Macroeconomics

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?

4i

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will be:

5 percent

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is:

5 percent

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals ______ percent

60

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?

7 percent

Exhibit: AD-AS Shifts (MOD 6 -15) Starting from long-run equilibrium at A with output equal to Y and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the short-run nonneutrality of money is represented by the movement from:

A to G

Exhibit: AD-AS Shifts (graph here) - MOD6 (9.) Starting from long-run equilibrium at A with output equal to ȳ and the price level equal to P1 , a demand-pull inflation would be represented by a shift from:

AD1 to AD2

Exhibit: IS*-LM* (MOD 6 -2) A small open economy with a floating exchange rate is initially at equilibrium A with IS*1 ,LM*1 , equilibrium exchange rate e2 , and equilibrium output Y1 . If there is an increase in government spending to IS*2 , the new equilibrium will be at ____, holding everything else constant.

B

Production Function (equation)

Y = F(K,L)

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate.In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate.

a capital inflow

To make a trade in a barter economy requires:

a double coincidence of wants

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 fall in consumption and income.

MOD 7 -13 Exhibit: Saving and Investment in a Small Open Economy In a small open economy, if the world interest rate is r1, then the economy has:

a trade surplus

Real money balances equal the:

amount of money expressed in terms of the quantity of goods and services it can purchase.

The long-run aggregate supply curve is vertical at the level of output:

at which unemployment is at its natural rate.

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

buy; LM

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:

by lowering the interest rate so that investment spending increases.

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.

decrease; LM

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease; decrease; decrease; decrease

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level

decrease; increase

Financial markets allow households to provide resources for investment ___________, while financial intermediaries allow households to provide resources for investment ___________.

directly; indirectly

All of the following are important macroeconomic variables except:

he marginal rate of substitution.

According to the classical theory of money, inflation does not make workers poorer because nominal wages increase:

in proportion to the increase in the overall price level.

An increase in government spending raises income:

in the short run, but leaves it unchanged in the long run, while lowering investment.

When government spending increases and taxes are increased by an equal amount, interest rates:

increase

constant returns to scale

increase in all factors of production leads to an increase in output of the same proportion.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

increase, but by less than 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.

increase; increase

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______ and net capital outflows ______.

increase; increase

The IS curve shows combinations of:

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

An LM curve shows combinations of:

interest rates and income, which bring equilibrium in the market for real money balances.

If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor:

is 75 percent.

Rigidity of the labor market, e.g., wages are not adjusted flexibly:

is a reason why deflation is costly

A positive inflation rate implies the following except:

is necessary if the Fed wants to have room manipulating nominal interest rate

Assume that a country experiences a reduction in productivity that lowers the marginal product of labor for any given level of labor. In this case, the:

labor demand curve shifts downward and to the left.

Factors of production

land, labor, capital - two most important (labor (L) & capital (K))

A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage. If GDP were changed so that it truly measured the sum of all final economic activity, the marriage would:

leave GDP unchanged.

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 ______.

lower; inward

Funds flow directly between savers and investors in financial __________ and flow indirectly between savers and investors through financial ________

markets; intermediaries

The money supply will increase if the

monetary base increases

The Phillips curve shows a ______ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a ______ relationship between the price level and output.

negative; positive

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

negatively; positively

The IS curve generally determines:

neither income nor the interest rate.

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the real wage were rigid, this would lead to:

no change in the real wage and a rise in unemployment

Holding other factors constant, legislation to cut taxes in an open economy will:

reduce national saving and lead to a trade deficit.

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.

right; accumulation

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:

rises by $60 billion

What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale?

the marginal productivity of labor relative to the marginal productivity of capital

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect ______ to increase.

the money supply

Unemployment Rate

the portion of people in the labor force who are not working

The CPI is determined by computing:

the price of a fixed basket of goods and services, relative to the price of the same basket in a base year.

In the long run, what determines the level of total production of goods and services in an economy?

the quantity of capital, quantity of labor, and production technology

When the LM curve is drawn, the quantity that is held fixed is:

the real money supply.

Labor

time people spend working.

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

trades with other countries.

