ECON MACRO MASTER

Cost of reducing inflation

disinflation is a reduction in the inflation rate -if a nation wants to reduce inflation, it must endure a period of high unemployment and low output

A country has national saving of $60 billion, government expenditures of $30 billion, domestic investment of $40 billion, and net capital outflow of $20 billion. What is its supply of loanable funds?

$60 billion

If a country had a trade surplus of $50 billion and then its exports rose by $30 billion and its imports rose by $20 billion, its net exports would now be

$60 billion.

The country of Sylvania has a GDP of $900, investment of $200, government purchases of $200, and net capital outflow of -$100. What is consumption?

$600

aggregate demand curve slopes

downward

NCO (supply of dollars)

- generated from cross border financial assets transactions -assume he exchange rate is not expected to change -> NCO dose dose not depend on the exchange rate: vertical against exchange rate

Fiscal deficit

-crowds out domestic investment -causes domestic currency appreciation and trade deficit -twin deficit

NX (demand for dollars)

-generated for international trade in goods and services -higher exchange rate-> cost more foreign currency to but domestic currency -> more expensive domestice goods-> NX slopes downward

When the domestic interest rate rises

-loans are more expensive, investment spending is more costly -loanable funds seek higher returns--> domestic assets are more attractive as opposed to foreign assests--> NCO falls

causes of capital flight

-political instability Investor-capital flight -sell assets, buys assets in safe haven Capital flight affects both markets

(adc) shifts from changes in consumption

-price level lower, the aggerate demand curve shifts to the left -price level rises, the curve shifts rightward ^^impacted by taxes -cut investment spending, shifts curve to the left

Which of the following is most likely to increase the exports of a country?

Political instability within the country increases modestly.

sticky price theory

Prices of some goods and services adjust sluggishly in response to changing economic conditions (why: menu cost)

effects of trade policy to increase trade balance

Real Exchange rate appreciate -discourage exports both imports and exports are reduced-> trade balance is not affected trade volume is reduced

If purchasing-power parity holds, a dollar will buy

enough foreign currency to buy as many goods as it does in the United States.

As the aggregate demand curve shifts rightward along a given aggregate supply curve, a. unemployment and inflation are higher. b. unemployment and inflation are lower. c. unemployment is higher and inflation is lower. d. unemployment is lower and inflation is higher.

d

In his famous article published in an economics journal in 1958, A.W. Phillips a. used data for the United States to show a negative relationship between the rate of change of the U.S. consumer price index and the U.S. unemployment rate. b. used data for the United States to show a negative relationship between the rate of change of wages in the U.S. and the U.S. unemployment rate. c. used data for the United Kingdom to show a negative relationship between the rate of change of the U.K. consumer price index and the U.K. unemployment rate. d. used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate.

d

In the long run, policy that changes aggregate demand changes a. both unemployment and the price level. b. neither unemployment nor the price level. c. only unemployment. d. only the price level.

d

If the Mexican nominal exchange rate does not change, but prices rise faster abroad than in Mexico, then the Mexican real exchange rate

declines.

When Ghana sells chocolate to the United States, U.S. net exports

decrease, and U.S. net capital outflow decreases.

Suppose the U.S. imposes an import quota on steel. U.S. exports

decrease, the real exchange rate of the U.S. dollar appreciates, and U.S. net capital outflow is unchanged.

Purchasing-power parity describes the forces that determine

exchange rates in the long run.

If U.S. consumers decrease their demand for cellphones from Finland, then other things the same Finland's

exports and net exports fall.

If a country had capital flight, then the real exchange rate would

fall. To offset this fall the government could increase the budget deficit.

U.S NCO ___________ when interest rises

falls

If there is a surplus in the U.S. loanable funds market, then the interest rate

falls, which increases the quantity of loanable funds demanded.

An appreciation of the U.S. real exchange rate induces U.S. consumers to buy

fewer domestic goods and more foreign goods.

misperceptions theory

firms may confuse changes in price level, p, with changes in individual market

A Canadian manufacturing company opens a factory the produces air conditioners in the United States. This is an example of Canadian

foreign direct investment that increases Canadian net capital outflow.

John, a U.S. citizen, opens up a Sports bar in Tokyo. This is an example of U.S.

foreign direct investment.

If U.S. citizens decide to purchase more foreign assets at each interest rate, the U.S. real interest rate

increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.

Long Run Phillips Curve

is vertical at the natural rate of unemployment -an expression of the classical idea of monetary neutrality

If a country has a trade deficit

it has negative net exports and negative net capital outflow.

If a country has a trade surplus

it has positive net exports and positive net capital outflow.

One year a country has negative net exports. The next year it still has negative net exports and imports have risen more than exports.

its trade deficit rose

Foward guidance:

keeping interest rates low for an extended period of time

In the open-economy macroeconomic model, the supply of dollars in the market for foreign-currency exchange comes from

net capital outflow

In the open-economy macroeconomic model, if a country's interest rate rises, then its

net capital outflow and net exports fall.

