GAP 9

If the multiplier is 5.25, then the MPC is A. 0.81. B. 0.68. C. 0.84. D. 0.19.

A. 0.81.

A rightward shift of the short-run aggregate-supply curve results in a more favorable trade-off between inflation and unemployment. a. TRUE b. FALSE

a. TRUE

According to the Friedman-Phelps analysis, in the long run actual inflation equals expected inflation and unemployment is at its natural rate. a. TRUE b. FALSE

a. TRUE

Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut. a. TRUE b. FALSE

a. TRUE

A policy change that reduces the natural rate of unemployment shifts both the long-run aggregate-supply curve and the long-run Phillips curve left. a. TRUE b. FALSE

b. FALSE

Monetary policy and fiscal policy are the only factors that influence aggregate demand. a. TRUE b. FALSE

b. FALSE

Scenario 34-1. Take the following information as given for a small, imaginary economy:• When income is $10,000, consumption spending is $6,500.• When income is $11,000, consumption spending is $7,250. Refer to Scenario 34-1. For this economy, an initial increase of $200 in net exports translates into a(n) A. $800 increase in aggregate demand in the absence of the crowding-out effect. B. $800 increase in aggregate demand when the crowding-out effect is taken into account. C. $570 increase in aggregate demand when the crowding-out effect is taken into account. D. $1,400 increase in aggregate demand in the absence of the crowding-out effect.

A. $800 increase in aggregate demand in the absence of the crowding-out effect.

A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be A. 1.6 for government purchases and 1.0 for tax cuts. B. 2.4 for government purchases and 1.4 for tax cuts. C. 1.6 for government purchases and 0.4 for tax cuts. D. 3.2 for government purchases and 2.0 for tax cuts.

A. 1.6 for government purchases and 1.0 for tax cuts.

Which of the following illustrates how the investment accelerator works? A. An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels. B. An increase in government expenditures increases the interest rate so that SnoozeBargain Co. decides to modernize its motels. C. An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by SnoozeBargain Co. rises. D. An increase in government expenditures decreases the interest rate so that SnoozeBargain Co. decides to modernize its motels.

A. An increase in government expenditures increases aggregate spending so that SnoozeBargain Co. decides to modernize its motels.

The multiplier effect A. amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects. B. and the crowding-out effect both diminish the effects of an increase in government expenditures. C. and the crowding-out effect both amplify the effects of an increase in government expenditures. D. diminishes the effects of an increase in government expenditures, while the crowding-out effect amplifies the effects.

A. amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.

Which of the following events would shift money demand to the right? A. an increase in the price level, but not an increase in the interest rate B. an increase in the interest rate or an increase in the price level C. neither an increase in the interest rate nor an increase in the price level D. an increase in the interest rate, but not an increase in the price level

A. an increase in the price level, but not an increase in the interest rate

The marginal propensity to consume (MPC) is defined as the fraction of A. extra income that a household consumes rather than saves. B. total income that a household either consumes or saves. C. extra income that a household either consumes or saves. D. total income that a household consumes rather than saves.

A. extra income that a household consumes rather than saves.

Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would A. increase the money supply. B. decrease the money supply. C. increase government spending. D. decrease government spending.

A. increase the money supply.

According to classical macroeconomic theory, in the long run A. monetary growth affects nominal but not real variables. B. a number of factors that affect unemployment are influenced by monetary growth. C. the only real variable affected by monetary growth is the unemployment rate. D. monetary growth affects both real and nominal variables.

A. monetary growth affects nominal but not real variables.

Figure 35-1. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the right-hand diagram, U represents the unemployment rate. Refer to Figure 35-1. What is measured along the vertical axis of the right-hand graph? A. the inflation rate B. the wage rate C. the interest rate

A. the inflation rate

If people correctly anticipate that inflation will fall by 1%, then A. the short-run Phillips curve shifts left and unemployment is unchanged. B. the short-run Phillips curve shifts right and unemployment is unchanged. C. the short-run Phillips curve would shift left and unemployment falls. D. the short-run Phillips curve shifts right and unemployment rises.

A. the short-run Phillips curve shifts left and unemployment is unchanged.

On the graph that depicts the theory of liquidity preference, A. the supply-of-money curve is vertical. B. the demand-for-money curve is vertical. C. the price level is measured along the vertical axis. D. the interest rate is measured along the horizontal axis.

A. the supply-of-money curve is vertical

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then A. 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. B. 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5. C. 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 3. D. 1 + MPC + MPC 2 + MPC 3 = 1.844 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 1.96.

