Econ 311: Money and Banking Final

(Chapter 21) Assume the IS curve is given as Y=10-2r and the MP curve is given as r=0.50+0.5pi. The AD curve is _____________. If pi 1%, then the real interest rate is ________% and output is _______.

Y=9-pi 1% 8

(Chapter 22) Observe a positive demand shock in the graph to the right. In the short run, ______________________. in the long run, _____________________ In the figure, the long-run equilibrium is given by _____________

"both inflation and output rise" "inflation rises, but output does not change." Point 3 (AD2 and LRAS)

(Chapter 17) The following data are​ given: Et​ = yen120 ​= $1.00 Et​+1​ = yen95 ​= $1.00 ​(one year​ later) iJapan​ = 10​% annually iU.S.​ = 10​% annually Calculate the future value of​ $1,000 in one year invested in the United States and Japan. If invested in the United​ States, the future value is_______. If invested in Japan​ (and repatriated back to​ dollars), the future value is ________.

$1,100 $1,389.47

(Chapter 23) What type of negative shock, if any, can pose a dilemma for policymaker? (a) A temporary negative supply shock (b) A permanent negative supply shock (c) An aggregate demand shock (d) All of the above are correct.

(a) A temporary negative supply shock

(Chapter 23) In what ways can non-conventional monetary policy affect the real interest rate for investments when the economy reaches the zero lower bound? How are credit spreads affected? (select all that apply) (a) By providing liquidity to key credit makers, the central bank can directly reduce financial frictions, which lowers the real interest rate for investments at any given safe policy interest rate. Credit spreads are reduced directly as financial frictions are reduced. (b) By providing forward guidance, the central banks acts to reduce financial frictions for any given current safe policy rate, thereby lowering the real interest rate for investments. Credit spreads are reduced directly as financial frictions are reduced. (c) By purchasing private assets, the central bank reduces financial frictions in specific asset classes, and therefore the real interest rate for investments in those markets. Credit spreads are reduced directly as financial frictions are reduced. (d) By purchasing government securities, the central bank directly lowers the safe policy real interest rate at any given level of financial frictions. Credit spreads are not affected directly.

(a) By providing liquidity to key credit makers, the central bank can directly reduce financial frictions, which lowers the real interest rate for investments at any given safe policy interest rate. Credit spreads are reduced directly as financial frictions are reduced. (b) By providing forward guidance, the central banks acts to reduce financial frictions for any given current safe policy rate, thereby lowering the real interest rate for investments. Credit spreads are reduced directly as financial frictions are reduced. (c) By purchasing private assets, the central bank reduces financial frictions in specific asset classes, and therefore the real interest rate for investments in those markets. Credit spreads are reduced directly as financial frictions are reduced. (d) By purchasing government securities, the central bank directly lowers the safe policy real interest rate at any given level of financial frictions. Credit spreads are not affected directly.

(Chapter 23) Suppose that a decrease in consumption spending reduces aggregate demand, creating a recession and unemployment. Which of the following would be an appropriate nonactivist policy response to this situation? (a) Do nothing, because the short-run aggregate supply curve will eventually shift rightward, returning the economy to full employment (b) Increase the growth rate of the money supply in order to increase aggregate demand and restore full employment. (c) Do nothing, because the short-run aggregate supply curve will eventually shift leftward, returning the economy to full employment (d) Decrease government spending in order to reduce inflation and restore full employment. Which of the following would be an appropriate activist policy response to this situation? (a) Do nothing, because the short-run aggregate supply curve will eventually shift leftward, returning the economy to full employment. (b) Decrease government spending in order to reduce inflation and restore full employment. (c) Do nothing, because the short-run aggregate supply curve will eventually shift rightward, returning the economy to full employment. (d) Increase the growth rate of the money supply in order to increase aggregate demand and restore full employment.

(a) Do nothing, because the short-run aggregate supply curve will eventually shift rightward, returning the economy to full employment. (d) Increase the growth rate of the money supply in order to increase aggregate demand and restore full employment.

(Chapter 21) "If f increases, then the Fed can keep output constant by reducing the real interest rates by the same amount as the increase in financial frictions." Is this statement true, false, or uncertain? Explain your answer. (a) False. The Fed would need to reduce the real interest rates by a little bit less than the changes in f to keep output constant. (b) True. The Fed can keep output constant by reducing the real interest rate by the same amount as the increase in financial frictions. (c) Uncertain. It depends on whether the Fed's distaste for inflation (characterized by the parameter lambda) equals zero or not.

(a) False. The Fed would need to reduce the real interest rate by a little bit less than the change in f to keep output constant.

(Chapter 21) Any factor that shifts the ________ curve shifts the _____________ curve in the _____________ direction. (a) IS, AD, same (b) IS, AD, opposite (c) MP, IS, opposite (d) MP, IS, same Suppose that the taxes are decreased and the central bank conducts an autonomous easing of monetary policy. What will be the result? (a) The IS curve shifts left, the MP curve shifts up, and the AD curve shifts left. (b) The IS curve shifts right, the MP curve shifts down, and the Ad curve shifts right. (c) The IS curve shifts left, the MP curve shifts down, and the AD curve shifts right (d) The IS curve shifts right, the MP curve shifts up, and there is an ambiguous effect on the AD curve. Which of the following represents a movement along a given AD curve? (a) Inflation decreases, the real interest rate decreases, the aggregate output increases. (b) Inflation decreases, the real interest rate decreases, and aggregate output decreases. (c) Inflation increases, the real interest rate increases, and aggregate output increases (d) Inflation increases, the real interest rate decreases, and aggregate output increases.

(a) IS, AD, same (b) The IS curve shifts right, the MP curve shifts down, and the AD curve shifts right (a) Inflation decreases, the real interest rate decreases, and aggregate output increases.

