Macroeconomics Final

If the MPC = 0.85, then the government purchases multiplier is about a. 1.18. b. 3.33. c. 6.67. d. 8.5.

c. 6.67.

In today's "fractional reserve" banking system of the United States, the reserve requirements imposed on commercial banks are: a. symbolic because actual reserves greatly exceed the requirements b. averages of the amounts needed to meet the public's demand for money c intended to set a limit on the total money supply rather than to serve as protection against bank runs d. in excess of what is normally needed, in case people become uneasy about the safety of their bank deposits

c intended to set a limit on the total money supply rather than to serve as protection against bank runs

A country with negative net exports has a trade surplus

False

A decrease in the growth rate of the money supply eventually causes the short-run Phillips curve to shift right

False

An increase in the money supply causes output to rise in the long run

False

Economists predict the business cycle well enough that stabilization policy is likely to work despite lags in the effects of policy.

False

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

False

If Argentina suffers from capital flight, Argentinean domestic investment and Argentinean net exports will both decline.

False

Other things the same, technological progress raises the price level..

False

Over the past two decades, the United States has persistently exported more goods and services than it has imported

False

Purchasing-power parity says that the nominal exchange rate must equal the real exchange rate.

False

Some economists, called supply-siders, argue that changes in the money supply exert a strong influence on aggregate supply

False

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

False

The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by one percentage point.

False

The short-run Phillips curve indicates that expansionary monetary policy will temporarily raise the unemployment rate above its natural rate.

False

If the CPI was 160 in 2001 and 40 in 1980, the cost of living was: a. 4 times higher in 2001 than in 1980 b. 25 times higher in 2001 than in 1980 c. constant over the period of time d. 4 times lower in 2001 than in 1980

a. 4 times higher in 2001 than in 1980

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate? a. Avoid unexpected changes in the inflation rate. b. Rewrite the tax laws so that nominal gains were taxed instead of real gains. c. Make policy that would discourage firms from issuing indexed bonds. d. All of the above are correct.

a. Avoid unexpected changes in the inflation rate.

In which of the following situations must national saving rise? a. Both domestic investment and net capital outflow increase. b. Domestic investment increases and net capital outflow decreases. c. Domestic investment decreases and net capital outflow increases. d. Both domestic investment and net capital outflow decrease.

a. Both domestic investment and net capital outflow increase.

The largest component of Gross Domestic Product is: a. Consumer spending b. Investment spending c. Government spending d. Net exports

a. Consumer spending

Unemployment would decrease and prices increase if a. aggregate demand shifted right. b. aggregate demand shifted left. c. aggregate supply shifted right. d. aggregate supply shifted left.

a. aggregate demand shifted right.

In an open economy, national saving equals a. domestic investment plus net capital outflow. b. domestic investment minus net capital outflow. c. domestic investment. d. net capital outflow.

a. domestic investment plus net capital outflow.

In the early 1960s, the Kennedy administration made considerable use of a. fiscal policy to stimulate the economy. b. fiscal policy to slow down the economy. c. monetary policy to stimulate the economy. d. monetary policy to slow down the economy.

a. fiscal policy to stimulate the economy.

When the Fed buys government bonds, the reserves of the banking system a. increase, so the money supply increases. b. increase, so the money supply decreases. c. decrease, so the money supply increases. d. decrease, so the money supply decreases.

a. increase, so the money supply increases.

In the long run, if the Fed increases the rate at which it increases the money supply, a. inflation will be higher. b. unemployment will be lower. c. real GDP will be higher. d. All of the above are correct.

a. inflation will be higher.

In the open-economy macroeconomic model, the supply of loanable funds comes from

a. national saving. Demand comes from only domestic investment. b. national saving. Demand comes from domestic investment and net capital outflow. c. Only net capital outflow. Demand for loanable funds comes from national saving. d. domestic investment and net capital outflow. Demand for loanable funds comes from national saving.

The variable that links the market for loanable funds and the market for foreign-currency exchange is a. net capital outflow. b. national saving. c. exports. d. domestic investment.

a. net capital outflow.

