Macro Theory Exam 2

Changes in monetary policy shift the: A) LM curve. B) planned spending curve. C) money demand curve. D) IS curve.

A) LM curve.

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would: A) decrease by 1 percent. B) decrease by 2 percent. C) decrease by 3 percent. D) increase by 1 percent.

A) decrease by 1 percent.

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift: A) downward and to the left. B) downward and to the right. C) upward and to the left. D) upward and to the right.

A) downward and to the left.

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

A) increase by 100

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

A) increase; increase

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by: A) increasing the money supply, but at the cost of permanently higher prices. B) decreasing the money supply, but at the cost of permanently lower prices. C) increasing the money supply, which would restore the original price level. D) decreasing the money supply, which would restore the original price level.

A) increasing the money supply, but at the cost of permanently higher prices.

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______. A) national income; goods and services B) the price level; goods and services C) national income; money D) the price level; money

A) national income; goods and services

The IS-LM model is generally used: A) only in the short run. B) only in the long run. C) both in the short run and the long run. D) in determining the price level.

A) only in the short run

An increase in the interest rate: A) reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects. B) increases planned investment, because people who make money from interest have more money to invest. C) has no effect on investment. D) may be caused by a drop in investment demand.

A) reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects.

The IS curve shifts when any of the following economic variables change except: A) the interest rate. B) government spending. C) tax rates. D) the marginal propensity to consume.

A) the interest rate.

On two occasions in the 1970s: A) world oil prices rose rapidly, inflation was high, and the unemployment rate was high. B) world oil prices rose rapidly, inflation was moderate, and the unemployment rate was high. C) world oil prices rose rapidly, inflation was high, and the unemployment rate was moderate. D) world oil prices rose rapidly, but the Fed used monetary policy to curb inflation.

A) world oil prices rose rapidly, inflation was high, and the unemployment rate was high.

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy: A) increases the amount of money in the economy. B) changes income, which changes consumption, which further changes income. C) is government spending and, therefore, more powerful than private spending. D) changes the interest rate.

B) changes income, which changes consumption, which further changes income.

Most economists believe that prices are: A) flexible in the short run but many are sticky in the long run. B) flexible in the long run but many are sticky in the short run. C) sticky in both the short and long runs. D) flexible in both the short and long runs.

B) flexible in the long run but many are sticky in the short run

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______. A) greater; inward B) greater; outward C) lower; inward D) lower; outward

B) greater; outward

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the: A) consumption function. B) interest rate. C) price level. D) nominal money supply.

B) interest rate.

Over the business cycle, investment spending ______ consumption spending. A) is inversely correlated with B) is more volatile than C) has about the same volatility as D) is less volatile than

B) is more volatile than

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

After the Kennedy tax cut in 1964, real GDP: A) fell and unemployment rose. B) rose and unemployment fell. C) and unemployment both rose. D) and unemployment both fell.

B) rose and unemployment fell

Which of the following is an example of a demand shock? A) a large oil-price increase B) the introduction and greater availability of credit cards C) a drought that destroys agricultural crops D) unions obtain a substantial wage increase

B) the introduction and greater availability of credit cards

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

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis: A) downward and to the left. B) upward and to the right. C) upward and to the left. D) downward and to the right.

B) upward and to the right.

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is: A) 350. B) 400. C) 600. D) 750.

C) 600.

In the long run, the level of output is determined by the: A) interaction of supply and demand. B) money supply and the levels of government spending and taxation. C) amounts of capital and labor and the available technology. D) preferences of the public.

C) amounts of capital and labor and the available technology

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.

Short-run fluctuations in output and employment are called: A) sectoral shifts. B) the classical dichotomy. C) business cycles. D) productivity slowdowns.

C) business cycles.

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ΔT will: A) decrease equilibrium income by ΔT. B) decrease equilibrium income by ΔT/(1 - MPC). C) decrease equilibrium income by (ΔT)(MPC)/(1 - MPC). D) not affect equilibrium income at all.

C) decrease equilibrium income by (ΔT)(MPC)/(1 - MPC).

The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases. A) the budget deficit B) consumption C) income D) real balances

C) income

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 ______. A) greater; inward B) greater; outward C) lower; inward D) lower; outward

C) lower; inward

The intersection of the IS and LM curve determines the values of: A) r, Y, and P, given G, T, and M. B) r, Y, and M, given G, T, and P. C) r and Y, given G, T, M, and P. D) p and Y, given G, T, and M

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

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

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 the IS-LM model, which two variables are influenced by the interest rate? A) supply of nominal money balances and demand for real balances B) demand for real money balances and government purchases C) supply of nominal money balances and investment spending D) demand for real money balances and investment spending

D) demand for real money balances and investment spending

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will: A) fall and in the long run prices will remain unchanged. B) remain unchanged and in the long run prices will fall. C) remain unchanged and in the long run prices will remain unchanged. D) fall and in the long run prices will fall.

D) fall and in the long run prices will fall.

An IS curve shows combinations of: A) taxes and government spending. B) nominal money balances and price levels. C) interest rates and income that bring equilibrium in the market for real balances. D) interest rates and income that bring equilibrium in the market for goods and services.

D) interest rates and income that bring equilibrium in the market for goods and services.

According to the theory of liquidity preference, the supply of real money balances: A) decreases as the interest rate increases. B) increases as the interest rate increases. C) increases as income increases. D) is fixed.

D) is fixed.

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______. A) positive; money supply B) negative; money supply C) positive; price level D) negative; price level

D) negative; price level

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. A) increase; slowdown B) increase; increase C) slowdown; increase D) slowdown; slowdown

D) slowdown; slowdown