(Chapter 21) What is the monetary policy curve? (a) It indicates the relationship between the inflation rate and the real interest rate. (b) It indicates the relationship between net exports and real interest rate. (c) It indicates the relationship between consumption expenditure and the real interest rate (d) It traces out he points at which the goods market is in equilibrium. Why does the monetary policy curve slope upward? (check all that apply) (a)When inflation​ increases, the supply of real money balances increases. This increases the equilibrium nominal interest rate in the money​ market, which also increases the real interest rate in the short run. (b) Monetary policymakers will follow the Taylor principle and respond aggressively to an increase in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises. (c) When inflation​ increases, the supply of real money balances declines. This increases the equilibrium nominal interest rate in the money​ market, which also increases the real interest rate in the short run. (d) Monetary policymakers will follow the Taylor principle and respond aggressively to a decrease in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises.

(a) It indicates the relationship between inflation rate and real interest rate. (b) Monetary policymakers will follow the Taylor principle and respond aggressively to an increase in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises. (c) When inflation​ increases, the supply of real money balances declines. This increases the equilibrium nominal interest rate in the money​ market, which also increases the real interest rate in the short run.

(Chapter 21) How does an autonomous tightening or easing of monetary policy by the Fed affect the MP curve? (a) When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve downward. (b) When the Fed decides to lower the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to raise the real interest rate at any given inflation rate, shifts the MP curve downward. (c) When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts downward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve upward. (d) None of the above are correct.

(a) When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve downward.

(Chapter 21) Which of the following causes the MP curve to shift down? (a) an autonomous easing of monetary policy (b) an increase in inflation (c) an autonomous tightening of monetary policy (d) a decrease in inflation When r increases, this causes a movement along the _________ curve, and shifts the ______ curve. (a) MP, AD (b) MP, IS (c) IS, AD (d) AD, MP

(a) an autonomous easing of monetary policy (c) IS, AD

(Chapter 23) The case for non-activist policy is stronger in: (a) graph (a) because in that graph prices and wages are more flexible, necessitating bigger changes in policy for the same change in output (b) graph (b) because in that graph prices and wages are less flexible, necessitating bigger changes in policy for the same change in output (c) graph (b) because in that graph prices and wages are more flexible, necessitating bigger changes in policy for the same change in output. (d) graph (a) because in that graph prices and wages are less flexible, necessitating bigger changes in policy for the same change in output Graph A: SRAS is steeper Graph B: SRAS is flatter

(a) graph (a) because in that graph prices and wages are more flexible, necessitating bigger changes in policy for the same change in output.

(Chapter 23) If most shocks to the economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes: (a) inflation will also stabilize economic activity, even in the short urn (b) economic activity will also stabilize inflation, but only in the short run. (c) inflation will destabilize economic activity in the short run (d) economic activity will destabilize inflation in the short run

(a) inflation will also stabilize economic activity, even in the short run

(Chapter 23) Aggregate demand-aggregate supply analysis suggests that if the Federal Reserve wants to increase its inflation rate target in the long run: (a) it should cause the monetary policy curve to shift downward (b) it can increase the target in the long run only by tolerating a permanent output gap (c) it should increase the real interest rate (d) the Taylor rule is the only information needed to determine the appropriate federal funds rate when doing so.

(a) it should cause the monetary policy curve to shift downward.

(Chapter 22) The self-correcting mechanism works its "magic" primarily through the linkage running from the (a) labor market to the product market via changes in the rate of change in production costs. (b) labor market to the product market via changes in the rate of profit (c) product market to the labor market via changes in the rate of hiring (d) aggregate demand curve to the aggregate supply curve. Had the government been unwilling in 2001 to wait for the self-correcting mechanism to "come into play," the restoration of potential output and full employment might have been pursed by _____________ Which of the following would not have enabled an activist government from pursuing the restoration of potential output and full employment after the negative demand shocks? (a) An increase in government purchases (b) An easing of monetary policy (c) An increase in the minimum wage (d) A decrease in taxes.

(a) labor market to the product market via changes in the rate of change in production costs. increasing aggregate demand (c) an increase in the minimum wage.

(Chapter 22) If stagflation is bad (high inflation and high unemployment), does this necessarily mean that very low inflation and very low unemployment is good? (check all that apply) (a) Yes. Extremely low levels of unemployment and inflation ensures that the economy is producing at potential output levels and that the economy is growing at a modest pace. (b) No. If unemployment is too low relative to the natural rate of unemployment, future inflation risk could build even if the current inflation rate remains relatively low. (c) No. Having too low of an inflation rate could mean that an adverse shock could result in a deflationary episode which can be particularly damaging. (d) Yes. Low unemployment and low inflation are associated with rapid increase in wages and thus quality of life.

(b) No. If unemployment is too low relative to the natural rate of unemployment, future inflation risk could build even if the current inflation rate remains relatively low. (c) No. Having too low of an inflation rate could mean that an adverse shock could result in a deflationary episode which can be particularly damaging.

(Chapter 17) In the mid to late 1970s, the yen appreciated relative to the dollar, even though Japan's inflation rate was higher than America's. What does this imply about Japanese productivity? (a) The Japanese central bank was selling yen in the foreign exchange market, which created inflation. (b) Productivity in japan rose faster than in the United States during this period. (c) The Japanese central bank was buying yen in the foreign exchange market, which created inflation. (d) Productivity in Japan rose slower than in the United States during this period. (e) Economic theory is unable to explain this phenomenon.

(b) Productivity in Japan grew faster than in the United States during this period.

(Chapter 21) If an asset-price bubble begins to form, assuming the central bank responds, how is it likely to respond, and what will be the effect on the MP curve? (a) The central bank would likely autonomously ease policy by decreasing r, the autonomous (exogenous) component of the real interest rate. This would shift the MP curve down. (b) The central bank would likely autonomously tighten policy by increasing r, the autonomous (exogenous) component of the real interest rate. This would shift the MP curve up. (c) The central bank would likely follow the Taylor principle, reacting to the asset-price bubble by lowering real interest rates. This would be reflected in a movement along the MP curve in the south-west direction (d) The central bank would likely follow the Taylor principle, reacting to the asset-price bubble by raising real interest rates. This would be reflected in a movement along the MP curve in the north-east direction.