If a country institutes policies that lead domestic firms to desire more capital stock

net capital outflows fall and the real exchange rate rises.

Suppose that because of legal and financial reforms in the country of Belats, foreigners find business opportunities there more attractive. We would expect the more attractive opportunities would cause Belats'

net exports and net capital outflow to decrease.

A Japanese flour mill buys wheat from the United States and pays for it with pesos. Other things the same, Japanese

net exports decrease, and U.S. net capital outflow increases.

The country of Frequencia is politically very stable and has a long tradition of respecting property rights. If several other countries suddenly became politically unstable, we would expect Frequencia's

net exports to fall.

sticky wage theory

nominal wages are slow to adjust to changing economic conditions (why: long term contracts)

trade policies do not affect the trade balance

nx=nco=s-i

economic flucatation are

often

The real exchange rate is the nominal exchange rate, defined as foreign currency per dollar, times

prices in the United States divided by foreign prices.

If the real exchange rate between the U.S. and Argentina is 1, then

purchasing power parity holds, and the amount of dollars needed to buy goods in the U.S. is the same as the amount needed to buy enough Argentinean bolivars to buy the same goods in Argentina.

government budget deficit

raise real interest rates, crowd out domestic investment, cause the currency to appreciate and push the trade balance toward deficit

(asc) anything that rasies real GDP, (asc) anything that lowers real GDP,

shifts the cruve to the right shifts the cruve to the left

changes in the econs output of goods and services are

strongly correlated with changes in the economy's utilization of its labor force -when gdp delines, unemployment rises

Foreign Currency exchange market

surplus: dollar depreciation shortage: dollar appreciation

loanable funds market

surplus: interest rate falls shortage: interest rate rises

A tax on imported goods is called a(n)

tariff.

When a country's government budget deficit decreases,

the real exchange rate of its currency decreases and its net exports increase.

fiscal policy

the setting of the level of government spending and taxation by government policymakers

The explanation for the slope of

the supply of loanable funds curve is based on the logic that a higher real interest rate leads to higher saving.

rational expectations

the theory that people optimally use all the information they have, including information about government policies, when forecasting the future

If saving is greater than domestic investment, then

there is a trade surplus and Y > C + I + G.

because recessions are economy wide phenomena

they show up in many sources of marcoeconomics

An increase in the budget deficit causes domestic interest rates

to rise and investment to fall.

When a country experiences capital flight, its net capital outflow,

which is part of the demand for loanable funds, increases.

During some year a country had exports of $50 billion, imports of $35 billion, and purchased $30 billion of foreign assets. What was the value of domestic assets purchased by foreigners?

$15 billion

In the open-economy macroeconomic model, the market for loanable funds equates national saving with

None of the above is correct.

the demand curve for the market of foregin-currency exchange

-slopes downward bc a higher real exchanged rate makes US goods more expensive and reduces the quantity of dollars demanded to buy those goods -at the equilibrium real exchange rate, the demand for dollars by foreigners arising from the U.S net exports of goods and services balances the supply of dollars from American arising from U.S net capital outflow

If the exchange rate is .70 euro per dollar, the price of an MP3 player in Paris is 150 euros and the price of an MP3 player in the U.S. is $150, then what is the real exchange rate?

.70 French MP3 players per U.S. MP3 player.

If a Starbucks tall latte cost $3.20 in the United States and 3 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

.938 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.

analysis of the interest-rate effect can be summarized as

1) a higher price level rasies money demand 2)higher money demand leads to a higher interest rate 3)a higher interest rate reduces the quantity of goods and services demanded

3 step outline to analyze events

1) determine which of the supply and demand curve the event affects 2) determine the direction the curve shifts 3) use the supply and demand diagrams to examine how these shifts alter the economy's equilibrium

3 key facts about economic fluctuations

1. Economic fluctuations are irregular and unpredictable 2. Most macroeconomic quantities fluctuate together 3. As output falls, unemployment rises

C

100. When Mexico suffered from capital flight in 1994, the U.S. real interest rate a. rose and the real exchange rate of the dollar appreciated. b. rose and the real exchange rate of the dollar depreciated. c. fell and the real exchange rate of the dollar appreciated. d. fell and the real exchange rate of the dollar depreciated.

C

101. The country of Frequencia is politically very stable and has a long tradition of respecting property rights. If several other countries suddenly became politically unstable, we would expect Frequencia's a. real interest rate to rise. b. real exchange rate to fall. c. net exports to fall. d. None of the above is likely.

