macro

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

260

If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:

400

(Exhibit: IS*-LM*) A small open economy with a fixed exchange rate e2 is initially at equilibrium A with and equilibrium output Y1. If there is a monetary expansion to the new equilibrium will be at ____, holding everything else constant.

A

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate.

capital inflow

In the Solow growth model, the steady-state occurs when:

capital per worker is constant.

In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes:

consumption per effective worker.

During the era of the gold standard, the price of gold in England:

could be higher or lower than the price of gold in the United States, but not by more than the cost of transporting gold between the two countries.

According to the Mundell-Fleming model, under:

floating exchange rates, a monetary expansion raises income whereas a fiscal expansion does not, but under fixed exchange rates, a fiscal expansion raises income whereas a monetary expansion does not.

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.

If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must:

give up the use of monetary policy for purposes of domestic stabilization

Empirical studies indicate that the rate of social return from positive "standing on others' shoulders" externalities of research ______ the negative "stepping on toes" externalities of research.

greatly exceed

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except:

high inflation.

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are ______, generating a ______ quantity of output demanded.

higher; greater

One argument in favor of tax cuts over spending-based fiscal stimulus is that:

historically tax cuts have been more successful than spending-based fiscal stimulus.

Most economists believe that the classical dichotomy:

holds approximately in the long run but not at all in the short run.

If money demand is infinite below some certain r (e.g., r*) and zero above r*, then the LM curve is ______ and ______ policy has no effect on output.

horizontal; monetary

An increase in taxes lowers income:

in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment

Most economists believe:

in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.

Differences in factor accumulation and/or differences in production efficiency must account for all international differences in:

income per person.

In the IS-LM model, a decrease in output would be the result of a(n):

increase in money demand.

If a larger share of national output is devoted to investment, starting from an initial steadystate capital stock below the Golden Rule level, then productivity growth will:

increase in the short run but not in the long run.

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

increase; decrease

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

increase; decrease

In the Mundell-Fleming model with flexible exchange rates, an increase in the price level results in a(n) ______ in the real exchange rate and a(n) ______ in net exports.

increase; decrease

An LM curve shows combinations of:

interest rates and income, which bring equilibrium in the market for real money balances.

A speculative attack on a currency occurs when:

investors' perceptions change, making a fixed exchange rate untenable

According to the theory of liquidity preference, the supply of nominal money balances:

is chosen by the central bank

With a per-worker production function y = k^1/2, the steady-state capital stock per worker (k*) as a function of the saving rate (s) is given by:

k* = (s/δ)^2.

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:

low aggregate demand.

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

lower; inward

The formula for the steady-state ratio of capital to labor (k*) with population growth at rate n but no technological change, where s is the saving rate, is s:

multiplied by f(k*) divided by the sum of the depreciation rate plus n.

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to decrease the money supply:

must be abandoned in order to maintain the fixed exchange rate.

In the Solow model with technological progress, the steady-state growth rate of total output is:

n + g.

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

negatively related to the interest rate and positively related to income.

The LM curve generally determines:

neither income nor the interest rate.

Alan Blinder's survey of firms found that the typical firm adjusts its prices:

once or twice a year.

The IS-LM model is generally used:

only in the short run.

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

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

output will decrease, but the price level will increase.

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

(Exhibit: Policy Interaction) 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 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be _____.

r2, Y3

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances.

raises

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.

real; nominal

During the Great Depression, countries that devalued their currencies generally ______ whereas countries that maintained the old exchange rate ______.

recovered relatively quickly; suffered longer

When an economy begins below the Golden Rule, reaching the Golden Rule:

requires initially reducing consumption to increase consumption in the future.

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

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:

return to the old level and output will be restored to the natural rate.

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y3, then inventories will ______, inducing firms to ______ production.

rise; decrease

In the Solow growth model, the steady state level of output per worker would be higher if the _____ increased or the _____ decreased.

saving rate; depreciation rate

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

sell; LM

Investment per worker (i) as a function of the saving ratio (s) and output per worker (f(k)) may be expressed as:

sf(k).