(b) The central bank would likely autonomously tighten policy by increasing r, the autonomous (exogenous) component of the real interest rate. This would shift the MP curve up.

(Chapter 22) What factors led to a decrease in both the unemployment rate and the inflation rate in the 1990s? (check all that apply.) (a) The Volcker disinflation, which continued into the 1990s (b) The computer revolution, which caused rapid increases in productivity (c) An increase in interest rates by the Federal Reserve to prevent the economy form overheating (d) Improved demographic factors, such as an increase in the average age of the workforce (e) Changes in the health care industry, which greatly increased medical care costs relative to other goods and services

(b) The computer revolution, which caused rapid increases in productivity (d) Improved demographic factors, such as an increase in the average age of the workforce.

(Chapter 22) Suppose that the public believes that a newly announced anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the inflation rate in the short run? (a) The inflation rate will rise and aggregate output will fall (b) The inflation rate will fall and aggregate output will rise (c) Both the inflation rate and aggregate output will rise (d) Both the inflation rate and aggregate output will fall.

(b) The inflation rate will fall and aggregate output will rise.

(Chapter 22) Which of the following best explains real business cycle theory? (a) It may take a long time for economies to correct themselves, and thus it is desirable to use activist policies to restore full employment (b) The potential level of output changes due to technology and other shocks, creating business cycles even though the economy is still producing at potential output. (c) The economy my depart from full employment as a result of past high unemployment, and thus even if output is at the natural rate, unemployment may be very high (d) The self-correcting economy quickly returns to full employment, and thus it is not necessary to use activist policies.

(b) The potential level of output changes due to technology and other shocks, creating business cycles even though the economy is still producing at potential output.

(Chapter 17) If the Indian government unexpectedly announces that the tariffs on foreign goods will be higher one year from now, what will happen to the value of the Indian rupee today? (a) Nothing will happen today, but the rupee will depreciate one year from today. (b) The rupee will appreciate today (c) Nothing will happen today, but the rupee will appreciate one year from today. (d) The rupee will depreciate today. (e) Nothing will happen to the rupee today or in the future.

(b) The rupee will appreciate today

(Chapter 21) How is an autonomous tightening or easing of monetary policy different than a change in the real interest rate due to a change in the current inflation rate? (a) Tightening or easing of monetary policy may cause a change in the responsiveness of the real interest rate to the inflation rate, not in its autonomous component. (b) With a tightening or easing of monetary policy, some projected changes in monetary policy independent of the current inflation rate may occur (c) Tightening or easing of monetary policy is reflected as a movement along the monetary curve rather than an upward or downward shift of the curve (d) Autonomous tightening or easing of monetary policy is based on a change in the nominal interest rate, not the real interest rate.

(b) With a tightening or easing of monetary policy, some projected changes in monetary policy independent of the current inflation rate may occur.

(Chapter 21) The Taylor Principle (a) implies the IS curve is downward sloping (b) holds when lambda greater than 0 (c) leads to higher real interest rates when inflation decreases. (d) leads to raise of the nominal interest rate equal to the rise in inflation the MP curve is _____________ sloping due to the Taylor Principle.

(b) holds when lambda is greater than 0 upward

(Chapter 21) Consider an economy described by the following: C=$3.25 trillion mpc=0.75 I=$1.3 trillion d=0.3 G=$3 trillion x=0.2 T=$2 trillion lambda = 1.5 NX=-$1 trillion r=1.5 f=1 The expression for the MP curve is: (a) r=1.5+0.75pi (b) r=1.5+1.5pi (c)r=2+0.75pi (d)r=2+1.5pi The expression for the AD curve is: (a) Y=13-3pi (b) Y=-3pi (c) Y=16-1.3pi (d) Y=13-1.3pi Assume that pi=2. The real interest rate is ________________ The equilibrium level of output is $___________ trillion Suppose government spending increases to $3.5 trillion. What happens to equilibrium output? Equilibrium output will _____________ to $___________ trillion If the Fed wanted to keep output constant at the initial level, then what monetary policy change should occur? In order to keep output constant, the Fed will have to ____________ the real interest rate to r=____________%

(b) r=1.5+15pi (b) Y=-3pi 4.5% $10 trillion increase $12 trillion increase 5.5%

(Chapter 21) The Federal Reserve affects the short-term nominal interest rate (a) through influencing fiscal policy. (b) through adjusting reserves in the banking system (c) by enforcing contracts (d) by changing the discount rate. When the Fed drains reserves from the banking system, the money banks have to lend to each other ______________, and the federal funds rate _________.

(b) through adjusting reserves in the banking system falls rises

(Chapter 21) How might the central bank respond? Why? (a) If the central bank wants to avoid an economic bubble due to an increase in financial frictions, it needs to increase the real interest rate for investments through an autonomous tightening of monetary policy (b) If the central bank wants to avoid a recession due to an increase in financial frictions, it needs to reduce the real interest rate for investments by following the Taylor principle. (c) If the central bank wants to avoid a recession due to an increase in financial frictions, it needs to reduce the real interest rate for investments through an autonomous easing of monetary policy. (d) If the central bank wants to avoid an economic bubble due to an increase in financial frictions, it needs to increase the real interest rate for investments by following the Taylor principle.

(c) If the central bank wants to avoid a recession due to an increase in financial frictions, it needs to reduce the real interest rate for investments through an autonomous easing of monetary policy.

(Chapter 21) When the inflation rate increases, what happens to the fed funds rate? Operationally, how does the Fed adjust the fed funds rate? (a) The Fed adjusts the fed funds rate down to provide more reserves to the banking system. (b) The Fed does not adjust the fed funds rate, as it is the real interest rate that should be adjusted. (c) The Fed adjusts the fed funds rate up through open market sale of bonds. (d) The Fed can adjust the fed funds rate either up or down, depending on the autonomous component of the real interest rate.

(c) The Fed adjusts the fed funds rate up through open market sales of bonds.