A

102. Which of the following is most likely to result if foreigners decide to withdraw the funds that they have loaned to the United States? a. U.S. net exports will rise b. U.S. net capital outflow will fall. c. U.S. domestic investment will rise d. the dollar will appreciate

C

103. In 1995 House Speaker Newt Gingrich threatened to send the United States into default on its debt. During the day of this announcement, U.S. interest rates rose and the real exchange rate of the U.S. dollar depreciated. Which of these changes is consistent with the results of the open-economy macroeconomic model? a. the increase in U.S. interest rates b. the depreciation of the real exchange rate of the U.S. dollar c. Both a and b are consistent. d. Neither a nor b are consistent.

B

104. In 2002 it looked like the Argentinean government might default on its debt (which eventually it did). The open-economy macroeconomic model predicts that this should have a. raised Argentinean interest rates and caused the Argentinean currency to appreciate. b. raised Argentinean interest rates and caused the Argentinean currency to depreciate. c. lowered Argentinean interest rates and caused the Argentinean currency to appreciate. d. lowered Argentinean interest rates and caused the Argentinean currency to depreciate.

A

105. In 1998 the Russian government defaulted on its bonds. According to the open-economy macroeconomic model, this should have a. increased Russian interest rates and net exports. b. reduced Russian interest rates and net exports. c. increased Russian interest rates and reduced Russian net exports. d. reduced Russian interest rates and increased Russian net exports.

C

106. If the world thought that many banks in a certain country were at or near the point of bankruptcy, then that country's real exchange rate a. and net exports would rise. b. would rise and net exports would fall. c. would fall and net exports would rise. d. and net exports would fall.

B

107. If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then a. net capital outflow and the real exchange rate will rise. b. net capital outflow will rise and the real exchange rate will fall. c. net capital outflow will fall and the real exchange rate will rise. d. net capital outflow and the exchange rate will fall.

C

108. If the risk of buying U.S. assets rises because it is discovered that lending institutions had not carefully evaluated borrowers prior to lending them funds, then a. the real exchange rate and the interest rate will rise. b. the real exchange rate will rise and the interest rate will fall. c. the real exchange rate will fall and the interest rate will rise. d. the real exchange rate and the interest rate will fall.

B

112. Which of the following would cause the real exchange rate of the U.S. dollar to depreciate? a. the U.S. government budget deficit increases b. capital flight from the United States c. the U.S. imposes import quotas d. None of the above is correct.

A

113. Which of the following would both raise the U.S. exchange rate? a. capital flight from other countries to the U.S. occurs and the U.S. moves from budget surplus to budget deficit b. capital flight from other countries to the U.S. occurs and the U.S. moves from budget deficit to budget surplus c. capital flight from the U.S. to other countries occurs, the U.S. moves from budget surplus to budget deficit d. capital flight from U.S. to other countries occurs, the U.S. moves from budget deficit to budget surplus

C

114. Which of the following will not change the U.S. real interest rate? a. capital flight from the United States b. the government budget deficit increases c. the U.S. imposes import quotas d. None of the above is correct.

C

115. Which of the following would both make a country's real exchange rate rise? a. its budget deficit increases and bonds issued in the country become riskier b. bonds issued in that country become riskier and it imposes an import quota c. it imposes an import quota and the budget deficit increases d. None of the above are correct.

C

116. Which of the following could explain a decrease in the U.S. real exchange rate? a. the U.S. government budget deficit rises b. the U.S. impose import quotas c. the default risk of U.S. assets rise d. All of the above are correct.

B

117. Which of the following will decrease U.S. net capital outflow? a. capital flight from the United States b. the government budget deficit increases c. the U.S. imposes import quotas d. None of the above is correct.

C

118. Which of the following is most likely to increase U.S. exports? a. The government gives subsidies to U.S. firms that export goods or services. b. The government reduces the size of the budget surplus. c. The United States unilaterally reduces its restrictions on foreign imports. d. Taxes on domestic saving rise.

C

119. Which of the following is most likely to increase the exports of a country? a. The government gives subsidies to firms that export goods or services. b. The government reduces the size of the budget surplus. c. Political instability within the country increases modestly. d. None of the above will increase exports.

B

120. Which of the following leads to an increase in net exports in the long run? a. either a decrease in the budget deficit or imposing an import quota b. a decrease in the budget deficit but not imposing an import quota c. imposing an import quota but not a decrease in the budget deficit d. neither a decrease in the budget deficit nor imposing an import quota

B

121. Which of the following is most likely to increase exports? a. a reduction in domestic political instability b. ending investment tax credits c. a reduction in the size of the government's budget surplus d. None of the above will increase exports.

A

122. Which of the following would do the most to reduce a trade deficit? a. increase domestic saving b. increase domestic political stability and respect of property rights c. other countries reduce their trade restrictions d. raise tariffs

A

123. If U.S. citizens decide to save a larger fraction of their incomes, the real interest rate a. decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases. b. decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases. c. increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases. d. increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.

D

124. If U.S. citizens decide to save a smaller fraction of their incomes, U.S. domestic investment a. increases, and U.S. net capital outflow increases. b. increases, and U.S. net capital outflow decreases. c. decreases, and U.S. net capital outflow increases. d. decreases, and U.S. net capital outflow decreases.