Other things the same, the real exchange rate between the U.S. and South African goods would be higher if a. prices in the U.S. were higher, or the number of South African and the dollar purchased were higher. b. prices in the U.S. were higher, or the number of South African and the dollar purchased were lower. c. prices in the U.S. were lower, or the number of South African and the dollar purchased were higher. d. prices in the U.S. were lower, or the number of South African and the dollar purchased were lower.

a. prices in the U.S. were higher, or the number of South African and the dollar purchased were higher.

An increase in the budget deficit causes domestic interest rates a. rise because the supply of loanable funds shifts left. b. fall because the supply of loanable funds shifts left. c.rise because the demand for loanable funds shifts right. d. fall because the demand for loanable funds shifts right.

a. rise because the supply of loanable funds shifts left.

Time inconsistency will cause the a. short-run Phillips curve to be higher than otherwise. b. short-run Phillips curve to be lower the otherwise. c. long-run Phillips curve to be farther to the right than otherwise. d. long-run Phillips curve to be farther left than otherwise.

a. short-run Phillips curve to be higher than otherwise.

Other things the same, if the dollar depreciates relative to the British pound, then a. the exchange rate falls. It will cost fewer pounds to travel in the U.S. b. the exchange rate falls. It will cost more pounds to travel in the U.S. c. the exchange rate rises. It will cost fewer pounds to travel in the U.S. d. the exchange rate rises. It will cost more pounds to travel in the U.S.

a. the exchange rate falls. It will cost fewer pounds to travel in the U.S.

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if a. the price level is higher than expected making production more profitable. b. the price level is higher than expected making production less profitable. c. the price level is lower than expected making production more profitable. d. the price level is higher than expected making production less profitable.

a. the price level is higher than expected making production more profitable.

A Big Mac in Japan costs 240 yen while it costs $3 in the U.S. The nominal exchange rate is 100 yen per dollar. Which of the following would both make the real exchange rate move towards purchasing-power parity? a. the price of Big Macs in the U.S. falls, the nominal exchange rate falls b. the price of Big Macs in the U.S. falls, the nominal exchange rate rises c. the price of Big Macs in the U.S. rises, the nominal exchange rate falls d. the price of Big Macs in the U.S. rises, the nominal exchange rate rises

a. the price of Big Macs in the U.S. falls, the nominal exchange rate falls

Refer to figure 22-3. In this order, which curve is a long-run Phillips curve and which is a short-run Phillips curve? a. A, B b. A, D c. C, B d. None of the above is correct.

b. A, D

When the price level falls the quantity of consumption goods demanded rises, while a. the quantity of net exports demanded falls. b. consumption goods demanded and the quantity of net exports demanded both rise. c. consumption goods demanded and the quantity of net exports demanded both fall. d. consumption goods demanded falls, while the quantity of net exports demand rises.

b. consumption goods demanded and the quantity of net exports demanded both rise.

The wealth effect stems from the idea that a higher price level a. increases the real value of households' money holdings. b. decreases the real value of households' money holdings. c. increases the real value of the domestic currency in foreign-exchange markets. d. decreases the real value of the domestic currency in foreign-exchange markets.

b. decreases the real value of households' money holdings.

If the unemployment rate rises, which policies would be appropriate to reduce it? a. increase the money supply, increase taxes b. increase the money supply, cut taxes c. decrease the money supply, increase taxes d. decrease the money supply, cut taxes

b. increase the money supply, cut taxes

A "weaker" U.S. dollar in foreign exchange markets: a. increases the demand for foreign products in the U.S. b. increases net exports for the U.S. c.reduces net exports for the U.S. d. has no impact on U.S. imports or exports

b. increases net exports for the U.S.

An adverse supply shock will shift short-run aggregate supply a. right, making prices rise. b. left, making prices rise. c. right, making prices fall. d. left, making prices fall.

b. left, making prices rise.