(Chapter 21) What would be the effect of an increase of U.S. net exports on the aggregate demand curve? (a) The aggregate demand curve shifts to the left. (b) The slope of the aggregate demand curve increases (c) The aggregate demand curve shifts to the right. (d) The aggregate demand curve does not shift. Would an increase in net exports affect the monetary policy curve? (a) Yes, the monetary policy curve shifts to the left (b) Yes, the slope of the monetary policy curve increases. (c) No, the monetary policy curve does not shift (d) Yes, the monetary policy curve shifts to the right.

(c) The aggregate demand curve shifts to the right (c) No, the monetary policy curve does not shift

(Chapter 22) "The appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand in the United States." Is this statement true, false, or uncertain? (a) It is uncertain whether the appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand because the appreciation of the U.S. dollar also affects the short-run aggregate supply curve and increases aggregate demand (b) the statement is false. An appreciation of the U.S. dollar increases net exports and according to aggregate demand and supply analysis, the aggregate demand curve shifts upward and to the right, thus increasing output. (c) The statement is true. an appreciation of the U.S. dollar decreases net exports and according to the aggregate demand and supply analysis, the aggregate demand curve shifts downward and to the left, thus reducing output.

(c) The statement is true. An appreciation of the U.S. dollar decreases net exports and according to aggregate demand and supply analysis, the aggregate demand curve shifts downward and to the left, thus reducing output.

(Chapter 21) Describe how (if at all) the IS curve, MP curve, and AD curve are affected in the following situation: There is an increase in the current inflation rate. (a) There is a movement along the MP curve, which decreases the real interest rate, the IS curve shifts to the right, and there is a movement along the AD curve, increasing output. (b) The IS curve is not affected, the MP curve becomes steeper, and the slope of the AD curve becomes flatter. (c) There is a movement along the MP curve, which increases the real interest rate, a movement along the IS curve to lower output, and a movement along the AD curve, reducing output. (d) The IS curve shifts to the right, the MP curve shifts to the left and there is movement along it, and the AD curve does not shift. (e) All the curves shift to the right.

(c) There is a movement along the MP curve, which increases the real interest rate, a movement along the IS curve to lower output, and a movement along the AD curve, reducing output.

(Chapter 23) How can demand-pull inflation lead to cost-push inflation? (a) demand-pull inflation shifts the aggregate supply curve downward, which causes a temporary negative supply shock and hence cost-push inflation (b) When demand-pull inflation occurs, unemployment is usually above the natural rate level, thus providing a greater chance for cost-push inflation to occur. (c) When a demand-pull inflation produces higher inflation rates, it could prompt workers to demand higher wages in anticipation of future higher inflation, creating cost-pushing inflation. (d) Although policymakers struggle with the distinction between demand-pull inflation and cost-push inflation, these are unrelated and one cannot lead to the other.

(c) When a demand-pull inflation produces higher inflation rates, it could prompt workers to demand higher wages in anticipation of future higher inflation, creating cost-push inflation.

(Chapter 22) If the Federal Reserve increases the money supply at the same time that congress implements an income tax cut, then which of the following is true? (a) both of these actions will decrease aggregate demand (b) the change in the money supply will increase aggregate demand, while the tax cut will decrease aggregate demand. (c) both of these actions will increase aggregate demand (d) the change in the money supply will decrease aggregate demand, while the tax cut will increase aggregate demand The graph to the right depicts aggregate supply and demand in long-run equilibrium Using the line drawing tool, show the short-run effect of an increase in the money supply combined with a tax cut. In the long run, the equilibrium price level will _____________ and the equilibrium level of aggregate output will ______________-

(c) both of these actions will increase aggregate demand the aggregate demand curve shifts up and to the right increase remain unchanged.

(Chapter 22) When financial frictions increase, the real cost of borrowing ____________, and the AD curve __________. (a) decreases, shifts left (b) increases, shifts right (c) increases, shifts left (d) decreases, shifts right When inflation increases, the AD curve _________________

(c) increases, shifts left does not shift

(Chapter 23) The divine coincidence occurs when: (a) an event causes both deflation and an increase in output (b) an increase in the inflation rate produces no change in the quantity supplied of output (c) monetary policies accomplish the dual objectives of stabilizing inflation and economic activity. (d) there is a trade-off between the pursuit of economic stability and inflation stability.

(c) monetary policies accomplish the dual objectives of stabilizing inflation and economic activity.

(Chapter 21) Consider an economy described by the following: C =$3.25 trillion mpc = 0.75 I = ​$1 trillion d ​= 0.3 G = $3.5 trillion x = 0.1 T = ​$3 trillion lambda = 1.5 NX = $1.5 trillion r = 1 f = 1 The expression for the MP curve is: (a) r=1+0.75pi (b) r=2+1.5pi (c) r=1+1.5pi (d) r=2+0.75pi The expression for the AD curve is: (a) Y=-2.4pi (b) Y=20.16-2.4pi (c) Y=25.2-1pi (d) Y=20.16-1pi Assume that pi=1%. The real interest rate r is __________% The equilibrium level of output is $_______ trillion Consumption is $__________ trillion Investment is $__________ trillion Net exports are $_____________ trillion Suppose the Fed increases r to r=2. The real interest rate is _________% The equilibrium level of output is $___________ trillion Consumption is $______ trillion Planned investment is $__________ trillion Net exports are $_________ trillion When the Fed increased r, output, consumption, planned investment, and net exports all decreased. The Fed increased r because it thinks the economy will ______________ in the future, or there is a risk that inflation will __________ in the future.

