Intermediate Macroeconomic Quizzes

Changes in fiscal policy shift the:

IS curve.

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______.

IS; left

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

increases; increases

Assume that the economy starts at point A, and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought, and point ______ represents the eventual long-run equilibrium. (Graph)

B, A

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______.

resulting from a change in the price level; at a given price level

When people want to hold _____ money, the income velocity of money increases, and the money demand parameter k ______ .

less; decreases

Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

A

If the real return on government bonds is 6 percent and the expected rate of inflation is 2 percent, then the cost of holding money is ______ percent.

8

If the Fed announces that it will raise the money supply in the future but does not change the money supply today,

both the nominal interest rate and the current price level will increase.

If a technological advancement increases the marginal product of both labor and capital, the neoclassical theory of distribution predicts that:

both the real wage and the real rental price of capital will rise.

A consumption function shows the relationship between consumption and:

disposable income.

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

does not change production

The equilibrium of the Keynesian cross shows:

equality of planned expenditure and income in the short run.

Variables that a model takes as given are called:

exogenous.

Exhibit: Saving, Investment, and the Interest Rate 1 The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts spending, holding other factors constant? (Graph)

point B

Based on the graph, if the interest rate is r1, then people will ______ bonds, and the interest rate will ______.

buy; fall

Assume that a firm buys all the parts that it puts into a laptop for $1,000, pays its workers $1,200 to assemble the laptop, and sells the laptop for $3,000. In this case, the value added by the laptop company is:

$2,000.

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals:

$600 billion

If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be:

0.18

If nominal GDP in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator?

1.27

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be:

12 percent

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 quantity theory of money and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

5 percent.

Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____, with a _____ price level. (Graph)

B; lower

In this graph, initially the economy is at point E, with price P0 and output aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______. (Graph)

C,B

National saving is:

private saving plus public saving.

The intersection of the IS and LM curves determines the values of:

r and Y, given G, T, M, and P.

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income: (Graph)

r2, Y2

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: (Graph)

r3, Y2.

Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to:

reduce the firm's wage bill.

Any policy aimed at lowering the natural rate of unemployment must either ______ the rate of job separation or ______ the rate of job finding.

reduce; increase

To reduce the money supply, the Federal Reserve:

sells government bonds.

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.

smaller than the multiplier

An assumption of _______ is more plausible for studying the short-run behavior of the economy, while an assumption of ______ is more plausible for studying the long-run, equilibrium behavior of the economy.

sticky prices; flexible prices

All of the following are stock variables except:

the government budget deficit.

In our model from Chapter 3, the real wage will increase if:

the marginal product of labor increases.

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

the money supply decreases.

The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to ______ spending on goods and services.

unexpected; reduce

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left.

An increase in government spending generally shifts the IS curve:

upward and to the right.

A policy that increases the job-finding rate _____ the natural rate of unemployment.

will decrease

The inflation tax is paid:

by all holders of money.

The money supply will decrease if the:

currency-deposit ratio increases.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level.

decrease; LM

An increase in income raises money ______ and ______ the equilibrium interest rate.

demand; raises

In this graph, if firms are producing at level Y1, then inventories will ______, inducing firms to ______ production. (Graph)

fall; increase

According to the classical theory of money, inflation does not make workers poorer because wages increase:

in proportion to the increase in the overall price level.

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply, shifting to _____.

increase; LM2

When the Fed increases the discount rate, it:

is likely to decrease the monetary base (B).

When a firm sells a product out of inventory, GDP:

is not changed.

A competitive, profit-maximizing firm chooses the amount of capital where the:

marginal product of capital equals the real rental rate.

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's:

need to generate revenue to pay for spending.

The Phillips curve shows a ______ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a ______ relationship between the price level and output.

negative; positive

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

Which of the following is the best example of structural unemployment?

Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

LM; does not shift

The ex post real interest rate will be greater than the ex ante real interest rate when the:

actual rate of inflation is less than the expected rate of inflation.

In a simple model of the supply and demand for pizza, the exogenous variables are:

aggregate income and the price of cheese.

In the classical model with fixed income, a decrease in the real interest rate could be the result of:

an increase in taxes.

If an increase of an equal percentage in all factors of production increases output by the same percentage, then a production function has the property called:

constant returns to scale.

If the unemployment rate is 6 percent and the number of employed is 188 million, then the labor force equals ______ million.

200

Use the IS-LM model to determine the impact on output and interest rates of a one-time increase in the price level due to a large increase in oil prices. Using words, answer the following questions (and make sure to explain why things are happening to earn full points): What happens to the curves and equilibrium values in the affected market(s) (i.e., the money market and/or goods market)? Explain. What shifts in the IS-LM model? Explain. Are the equilibrium levels of interest rates and income in the IS-LM model different than before the increase in oil prices? If so, how are they different? Explain.

If there is a large increase in oil prices that increases the overall price level P, then assuming M is unchanged, the supply of real money balances M/P in the money market decreases. This leads to an increase in the money market equilibrium real interest rate for any given level of output/income. This is a leftward shift of the LM curve. In the IS-LM model, this results in a higher equilibrium interest rate and a lower equilibrium level of output/income. In the goods market, the increase in the interest rate decreases investment, which decreases planned expenditure and shifts the planned expenditure curve downward in the Keynesian cross, which results in a lower equilibrium level of output in the goods market. ​

Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed. In addition, the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. The economy can be described by the following set of equations: ​ ​ Y = AKα L(1 - α) Y = C + I + G C = C (Y - T) I = I(r) Suggest at least two policies that a government could use to increase the equilibrium quantity of investment in the economy and carefully explain how these policies produce this result.

Private Spending (Y-T-C)Public Spending (T-G)Y = C + I + GI = Y - C - GIf the private as well as public spending (consumption of goods and services) is decreased in an economy, the equilibrium quantity of investment would increase because then people would put more money in investments rather than purchasing goods and services, which would increase the demand for investment.For instance, assume Y = 20, C = 8, and G = 6. Then, I = Y - C - G = 6.Now, let's assume C = 5. Then, I = Y - C - G = 9As seen above, when the consumption decreases, Investment increases.Along with that, if the government cuts its spending, it would also help increase the equilibrium quantity of investment in the economy.For instance, assumeY = 20, C = 8, and G = 6. Then, I = Y - C - G = 6.Now, let's assume G = 3. Then, I = Y - C - G = 9As seen above, when the government purchases decrease, Investment increases.

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by:

a significant increase in the reserve-deposit ratio.