Which of the following is the most likely result from an increase in a country's government budget surplus? a. higher interest rates b. lower imports c. lower net capital outflows d. lower domestic investment

b. lower imports

An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected price level a. rises, shifting aggregate demand right. b. rises, shifting aggregate demand left. c. falls, shifting aggregate supply right. d. falls, shifting aggregate supply left.

c. falls, shifting aggregate supply right.

Achieving full employment over a period of time will: a. diminish labor productivity b. reduce the level of investment as a percentage of GDP c. increase economic growth d. have no impact on economic growth

c. increase economic growth

Disinflation is defined as a a. zero rate of inflation. b. constant rate of inflation. c. reduction in the rate of inflation. d. negative rate of inflation.

c. reduction in the rate of inflation.

Over time continued budget deficits lead to a. a higher capital stock and higher real wages. b. a higher capital stock and lower real wages. c. a lower capital stock and higher real wages. d. a lower capital stock and lower real wages.

d. a lower capital stock and lower real wages.

Changes in the price level affect which components of aggregate demand? a. only consumption and investment b. only consumption and net exports c. only investment d. consumption, investment, and net exports

d. consumption, investment, and net export

The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed a. increased the money supply because it was concerned about unemployment. b. increased the money supply because it was concerned about inflation. c. decreased the money supply because it was concerned about unemployment. d. decreased the money supply because it was concerned about inflation.

d. decreased the money supply because it was concerned about inflation.

A favorable supply shock will cause inflation to a. rise and shift the short-run Phillips curve right. b. rise and shift the short-run Phillips curve left. c. fall and shift the short-run Phillips curve right. d. fall and shift the short-run Phillips curve left.

d. fall and shift the short-run Phillips curve left.

Means-tested programs tend to favor a. those with high income as would a consumption tax. b. those with high income while a consumption tax would favor those with low income. c. those with low income as would a consumption tax. d. those with low income while a consumption tax would favor those with high income.

d. those with low income while a consumption tax would favor those with high income.

John, a U.S. citizen, opens up a Sports bar in Tokyo. This is an example of U.S. a. exports. b. imports. c. foreign portfolio investment. d.foreign direct investment.

d.foreign direct investment.

According to classical macroeconomic theory, changes in the money supply change nominal but not real variables.

True

During recessions, unemployment insurance payments tend to rise.

True

For the U.S. economy, the most important reason for the downward slope of the aggregate-demand curve is the interest-rate effect.

True

If prices in the U.S. rise faster than prices in the United Kingdom, then according to the doctrine of purchasing-power parity the U.S. nominal exchange rate should fall.

True

Other things the same, an increase in the nominal exchange rate raises the real exchange rate

True

The downward slope of the aggregate demand curve is based on logic that as the price level rises, consumption, investment, and net exports all fall.

True

The proliferation of Internet usage serves as an example of a favorable supply shock. (chapter 22)

True

U.S. exports make up less than 20 percent of GDP.

True

Samuelson and Solow reasoned that when aggregate demand was high, unemployment was a. low, so there was upward pressure on wages and prices. b. low, so there was downward pressure on wages and prices. c. high, so there was upward pressure on wages and prices. d. high, so there was downward pressure on wages and prices.

a. low, so there was upward pressure on wages and prices.

In which of the following cases would the quantity of money demanded be smallest? a. r = 0.07, P = 1.0 b. r = 0.05, P = 1.0 c. r = 0.04, P = 1.2 d. r = 0.04, P = 1.0

a. r = 0.07, P = 1.0

The aggregate quantity of goods and services demanded changes as the price level rises because a. real wealth falls, interest rates rise, and the dollar appreciates. b. real wealth falls, interest rates rise, and the dollar depreciates. c. real wealth rises, interest rates fall, and the dollar appreciates. d. real wealth rises, interest rates fall, and the dollar depreciates.

a. real wealth falls, interest rates rise, and the dollar appreciates.

A policymaker in favor of stabilizing the economy would be likely to believe a. recessions are a waste of resources. b.economies must suffer through the booms and busts of the business cycle. c. the long policy lags make implementing policy changes in response to recession too risky. d. policy exacerbates the magnitude of economic fluctuations.

a. recessions are a waste of resources.

