EC 111 Practice Exam 3

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.

The Soviet government in the 1980's never abandoned the ruble as the official currency. However, the people of Moscow preferred to accept

goods such as cigarettes or American dollars in exchange for goods and services, reminding us of the fact that government decree by itself is not sufficient for the success of a commodity money.

In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.

The principle of monetary neutrality implies that an increase in the money supply will

increase the price level, but not real GDP.

Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire

increased consumption, which shifts the aggregate-demand curve right.

An increase in the MPC

increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.

An open-market purchase

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.

As the MPC gets close to 1, the value of the multiplier approaches

infinity.

According to the short-run Phillips curve, inflation

would fall and unemployment would rise if policymakers decreased the money supply.

Higher inflation makes relative prices

more variable, making it less likely that resources will be allocated to their best use.

Credit card limits are included in

neither M1 nor M2.

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

neither an increase in the price level that is greater than expected nor an increase in the expected price level.

Suppose that the money supply decreases. In the short run, this increases prices according to

neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.

Refer to Figure 35-1. What is measured along the horizontal axis of the left-hand graph?

output

Other things the same, automatic stabilizers tend to

raise expenditures during recessions and lower expenditures during expansions.

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

real wealth rises, interest rates fall, and the dollar depreciates.

If inflation expectations rise, the short-run Phillips curve shifts

right. If inflation remains the same, unemployment rises.

If the value of a dollar falls, then the quantity of money demanded

rises, meaning people want to hold more of their wealth in a liquid form

The shoeleather cost of inflation refers to

the waste of resources used to maintain lower money holdings.

A favorable supply shock will cause

unemployment to fall and the short-run Phillips curve to shift left.

Suppose the Fed requires banks to hold 9 percent of their deposits as reserves. A bank has $18,000 of excess reserves and then sells the Fed a Treasury bill for $9,000. How much does this bank now have to lend out if it decides to hold only required reserves?

$27,000

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

decreases and aggregate demand shifts left.

When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money

demanded increases

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency

falls, because one unit of currency buys fewer ice cream cones.

Who was reappointed Chair of the Board of Governors in 2009 by President Barrack Obama?

Ben Bernanke

Which of the following is a store of value? currency US government bonds fine art all of the above

all of the above

When looking at a graph of aggregate demand, which of the following is correct?

The variable on the vertical axis is nominal; the variable on the horizontal axis is real

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

a decrease in the expected price level

Suppose that during World War II the long-run aggregate supply curve shifted right. In order for price and output to have changed in the direction they did, what would have to have happened to aggregate demand?

It would have to have shifted left by less than aggregate supply shifted

Assume the following. • The MPC has a value of 0.8. • The relationship between the interest rate, r, and investment, I, is given by the equation, where b is a positive constant. • Government purchases, G, are increased by $1,000. In which of the following cases would there be no crowding out?

b=0

A movement to the right along a given short-run Phillips curve could be caused by

contractionary monetary policy, but not an increase in the natural rate of unemployment.

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. In the long run, if the Fed does not respond, the change in price expectations created by the crisis shifts

short-run aggregate supply right.

Which of the following accounts for about two-thirds of the decline in output during a recession?

the decline in investment spending.

According to John Maynard Keynes,

the interest rate adjusts to balance the supply of, and demand for, money.

The aggregate demand and aggregate supply graph has

the price level on the vertical axis. The price level can be measured by the GDP deflator.

The discount rate is

the rate at which the Fed lends to banks.

During World War II, the economy's production increased about

100 percent and prices rose about 20 percent.

Suppose every good costs $8 per unit and Molly holds $120. What is the real value of the money she holds?

15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars.

If the reserve ratio is 15 percent, the money multiplier is

6.7

Typical estimates of the sacrifice ratio suggest that about 10 percent of annual output has to be given up in order to reduce the inflation rate from

7 percent to 5 percent.

Other things the same, if the long-run aggregate supply curve shifts right, prices

decrease and output increases.

Darla puts her money into a bank account that earns interest. One year later she sees that the account has 6 percent more dollars and that her money will buy 7.5 percent more goods.

The nominal interest rate was 6 percent and the inflation rate was -1.5 percent.

You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced

a nominal loss and a real gain.

Which of the following increase when the Fed makes open market purchases?

currency and reserves

Critics of stabilization policy argue that a. there is a lag between the time policy is passed and the time policy has an impact on the economy. b. the impact of policy may last longer than the problem it was designed to offset. c. policy can be a source of, instead of a cure for, economic fluctuations. d. All of the above are correct.

d. All of the above are correct.

When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an

excess demand for money, so the price level will fall.

For a number of years Canada and many European countries have had higher average unemployment rates than the United States. The Phillips curve suggests that these countries

have long-run Phillips curves to the right of the United States'.

If the Federal Reserve increases the interest rate on bank deposits at the Fed, banks will want to hold

more reserves, so the money multiplier will fall.

A favorable supply shock causes output to

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

Which of the following Fed actions would both decrease the money supply?

sell bonds and raise the reserve requirement