(c) r=1+1.5pi (a) Y=-2.4pi 2.5% $22.8 trillion $18.1 trillion $-0.05 trillion $1.25 trillion 3.5% $21.2 trillion $16.9 trillion $-0.35 trillion $1.15 trillion strengthen rise

(Chapter 23) Suppose three economies are hit with the same negative supply shock. In county A, inflation initially rises and output falls, then inflation rises more and output increases. In country B, inflation initially rises and output falls; then both inflation and output fall. In country C, inflation rises and output falls, then inflation falls and output eventually increases. What type of stabilization approach did country A take? In Country A, policymakers chose a policy to: (a) stabilize inflation (b) leave autonomous monetary policy unchanged (c) stabilize output

(c) stabilize output

(Chapter 22) The aggregate demand curve slopes downward because a rise in inflation leads: (a) the monetary policy authorities to impose credit controls (b) the fiscal policy authorities to impose contractionary fiscal measures. (c) the monetary policy authorities to raise real interest rates. (d) consumers and businesses to increase autonomous expenditures The short-run aggregate supply curve slopes upward because an increase in output relative to potential output: (a) leads to unstable markets and higher inflation (b) creates tight labor and product markets that cause inflation to rise (c) causes markets to have excess supplies, putting upward -pressure on inflation. (d)induces aggregate demand to increase, increasing inflation.

(c) the monetary policy authorities to raise real interest rates (b) creates tight labor and product markets that cause inflation to rise.

(Chapter 17) If the exchange rate is below the equilibrium exchange rate, then (a) the quantity of domestic assets supplied is less than the quantity of domestic assets demanded, and the domestic currency will depreciate. (b) the quantity of domestic assets supplied is greater than the quantity of domestic assets demanded, and the domestic currency will depreciate. (c) the quantity of domestic assets supplied is less than the quantity of domestic assets demanded, and the domestic currency will appreciate. (d) the quantity of domestic assets supplied is greater than the quantity of domestic assets demanded, and the domestic currency will appreciate. Based on the figure, equilibrium in the foreign exchange market occurs at __________. _________________ shows excess supply and ___________ shows excess demand.

(c) the quantity of domestic assets supplied is less than the quantity of domestic assets demanded, and the domestic currency will appreciate. Point B Point A Point C

(Chapter 22) In the short run, which of the following is likely to happen if there is a decrease in taxes? (a) A decrease in taxes will lead to a leftward shift of the aggregate demand curve. Therefore, there will be a decrease in both inflation and output. (b) A decrease in taxes will lead to a movement along the aggregate demand curve in the north-west direction. Therefore there will be an increase in inflation and a decrease in output. (c) A decrease in taxes will lead to a movement along the aggregate demand curve in the south-east direction. Therefore, there will be a decrease in inflation and an increase in output. (d) A decrease in taxes will lead to a rightward shift of the aggregate demand curve. Therefore there will be an increase in inflation and output. In the long run, which of the following is likely to happen if there is a decrease in taxes? (a) The economy will reach a new long-run equilibrium, with potential level of output and inflation permanently higher (b) The economy will reach a new long-run equilibrium with potential level of output and inflation permanently lower (c) The economy will reach a new long-run equilibrium, with permanently higher inflation and output (d) The economy will reach a new long-run equilibrium, with higher output and permanently lower inflation

(d) A decrease in taxes will lead to a rightward shift of the aggregate demand curve. Therefore, there will be an increase in inflation and output (a) The economy will reach a new long-run equilibrium, with potential level of output and inflation permanently higher.

(Chapter 22) Classify the following situation as a supply or demand shock: Households and firms become more optimistic about the economy: (a) A negative demand shock (b) A positive (temporary) supply shock (c) A negative (temporary) supply shock (d) A positive demand shock Determine the effects on inflation and output in the short-run and the long-run using AD/AS graph analysis In the short run, output __________ and inflation ______________. In the long run, output ________ to potential and inflation ________________.

(d) A positive demand shock increases increases falls rises

(Chapter 21) What is the key assumption underlying the Fed's ability to control the real interest rate? (a) Nominal interest rates should be increased by more than any rise in expected inflation to stabilize inflation (b) It is the real interest rate, not the nominal rate, that determines the level of equilibrium output.. (c) The real interest rate is the nominal interest rate minus expected inflation (d) Because inflation is relatively sticky in the short run, when the Federal Reserve changes the federal funds rate, it implies similar changes in real interest rates.

(d) Because inflation is relatively sticky in the short run, when the Federal Reserve changes the federal funds rate, it implies similar changes in real interest rates.

(Chapter 23) In the United States, inflation increased significantly in the 1960s and 1970s. However, unemployment behaved very differently in the two decades. Which of the following is true of the behavior of unemployment in the 1960s? (a)Most of the inflation came form cost-push sources, such as adverse price shocks, declines in productivity, and sharp increases in inflation expectations. This resulted in substantial shifts of the short-run aggregate supply curve downward, and triggering spiraling inflation and extremely low levels of unemployment. (b) Most of the inflation came from cost-push sources, such as adverse price shocks, declines in productivity, and sharp increases in inflation expectations. This resulted in substantial shifts of the short-run aggregate supply curve upward, and triggering spiraling inflation and higher unemployment (c) Much of the inflationary pressures were generated from demand-pull inflation policies due to highly contradictory fiscal and monetary policy pushing the aggregate demand curve far to the left. This helped to increase unemployment to very high levels. (d) Much of the inflationary pressures were generated form demand-pull inflation policies due to highly expansionary fiscal and monetary policy pushing the aggregate demand curve far to the right. This helped to reduce unemployment to low levels. Which of the following is true of the behavior of unemployment in the 1970s? (a) Most of the inflation came form cost-push sources, such as adverse price shocks, declines in productivity, and sharp increases in inflation expectations. This resulted in substantial shifts of the short-run aggregate supply curve downward, and triggering spiraling inflation and extremely low levels of unemployment. (b) Much of the inflationary pressures were generated from demand-pull inflation policies due to highly expansionary fiscal and monetary policy pushing the aggregate demand curve far to the right. This helped to reduce unemployment to low levels. (c) Most of the inflation came from cost-push sources, such as adverse price shocks, declines in productivity, and sharp increases in inflation expectations. This resulted in substantial shifts of the short-run aggregate supply curve upward, and triggering spiraling inflation and higher unemployment (d) Much of the inflationary pressures were generated from demand-pull inflation policies due to highly contractionary fiscal policy pushing aggregate demand curve far to the left. This helped to increase unemployment to very high levels.

