EC 309 - Final Exam

A decrease in the price level, holding nominal money supply constant, will shift the LM curve

downward the right

the Keynesian cross shows

equality pf planned expenditure and income in the short run

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except:

high inflation.

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ______ prices and ______ output in the short run.

higher; lower

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:

a higher interest rate

Equilibrium levels of income and interest rate are _____ related in the goods/services, and equilibrium levels of income and IR are_____ related in the market for real money balance

negatively; positively

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

output will decrease, but the price level will increase.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.

output; prices

In the short run an adverse supply shock causes:

prices to rise and output to fall.

in the kenose cross model, actual expenditure differ from planned expenditure by the amount of

unplanned inventory investments

if the interest rate is above the equilibrium value, the

supply of real balance exceeds the demand

If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is:

Y = 1,600 - 3T - 100r + 4G.

The long run refers to a period:

during which prices are flexible

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.

falls; falls

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

greater; outward

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

higher; lower

One argument in favor of tax cuts over spending-based fiscal stimulus is that:

historically tax cuts have been more successful than spending based fiscal stimulus

If money demand is infinite below some certain r (e.g., r) and zero above r, then the LM curve is ______ and ______ policy has no effect on output.

horizontal; monetary

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate fell by 1 percentage point over a year, Okun's law predicts that real GDP would:

increase by 5 percent.

The monetary transmission mechanism works through the effects of changes in the money supply on:

investment

in the Keynesian cross model, what adjusts to move the economy equal following a change in exogenous planned spending

production

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

both Central Bank A and Central Bank B should increase the quantity of money.

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift:

both the LM and the IS curves.

In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ______ and output .______

falls; rises

If a change in government regulations allows banks to start paying interest on checking accounts, this will:

increase the demand for money.

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.

weaker; stronger

If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is:

.0.005

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

260; y= c + I + g (solve for G)

(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______.

C; B

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.

What can the Fed do to dampen this boom and keep output closer to the natural level?

The Fed might reduce the money supply to offset the increase in velocity. Offsetting the change in velocity would stabilize aggregate demand. Thus, the Fed can reduce or even eliminate the impact of demand shocks on output and employment if it can skillfully control the money supply.

when drawn on a grab with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the

right with slope of the less than one

if firms are producing at level Y3 then inventories will ___ inducing firms to ____ production

rise \ decrease

A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production. slowdown; slowdown

slowdown; slowdown

An increase in consumer saving for any given level of income will shift the:

IS curve downward and to the left.

In the IS-LM model, starting with no expected inflation, if expected inflation becomes negative, then the:

IS curve shifts leftward.

The price level decreases and output increases in the transition from equilibrium is _____ the natural rate of output in the short run.

below

the IS and LM curves together generally determines

both the income and the interest rate

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

buy; LM

if the interest rate is r3, then people will ______ bonds and the interest rate will ______

buy; fall

The aggregate demand curve tells us possible:

combinations of P and Y for a given value of M.

in the Keynesian cross model, if taxes are reduced by 100, then planned expenditure ____ for any given level of income

increase, but by less than 100

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply shifting to _____.

increase; LM2

in the Keynesian cross model, a decrease in the interest rate ___ Planned investment spending and _____ the equal level of income

increases ; increases

A variable that links the market for goods and services and the market for real money balances in the IS- LM model is the

interest rate

Over the business cycle, investment spending ______ consumption spending.

is more volatile than

The spending hypothesis suggests that the Great Depression was caused by a:

leftward shift in the IS curve

An increase in the money supply:

lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run.

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

r3, Y2

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.

smaller than the multiplier

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

smaller the sensitivity of investment spending to the interest rate.

Which of the following is an example of a demand shock?

the introduction and greater availability of credit cards

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on

the money supply.