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment? a. a decrease in the money supply b. a reduction in tax rates c. a decrease in government purchases d. None of the above is correct.

b. a reduction in tax rates

If efficiency wages become more common, a. both the long-run Phillips curve and the long-run aggregate supply curve would shift right. b. both the long-run Phillips curve and the long-run aggregate supply curve would shift left. c. the long-run Phillips curve would shift right, and the long-run aggregate supply curve would shift left. d. the long-run Phillips curve would shift left, and the long-run aggregate supply curve would shift right.

c. the long-run Phillips curve would shift right, and the long-run aggregate supply curve would shift left.

If a country had a trade surplus of $50 billion and then its exports rose by $30 billion and its imports rose by $20 billion, its net exports would now be a. $0 billion. b. $20 billion. c. $40 billion. d. $60 billion.

d. $60 billion.

Which of the following correctly explains the crowding-out effect? a. An increase in government expenditures decreases the interest rate and so increases investment spending. b. An increase in government expenditures increases the interest rate and so reduces investment spending. c. A decrease in government expenditures increases the interest rate and so increases investment spending. d. A decrease in government expenditures decreases the interest rate and so reduces investment spending.

b. An increase in government expenditures increases the interest rate and so reduces investment spending.

The classical dichotomy and monetary neutrality are represented graphically by a. an upward-sloping long-run aggregate-supply curve. b. a vertical long-run aggregate-supply curve. c. an upward-sloping short-run aggregate-curve. d. a downward-sloping aggregate-demand curve.

b. a vertical long-run aggregate-supply curve.

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference? a. only the nominal interest rate b. both the nominal interest rate and the real interest rate c. only the interest rate on long-term bonds d. only the interest rate on short-term government bonds

b. both the nominal interest rate and the real interest rate

A large and sudden movement of funds out of a country is called a arbitrage. b. capital flight. c. crowding out. d. capital mobility.

b. capital flight.

One determinant of the natural rate of unemployment is the a. rate of growth of the money supply. b. minimum wage rate. c. expected inflation rate. d. All of the above are correct.

b. minimum wage rate.

A permanent reduction in inflation would a. permanently reduce shoe leather costs and permanently lower unemployment b. permanently reduce shoe leather costs and temporarily raise unemployment c. temporarily reduce shoe leather costs and temporarily lower unemployment d. temporarily reduce shoe leather costs and temporarily raise unemployment

b. permanently reduce shoe leather costs and temporarily raise unemployment

The aggregate demand and aggregate supply graph has a. quantity of output on the horizontal axis. Output can be measured by the GDP deflator. b. quantity of output on the horizontal axis. Output can be measured by real GDP. c. quantity of output on the vertical axis. Output can be measured by the GDP deflator. d. quantity of output on the vertical axis. Output can be measured by real GDP.

b. quantity of output on the horizontal axis. Output can be measured by real GDP.

If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the exchange rate a. and the quantity of dollars traded rises. b. rises and the quantity of dollars traded falls. c. falls and the quantity of dollars traded rises. d. and the quantity of dollars traded falls.

b. rises and the quantity of dollars traded falls.

Investment is a a. small part of real GDP, so it accounts for a small share of the fluctuation in real GDP. b. small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP. c. large part of real GDP, so it accounts for a large share of the fluctuation in real GDP. d. large part of real GDP, yet it accounts for a small share of the fluctuation in real GDP.

b. small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.

In order to understand how the economy works in the short run, we need to a. study the classical model. b. study a model in which real and nominal variables interact. c. understand that "money is a veil." d. understand that money is neutral in the short run.

b. study a model in which real and nominal variables interact.

If the U.S. imposed an import quota on apples, then which of the following would rise? a. the U.S. real exchange rate and U.S. net exports b. the U.S. real exchange rate but not U.S. net exports c. U.S. net exports but not the U.S. real exchange rate d. neither the U.S. real exchange rate nor U.S. net exports

b. the U.S. real exchange rate but not U.S. net exports

The logic of the multiplier effect applies a. only to changes in government spending. b. to any change in spending on any component of GDP. c. only to changes in the money supply. d. only when the crowding-out effect is sufficiently strong.

b. to any change in spending on any component of GDP.

