Macroeconomics 2nd Half of Year

When the consumer has chosen his or her optimal values of first-period and second-period consumption, the marginal rate of substitution equals:

a. 1 plus the interest rate r. Correct

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

a. IS curve shifts leftward. Correct

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

a. IS; shifts to the right Correct

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. a fall in consumption and income. Correct

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

a. be greater than Correct

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?

a. classical closed economy Correct

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:

a. exchange rate. Correct

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. Correct

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

a. increase; IS Correct

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

a. increased. Correct

According to Modigliani's life-cycle hypothesis, if a consumer wants equal consumption in every year and the interest rate is zero, then the marginal propensity to consume out of wealth ______ as years ______ decrease.

a. increases; of life remaining Correct

The short-run equilibrium in the dynamic model of aggregate demand and supply determines the:

a. inflation rate and inflation target. Incorrect

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 ______.

a. large; small. Correct

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.

a. lower; lower Correct

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 Correct

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.

a. movement along the; shift in the Correct

A binding borrowing constraint will ______ the potency of an announced future tax cut to influence aggregate demand but will ______ the potency of a temporary tax cut.

a. not affect; increase Correct

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

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

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 ______.

a. price level; inflation rate Correct

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

a. ran out of foreign-currency reserves. Correct

The average propensity to consume is the:

a. ratio of consumption to income. Correct

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation ____ its target, or output ____ its natural level.

a. rises above; rises above Correct

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:

a. 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. Correct

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

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

a. vertical; monetary Correct

A consumer spending excessively today, intending to start saving for retirement tomorrow, but deciding to continue spending when tomorrow arrives is an example of:

b. time-inconsistent preferences. Correct

Milton Friedman viewed current income as the sum of permanent income and:

b. transitory income. Correct

Precautionary saving is saving for:

b. unpredictable expenses. Correct

In Irving Fisher's two-period model, if the consumer is initially a saver and the interest rate increases, and first-period consumption decreases, then we can conclude that the income effect:

b. was less than the substitution effect. Correct

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

c. 0.06. Correct

(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:

c. AS1 to AS2 Correct

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

c. LM: shifts to the right Correct

John Maynard Keynes believed that the average propensity to consume:

c. decreased as income increased. Correct

Kuznets' data showed a short-run consumption function with a ______ APC, and a long-run consumption function with a ______ APC.

c. falling; constant Correct

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

c. give up the use of monetary policy for purposes of domestic stabilization. Correct

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

c. in the long run. Correct

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.

c. increase in the price level caused by more expensive imports Correct

In the dynamic model of aggregate demand and aggregate supply, one period in time is connected to the next period through:

c. inflation expectation. Correct

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

c. inflation; unemployment

A liquidity trap occurs when:

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

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

c. leftward shift in the LM curve. Correct

According to the Taylor rule, when real GDP is below its natural level, the nominal federal funds rate should be _____, and when inflation exceeds 2 percent, the nominal federal funds rate should be _____

c. lowered; raised Correct

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

c. permanently reducing the money supply. Correct

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

c. the price level

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

c. trades with other countries. Correct

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:

d. 0. Correct

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

d. Reduce output by 12 percent for 1 year. Correct

Expectations of inflation based on recently observed inflation is called the assumption of _____ expectations

d. adaptive Correct

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

d. decrease the money supply. Correct

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.

d. decrease; LM Correct

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 ______.

d. decrease; increase Correct

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

d. introduction of new products such as DVD players. Correct

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will be at their natural levels?

d. output and the real interest rate Correct

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

d. price level. Correct

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

d. 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:

d. right by 200. Correct

The life-cycle hypothesis and the permanent-income hypothesis both assume that consumers seek to:

d. smooth consumption over their lifetimes. Correct

According to the sticky-price model:

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

(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:

d. this represents a movement down the aggregate demand curve.

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 ______.

d. unemployment; output Correct

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, the nominal interest rate, it, equals all of the following except:

A, B, Or D

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period the DAS curve _____ and the DAD curve _____.

A, B, or C

The dynamic model of aggregate demand and aggregate supply assumes that people form expectations of inflation based on:

A, B, or C

The dynamic aggregate demand curve is derived from each of the following equations of the model of aggregate demand and aggregate supply except:

A, B, or D

According to the life-cycle model, when wealth and income increase together in the long run, the average propensity to consume.

A, C, or D

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a one-period positive supply shock causes output to

A, C, or D

The consumption decisions of individuals are not important for the:

A, C, or D

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 _____.

A, C, or D (Guess)

A central bank that chooses a large value of θπ, the responsiveness of nominal interest rates to inflation, and a small value of θY, the responsiveness of nominal interest rates to output, is choosing to obtain less _____ at the expense of more _____.

A. inflation; output B. output; inflation C. inflation variability; output variability

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

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

If a consumer cannot borrow, then consumption in period one must be ______ income in period(s) _____.

B, C, or D

If the Keynesian consumption function is written as then the average propensity to consume is:

B, C, or D

In the Fisher two-period model, if the consumer is a saver, consumption in periods one and two are normal goods, and the income effect of an increase in interest rate is greater than the substitution effect, then saving:

B, C, or D

In the dynamic model of aggregate demand and aggregate supply, holding other factors constant, when the natural level of output increases, then inflation

B, C, or D

(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.

B, C, or D (Guess)

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:

b. $25 billion. Correct

In the dynamic model, the supply shock variable, υt, is a variable appearing in which of the following equations of the model?

b. Phillips curve Correct

Which of the following would be represented by a negative value of the random demand shock, t?

b. a decrease in government spending Correct

According to the Phillips curve, firms raise prices when output is _____ the natural level of output or, equivalently, when the unemployment rate is _____ the natural rate of unemployment.

b. above; below Correct

The marginal propensity to consume is the:

b. amount consumed out of an additional dollar of income. Correct

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

b. decreased. Correct

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, the DAS curve _____ and the DAD curve _____.

b. does not shift; shifts rightward Correct

According to the Fisher equation, the real interest rate equals the nominal interest rate minus the:

b. expected rate of inflation Correct

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.

b. falls below the Correct

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

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

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

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

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

b. income rises but the exchange rate does not rise.

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.

b. increase; raise

Inflation inertia refers to the idea that inflation:

b. keeps on going unless something acts to stop it. Correct

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:

b. no change in income or net exports. Correct

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

b. political clout. Correct

(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 _____.

b. r2, Y3 Correct

(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:

b. r3, Y2 Correct

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

b. rises and the real exchange rate depreciates. Correct

According to the permanent-income hypothesis, if consumers receive a permanent increase in their salary then they will:

b. spend most of it in the current year. Correct

The dynamic aggregate supply curve is derived from which of the five equations of the model of aggregate demand and aggregate supply?

b. the Phillips curve and adaptive expectations Correct

Empirical studies of Franco Modigliani's life-cycle hypothesis show that:

b. the elderly do not seem to run down their wealth in old age, as a simple version of the theory would predict. Correct

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

b. the overall level of prices and relative prices. Correct

If consumers correctly anticipate their future incomes:

b. the saving rate will be low when consumers anticipate a boom. Correct

Long-run equilibrium occurs in the dynamic model of aggregate demand and aggregate supply when:

b. there are no shocks and inflation is stable. Correct