B. 1 + MPC + MPC 2 + MPC 3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of 2.5.

Scenario 34-1. Take the following information as given for a small, imaginary economy:• When income is $10,000, consumption spending is $6,500.• When income is $11,000, consumption spending is $7,250. Refer to Scenario 34-1. The multiplier for this economy is A. 1.53. B. 4.00. C. 7.00. D. 2.85.

B. 4.00.

Figure 35-6 Use the graph below to answer the following questions. Refer to Figure 35-6. The money supply growth rate is greatest at A. B. B. F. C. C. D. A.

B. F. (highest point on vertical graph)

In which of the following cases does the aggregate-demand curve shift to the right? A. The money supply decreases, causing the interest rate to fall. B. The money supply increases, causing the interest rate to fall. C. The price level falls, causing the interest rate to fall. D. The price level rises, causing the interest rate to fall.

B. The money supply increases, causing the interest rate to fall.

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then

B. aggregate demand falls by 11/2 x $40 billion.

Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment A. falls. As inflation expectations adjust, the short-run Phillips curve shifts left. B. falls. As inflation expectations adjust, the short-run Phillips curve shifts right. C. rises. As inflation expectations adjust, the short-run Phillips curve shifts left. D. rises. As inflation expectations adjust, the short-run Phillips curve shifts right.

B. falls. As inflation expectations adjust, the short-run Phillips curve shifts right.

The experience of the Volcker disinflation of the early 1980s A. generally increased estimates of the sacrifice ratio. B. generally decreased estimates of the sacrifice ratio. C. clearly refuted the predictions of the opponents of rational expectations. D. clearly refuted the predictions of the proponents of rational expectations

B. generally decreased estimates of the sacrifice ratio.

Suppose the central bank pursues an unexpectedly tight monetary policy. In the short-run the effects of this are shown by A. shifting the short-run Phillips curve to the left. B. moving to the right along the short-run Phillips curve. C. moving to the left along the short-run Phillips curve. D. shifting the short-run Phillips curve to the right.

B. moving to the right along the short-run Phillips curve.

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services pay their employees. This sequence of events illustrates A. the bandwagon effect. B. the multiplier effect. C. the chain effect. D. the accelerator effect.

B. the multiplier effect.

Samuelson and Solow argued that a combination of low unemployment and low inflation A. could be achieved with an "appropriate" fiscal policy. B. was impossible given the historical data as summarized by the Phillips curve. C. could be achieved with an "appropriate" mix of monetary and fiscal policies. D. could be achieved with an "appropriate" monetary policy.

B. was impossible given the historical data as summarized by the Phillips curve.

Economists who are skeptical about the relevance of "liquidity traps" argue that

C. a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero

According to liquidity preference theory, the money-supply curve would shift if the Fed A. increase the real income. B. increased money demand. C. engaged in open-market operations. D. did any of the above

C. engaged in open-market operations.

If the Federal Reserve increases the growth rate of the money supply, in the long run A. inflation is unchanged while the unemployment rate is lower. B. inflation is higher and the unemployment rate is lower. C. inflation is higher while the unemployment rate is unchanged. D. None of the above is correct.

C. inflation is higher while the unemployment rate is unchanged.

The misery index is calculated as the A. unemployment rate minus the inflation rate. B. actual inflation rate minus the expected inflation rate. C. inflation rate plus the unemployment rate. D. natural unemployment rate times the inflation rate

C. inflation rate plus the unemployment rate.

Most economists believe that a tradeoff between inflation and unemployment exists A. only in the long run. B. in neither the short nor long run. C. only in the short run. D. in both the short and long run.

C. only in the short run.

The Employment Act of 1946 states that A. the Fed should use monetary policy only to control the rate of inflation. B. the government should periodically increase the minimum wage and unemployment insurance benefits. C. the government should promote full employment and production. D. All of the above are correct.

C. the government should promote full employment and production.

If a central bank decreases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result? A. neither output nor the price level B. output but not the price level C. the price level but not output D. both the price level and output

C. the price level but not output

In the 1970's the Federal Reserve responded to an adverse supply shock. Its policy made A. the recession that followed larger and also produced a less favorable tradeoff between inflation and unemployment. B. the recession that followed larger, but in doing so provided a more favorable tradeoff between inflation and unemployment. C. the recession that followed smaller, but in doing so produced a less favorable tradeoff between inflation and unemployment. D. the recession that followed smaller and so provided a more favorable tradeoff between inflation and unemployment.