Ultimately, the change in unemployment associated with a change in inflation is due to a. the shape of the long-run aggregate supply curve. b. unanticipated inflation, not inflation per se. c. anticipated inflation, not inflation per se. d. a change in the natural rate of unemployment.

b. unanticipated inflation, not inflation per se.

Rapid increases in energy prices cause: a. A decrease in both the general price level and Real GDP b. A decrease in the general price level and an increase in Real GDP c. An increase in the general price level and a decrease in Real GDP d. An increase in both the general price level and Real GDP

c. An increase in the general price level and a decrease in Real GDP

A U.S. mutual fund buys stocks issued by a Columbian company. This purchase is an example of a. U.S. foreign direct investment. It increases Columbia's net capital outflow.b. U.S. foreign direct investment. It decreases Columbia's net capital outflow. c. U.S. foreign portfolio investment. It decreases Columbia's net capital outflow. d. U.S. foreign portfolio investment. It increases Columbia's net capital outflow.

c. U.S. foreign portfolio investment. It decreases Columbia's net capital outflow.

If the Fed wants to increase the quantity of money to combat a recession, which of the following tool(s) would the Fed utilize?: a. Increase the reserve requirement ratio b. Increase the discount rate c. Undertake open market purchases of government securities (bonds) d. All of the above

c. Undertake open market purchases of government securities (bonds)

Which of the following decreases aggregate demand and therefore shifts the AD curve to the left?: a. a tax cut b. a decrease in the price level c. a decrease in government purchases of goods and services d. a decrease in the price of exported goods and services

c. a decrease in government purchases of goods and services

Stephen Cecchetti argues that the Fed should a. follow a precise mechanical rule. b. follow a rule that could vary some based on the economic forecasts of a forecasting model. c. be allowed discretion but announce a numerical target for inflation. d. have complete discretion without a rule and without needing to announce targets.

c. be allowed discretion but announce a numerical target for inflation.

According to the classical model, which of the following would double if the quantity of money doubled? a. prices but not nominal income b. nominal income but not prices c. both prices and nominal income d. neither prices nor nominal income

c. both prices and nominal income

A law that requires the money supply to grow by a fixed percentage each year would eliminate a. the time inconsistency problem, but not political business cycles. b. the political business cycle, but not the time inconsistency problem. c. both the time inconsistency problem and political business cycles. d. neither the time inconsistency problem nor political business cycles.

c. both the time inconsistency problem and political business cycles.

If the U.S. has exports of $1.5 trillion and imports of $2.2 trillion, then the U.S. a. sells more overseas then it buys from overseas; it has a trade deficit. b. sells more overseas then it buys from overseas; it has a trade surplus. c. buys more from overseas then it sells overseas; it has a trade deficit. d. buys more from overseas then it sells overseas; it has a trade surplus.

c. buys more from overseas then it sells overseas; it has a trade deficit.

If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity? a. P = e/P* b. 1 = e/P* c. e = P*/P e. None of the above is correct.

c. e = P*/P

If purchasing-power parity holds, a dollar will buy a. one unit of each foreign currency. b. foreign currency equal to the U.S. price level divided by the foreign country's price level. c. enough foreign currency to buy as many goods as it does in the United States. d. None of the above is implied by purchasing-power parity.

c. enough foreign currency to buy as many goods as it does in the United States.

An increase in the U.S. real interest rate induces a. Americans to buy more foreign assets, which increases U.S. net capital outflow. b. Americans to buy more foreign assets, which reduces U.S. net capital outflow. c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow. d. foreigners to buy more U.S. assets, which increases U.S. net capital outflow.

c. foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.

The interest-rate effect a. depends on the idea that increases in interest rates increase the quantity of money demanded. b. depends on the idea that increases in interest rates increase the quantity of money supplied. c. is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve. d. is the least important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.

c. is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.

