MACRO FINAL

In the circular flow model, the flow of dollars from firms to households is paid _____, and the flow of dollars from households to firms is paid _____. A) as wages, capital income, and profits; for goods and services B) for value added; as imputed values C) in current dollars; in constant dollars D) as interest and dividends; for depreciation and taxes

as wages, capital income, and profits; for goods and services

An economy's _____ equals its _____. A) consumption; income B) consumption; expenditure on goods and services C) expenditure on goods; expenditures on services D) total income; total expenditure on goods and services

total income; total expenditure on goods and services

Which of the panels illustrates the impact of contractionary fiscal policies at home on the real exchange rate? A B C D

A

Consider the money demand function that takes the form (M/P)d = Y/(4i), where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy? A) i B) 4i C) 1/(4i) D) 0.25

B) 4i

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. A) B; C B) B; A C) E; D D) D; A

B) B; A

A small open economy with a floating exchange rate is initially in equilibrium at A with holding all else constant, if the domestic price level increases, then the _____ curve will shift to _____. A) LM; LM2* B) LM; LM3* C) IS; IS2* D) IS; IS3*

B) LM; LM3*

Based on the graph, which is the correct ordering of the price levels and money supplies? A) P1 > P2 and M1 > M2 B) P1 > P2 and M1 < M2 C) P1 < P2 and M1 > M2 D) P1 < P2 and M1 < M2

B) P1 > P2 and M1 < M2

In a classical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would: A) still crowd out exactly $10 billion of investment. B) crowd out between zero and $10 billion of investment. C) not crowd out any investment. D) crowd out more than $10 billion of investment.

B) crowd out between zero and $10 billion of investment.

If an aggregate demand curve is drawn with real gross domestic product (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. A) downward; steeper B) downward; flatter C) upward; steeper D) upward; flatter

B) downward; flatter

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income: A) increases by 250. B) increases by more than 250. C) decreases by 250. D) increases but by less than 250.

B) increases by more than 250.

Inflation _____ the variability of relative prices and _____ the efficiency of the allocation of resources. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

B) increases; decreases

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 floating exchange rates, lead to: A) a fall in income and net exports. B) no change in income or net exports. C) a fall in income but no change in net exports. D) no change in income but a fall in net exports.

B) no change in income or net exports.

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. A) only prices; only output B) only output; only prices C) both prices and output; only prices D) both prices and output; both prices and output

B) only output; only prices

If the short-run aggregate supply curve is horizontal, and each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then: A) output and employment will increase in the short run. B) output and employment will decrease in the short run. C) prices will increase in the short run. D) prices will decrease in the short run.

B) output and employment will decrease in the short run.

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. A) prices; output B) output; prices C) output; output D) prices; prices

B) output; prices

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? A) point A B) point B C) point C D) point D

B) point B

An adverse supply shock _____ the short-run aggregate supply curve _____ the natural level of output. A) raises; but cannot affect B) raises; and may also lower C) lowers; but cannot affect D) lowers; and may also lower

B) raises; and may also lower

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving: A) rises by $100 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $100 billion.

B) rises by $60 billion.

All of these are stock variables EXCEPT: A) a consumer's wealth. B) the government budget deficit. C) the number of unemployed people. D) the amount of capital in the economy.

B) the government budget deficit.

A decrease in the real money supply, other things being equal, will shift the LM curve: A) downward and to the left. B) upward and to the left. C) downward and to the right. D) upward and to the right.

B) upward and to the left.

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: A) $100 billion. B) $150 billion. C) $600 billion. D) $650 billion.

C) $600 billion.

If real gross domestic product (GDP) grew by 6 percent and population grew by 2 percent, then real GDP per person grew by approximately _____ percent. A) 2 B) 3 C) 4 D) 8

C) 4

Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _____, with a _____ price level. A) B; higher B) B; lower C) C; higher D) C; lower

C) C; higher

A small open economy with a floating exchange rate is initially in equilibrium at A with IS*1. Holding all else constant, if the government imposes a tariff on imports in order to protect domestic jobs, then the _____ curve will shift to _____. A) LM; LM2* B) LM; LM3* C) IS; IS2* D) IS; IS3*

C) IS; IS2*

One argument favoring a floating-exchange-rate system is that it: A) makes international trade less difficult. B) minimizes destabilizing speculation by international investors. C) allows monetary policy to be used for other purposes. D) helps prevent excessive growth in the money supply.