D

125. If government policy encouraged households to save more at each interest rate, then a. the real exchange rate and net exports would rise. b. the real exchange rate and net exports would fall. c. the real exchange rate would rise and net exports would fall. d. the real exchange rate would fall and net exports would rise.

D

126. If the government of Kenya implemented a policy that decreased national saving, its real exchange rate would a. depreciate and Kenyan net exports would rise. b. depreciate and Kenyan net exports would fall. c. appreciate and Kenyan net exports would rise. d. appreciate and Kenyan net exports would fall.

C

127. If a country institutes policies that lead domestic firms to desire more capital stock a. net capital outflows rise and the real exchange rate rises. b. net capital outflows rise and the real exchange rate falls. c. net capital outflows fall and the real exchange rate rises. d. net capital outflows and the real exchange rate falls.

B

128. If U.S. citizens decide to purchase more foreign assets at each interest rate, the U.S. real interest rate a. increases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow decreases. b. increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases. c. decreases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow decreases. d. decreases, the real exchange rate of the dollar appreciates, and U.S. net capital outflow increases.

A

129. If the government of Colombia made policy changes that increased national saving, the real exchange rate of the peso would a. depreciate and Colombian net exports would rise. b. depreciate and Colombian net exports would fall. c. appreciate and Colombian net exports would rise. d. appreciate and Colombian net exports would fall.

A

130. If a country had capital flight, then the real exchange rate would a. fall. To offset this fall the government could increase the budget deficit. b. fall. To offset this fall the government could decrease the budget deficit. c. rise. To offset this rise the government could increase the budget deficit. d. rise. To offset this rise the government could decrease the budget deficit.

According to purchasing-power parity, if a basket of goods costs $100 in the U.S. and the same basket costs 800 pesos in Argentina, then what is the nominal exchange rate?

8 pesos per dollar

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing power parity to hold?

80 florin

A

91. When a country suffers from capital flight, the demand for loanable funds in that country shifts a. right, which increases interest rates in that country. b. right, which decreases interest rates in that country. c. left, which increases interest rates in that country. d. left, which decreases interest rates in that country.

B

92. When a country suffers from capital flight, the exchange rate a. depreciates, because demand in the market for foreign-currency exchange shifts left. b. depreciates, because supply in the market for foreign-currency exchange shifts right. c. appreciates, because demand in the market for foreign-currency exchange shifts right. d. None of the above is correct.

D

93. If a country experiences capital flight, which of the following curves shift right? a. only the demand for loanable funds. b. only the supply of dollars in the market for foreign-currency exchange. c. only the net capital outflow curve and the supply of dollars in the market for foreign currency exchange. d. the demand for loanable funds, the net capital outflow curve, and the supply of dollars in the market for foreign currency exchange.

C

94. When a country experiences capital flight, the interest rate a. falls because the demand for loanable funds shifts left. b. falls because the supply for loanable funds shifts right. c. rises because the demand for loanable funds shifts right. d. rises because the supply for loanable funds shifts left.

B

95. When a country experiences capital flight its a. net capital outflow increases and its real exchange rate rises. b. net capital outflow increases and its real exchange rate falls. c. net capital outflow decreases and its real exchange rate rises. d. net capital outflow decreases and its real exchange rate falls.

B

96. When a country experiences capital flight, which of the following rise? a. its real interest rate and its real exchange rate b. its real interest rate but not its real exchange rate c. its real exchange rate but not its real interest rate d. neither its real interest rate nor its foreign exchange rate

C

97. When a country experiences capital flight its currency a. appreciates and net exports rise. b. appreciates and net exports fall. c. depreciates and net exports rise. d. depreciates and net exports fall.

D

98. If Kenya experienced capital flight, the supply of Kenyan schillings in the market for foreign-currency exchange would shift a. left, which would make the real exchange rate of the Kenyan schilling appreciate. b. left, which would make the real exchange rate of the Kenyan schilling depreciate. c. right, which would make the real exchange rate of the Kenyan schilling appreciate. d. right, which would make the real exchange rate of the Kenyan schilling depreciate.

B

99. When Mexico suffered from capital flight in 1994, U.S. demand for loanable funds a. and U.S. net capital outflow rose. b. and U.S. net capital outflow fell. c. fell and U.S. net capital outflow rose. d. rose and U.S. net capital outflow fell.

Which of the following is an example of U.S. foreign direct investment?

A U.S. citizen builds and operates a coffee shop in the Netherlands.

Which of the following is included in the demand for dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?

A firm in Canada wants to buy rice from a U.S. company.

Stagflation

A period of falling output and rising prices -wage-price spiral -policy makers can influence aggregate demand -- can mitigate the adverse impact on demand but at the cost of exacerbating inflation

A ton of scrap iron sells for $150 in the U.S. and 1400 yuan in China. The nominal exchange rate is 6.7 yuan per dollar.