Other things the same, automatic stabilizers tend to a. raise expenditures during expansions and recessions. b. lower expenditures during expansions and recessions. c. raise expenditures during recessions and lower expenditures during expansions. d. raise expenditures during expansions and lower expenditures during recessions.

c. raise expenditures during recessions and lower expenditures during expansions.

Which of the following will not change the U.S. real interest rate? a. capital flight from the United States b. the government budget deficit increases c. the U.S. imposes import quotas d. None of the above is correct.

c. the U.S. imposes import quotas

The long-run aggregate supply curve shifts right if a. the price level rises. b. the price level falls. c. the capital stock increases. d. the capital stock decreases.

c. the capital stock increases.

Alan Blinder believes a. we must attain zero percent inflation. b. the sacrifice for zero inflation is small. c. the costs from low inflation are modest. d. balanced budgets are essential to inflation targeting.

c. the costs from low inflation are modest.

Suppose an economy has a natural rate of unemployment of 6 percent. If the rate of unemployment for that economy drops from 9 to 6 percent, we could conclude that: a. only structural unemployment remains in this economy b. the economy's production possibilities curve shifted outward c. the economy moved from a point inside its production possibilities curve to a point on or near the curve d. nominal GDP would rise but real GDP would fall

c. the economy moved from a point inside its production possibilities curve to a point on or near the curve

A country has national saving of $70 billion, government expenditures of $20 billion, domestic investment of $30 billion, and net capital outflow of $40 billion. What is its supply of loanable funds? a. $30 billion b. $40 billion c. $50 billion d. $70 billion

d. $70 billion

Suppose the nominal annual interest rate on a two-year loan is 16 percent and lenders expect inflation to be 10 percent in each of the two years. The annual real rate of interest is: a. 12 percent b. 16 percent c. 4 percent d. 6 percent e. 26 percent

d. 6 percent

Any policy change that reduced the natural rate of unemployment a. would shift the long-run Phillips curve to the left. b. would shift the long-run aggregate-supply curve to the right. c. would be a policy change that improved the functioning of the labor market. d. All of the above are correct.

d. All of the above are correct.

You hold currency from a foreign country. If that country has a higher rate of inflation than the United States, then over time the foreign currency will buy a. more goods in that country and buy more dollars. b. more goods in that country but buy fewer dollars. c. fewer goods in that country but buy more dollars. d. fewer goods in that country and buy fewer dollars.

d. fewer goods in that country and buy fewer dollars.

If households view a tax cut as temporary, then the tax cut a. has no affect on aggregate demand. b. has more of an affect on aggregate demand than if households view it as permanent. c. has the same affect as when households view the cut as permanent. d. has less of an affect on aggregate demand than if households view it as permanent.

d. has less of an affect on aggregate demand than if households view it as permanent.

1. One year a country has negative net exports. The next year it still has negative net exports and imports have risen more than exports. a. its trade surplus fell. b. its trade surplus rose c. its trade deficit fell. d. its trade deficit rose

d. its trade deficit rose

A program to reduce inflation is likely to have lower costs if the sacrifice ratio is high, and the reduction is unexpected. b. high, and the reduction is expected. c. low, and the reduction is unexpected. d. low, and the reduction is expected.

d. low, and the reduction is expected.

Phillips found a a. positive relation between unemployment and inflation in the United Kingdom. b. positive relation between unemployment and inflation in the United States. c. negative relation between unemployment and inflation in the United States. d. negative relation between unemployment and inflation in the United Kingdom.

d. negative relation between unemployment and inflation in the United Kingdom.

In the open-economy macroeconomic model, if a country 's interest rate rises, then its a. net capital outflow and net exports rise. b. net capital outflow rises and its net exports fall. c. net capital outflow falls and its net exports rise. d. net capital outflow and net exports fall.

d. net capital outflow and net exports fall

The classical dichotomy refers to the separation of a. variables that move with the business cycle and variables that do not. b. changes in money and changes in government expenditures. c. decisions made by the public and decisions made by the government. d. real and nominal variables.

d. real and nominal variables.