Macro Economics Final Exam Chapter 10-16, 18-20

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about:

$25 billion.

The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately:

0.

Assume that an economy has the Phillips curve π = π-1 - 0.5(u - 0.06). Then the natural rate of unemployment is:

0.06.

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. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1,600.

(Exhibit: Supply Shock) Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point:

A

In the IS-LM model, starting with no expected inflation, if expected inflation becomes negative, then the:

IS curve shifts leftward.

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

IS; shifts to the right

Changes in monetary policy shift the:

LM curve.

Exhibit: Risk Premium A small open economy with a floating exchange rate is initially in equilibrium at A with If the establishment of a new government in the country decreases the risk premium, then will shift to _____ and will shift to _____.

LM*3; IS*2

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

LM: shifts to the right

An economy must sacrifice 12 percent of GDP to reduce inflation. Which of the following plans represents the "cold turkey" solution to inflation?

Reduce output by 12 percent for 1 year.

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model, with fixed exchange rates, lead to:

a fall in consumption and income.

Along any given IS curve:

both government spending and tax rates are fixed.

If price expectations are assumed to be correct, money demand is proportional to income, and there are no international capital flows, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

classical closed economy

The aggregate demand curve tells us possible:

combinations of P and Y for a given value of M.

The economic response to the overnight reduction in the French money supply by 20 percent in 1724,

confirmed that money is not neutral in the short run because both output and prices dropped.

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

exchange rate.

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is lower than expected, then output ______ natural rate of output.

falls below the

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.

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.

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

higher; lower

Most economists believe that the classical dichotomy:

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

Economists are able to estimate the natural rate of unemployment in the United States:

in a 95 percent confidence interval of 2 to 3 percentage points.

According to the natural-rate hypothesis, output will be at the natural rate:

in the long run.

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

income and the interest rate rise, whereas consumption and investment fall.

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

income rises but the exchange rate does not rise.

An explanation for the slope of the LM curve is that as:

income rises, money demand rises, and a higher interest rate is required.

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) ______ sufficient to offset the decline in the demand for money caused by the higher risk premium.

increase in the price level caused by more expensive imports

If a change in government regulations allows banks to start paying interest on checking accounts, this will:

increase the demand for money

In a small open economy a decrease in the exchange rate will _____ net exports and shift the _____ curve.

increase; IS

The money hypothesis suggests that the Great Depression was caused by a:

leftward shift in the LM curve.

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

lower the interest rate.

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.

lowers; raises

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

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

national income; goods and services

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

negative; unemployment rate

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

The LM curve generally determines:

neither income nor the interest rate.

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:

no change in income or net exports.

When Paul Volcker tightened the money supply:

nominal interest rates fell in the long run.

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

An economic change that does not shift the aggregate demand curve is a change in:

the price level.

When the LM curve is drawn, the quantity that is held fixed is:

the real money supply.

All of the following are suggested by the results of Alan Blinder's survey of firms except:

there is only one theory of price stickiness.

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant:

this represents a movement down the aggregate demand curve.

Compared to a closed economy, an open economy is one that:

trades with other countries.

Based on the Phillips curve, unexpected movements in inflation are related to ______, and based on the short-run aggregate supply curve, unexpected movements in the price level are related to ______.

unemployment; output

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 nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

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

vertical; monetary

(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to and the price level equal to P1, a cost-push inflation would be represented by a shift from:

AS1 to AS2

(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

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.

aggregate supply; aggregate demand

According to the imperfect-information model, when the price level is greater than the expected price level, output will _____ the natural level of output

be greater than

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:

be smaller.

In a small open economy with a floating exchange rate, an effective policy to decrease equilibrium output is to:

decrease the money supply.

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

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes net exports to ______, and expansionary monetary policy causes net exports to ______.

decrease; increase

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

decreased.

When GDP growth declines, investment spending typically ______ and consumption spending typically ______.

decreases; decreases

An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

downward and to the left.

The short run refers to a period:

during which prices are sticky and unemployment may occur.

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate.

increase; increase

An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM framework, ______ output and ______ interest rates.

increase; raise

A reduction in the demand for money is the equivalent of a(n) _______ in velocity and will shift the aggregate demand curve to the _____.

increase; right

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

increased.

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

increases by more than 250.

The classical dichotomy breaks down for a Phillips curve, which shows the relationship between a nominal variable, ______, and a real variable, ______.

inflation; unemployment

A liquidity trap occurs when:

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

Each of the following phenomena hinders the precise estimation of the natural rate of unemployment except:

introduction of new products such as DVD players.

Business cycles are

irregular and unpredictable

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

is fixed.

Inflation inertia refers to the idea that inflation:

keeps on going unless something acts to stop it.

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then monetary policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

large; small.

The assumption of rational expectations for inflation means that people will form their expectations of inflation by:

optimally using all available information, including information about current policies, to forecast the future.

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.

output decreases and prices are unchanged; fall

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

A recession may alter an economy's natural rate of unemployment in all of the following ways except by:

permanently reducing the money supply.

"Crony capitalism" refers to situations in which banks make loans to those borrowers with the most:

political clout.

According to the sticky-price model, deviations of output from the natural level are _____ deviations of the price level from the expected price level.

positively associated with

All of the following are exogenous variables in the mother of all models in the Appendix to Chapter 14 except the:

price level.

Along a short-run aggregate supply curve, output is related to unexpected movements in the ______. Along a Phillips curve, unemployment is related to unexpected movements in the ______.

price level; inflation rate

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

production

(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

(Exhibit: IS-LM Fiscal Policy) 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:

r3, Y2

At the end of 1994 the Mexican government was unable to maintain a fixed exchange rate because it:

ran out of foreign-currency reserves.

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

recovered relatively quickly; suffered longer

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the:

right by 200.

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

rise in the short run but return to its original equilibrium level in the long run

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

rise; decrease

In the Mundell-Fleming model, if the price level falls, then the equilibrium income

rises and the real exchange rate depreciates.

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.

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

According to the sticky-price model:

some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

technological progress; variations in labor-market utilization

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services.

the interest rate and the level of income

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

the introduction and greater availability of credit cards

The imperfect-information model assumes that producers find it difficult to distinguish between changes in:

the overall level of prices and relative prices.