euro area and Australia

Historical evidence for the U.S. economy indicates that

changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle

During recessions which type of spending falls?

consumption and investment

If the U.S. real exchange rate appreciates, U.S. exports

decrease and U.S. imports increase.

When prices are falling, economists say that there is

deflation

When a country experiences capital flight its currency

depreciates and net exports rise.

According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also

either a rise in output or a fall in velocity.

During a recession the economy experiences

falling employment and income.

During recessions investment

falls by a larger percentage than GDP.

During recessions employment typically

falls substantially. As the recession ends, employment rises gradually.

If the number of dollars needed to buy a representative basket of goods falls, the price level

falls, so the value of money rises.

The idea of menu costs suggests that

firms alter prices more frequently as inflation increases.

Net capital outflow is defined as the purchase of

foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.

Economists agree that

high inflation is costly, but they disagree about the costs of moderate inflation.

When a country imposes an import quota, its

imports fall and its net exports are unchanged.

The increase in international trade in the United States is partly due to

improvements in transportation. advances in telecommunications. increased trade of goods with a high value per pound.

In an open economy, the source of the demand for loanable funds is

investment + net capital outflow

Recession come at

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

Governments may prefer an inflation tax to some other type of tax because the inflation tax

is easier to impose.

The inflation tax

is the revenue created when the government prints money. is an alternative to income taxes and government borrowing .b. taxes most those who hold the most money .c. is the revenue created when the government prints money.

Inflation is problematic if

it distorts relative prices, causing a misallocation of resources.

Most economists believe that the classical model is the appropriate model for analysis of the economy in the

long run, because real and nominal variables are essentially determined separately in the long run

Wealth is redistributed from creditors to debtors when inflation was expected to be

low and it turns out to be high.

Open-market purchases by the Fed

make the price level rise, and make the value of money fall

Purchasing-power parity theory does not hold at all times because

many goods are not easily transported. the same goods produced in different countries may be imperfect substitutes for each other.

Other things the same, if the real interest rate in a country falls, domestic residents will desire to purchase

more capital goods and more foreign bonds

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

more domestic goods and fewer foreign goods.

Most economists believe the principle of monetary neutrality is

mostly relevant to the long run.

In the open-economy macroeconomic model, the supply of dollars in the market for foreign-currency exchange comes from

net capital outflow

A country has a trade deficit. Which of the following must also be true?

net capital outflow is negative and domestic investment is larger than saving

In the U.S., taxes on capital gains are computed using

nominal gains. This is one way by which higher inflation discourages saving

Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her

nominal income increased, but their real income decreased.

According to classical macroeconomic theory, changes in the money supply affect

nominal variables, but not real variables.

Economic variables whose values are measured in monetary units are called

nominal variables.

A U.S.-imposed quota on automobiles would shift

only the demand curve in the market for foreign-currency exchange right.

Inflation can be measured by the

percentage change in the consumer price index. Inflation in the U.S. has averaged about 3.6% over the last 80 years.

Over the past three decades, the United States has

persistently had a trade deficit.

According to the theory of purchasing-power parity, the nominal exchange rate between two countries must reflect the differing

price levels in those countries.

In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold

raised the price level, but decreased the value of gold in Cairo.

The model of aggregate demand and aggregate supply explains the relationship between

real GDP and the price level.

Line A is

real GDP.

In the open-economy macroeconomic model, the key determinant of net capital outflow is the

real interest rate.

Economic variables whose values are measured in goods are called

real variables.

If a government increases its budget deficit, then interest rates

rise and the real exchange rate appreciates.

The value of money falls as the price level

rises, because the number of dollars needed to buy a representative basket of goods rises.

People go to the bank more frequently to reduce currency holdings when inflation is high. The sacrifice of time and convenience that is involved in doing that is referred to as

shoeleather cost.

Investment is a

small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP

If France had positive net exports last year, then it

sold more abroad than it purchased abroad and had a trade surplus.

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

the dollar would buy more pounds. The appreciation would encourage you to buy more British goods and services

If the demand for net exports rises, which of the following happens in the open-economy macroeconomic model?

the exchange rate rises

According to the classical dichotomy, which of the following is influenced by monetary factors

the nominal interest rate.

According to the classical dichotomy, which of the following increases when the money supply increases?

the nominal wage.

The model of short-run economic fluctuations focuses on

the price level and real GDP.

When a country's government budget deficit decreases,

the real exchange rate of its currency decreases and its net exports increase.

On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes. What quantity is measured along the vertical axis?​

the value of money

If saving is greater than domestic investment, then

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