(d) Much of the inflationary pressures were generated form demand-pull inflation policies due to highly expansionary fiscal and monetary policy pushing the aggregate demand curve far to the right. This helped to reduce unemployment to low levels. (c) Most of the inflation came from cost-push sources, such as adverse price shocks, declines in productivity, and sharp increases in inflation expectations. This resulted in substantial shifts of the short-run aggregate supply curve upward, and triggering spiraling inflation and higher unemployment.

(Chapter 23) What will happen if policymakers erroneously believe that the natural rate of unemployment is 7% when it is actually 5% and pursue stabilization policy? (a) Policymakers will provide a fiscal stimulus package to lower the unemployment rate and increase aggregate demand (b) Policymakers will leave autonomous monetary policy unchanged, relying on the self-correcting mechanism (c) Policymakers will definitely pursue expansionary policy, which will help to reduce the unemployment rate (d) Policymakers will likely pursue contractionary policy, which could lead to deflation and severe economic downturn.

(d) Policymakers will likely pursue contractionaly policy, which could lead to deflation and severe economic downturn.

(Chapter 21) What is the real interest rate? (a) The nominal interest rate plus expected inflation (b) Expected inflation (c) The nominal interest rate (d) The nominal interest rate minus expected inflation Why can the Fed control the real interest rate in the short run but not in the long run? (a) It adjusts for​ inflation, and prices are sticky in the short run.​ Hence, when a change in the​ Fed's monetary policy causes the nominal interest rate to​ change, the real interest rate also changes in the same direction. In the long​ run, actual and expected inflation change in response to changes in monetary​ policy, leaving the real interest rate unaffected. (b) Inflation and prices are sticky in the short run.​ Hence, when a change in the​ Fed's monetary policy causes the nominal interest rate to​ change, the real interest rate does not change. In the long​ run, actual and expected inflation change in response to changes in monetary​ policy, leaving the real interest rate unaffected. (c) It adjusts for inflation in the short run.​ Hence, when a change in the​ Fed's monetary policy causes the nominal interest rate to​ change, the real interest rate also changes. In the long​ run, actual and expected inflation does not change in response to changes in monetary policy. (d) None of the above are correct.

(d) The nominal interest rate minus expected inflation (a) It adjusts for​ inflation, and prices are sticky in the short run.​ Hence, when a change in the​ Fed's monetary policy causes the nominal interest rate to​ change, the real interest rate also changes in the same direction. In the long​ run, actual and expected inflation change in response to changes in monetary​ policy, leaving the real interest rate unaffected.

(Chapter 23) Many developing countries suffer from graft and endemic corruption. How does this help explain why these economies have typically high inflation and economic stagnation? (a) These conditions result in efficiencies in markets, but only in the short run; therefore, the long-run productive capacity of the economy never reaches potential and thus acts like a permanent negative supply shock. (b) Corruption in developing countries increases taxes, which decreases aggregate demand, and thus creates higher inflation and economic stagnation. (c) Corruption in developing countries reduces government spending, which decreases aggregate demand, and thus creates higher inflation and economic stagnation (d) These conditions result in inefficiencies in markets, which reduce the long-run productive capacity of the economy, and thus act like a permanent negative supply shock.

(d) These conditions result in inefficiencies in markets, which reduce the long-run productive capacity of the economy, and thus act like a permanent negative supply shock.

(Chapter 23) Why does the self-correcting mechanism stop working when the policy rate hits the zero lower bound? (a) The​ self-correcting mechanism stops working because the falling inflation produced by a negative output gap produces lower rather than higher real interest rates when the policy rate hits the zero lower​ bound, and this decrease depresses saving and investment and therefore further widens the output gap. (b) The​ self-correcting mechanism stops working because the rising inflation produced by a positive output gap produces lower rather than higher real interest rates when the policy rate hits the zero lower​ bound, and this decrease enhances planned spending and further widens the output gap. (c) The​ self-correcting mechanism stops working because the rising inflation produced by a negative output gap produces lower rather than higher real interest rates when the policy rate hits the zero lower​ bound, and this decrease depresses planned spending and further widens the output gap. (d) The​ self-correcting mechanism stops working because the falling inflation produced by a negative output gap produces higher rather than lower real interest rates when the policy rate hits the zero lower​ bound, and this increase depresses planned spending and further widens the output gap.

(d) The​ self-correcting mechanism stops working because the falling inflation produced by a negative output gap produces higher rather than lower real interest rates when the policy rate hits the zero lower​ bound, and this increase depresses planned spending and further widens the output gap.

(Chapter 23) How does the policy rate hitting a floor of zero lead to an upward sloping aggregate demand curve? (a)When the policy rate hits a floor of the​ zero, the negative relationship between inflation and the real interest rate embodied by the MP curve becomes​ positive, and this reversal results in lower inflation producing a higher real interest​ rate, and hence lower planned​ spending, i.e., an upward sloping AD curve. (b) When the policy rate hits a floor of the​ zero, the positive relationship between inflation and the real interest rate embodied by the MP curve becomes​ negative, and this reversal results in higher inflation producing a higher real interest​ rate, and hence lower planned​ spending, i.e., an upward sloping AD curve. (c) When the policy rate hits a floor of the​ zero, the negative relationship between planned spending and the real interest rate embodied by the IS curve becomes​ positive, and this reversal results in lower inflation producing a lower real interest​ rate, and hence lower planned​ spending, i.e., an upward sloping AD curve. (d) When the policy rate hits a floor of the​ zero, the positive relationship between inflation and the real interest rate embodied by the MP curve becomes​ negative, and this reversal results in lower inflation producing a higher real interest​ rate, and hence lower planned​ spending, i.e., an upward sloping AD curve.

(d) When the policy rate hits a floor of the​ zero, the positive relationship between inflation and the real interest rate embodied by the MP curve becomes​ negative, and this reversal results in lower inflation producing a higher real interest​ rate, and hence lower planned​ spending, i.e., an upward sloping AD curve.