C) allows monetary policy to be used for other purposes.

The IS and LM curves together generally determine: A) income only. B) the interest rate only. C) both income and the interest rate. D) income, the interest rate, and the price level.

C) both income and the interest rate.

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on: A) only the current money supply. B) only the expected future money supply. C) both the current and expected future money supply. D) neither the current nor the expected future money supply.

C) both the current and expected future money supply.

In the classical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving _____ and private saving _____. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; does not change

C) decreases; increases

The core inflation rate: A) measures the change in producer prices. B) is measured using a Paasche index. C) excludes food and energy prices. D) includes the price of exports and includes the price of imports.

C) excludes food and energy prices.

In this graph, if firms are producing at level Y1, then inventories will _____, inducing firms to _____ production. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease

C) fall; increase

The tax multiplier indicates how much _____ change(s) in response to a $1 change in taxes. A) the budget deficit B) consumption C) income D) real balances

C) income

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 _____. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase

C) increase; decrease

When the demand for loanable funds exceeds the supply of loanable funds, households and the government want to save _____ than firms want to invest, and the interest rate _____. A) more; rises B) more; falls C) less; rises D) less; falls

C) less; rises

Gross national product (GNP) equals gross domestic product (GDP) _____ income earned domestically by foreigners _____ income that nationals earn abroad. A) plus; plus B) minus; minus C) minus; plus D) plus; minus

C) minus; plus

Open-market operations change the _____; changes in interest rate paid on reserves change the _____; and changes in the discount rate change the _____. A) monetary base; monetary base; monetary base B) money multiplier; money multiplier; money multiplier C) monetary base; money multiplier; monetary base D) money multiplier; monetary base; money multiplier

C) monetary base; money multiplier; monetary base

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run, and: A) prices will remain unchanged in the long run. B) output will fall 5 percent in the long run. C) prices will fall 5 percent in the long run. C) output will remain unchanged in the long run.

C) prices will fall 5 percent in the long run.

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____. A) output; output B) prices; prices C) prices; output D) output; prices

C) prices; output

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income: A) r2, Y2. B) r3, Y2. C) r2, Y3. D) r3, Y3.

C) r2, Y3.

The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances. A) inflation and unemployment B) the price level and real output C) the interest rate and the level of income. D) the interest rate and real money balances

C) the interest rate and the level of income.

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate: A) will fall, and its net exports will rise. B) will rise, and its net exports will fall. C) and net exports will both fall. D) and net exports will both rise.

A) will fall, and its net exports will rise.

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____. A) $2 billion; $8 billion B) $0.75 billion; $1 billion C) $0.75 billion; $0.75 billion D) $1 billion; $4 billion

A) $2 billion; $8 billion

Assume that a tire company sells four tires to an automobile company for $400, another company sells a navigation system for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in gross domestic product (GDP) is: A) $20,000. B) $20,000 less the automobile company's profit on the car. C) $20,900. D) $20,900 less the profits of all three companies on the items that they sold.

A) $20,000.

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate: A) and net exports will both fall. B) will fall, and net exports will rise. C) will rise, and net exports will fall. D) and net exports will both rise.

A) and net exports will both fall.

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 decrease in the velocity of money: A) both Central Bank A and Central Bank B should increase the quantity of money. B) Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable. C) Central Bank A should keep the quantity of money stable, whereas Central Bank B should increase it. D) both Central Bank A and Central Bank B should keep the quantity of money stable.

A) both Central Bank A and Central Bank B should increase the quantity of money.

Assume that the consumption function is given by C = 150 + 0.85 (Y - T) and the tax function is given by T = t0 + t1Y. If t0 increases by 1 unit, then consumption: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.