In a steady-state economy with a saving rate s, population growth n, and labor-augmenting technological progress g, the formula for the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f(k*)), is (denoting the depreciation rate by δ):

sf(k)/(δ + n + g).

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS* curve:

slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market

The LM curve, in the usual case:

slopes up to the right.

A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production.

slowdown; slowdown

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

smaller; greater

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.

The interaction of the IS curve and the LM curve together determine:

the equilibrium level of the interest rate and output.

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:

the exchange rate will rise, but income will remain unchanged.

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?

the interest 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

The slope of the IS curve depends on:

the interest sensitivity of investment and the marginal propensity to consume

Which of the following is an example of a demand shock?

the introduction and greater availability of credit cards

In a small open economy with a floating exchange rate, the exchange rate will appreciate if:

the money supply is decreased.

Empirical results justify substantial government subsidies to research based on the finding that the:

the private return to research is less than the social return to research.

In the Solow growth model with population growth and technological change, the steadystate growth rate of income per person depends on:

the rate of technological progress.

In the Solow growth model of Chapter 8, where s is the saving rate, y is output per worker, and i is investment per worker, consumption per worker (c) equals:

(1 - s)y

(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a shortterm equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level.

B; lower

(Exhibit: IS*-LM*) A small open economy with a fixed exchange rate e2 is initially at equilibrium A with and equilibrium output Y1. If there is an increase in government spending to the new equilibrium will be at ____, holding everything else constant.

C

(Exhibit: Shifting IS* and LM*) A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if the government imposes a tariff on imports in order to protect domestic jobs, then the _____ curve will shift to _____.

IS1*; IS2*

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

If money demand does not depend on income, then the ______ curve is ______.

LM; horizontal

If money demand is extremely sensitive to the interest rate, then the ______ curve is ______.

LM; horizontal

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:

a fall in income and net exports.

The relationship between the quantity of goods and services supplied and the price level is called:

aggregate supply.

Tax cuts stimulate ______ by improving workers' incentive and expand ______ by raising households' disposable income.

aggregate supply; aggregate demand

According to Kremer, large populations:

are a prerequisite for technological advances and higher living standards.

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

between zero and one.

The IS and LM curves together generally determine:

both income and the interest rate.

Both Keynesians and supply-siders believe a tax cut will lead to growth:

but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS* curve shifts to the right, raising the exchange rate:

but not raising net exports or income.

(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______.

buy; fall

In the Mundell-Fleming model, if political turmoil raises the risk premium in a country's interest rate, then the exchange rate will ______.

decrease

In the Solow growth model, if investment is less than depreciation, the capital stock will ______ and output will ______ until the steady state is attained.

decrease; decrease

A devaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

decreased

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate ______, and the LM* curve shifts to the ______.

decreases; right

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

demand; raises

In this graph, capital-labor ratio k2 is not the steady-state capital-labor ratio because:

depreciation is greater than gross investment.

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves farther to the right.

downward; flatter

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

fall; increase

Other things equal, a given change in government spending has a larger effect on demand the:

flatter the LM curve.

In the Solow growth model, if two countries are otherwise identical (with the same production function, same saving rate, same depreciation rate, and same rate of population growth) except that Country Large has a population of 1 billion workers and Country Small has a population of 10 million workers, then the steady-state level of output per worker will be _____ and the steady-state growth rate of output per worker will be _____.

the same in both countries; the same in both countries

In the two-sector endogenous growth model, the steady-state stock of physical capital is determined by _____, and the growth in the stock of knowledge is determined by _____.

the saving rate; the fraction of labor in universities

Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.

two

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.

weaker; stronger

The analysis in Chapter 9 of the current capital stock in the United States versus the Golden Rule level of capital stock shows that the capital stock in the United States is:

well below the Golden Rule level.

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

zero.

In the Solow growth model, the steady-state growth rate of output per effective worker is ______, and the steady-state growth rate of output per actual worker is ______.

zero; the rate of technological progress

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ΔG and the planned expenditure schedule by an equal amount, then equilibrium income rises by

ΔG divided by the quantity one minus the marginal propensity to consume.