(Chapter 22) Suppose the inflation rate remains relatively constant and output decreases and the unemployment rate increases. this is possible if: (a) the aggregate supply curve shifts to the left and the aggregate demand curve remains the same (b) the aggregate supply curve shifts to the left and the aggregate demand curve shifts to the right (c) both the aggregate supply and demand curves shift horizontally to the right by the same amount (d) both the aggregate supply and demand curves shift horizontally to the left by the same amount.

(d) both the aggregate supply and demand curves shift horizontally to the left by the same amount.

(Chapter 23) With a permanent negative supply shock and no policy response, inflation will eventually _____________ and output will ____________. (a) increase, not change (b) stabilize at target, not change (c) decrease, decrease (d) increase, increase Stabilizing inflation at target as a result of positive permanent supply shock results in (a) recession (b) a higher natural rate of unemployment (c) output permanently lower than before the shock (d) output stabilized at a higher level than before the shock Stabilizing economic activity as a result of a temporary negative supply shock results in (a) higher inflation in the short run (b) inflation maintained at target in the short run (c) lower inflation in the short run (d) an ambiguous effect on inflation in the short run

(d) increase, increase (d) output stabilized at a higher level than before the shock (a) higher inflation in the short run

(Chapter 17) Given the exchange rates and prices of digital music player (produced in the United States) on the following two dates: June 30, 2005 --- 120 yen=$1.00 ------Price=$119 June 30, 2006 ---110 yen=$1.00 -------Price=$119 Complete the following table: June 30, 2005--------Yen price=_________ ---- Dollar Price= $119 June 30, 2006--------Yen price=_________ ---- Dollar Price=_____________ U.S. exports of digital music players are likely to ____________

14,280 Yen 13,090 Yen $119 increase

(Chapter 17) In 1999, the euro was trading at $0.90 per euro. If the euro is now trading at $1.15 per euro, the euro has appreciated by ______%.

27.78%

(Chapter 17) If transportation costs and trade barriers are low and the exchange rate is 0.5 euros per dollar, then according to the law of one price, a computer that costs $1,000 in the United States will cost __________ euros in Europe. If, in retaliation for "unfair" trade practices, Congress imposes a tariff on Chinese imports, but at the same time Chinese demand for American goods increases, then in the long run (a) the dollar will depreciate relative to the yuan (b) it is not clear whether the dollar will appreciate or depreciate relative to the yuan (c) the Chinese yuan will depreciate relative to the dollar (d) the Chinese yuan will appreciate relative the the dollar If U.S. products become popular in Europe and exports of U.S. products to Europe increase, then in the long run, (a) European goods will become more expensive in the United States (b) U.S. goods will become less expensive in Europe. (c) The euro per dollar exchange rate will fall (d) The euro per dollar exchange rate will rise.

500 (c) the Chinese yuan will depreciate relative to the dollar (d) the euro per dollar exchange rate will rise

(Chapter 17) The following data are given: Et​ = yen105 ​= $1.00 Et​+1​ = yen101 ​= $1.00 iU.S.​ = 13​% If the interest parity condition is expected to hold, interest rates in Japan should equal ____________%

9.19%

(Chapter 22) Using the line drawing tool, show the effect of increased consumer pessimism on the aggregate demand curve. John Maynard Keynes described waves of consumer and investor optimism and pessimism as: (a) fiscal policy (b) animal spirits (c) the business cycle (d) the equation of exchange (e) supply shocks

AD curve shifts down and to the left (b) animal spirits.

(Chapter 22) The graph to the right shows the effect of an increase in investment spending Using the line drawing tool, show how the economy will self-correct. The economy is currently in long-run equilibrium Suppose that investor optimism leads to an investment boom. Which of the following best explains the short-run effect on the economy? (a)Short-run aggregate supply decreases, the price level rises, and output falls below the natural rate (b) Both aggregate demand and short-run aggregate supply rise, causing output to rise above the natural rate. (c) Aggregate demand increases, the price level rises, and output rises above the natural rate. (d) Aggregate demand decreases, the price level falls,and output falls below the natural rate. (e) Short-run aggregate supply increase, the price level falls, and output rises above the natural rate.

AS shifts up and to the left (c) Aggregate demand increases, the price level rises, and output rises above the natural rate.

(Chapter 22) Using the line drawing tool, show how the economy will self-correct When aggregate output is below the natural rate, what will happen to the inflation rate over time if the aggregate demand curve remains unchanged? (a) The inflation rate will not change because the economy is in long-run equilibrium (b) The inflation rate will fall because the tightness of the labor market will eventually cause wages to rise. (c) The inflation rate will rise because the slackness of the labor market will eventually cause wages to fall (d) The inflation rate will rise because the tightness of the labor market will eventually cause wages to rise. (e) The inflation rate will fall because the slackness of the labor market will eventually cause wages to fall.

AS will shift down and to the right. (e) The inflation rate will fall because the slackness of the labor market will eventually cause wages to fall

(Chapter 22) An​ economy's aggregate demand is shown graphically as a​ downward-sloping curve. The position of this curve relative to the vertical axis is impacted by six basic factors. The top portion of the following table lists these six factors along with several that do not affect the position of the aggregate demand curve. A response box is attached to each factor. The​ table's bottom portion contains a labeling key. Label any factor that does not impact AD with an X. For a factor that shifts aggregate demand to the​ right, use the label​ R; similarly, for a factor that shifts aggregate demand to the​ left, use the label L. Keep in mind that each factor is to be assessed on the assumption that all else is constant. ​(Note​: Each letter is used three​ times.) The Federal Reserve autonomously loosens monetary policy. The government adopts ill-advised regulations that diminish the economy's overall efficiency. The government allows previously enacted tax cuts to expire, resulting in much higher taxes for households. The prospect of worsening inflation induces the Federal Reserve to tighten monetary policy. Consumer pessimism spreads as the media reports disappointing news about the economy. Actual output falls below potential output, eliminating "tightness" in resource markets. Foreign economies crash, producing a substantial drop in net exports. Optimism within the business community induces a surge in planned business expenditures. War breaks out, forcing the government to substantially enhance defense expenditures. X: This factor does not affect the location of the aggregate demand curve R: This factor shifts aggregate demand to the right L: This factor shifts aggregate demand to the left.

