Econ Final

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

50 and the interest rate falls by 0.5 percent.

Assume that the nominal interest rate is 11 percent, the inflation rate is 8 percent, and government debt at the beginning of the year equals $4 trillion. By how much is the government budget deficit overstated as a result of inflation?

0.32 trillion

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year's GDP.

20

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the short-run effects will be:

higher output and lower unemployment.

Arguments in favor of passive economic policy include all of the following except:

recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary.

In a time of inflation when the real (i.e., deflated) value of the government debt is constant, then the conventionally:

reported government budget will show a deficit equal to the inflation rate times the outstanding debt.

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as ______, so their consumption will ______.

a rescheduling of taxes into the future; remain unchanged.

According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase.

greater; increase

A time-inconsistency problem in macroeconomic policy can occur when the policymaker:

has discretion to act as it seems best in each situation, based on his or her own knowledge and experience.

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation.

increase; higher

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

lower; raises; reduces

If people's expectations of inflation are formed rationally rather than based on adaptive expectations and if policymakers make a credible policy move to reduce inflation, then the costs of reducing inflation will be ______ traditional estimates of the sacrifice ratio.

much lower than

14. Assume that there is a short-run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank uses discretion in conducting monetary policy. Initially, households and firms expect high inflation. Following an announcement by the central bank of a low-inflation policy, households and firms will ______ the central bank's announcement and ______ their expectations of inflation.

not believe; not change

A recession may alter an economy's natural rate of unemployment in all of the following ways except by:

permanently reducing the money supply.

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the:

short-run aggregate supply curve.

All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:

the 25-percent reduction in the money supply between 1929 and 1933.

If capital budgeting procedures were employed, the budget deficit would be measured as:

the change in government debt minus the change in government capital assets.