EC 111 Practice Final Exam

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

$60.75

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

the equilibrium interest rate increases.

There is an excess demand for money at an interest rate of

3.25 percent

Which of the following would cause stagflation?

Aggregate supply shifts left.

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall.

Other things the same, which of the following would cause the real exchange rate to rise?

Both an increase in the real interest rate and an increase in foreign demand for U.S. goods and services.

People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this?

Both sticky price theory and sticky wage theory

Which of the following would not be directly included in aggregate demand?

Government's tax collections

In 2008, the United States was in recession. Which of the following things would you not expect to have happened?

Increased real GDP

Suppose the economy starts at Point R. If aggregate demand increases from AD2 to AD3, then in the short run the economy moves to

Point O.

If the economy is in long-run equilibrium, then an adverse shift in short-run aggregate supply would move the economy from

Q to R.

A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?

The government reduces government spending, resulting in a decrease in people's incomes.

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

The interest-rate effect

Which of the following is not a determinant of the long-run level of real GDP?

The price level

If the stock market crashes, then

aggregate demand decreases, which the Fed could offset by purchasing bonds.

When Mexico suffered from capital flight in 1994, Mexico's net capital outflow

and net exports increased.

The economic boom of the early 1940s resulted mostly from

increased government expenditures.

In the market for foreign-currency exchange, the effects of an increase in the budget surplus shown in graph (c) can be illustrated as a move from j to

k

Because a government budget deficit represents

negative public saving, it decreases national saving

Other things the same, if technology increases, then in the long run

output is higher and prices are lower.

In which of the following cases would the quantity of money demanded be smallest?

r = 0.06, P = 1.0

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would

rise which by itself would increase aggregate demand.

If the real interest rate is 7 percent, there will be a

surplus of $60 billion.

If the economy starts at O, a decrease in the money supply moves the economy

to Q in the long run.

A country has domestic investment of $235 billion. Its citizens purchase $610 billion of foreign assets and foreign citizens purchase $300 billion of its assets. What is national saving?

$545 billion

A country has national saving of $60 billion, government expenditures of $40 billion, domestic investment of $10 billion, and net capital outflow of $45 billion. What is its supply of loanable funds?

$60 billion

Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%.Which curve shifts and in which direction?

Aggregate demand shifts left.

The shift of the short-run aggregate-supply curve from SRAS1 to SRAS2

could be caused by a decrease in the expected price level.

From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel wealthier, then it would have shifted aggregate

demand right.

In an open economy, national saving equals

domestic investment plus net capital outflow.

If the real exchange rate for the dollar is above the equilibrium level, the quantity of dollars supplied in the market for foreign-currency exchange is

greater than the quantity demanded and the dollar will depreciate.

At the equilibrium real interest rate in the open-economy macroeconomic model,

net capital outflow + domestic investment = saving.

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy.

Other things the same, a higher real interest rate

raises the quantity of loanable funds supplied.

Assume the MPC is 0.80. Assume there is a multiplier effect and that the total crowding-out effect is $14 billion. An increase in government purchases of $90 billion will shift aggregate demand to the

right by $436 billion.

If the Federal Reserve decided to raise interest rates, it could

sell bonds to lower the money supply.

If the money-supply curve MS on the left-hand graph were to shift to the left, this would

shift the AD curve to the left.

If the United States raised its tariff on tires, then at the original exchange rate there would be a

shortage in the market for foreign-currency exchange, so the real exchange rate would appreciate.

If the quantity of loanable funds supplied is greater than the quantity demanded, then there is a

surplus of loanable funds and the interest rate will fall.

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

vertical