Intermediate Macro Test 2

In the Keynesian-cross analysis, if the consumption function is given by C = 200 + 0.7 (Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is

1,100

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by

500

Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is ______ percent

6

Which of the following is an example of adverse selection?

The sickest people buy health insurance

=One argument favoring a floating-exchange-rate system is that it:

allows monetary policy to be used for other purposes.

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income (Note: assume that the effect of the change in the world interest on capital outflow is larger than those of the domestic interest rate):

and net exports both to rise

A situation in which one party to an economic transaction has more knowledge about the transaction than the other is called:

asymmetric information

1. During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n):

contractionary shift in the IS curve.

In a short-run model of a large open economy with a floating exchange rate, net capital outflow ______ as the domestic interest rate increases and is just equal to the ______ in net exports

decreases; decrease

1. A difference between the economic long run and the short run is that

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant

demand for real balances per unit of output.

Banks help mitigate the problem of adverse selection in lending by

developing expertise in evaluating the business prospects of loan applicants

1. Conventional monetary and fiscal policies during a financial crisis are aimed at _____, while acting as a lender of last resort or injecting government funds into the financial system during a financial crisis is aimed at _____.

expanding aggregate demand; restoring confidence in the financial system

The precipitous fall in the price of assets that takes place when financial institutions must sell their assets quickly in the midst of a crisis is called a(n):

fire sale

Most economists believe that prices are

flexible in the long run but many are sticky in the short run.

The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have:

free capital flows, a fixed exchange rate, and an independent monetary policy

In a short-run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in

income, the interest rate, and the exchange rate but a decrease in investment and net exports

1. If a short-run equilibrium occurs at a level of output above the potential, then in the transition to the long run prices will ______, and output will ______.

increase; decrease

According to the theory of liquidity preference, decreasing the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will ______ nominal interest rates in the long run

increase; decrease

An IS curve shows combinations of

interest rates and income that bring equilibrium in the market for goods and services

1. A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective

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

The principal purpose of a central bank acting as a lender of last resort is to

maintain the liquidity of the financial system

The risk that imperfectly monitored agents will act in dishonest or otherwise inappropriate ways is called:

moral hazard

In a large open economy with a floating exchange rate, such as in the United States, in the short run a monetary contraction

raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers net exports.

Other things equal, an expected deflation can change demand by

raising the real interest rate for any given nominal interest rate, thus reducing desired investment

Conventional monetary policy was limited during the 2008-2009 financial crisis because the central bank could not

reduce the target interest rate below zero

One argument favoring a fixed-exchange-rate system is that it

reduces exchange-rate uncertainty, thereby promoting more international trade

1. An increase in the interest rate:

reduces planned investment because the interest rate is the cost of borrowing to finance investment projects.

Stabilization policy refers to policy actions aimed at

reducing the severity of short-run economic fluctuations

A rise in the price of an asset above its fundamental value is called a(n):

speculative bubble

In the Mundell-Fleming model

the behavior of the economy depends on whether the exchange-rate system has a floating or fixed exchange rate.

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances

the interest rate and the level of income

In a short-run model of a large open economy with a floating exchange rate:

the interest rate is determined in the IS-LM framework, and this value determines net capital outflow; then the exchange rate adjusts to make net exports equal net capital outflow

1. In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

unplanned inventory investment

The housing price boom prior to the 2008-2009 recession was fueled by all of the following except:

unusually large increases in building material costs.

If neither investment nor consumption depends on the interest rate, then the IS curve is ______, and ______ policy has no effect on output

vertical; monetary

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 a country chooses to have free capital flows and to conduct an independent monetary policy, then it must:

live with exchange-rate volatility.

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve.

movement along the; shift in the

Okun's law is the ______ relationship between real GDP and the ______.

negative; unemployment rate

The theory of liquidity preference states that the quantity of real money balances demanded is

negatively related to the interest rate and positively related to income

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances

negatively; positively

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run.

only output; only prices

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run, and ______ increase(s) in the long run.

output; prices