ECON 2030 Final Quizzes

Which of the following correctly explains the crowding out effect

An increase in government expenditures increases the interest rate and so reduces investment spending.

What actions could be taken to stabilize output in repose to a large decrease in US net exports?

Decrease taxes or increase money supply

The price of imported oil rises. If the government wanted to stabilize output, which of the following could do it?

Increase government expenditures or increase the money supply

According to the interest rate effect, an increase in the price level

Increase money demand and interest rates. Investment declines.

Suppose there is a tax increase. To stabilize output, the federal reserve will

Increase the money sypply

It business and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

Increasing the money supple which lowers interest rates

Suppose the economy is currently at point A. To resort full employment, the appropriate fiscal response

Is a reduction in government spending

Which is the following is correct

Unemployment rises as the economy moves from point a to point b. Either fiscal or monetary policy could be used to move the economy from point b to point a. If the economy is left alone, then as the economy moves from point b to long-run equilibrium, the price level will fall farther.

The natural rate of output occurs at

Y2

If the US imposes an import quota on clothing, then the

demand for dollars in the market for foreign-currency exchange shifts right

When a country experiences capital flight its currency

depreciates and net exports rise

When a country suffers from capital flight, the exchange right

depreciates, because supply in the market for foreign-currency exchange shifts right

According to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply leads to

a decrease in the price level but does not change real GDP

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

fall, so firms increase investment

During recessions, income

falls and unemployment rises

Suppose business in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift

aggregate demand left

If the French government increases its expenditures and reduces taxes, then France's interest rate

and its exchange rate rise

If the Japanese government raised its budget deficit, then the yen would

appreciate and Japanese net exports would fall

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. What happens to the price level and real GDP in the short run?

both the price level and real GDP fall

The long-run aggregate supply curve shifts right if

immigration from abroad increases, the capital stock increases, technology advances

The misconception theory of the short-run aggregate curve says if the price level in higher than people expected, then some firms believe that relative price of what they produce has

increased, so they increase production

If the supply of loanable funds shifts right, then the equilibrium

interest rate falls, so domestic residents will want to purchase more foreign assets

If people decide to hold less money, then

money demand decreases, there is an excess supply of money, and interest rates fall.

In the open-economy macroeconomic model, the supply of loanable funds equals

national saving. The demand for loanable funds comes from domestic investment + net capital outflow.

In the open-economy macroeconomic model, if foreign interest rates rise and the US interest rate stays the same then US

net capital outflow rises, so the supply of dollars in the market for foreign exchange shifts right

If the current interest rate is 2 percent

people will sell more bonds, which drives interest rates up.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected

production is more profitable and employment rises

If the government repeals an investment tax credit and increases income taxes

real GDP and the price level fall

If foreigners want to buy more US bonds, then in the market for foreign currency exchange the exchange rate

rises and the quantity of dollars traded falls

Other things the same, people in the US would want to save more if the real interest in the US

rose. The increased saving would increase the quantity of loanable funds supplied.

Suppose that US firms desire to purchase more equipment and build more factories and stores in the US. The effects of this are illustrated by

shifting the demand curve in panel a to the right and the supply curve in panel c to the left

An increase in a country's budget surplus shifts its

supply of loanable funds right and increases investment spending

If at a given real interest rate desired national saving is $60 billion, domestic investment is $30 billion, and net capital outflow is $20 billion, then at that real interest rate in the loanable funds market there is a

surplus. The real interest rate will fall.

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

the equilibrium interest rate increases.

People choose to hold a larger quantity of money if

the interest rate falls, which causes the opportunity cost of holding money to fall

In the open-economy macroeconomic model, if the investment demand decreases, then

the supply of dollars in the market for foreign-currency exchange shifts right

When the Fed buys bonds

the supply of money increases and so aggregate demand shifts right

Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. Refer to Figure 34-6. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD, to AD, if there were no crowding out; the AD curve actually shifts from AD, to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD, and AD, is $55 billion. The extent of crowding out, for any particular level of the price level, is

20 billion

If the MPC = 4/5, then the government purchases multiplier is

5

The aggregate demand curve could shift from AD1 to AD2 as a result of

A decrease in net exports

Other things the same, what would cause the exchange rate to rise?

Both an increase in the interest rate and an increase in foreign demand for US goods and services

A US grocery chain borrows money to buy a wardrobe in Ohio and another in Italy. Borrowing for which warehouse is included in the demand for loanable funds in the US?

Both the one in Ohio and the one in Italy

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

Short-run aggregate supply shifts right

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

Critics of stabilization policy argue that

The lag problem ends up being a cause of economic fluctuations

If the price level is higher than expected, firms might raise their production in the short run if

The nominal wage they pay their employees was set based on the expected price level. Prices are costly to adjust and they have set their price at some time in the past but are not ready to change it. They believe that the price of their product has risen relative to the price of other products, when in fact the rise in the price of their product reflects an increase in the general price level.

Other things the same, continued increases in technology lead to

continued increases in real GDP and continued decreases in the price level

Suppose households attempt to decrease their money holdings. To counter this decrease in money demand and stabilize output, the federal reserve will

decrease the money supply

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

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

When a country suffers from capital flight, the demand for loanable funds in that country shifts

right, which increases interest rates in that country

An economic expansion caused by a shift in aggregate demand prices to

rise in the short run, and rise even more in the long run

If the US 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

A movement from P1 and Y2, to P2 and Y1 would be consistent with

stagflation

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

to C in the long run

If the economy starts at A and there is a fall in aggregate demand, the economy moves

to C in the long term

In the graph of the money market, the money supply curve is

vertical. It shifts rightward if the Fed buys bonds.

If output is above its natural rate, then according to sticky-wage theory

workers will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.