A profit could be made by buying scrap iron in the U.S. and selling it in China. This would tend to drive down the price of Chinese scrap iron.

Tariff

A tax on imported goods

Which of the following periods of U.S. economic history featured the short-run Phillips curve shifting to the left, but not the long-run Phillips curve?

After the Volcker disinflation, the unemployment rate was lower for each inflation rate, consistent with the short-run Phillips curve shifting left. Monetary policy does not shift the long-run Phillips curve.

According to the short-run Phillips curve, inflation would rise and unemployment would fall if policymakers increased the money supply.

An increase in the money supply would shift the aggregate-demand curve right, which would cause inflation to rise and unemployment to fall.

A U.S. based company sells semiconductors to an Italian firm. The U.S. company uses all of the revenues from this sale to purchase automobiles from Italian firms. These transactionsA U.S. based company sells semiconductors to an Italian firm. The U.S. company uses all of the revenues from this sale to purchase automobiles from Italian firms. These transactions

None of the above is correct.

Which of the following policy actions does NOT shift the aggregate-demand curve? A change in the price level

Fiscal policy such as a decrease in taxes or an increase in government spending shifts the aggregate-demand curve. Similarly, monetary policy such as the Fed conducting open-market operations also shifts the aggregate-demand curve. Because the aggregate demand curve represents the relationship between the price level and the quantity of output, a change in the price level causes a movement along the aggregate-demand curve.

T/F Although wages, incomes, and interest rates are most often discussed in real terms, what matters most are their nominal values.

Flase --- Nominal variables may be the first things we see when we observe an economy, but what's important are the real variables.

An increase in real interest rates in the United States changes the quantity of loanable funds demanded because

Foreign residents will want to buy fewer foreign assets.

There is a temporary favorable supply shock. Given the effects of this shock, if the central bank chooses to return unemployment closer to its previous rate it would reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.

If the central bank reduces the rate at which it increases the money supply, unemployment will rise closer to its previous rate. Prices will fall and, as expected inflation falls, the short-run Phillips curve shifts to the left.

If wages are sticky, then a smaller than expected increase in the price level aises the real costs of production, so the aggregate quantity of goods and services declines.

If the price level is lower than expected, wages are higher relative to prices. In response, firms hire fewer workers and reduce the quantity of output supplied.

In the open-economy macroeconomic model, if the supply of loanable funds shifts right, net capital outflow increases and the real exchange rate decreases.

If the supply of loanable funds shifts right, the equilibrium real interest rate will decrease in the loanable funds market. This will make U.S. assets less attractive relative to foreign assets, increasing the net capital outflow of the U.S. Since net capital outflow represents the supply of dollars in the foreign-currency exchange, the supply curve will shift right as well, representing an increase in net capital outflow. This rightward shift of the supply of dollars will decrease the equilibrium exchange rate.

Imagine two economies that are identical except that, for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $1,500 billion. It follows that the price level, but not real GDP is higher in country B.

If two economies were identical except that one had more money in circulation, real GDP would be identical in both economies, but the price level would be higher in the economy with more money.

Sometimes during times of heightened national security, government expenditures are larger than normal. What could the Fed do to reduce the effects this spending creates on interest rates?

Increase the money supply by buying bonds. --- The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, raises the interest rate and thereby reduces investment spending. In order to counter this rise in the interest rate, the Fed would want to increase the money supply since this puts downward pressure on the interest rate in the market for money. In order to do this, the Fed could buy bonds through open-market operations.

A country has net capital outflow of $20 billion. Which of the following is consistent with this net capital outflow?

It has $20 billion of net exports.

In the short run, which of the following statements is true about the effects of an increase in the money supply?

It will lower the cost of borrowing. --- An increase in the money supply reduces the equilibrium interest rate. Because the interest rate is the cost of borrowing, the fall in the interest rate raises the quantity of goods and services demanded at a given price level. This causes the aggregate-demand curve to shift to the right.

theory of liquidity preference

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance

capital flight from Mexico to the US example

Mexico nco increases - supply of pesos in the FCEM increases -peso depreciates; mexico's nx increase, mexico's reals interest rate increases U.S nco decreases -supply of dollar in the FCEM decreases -the dollar appreciates; US nx decreaes, US real interest rate decreases - relatively small imapct on the the U.S economy due to its size

T/F The sacrifice ratio of the Volcker disinflation was smaller than previous estimates had predicted.

Most estimates of the sacrifice ratio based on the Volcker disinflation are smaller than estimates that had been obtained from previous data.

MPC (marginal propensity to consume)

Multipler = 1/(1-MPC)

market for foreign currency exchange

NCO = NX, where nco represents the quantity of dollars supplied for the purpose of buying foreign assets and the net exports represent the quantity of dollars demanded for the purpose of buying US net exports

Suppose you observe Japan's net capital outflow increase. Based on the open-economy macroeconomic model, which of the following could have caused this?