A) decreases by 0.85 units.

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: A) decreasing the money supply. B) increasing the money supply. C) decreasing the price level. D) increasing the price level.

A) decreasing the money supply.

An increase in taxes shifts the IS curve: A) downward and to the left. B) upward and to the right. C) upward and to the left. D) downward and to the right.

A) downward and to the left.

According to the Mundell-Fleming model, under: A) 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. B) both floating and fixed exchange rates, a monetary expansion raises income, but a fiscal expansion does not. C) both floating and fixed exchange rates, a fiscal expansion raises income, but a monetary expansion does not. D) floating exchange rates, a fiscal expansion raises income whereas a monetary expansion does not; but under a fixed exchange rate, a monetary expansion raises income whereas a fiscal expansion does not.

A) 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.

Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) _____ in the money supply or a(n) _____ in velocity. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A) increase; increase

According to the quantity equation, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be: A) increasing. B) decreasing. C) 7 percent. D) constant.

A) increasing.

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. A) lowers; raises B) raises; lowers C) raises; raises D) lowers; lowers

A) lowers; raises

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 there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy)? A) point A B) point B C) point C D) point D

A) point A

Two interpretations of the IS-LM model are that the model explains: A) the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve. B) the short-run quantity theory of income or the short-run Fisher effect. C) the determination of investment and saving or what shifts the liquidity preference schedule. D) changes in government spending and taxes or the determination of the supply of real money balances.

A) the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve.

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. A) unexpected; reduce B) unexpected; increase C) expected; reduce D) expected; increase

A) unexpected; reduce

In the IS-LM analysis, the increase in income resulting from a tax cut is _____ the increase in income resulting from an equal rise in government spending. A) usually less than B) usually greater than C) usually equal to D) sometimes less and sometimes greater than

A) usually less than

In a short-run model of a large open economy with a floating exchange rate: A) net exports determine the exchange rate, which in turn determines net capital outflow. B) net exports determine net capital outflow, which determines the interest rate. C) 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. D) the interest rate determines investment and net capital outflow, which are equal within the IS-LM framework; the exchange rate then determines net exports.

C) 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.

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: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change.

C) the money supply decreases.

According to the classical dichotomy, when the money supply decreases, _____ will decrease. A) real gross domestic product (GDP) B) consumption spending C) the price level D) investment spending

C) the price level

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: A) 0.6. B) 1.67. C) 2.0. D) 2.5.

D) 2.5.

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent. A) 1; 5 B) 5; 1 C) 1; 1 D) 5; 5

D) 5; 5

Analysis of the short run and long run indicates that the _____ assumptions are most appropriate in _____. A) classical; both the short run and the long run B) Keynesian; both the short run and the long run C) classical; the short run D) Keynesian; the short run

D) Keynesian; the short run

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____. A) IS; shifts to the right B) IS; does not shift C) LM; shifts to the right D) LM; does not shift

D) LM; does not shift

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income: A) and net exports both to fall. B) to rise and net exports to fall. C) to fall and net exports to rise. D) and net exports both to rise.

D) and net exports both to rise.

Based on the graph, if the interest rate is r1, then people will _____ bonds, and the interest rate will _____. A) sell; rise B) sell; fall C) buy; rise D) buy; fall

D) buy; fall

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income. A) increases; downward B) increases; upward C) decreases; upward D) decreases; downward

D) decreases; downward

In a small open economy, if the introduction of automatic teller machines reduces the demand for money, then net exports: A) fall, and the real exchange rate falls. B) fall, but the real exchange rate remains unchanged. C) remain unchanged, but the real exchange rate falls. D) increase, and the real exchange rate remains unchanged.

D) increase, and the real exchange rate remains unchanged.

Planned expenditure is a function of: A) planned investment. b) planned government spending and taxes. C) planned investment, government spending, and taxes. D) national income and planned investment, government spending, and taxes.

D) national income and planned investment, government spending, and taxes.