R X L X L X L R R

(Chapter 17) Using the line drawing tool, show the effect of an increase in the foreign interest rate i^F. This shock will cause the dollar to __________.

The demand curve will move down and to the left. depreciate

(Chapter 17) Suppose because of the growing public debt in the U.S. foreigners no longer think that U.S. Treasury securities are the safest asset and try to sell it. Using the line drawing tool, show how the value of the U.S. dollar would be affected If foreigners lose faith in the U.S. Treasury securities, the dollar will ________

The demand line will move down and to the left. depreciate.

(Chapter 17) Using the line drawing tool, show the effect of an increase in the domestic interest rate i^D. Properly label your new line. This shock will case the dollar to ___________.

The demand line will move up and to the right. appreciate

(Chapter 17) A German sports car is selling for 70,000 euros. What is the dollar price in the United States for the German car if the exchange rate is 0.70 euro per dollar?

The price in U.S. dollars is $100,000.

(Chapter 17) When the U.S. dollar depreciates, what happens to the exports and imports in the United States? As the U.S. dollar depreciates, domestic goods become _________ and imported goods become ___________, thus ________________ will buy more of the U.S. produced goods. Hence, U.S. exports will __________ and U.S. imports will _________.

cheaper more expensive domestic consumers and foreigners increase decrease

(Chapter 23) Fill in the blanks to determine the type of inflation that is being described in each scenario. A temporary negative supply shock would tend to result in ___________ inflation. This type of inflation is associated with the unemployment rate being ____________ its natural rate. Increasing aggregate demand to reach an output target above potential output would tend to result in ________________ inflation. This type of inflation is associated with the unemployment rate being __________ its natural rate.

cost-push greater than demand-pull less than

(Chapter 23) Implementing stabilization policy is made more difficult by the presence of various time lags. Fill in the blanks below to match each description with the time lag it describes The time it takes to collect and process the data that indicate how well the economy is faring is known as the __________. The time that policymakers may wait for data that support their initial impression of the current state of the economy is known as the ___________. The time required for policymakers to put a policy into action once approved is known as the ________________. The time to decide on the appropriate policy for the current economic situation is known as the _______________ The time it takes for a policy to have an effect on the economy is known as the _____________

data lag recognition lag implementation lag legislative lag effectiveness lag

(Chapter 22) Suppose that the White House decides to sharply decrease military spending without increasing government spending in other areas. This measure would, all else constant, cause aggregate demand to ________ Using the line drawing tool, show your answer on the graph to the right.

decrease AD curve shifts to the left

(Chapter 23) Typically in _____________ inflation, the unemployment rate will be at or below the natural rate of unemployment for some time.

demand-pull

(Chapter 22) Both short-run and long-run equilibria require that the quantity of aggregate output demanded and the quantity supplied are _______________- Beyond this equality, the attainment of a long-run equilibrium also requires that actual output ____________ potential output. In the figure to the right, a long-run equilibrium exists at ____________, while a short-run equilibrium occurs at ______________.

equal equal point 1 (AD1 and AS and LRAS) points 1 and 2 (AD1 or AD2 and AS)

(Chapter 22) Suppose the economy is starting from a situation of long-run equilibrium. In this case, we know that its equilibrium output (Y*) is _________ its potential output (Y^P) Starting form its long-run equilibrium at point 1 in the figure to the right, suppose the economy experiences a permanent positive supply shock. Using the line drawing tool, shift the LRAS curve. Using the line drawing tool, shift one of the remaining curves such that a new short-run equilibrium is achieved that is not also a long-run equilibrium. Compared to its original state, the economy in the short-run equilibrium at point 2 has output that is __________ and inflation that is ____________. At the new short-run equilibrium, the output gap (Y*-Y^p) is __________- The negative output gap means that the aggregate supply curve (AS2) will shift ______________. The shifts in the short-run aggregate supply curve continue until: (a) the output gap falls to zero (b) a new long-run equilibrium is attained (c) the AS curve intersects AD1 and LRAS2 (d) Both A and C are correct (e) All of the above are correct.

equal to LRAS shifts to the right AS shifts down and to the right higher lower negative down and to the right (e) All of the above are correct

(Chapter 17) In the second column of the following table, indicate whether the exchange rate will rise or fall as a result in the change in the factor. Domestic interest rate fall Foreign interest rate fall Domestic price level fall Tariffs and quotas fall Import demand fall Export demand fall Domestic productivity fall

fall rise rise fall rise fall fall

(Chapter 21) If lambda equals 0, what does that imply about the relationship between the nominal interest rate and the inflation rate? When lambda equals 0, this means that as inflation increases the nominal interest rate will ______________ by _________________ the inflation rate, os that the real interest rate _______________

increase exactly the same as stays constant

(Chapter 23) If government spending increases, describe how monetary policymakers would respond (if at all) to stabilize economic activity. Assume the economy starts at a long-run equilibrium. An increase in government spending _______________ aggregate demand, so monetary policymakers would pursue an autonomous _____________ of monetary policy to stabilize economic activity.

increases tightening

(Chapter 17) If the Canadian dollar to U.S. dollar exchange rate is 1.21 and the British pound to U.S. dollar exchange rate is 0.69, what must be the Canadian dollar to British pound exchange rate?

the spot exchange rate is 1.75 Canadian dollars per pound.

(Chapter 23) The aggregate demand curve is kinked at ______________ because as the inflation rate decreases the real interest rate _____________; thus decreasing the aggregate quantity demanded. The Abenomics program sought to lower financial frictions through the purchase of long-term assets. What is the purpose of lowering financial frictions? Lowering financial frictions would _________ on investments and shift the aggregate demand curve to the ________________. (a) lower the nominal interest rate; right (b) raise the nominal interest rate; left (c) raise the real interest rate; left (d) lower the real interest rate; right

the zero lower bound increases (d) lower the real interest rate; right