Real interest rates in the U.S. increase. --- When the U.S. real interest rate rises, U.S. capital assets become more attractive to foreign countries as well as domestic investors. Thus, an increase in the U.S. real interest rate encourages Japanese investors to buy more U.S. assets and fewer Japanese investments. For both reasons, a high U.S. real interest rate reduces U.S. net capital outflow and increases Japanese net capital outflow.

market for loanable funds

S(savings) = I(domestic investment) + NCO(net capital outflow) -loanable funds should be interpreted as the domestically generated flow of resources available for capital accumulation

If U.S. exports are $300 billion and U.S. imports total $350 billion, which of the following is correct?

The U.S. has a trade deficit of $50 billion.

Which of the following would make both the equilibrium real interest rate and the equilibrium quantity of loanable funds decrease?

The demand for loanable funds shifts left.

The supply of loanable funds shifts right and increases investment spending. Which of the following could cause this result?

The government begins running a budget surplus. --- A budget surplus creates positive public saving. Since public saving is a component of national saving, national saving increases if a government shifts from a budget deficit to a surplus. Since supply in the loanable funds market is represented by national saving, the supply curve in the loanable funds market shifts right leading to a higher quantity of loanable funds and investment.

Take the following information as given for small, imaginary economy: When income is $10,000, consumption spending is $6,500. When income is $11,000, consumption spending is $7,100. Refer to the Scenario. The marginal propensity to consume for this economy is

The marginal propensity to consume is the fraction of extra income that a household consumes rather than saves. In this case, an extra $1,000 of income increases spending by $600. This increase represents a $600/$1,000=0.60 fraction of the increase in income.

Which of the following is correct concerning the open-economy macroeconomic model?

The net-capital-outflow curve slopes downward.

Which of the following does purchasing-power parity imply?

The purchasing power of the dollar is the same in the U.S. as in foreign countries.

If there is a shortage in the U.S. loanable funds market, then NCO + I > S.

The supply of loanable funds comes from national saving (S), while the demand for loanable funds comes from domestic Investment (I) and net capital outflow (NCO). If there is a shortage in the loanable funds market, the quantity of loanable funds supplied is less than the quantity demanded. This means that NCO+I > S.

Stacey, a U.S. citizen, buys a bond issued by an Italian pasta manufacturer.

This purchase is foreign portfolio investment. By itself it increases U.S. net capital outflow.

The decline in investment spending accounts for approximately how much of the decline in output during a recession?

Two-thirds --- Even though investment averages about one-seventh of GDP, declines in investment account for about two-thirds of the declines in GDP during recessions.

At a given real exchange rate, which of the following, by itself, would increase the supply of dollars in the market for foreign-currency exchange?

U.S. citizens want to buy more foreign bonds

In the context of the aggregate-demand curve, when the price level increases, households increase their holdings of money, interest rates increase, and spending on investment goods decreases because of the interest-rate effect.

When the price level rises, households try to increase their holdings of money by reducing their willingness to lend some of it out. A household would buy fewer bonds and the interest rate would rise. A higher interest rate motivates firms and households to spend less on investment.

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are a. downward pressures on prices and wages. b. downward pressures on prices and upward pressures on wages. c. upward pressures on prices and downward pressures on wages. d. upward pressures on prices and wages.

a

If the central bank increases the money supply, then in the short run prices a. rise and unemployment falls. b. fall and unemployment rises. c. and unemployment rise. d. and unemployment fall.

a

Samuelson and Solow reasoned that when aggregate demand was high, unemployment was a. low, so there was upward pressure on wages and prices. b. low, so there was downward pressure on wages and prices. c. high, so there was upward pressure on wages and prices. d. high, so there was downward pressure on wages and prices.

a

short run economic fluctuations

are often called business cycle -prices are sticky --sticky nominal wages due to labor contract -assumption of monetary neutrality no longer applies -changes in the money supply affect the real variable

Suppose Americans become concerned about saving for retirement and, as a result, reduce their current consumption expenditures. Which of the following would you expect to occur as a result of this change? a. In the short run, unemployment will increase and inflation will fall. b. In the short run, unemployment will increase and inflation will rise. c. In the short run, unemployment will decrease and inflation will rise. d. In the short run, unemployment will decrease and inflation will fall.

a

When aggregate demand shifts right along the short-run aggregate supply curve, unemployment a. falls, so there are upward pressures on wages and prices. b. falls, so there are downward pressures on wages and prices. c. rises, so there are upward pressures on wages and prices. d. rises, so there are downward pressures on wages and prices.