C. the recession that followed smaller, but in doing so produced a less favorable tradeoff between inflation and unemployment.

An increase in government spending on goods to build or repair infrastructure A. shifts the aggregate supply curve to the right, but this effect is likely more important in the long run. B. shifts the aggregate demand curve to the right. C. has a multiplier effect. D. All of the above are correct.

D. All of the above are correct.

Figure 35-7 Use the two graphs in the diagram to answer the following questions. Refer to Figure 35-7. Starting from C and 3, in the short run, an unexpected decrease in money supply growth moves the economy to A. back to C and 3. B. A and 1. C. D and 4. D. B and 2.

D. B and 2. (Lower PL and output & Lower Inflation rate and higher unemployment rate)

The theory of liquidity preference assumes that the nominal supply of money is determined by the A. level of real output only. B. interest rate only. C. level of real output and by the interest rate. D. Federal Reserve.

D. Federal Reserve.

Monetary Policy in Mokania Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate. Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct? A. Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 1. B. Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 3. C. Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 1. D. Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.

D. Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.

Suppose that an economy is currently experiencing 10 percent unemployment and 15 percent inflation. If in the process of bringing inflation down by 2 percentage points, real GDP falls by 6 percent for a year, the sacrifice ratio is A. 12. B. 2. C. 5. D. None of the above is correct.

D. None of the above is correct.

Which of the following would cause the price level to rise and output to fall in the short run? A. an increase in the money supply B. a decrease in the money supply C. a favorable supply shock D. an adverse supply shock

D. an adverse supply shock

In the late 1960s, economist Edmund Phelps published a paper that A. argued that the Phillips curve was stable and that it would not shift. B. showed the optimal point on the Phillips curve was at an unemployment rate of 5 percent and an inflation rate of 2 percent. C. disproved Friedman's claim that monetary policy was effective in controlling inflation. D. argued that there was no long-run tradeoff between inflation and unemployment.

D. argued that there was no long-run tradeoff between inflation and unemployment.

A policy that raised the natural rate of unemployment would shift A. neither the long-run Phillips curve nor the short-run Phillips curve right. B. the long-run Phillips curve right but leave the short-run Phillips curve unchanged. C. the short-run Phillips curve right but leave the long-run Phillips curve unchanged. D. both the short-run and the long-run Phillips curves to the right.

D. both the short-run and the long-run Phillips curves to the right.

A country is likely to have a higher sacrifice ratio if A. contracts are shorter, and people believe the central bank will not reduce inflation. B. contracts are shorter, and people believe the central bank will reduce inflation. C. contracts are longer, and people believe the central bank will reduce inflation. D. contracts are longer, and people believe the central bank will not reduce inflation

D. contracts are longer, and people believe the central bank will not reduce inflation

The large increase in oil prices in the 1970s was caused primarily by a(n) A. increase in demand for oil. B. decrease in demand for oil. C. increase in the supply of oil. D. decrease in the supply of oil.

D. decrease in the supply of oil.

Which among the following assets is the most liquid? A. fine art B. shares of stock C. corporate bonds D. deposits that can be withdrawn using ATMs

D. deposits that can be withdrawn using ATMs

If it were not for the automatic stabilizers in the U.S. economy, A. a strict balanced-budget rule would be more desirable than it is now. B. the Federal Reserve would have less reason than it has now to monitor stock prices. C. it would be more desirable than it is now for the Federal Reserve to target an interest rate. D. output and employment would probably be more volatile than they are now.

D. output and employment would probably be more volatile than they are now.

If there is a temporary adverse supply shock, then the short-run Phillips curve shifts to the A. left. It remains to the left if the central bank pursues expansionary monetary policy. B. right. It remains to the right regardless of monetary policy. C. left. It remains to the left regardless of monetary policy. D. right. It remains to the right if the central bank pursues expansionary monetary policy.

D. right. It remains to the right if the central bank pursues expansionary monetary policy.

Critics of stabilization policy argue that A. active fiscal policy is required for steady economic growth. B. "animal spirits" must be offset by active monetary policy. C. active monetary policy is necessary for steady economic growth. D. the lag problem ends up being a cause of economic fluctuations.

D. the lag problem ends up being a cause of economic fluctuations.

The logic of the multiplier effect applies A. only when the crowding-out effect is sufficiently strong. B. only to changes in the money supply. C. only to changes in government spending. D. to any change in spending on any component of GDP.

D. to any change in spending on any component of GDP.