Macro Final

The Mundell-Fleming model is a ______ model for a ______ open economy.

short-run; small

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

IS; shifts to the right

Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.

Keynesian; the short run whereas the classical assumptions are most appropriate in the long run

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.

Between 1995 and 2005, China chose to:

conduct an independent monetary policy, restrict international-capital flows, and maintain a fixed exchange rate.

In the IS-LM model, changes in taxes initially affect planned expenditures through:

consumption

An unexpected deflation can change demand by redistributing wealth from:

debtors to creditors, thus lowering consumption.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.

decrease

A shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will ______ in the long run, as compared to a short-run equilibrium.

decrease output but increase prices

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

When a country abandons its national currency and adopts the currency of the United States, this is known as:

dollarization.

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.

In the IS-LM model when taxation increases, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.

falls; falls

A monetary union with a common currency is an example of a:

fixed-exchange-rate system.

Under a floating system, the exchange rate:

fluctuates in response to changing economic conditions.

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.

All of the following may have contributed to the financial crisis and economic downturn of 2008-09 except:

high inflation.

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.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

increase

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

increase in the money supply.

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

increase the money supply.

In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports:

increase, the money supply increases, and income increases.

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

increased.

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium, the money supply:

increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income.

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out:

investment

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 taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

investment rises but consumption falls.

Under a fixed system, the exchange rate:

is maintained at a predetermined level by the central bank.

A given increase in taxes shifts the IS curve more to the left the:

larger the marginal propensity to consume.

The increase in income in response to a fiscal expansion in the IS-LM model is:

less than in the Keynesian-cross model unless the LM curve is horizontal.

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

live with exchange-rate volatility.

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

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 Mundell-Fleming model, the exogenous variables are the:

price level, world interest rate, monetary policy, and fiscal policy.

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

reduces exchange-rate uncertainty, thereby promoting more international trade.

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

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.

rises; falls

In the Mundell-Fleming model:

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

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.

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

the interest rate and the level of output.

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

the money supply is decreased.

If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate was 150 yen per dollar, then:

the money supply would rise until the market exchange rate was 100 yen per dollar.

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

the price level.

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

trades with other countries.

In the Mundell-Fleming model, the domestic interest rate is determined by the:

world interest rate.

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.

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.

-2

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

allows monetary policy to be used for other purposes.

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

control its citizen's access to world financial markets.

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease; decrease; decrease; decrease

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

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.

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

increase; IS

The intersection of the IS* and LM* curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium.

level of output; exchange rate

An increase in consumer saving for any given level of income will shift the:

IS curve downward and to the left.

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

One policy response to the U.S. economic slowdown of 2001 were tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

IS; right

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

LM: shifts to the right

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

LM; does not shift

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.

LM; right

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

LM; right

Under a fixed-exchange-rate system, the central bank of a small open economy must:

allow the money supply to adjust to whatever level will ensure that the equilibrium exchange rate equals the announced exchange rate.

A liquidity trap occurs when:

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

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 LM* curve:

is vertical because the exchange rate does not enter into the LM* equation.

In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.

rises; rises

The principal economic loss when a country dollarizes is the loss of:

seigniorage revenue.

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

sell; LM

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.