a

aggregate supply curve

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

aggregate demand curve

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

Philips Curve

a curve that shows the short-run trade-off between inflation and unemployment -illustrates a negative association between the inflation rate and the unemployment rate -shows the conditions of inflation and unemployment that arise in the short run as shifts in the aggerate demand curve move the economy along the short-run aggregate-supply curve

trade policy

a government policy that directly influences the quantity of goods and services that a country imports or exports -trade policies do not affect the trade balance

capital flight

a large and sudden reduction in the demand for assets located in a country - increases interest rate and decreases the value of that currency in the market for foreign-currency exchange

import quota

a limit on the number of products in certain categories that a nation can import

Recession

a period of declining real incomes and rising unemployment

Depression

a sever recession

supply shocks

an event that directly alters firms' costs and prices, shifting the AS and PC curves

Which of the following events would cause the Fed to stabilize output through increasing the money supply?

an increase in taxes. --- An increase in the money supply by the Fed would cause interest rates to decline. Because the interest rate is the cost of borrowing, the fall in the interest rate raises the quantity of goods and services demanded, which would increase the equilibrium level of output in an economy. This means that the event that would cause the Fed to stabilize in this way must cause output to fall. An increase in net exports, an increase in government spending, and a decrease in interest rates all cause aggregate demand to rise, whereas an increase in taxes causes aggregate demand to decline.

If the world thought that many banks in a certain country were at or near the point of bankruptcy, then that country's real exchange rate

and net exports would rise.

Suppose that the U.S. imposes an import quota on lumber. The quota makes the real exchange rate of the U.S. dollar

appreciate but does not change the real interest rate in the United States.

Other things the same, if the exchange rate changes from .30 Kuwaiti dinar per dollar to .35 Kuwaiti dinar per dollar, then the dollar has

appreciated and so buys more Kuwaiti goods.

If policymakers decrease aggregate demand, then in the long run a. prices will be lower and unemployment will be higher. b. prices will be lower and unemployment will be unchanged. c. prices and unemployment will be unchanged. d. None of the above is correct.

b

If policymakers expand aggregate demand, then in the long run a. prices will be higher and unemployment will be lower. b. prices will be higher and unemployment will be unchanged. c. prices and unemployment will be unchanged. d. None of the above is correct.

b

If the central bank increases the money supply, in the short run, the price level a. and unemployment rise. b. rises and unemployment falls. c. falls and unemployment rises. d. and unemployment fall.

b

Samuelson and Solow reasoned that when aggregate demand was low, unemployment was a. high, so there was upward pressure on wages and prices. b. high, so there was downward pressure on wages and prices. c. low, so there was upward pressure on wages and prices. d. low, so there was downward pressure on wages and prices.

b

Suppose that the money supply decreases. In the short run, this increases prices according to a. both the short-run Phillips curve and the aggregate demand and aggregate supply model. b. neither the short-run Phillips curve nor the aggregate demand and aggregate supply model. c. the short-run Phillips curve, but not according to the aggregate demand and aggregate supply model. d. the aggregate demand and aggregate supply model but not according to the short-run Phillips curve.

b

Which of the following depends primarily on the growth rate of the money supply? a. inflation and the natural rate of unemployment b. inflation but not the natural rate of unemployment c. the natural rate of unemployment but not inflation d. neither inflation nor the natural rate of unemployment

b

If the United States had negative net exports last year, then it

bought more abroad than it sold abroad and had a trade deficit.

Quantitate Easing

buying of mortgage-backed securities and longer-term government bonds

If consumption expenditures fall, then in the short run a. inflation and unemployment rise. b. inflation rises and unemployment falls. c. inflation falls and unemployment rises. d. inflation and unemployment fall.

c

If the central bank decreases the money supply, then output a. and unemployment rises. b. rises and unemployment falls. c. falls and unemployment rises. d. and unemployment falls.

c

In 2007 and 2008 households and firms reduced desired expenditures. During the same period inflation fell and unemployment rose. a. The change in inflation, but not the change in unemployment is consistent with what a given short-run Phillips curve implies. b. The change in unemployment, but not the change in inflation is consistent with what a given short-run Phillips curve implies. c. Both the change in inflation and the change in unemployment are consistent with what a given short-run Phillips curve implies. d. Neither the change in inflation nor the change in unemployment are consistent with what a given short-run Phillips curve implies.

c

Samuelson and Solow believed that the Phillips curve a. implied that low unemployment was associated with low inflation. b. indicated that the aggregate supply and aggregate demand model was incorrect. c. offered policymakers a menu of possible economic outcomes from which to choose. d. All of the above are correct.

c

When monetary and fiscal policymakers expand aggregate demand, which of the following costs is incurred in the short run? a. Short-run aggregate supply decreases. b. The natural rate of unemployment increases. c. The price level increases more rapidly. d. The money supply increases less rapidly.

c

A large and sudden movement of funds out of a country is called

capital flight.

The U.S. has a trade surplus. Which of the following is correct?

capital is flowing out of the U.S. and S > I

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

In the open-economy macroeconomic model, the demand for dollars shifts right if at any given exchange rate

foreign residents want to buy more U.S. goods and services. and U.S. residents want to buy fewer foreign goods and services.

