Macroeconomics Final Exam (Prof. Xiaoxiao Li)

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

$60 billion.

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?

$70 billion

According to the classical model, which of the following would double if the quantity of money doubled?

both prices and nominal income

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference?

both the nominal interest rate and the real interest rate

A law that requires the money supply to grow by a fixed percentage each year would eliminate

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

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

In an open economy, national saving equals

domestic investment plus net capital outflow

If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is implied by purchasing-power parity?

e = P*/P

If purchasing-power parity holds, a dollar will buy

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

A program to reduce inflation is likely to have lower costs if the sacrifice ratio is

low, and the reduction is expected.

Samuelson and Solow reasoned that when aggregate demand was high, unemployment was

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

Which of the following is the most likely result from an increase in a country's government budget surplus?

lower imports

The aggregate quantity of goods and services demanded changes as the price level rises because

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

A policymaker in favor of stabilizing the economy would be likely to believe

recessions are a waste of resources.

An increase in the budget deficit makes domestic interest rates

rise because the supply of loanable funds shifts left

If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the exchange rate

rises and the quantity of dollars traded falls.

The classical dichotomy refers to the separation of

real and nominal variables.

If the CPI was 160 in 2001 and 40 in 1980, the cost of living was:

4 times higher in 2001 than in 1980

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:

6 percent

If the MPC = 0.85, then the government purchases multiplier is about

6.67. multiplier=1/(1-MPC)=1/(1-0.85)=6.67

In this order, which curve is a long-run Phillips curve and which is a short-run Phillips curve?

A, D

Any policy change that reduced the natural rate of unemployment

All of the above are correct

Which of the following correctly explains the crowding-out effect?

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

Rapid increases in energy prices cause:

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

Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

Avoid unexpected changes in the inflation rate.

In which of the following situations must national saving rise?

Both domestic investment and net capital outflow increase.

The largest component of Gross Domestic Product is:

Consumer spending

The Fed raised interest rates in 2004 and 2005. This implies, other things the same, that the Fed

Decreased the money supply because it was concerned about inflation.

If the Fed wants to increase the quantity of money to combat a recession, which of the following tool(s) would the Fed utilize?:

Undertake open market purchases of government securities (bonds)

A U.S. mutual fund buys stocks issued by a Columbian company. This purchase is an example of

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

Which of the following decreases aggregate demand and therefore shifts the AD curve to the left?:

a decrease in government purchases of goods and services

Over time continued budget deficits lead to

a lower capital stock and lower real wages.

Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment

a reduction in tax rates

Disinflation is defined as a

a reduction in the rate of inflation

The classical dichotomy and monetary neutrality are represented graphically by

a vertical long-run aggregate-supply curve.

Unemployment would decrease and prices increase if

aggregate demand shifted right

Stephen Cecchetti argues that the Fed should

be allowed discretion but announce a numerical target for inflation.

The wealth effect stems from the idea that a higher price level

decreases the real value of households' money holdings.

A large and sudden movement of funds out of a country is called

capital flight

When the price level falls the quantity of

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

Changes in the price level affect which components of aggregate demand?

consumption, investment, and net exports

A favorable supply shock will cause inflation to

fall and shift the short-run Phillips curve left.

An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected price level

falls, shifting aggregate supply right.

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

fewer goods in that country and buy fewer dollars.

In the early 1960s, the Kennedy administration made considerable use of

fiscal policy to stimulate the economy.

John, a U.S. citizen, opens up a Sports bar in Tokyo. This is an example of U.S.

foreign direct investment

An increase in the U.S. real interest rate induces

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

If households view a tax cut as temporary, then the tax cut

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

Achieving full employment over a period of time will:

increase economic growth

If the unemployment rate rises, which policies would be appropriate to reduce it?

increase the money supply, cut taxes

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases.

A "weaker" U.S. dollar in foreign exchange markets:

increases net exports for the U.S.

In the long run, if the Fed increases the rate at which it increases the money supply,

inflation will be higher.

In today's "fractional reserve" banking system of the United States, the reserve requirements imposed on commercial banks are:

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

The interest-rate effect

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

One year a country has negative net exports. The next year it still has negative net exports and imports have risen more than exports.

its trade deficit rose

An adverse supply shock will shift short-run aggregate supply

left, making prices rise.

One determinant of the natural rate of unemployment is the

minimum wage rate.

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

national saving. Demand comes from domestic investment and net capital outflow.

Phillips found a

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

net capital outflow and net exports fall.

The variable that links the market for loanable funds and the market for foreign-currency exchange is

net capital outflow.

A permanent reduction in inflation would

permanently reduce menu costs and temporarily raise unemployment

Other things the same, the real exchange rate between U.S. and South African goods would be higher if

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

The aggregate demand and aggregate supply graph has

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

In which of the following cases would the quantity of money demanded be smallest?

r = 0.07, P = 1.0

Other things the same, automatic stabilizers tend to

raise expenditures during recessions and lower expenditures during expansions.

Time inconsistency will cause the

short-run Phillips curve to be higher than otherwise.

Investment is a

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

study a model in which real and nominal variables interact.

Which of the following will not change the U.S. real interest rate?

the U.S. imposes import quotas

If the U.S. imposed an import quota on apples, then which of the following would rise?

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

The long-run aggregate supply curve shifts right if

the capital stock increases.

Alan Blinder believes

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:

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

Other things the same, if the dollar depreciates relative to the British pound, then

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

If efficiency wages became more common,

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

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

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?

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

Means-tested programs tend to favor

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

The logic of the multiplier effect applies

to any change in spending on any component of GDP.

Ultimately, the change in unemployment associated with a change in inflation is due to

unanticipated inflation, not inflation per se