Other things the same, which of the following would shift the supply of dollars in the market for foreign exchange to the right?

foreigners want to buy fewer U.S. bonds

A haircut costs 200 pesos in Mexico and $20 in the U.S. The exchange rate is 12.5 pesos per dollar. The real exchange rate is

greater than one. Haircuts in Mexico are cheaper than in the U.S.

If the U.S. government imposed a quota on toy imports, then

imports and exports would both fall.

When a country imposes an import quota, its

imports fall and its net exports are unchanged.

Which of the following both reduce net exports?

imports rise, exports fall

If a U.S. textbook publishing company sells texts overseas, U.S. net exports

increase, and U.S. net capital outflow increases.

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

increased.

In the open-economy macroeconomic model, if the supply of loanable funds increases, net capital outflow

increases and the real exchange rate decreases.

When Microsoft establishes a distribution center in France, U.S. net capital outflow

increases because Microsoft makes a direct investment in capital in France.

SRAS curve slopes upward

increases in price -> increases in goods supplied

net capital outflow

links the market for loanable funds and the market for foreign currency exchange - in the market for loanable funds, nco is a component of demand - in the market for foreign currency exchange nco is a source of supply

Other things the same, a lower real interest rate decreases the quantity of

loanable funds supplied.

the aggregate supply curve is vertical only in the

long run

when the interest rate is above the equilibruim when the interest rate is below the equilibruim

low rate high rates

Mike, a U.S. citizen, buys $1,000 worth of olives from Greece. By itself this purchase

ncreases U.S. imports by $1,000 and decreases U.S. net exports by $1,000.

If Ireland's domestic investment exceeds national saving, then Ireland has

negative net capital outflows and negative net exports.

Both I and NCO depend on domestic interest rate _________________

negatively

If sales of Saudi Arabian oil to the rest of the world increase and Saudis use the proceeds to buy foreign goods, which of the following increases?

neither Saudi Arabian net exports nor net capital outflow

If a tariff on lumber were implemented, for the country as a whole which of the following would rise?

neither exports nor net exports

According to the open-economy macroeconomic model, import quotas increase which of the following

neither net exports nor net capital outflow.

You buy a new car built in Sweden. Other things the same, your purchase by itself

raises U.S. imports and lowers U.S. net exports.

In the open economy macroeconomic model, the price that balances supply and demand in the market for foreign-currency exchange model is the

real exchange rate.

a government budget deficit _____________ the supply of loanable funds and ____________ ____ the interest rate

reduces, drives up

Other things the same, an increase in the U.S. interest rate causes the quantity of loanable funds supplied to

rise because national saving rises.

When Mexico suffered from capital flight in 1994, Mexico's real interest rate

rose and the peso depreciated.

Other things the same, people in the U.S. would want to save more if the real interest rate in the U.S.

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

Mark, a U.S. citizen, buys stock in a British Shipping company. This purchase is an example of

saving for Mark and U.S. foreign portfolio investment.

If there is a trade deficit, then

saving is less than domestic investment and Y < C + I + G.

any change in the natural rate of output

shifts the LRAS curve to the right

According to purchasing power parity, if over the course of a year the price level in the U.S. rises more than in Japan, then which of the following falls?

the U.S. nominal exchange rate, but not the U.S. real exchange rate

multiplier effect

the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

A firm produces manufacturing equipment, some of which it exports. Which of the following effects of a budget deficit would likely reduce the quantity of equipment it sells?

the change in the interest rate and the change in the exchange rate

natural rate hypothesis

the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation

In the open-economy macroeconomic model, if for some reason foreign citizens want to purchase more U.S. goods and services at each exchange rate, then

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

If a country experiences capital flight, which of the following curves shift right?

the demand for loanable funds, the net capital outflow curve, and the supply of dollars in the market for foreign currency exchange.

(adc) when the price level falls,

the dollar you hold rise in value, increasing your wealth and your ability to buy goods and services

Other things the same, if the dollar depreciates relative to the Japanese yen, then

the exchange rate falls. It will cost fewer yen to travel in the U.S.

Which of the following is consistent with moving from a shortage to equilibrium in the market for foreign currency exchange?

the exchange rate rises so foreign residents want to buy fewer U.S. goods and services

If the U.S. government imposes a quota on toy imports, then

the exchange rate rises.

model of aggregate demand and supply

the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

sacrifice ratio

the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point

crowding-out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

natural level of output

the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate

(adc) a lower interest rate increases the

the quanitiy of goods demaned

(adc) the depreciation of the dollar leads to an increase in

the quanity of goods demaned

Which of the following does purchasing-power parity conclude should equal 1?

the real exchange rate but not the nominal exchange rate

If a dollar buys more potatoes in the U.S. than in France, then

the real exchange rate is less than 1; a profit might be made by buying potatoes in the U.S. and selling them in France.