The quantity theory of money assumes that:

velocity is constant

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by _______

$0.75 billion; more than $0.75 billion

If the domestic government of a small open economy reduces government spending, the real exchange rate will __________ and net exports will ___________

Decrease, increase

If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and net exports are - $1,910, then government purchases are

$2,977

If GDP (measured in billions of current dollars) is $5,465 and the sum of consumption, investment, and government purchases is $5,496, while exports equal $673, imports are:

$704.

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 1,000. Government spending is 600. In this case, equilibrium investment is:

1,500

If nominal GDP grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately ______ percent.

2

All of the following transactions that took place in 2009 would be included in GDP for 2009 except the purchase of a:

2001 Jeep Cherokee.

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:

600

For a country A, the real GDP growth rate is 8% and inflation is 4%. If the velocity of money remains constant, what is the change in real money balances:

8%

During the crisis 2007-2011, the monetary base increased by 300% but M1 increased by only 40%. The reason behind might be:

Banks decided to hold higher reserves due to increased risk

Gross Domestic Product differs from Net Domestic Product by an amount called

Capital Consumption Allowance (depreciation of capital stock)

When cars are made but put away for a later sale, this is called:

Change in inventory

How can GDP measure both the economy's income and its expenditure on output?

because every transaction has a buyer and a seller, every dollar of expenditure by a buyer must become a dollar of income to a seller. for the economy as a whole, income must equal expenditure

One possible benefit of moderate inflation is:

better functioning labor markets

The demand for output in a closed economy is the sum of:

consumption, investment, and government spending.

If wage rigidity holds the real wage above the equilibrium level, an increase in the demand for labor will ______ the number unemployed.

decrease

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will:

decrease

In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving (T-G)______ and private saving (Y-T-C)______.

decreases; increases

In the IS-LM model, which two variables are influenced by the interest rate?

demand for real money balances and investment spending

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 __________.

lower; inward

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

lower; raises; reduces

Consumer Price Index (CPI)

measures the level of prices

The labor force equals the:

number of employed and unemployed individuals

The IS-LM model is generally used:

only in the short run

Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run.

output; prices

For the purposes of the Keynesian cross, planned expenditure consists of:

planned investment, government spending, and consumption expenditures.

A competitive, profit-maximizing firm hires labor until the:

price of output multiplied by the marginal product of labor equals the wage.

A competitive firm chooses the:

quantity of labor and capital to employ.

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.

real; nominal

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

smaller; greater

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow.

surplus; positive

In the United States, monetary policy is controlled by:

the Federal Reserve.

An increase in the price of goods bought by firms and the government will show up in:

the GDP deflator but not in the CPI.

Factor prices

the amount paid for one unit of a factor of production

Production Function

the available technology for turning capital and labor into output

Along an IS curve all of the following are always true except:

the demand for real balances equals the supply of real balances.

Capital

the set of tools that workers use

If net capital outflow is positive, then:

the trade balance must be positive.

In a small open economy with a floating exchange rate, if the government decreases the money supply, then in the new short-run equilibrium:

income falls and the exchange rate rises.

In a small open economy with a fixed exchange rate, if the central bank tries to increase the money supply, then in the new short-run equilibrium:

income remains constant.

An explanation for the slope of the LM curve is that as:

income rises, money demand rises, and a higher interest rate is required.

Gross Domestic Product (GDP)

The total income of everyone in the economy, including goods and services.

How will the expansionary fiscal policy "abroad" will affect a small open economy?

Increase net exports because the interest rate r increases

If the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _________ and net exports will ______________

Increase, decrease

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

LM; right

The statistical relationship between changes in real GDP and changes in the unemployment rate is called:

Okun's law

In the IS-LM model when government spending rises, in the short-run equilibrium, in the usual case the interest rate __________ and output ___________

Rises, rises

If the government decreases its expenditures (G goes down), the IS curve will ________ and the interest rate will ___________

Shift to the left and the interest rate will fall

A supply shock does not occur when:

The Fed increases the money supply

If the nominal interest rate increases, you would expect:

The demand for money to decrease

Economic profit is zero if:

all factors are paid their marginal products and there are constant returns to scale

Under a fixed-exchange-rate system, the central bank of a small open economy must:

allow the money supply to adjust to whatever level will ensure that the equilibrium exchange rate equals the announced exchange rate.

Assume that the money demand function is left parenthesis (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

drop by 2 percent

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:

equals the inflation rate.

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is higher than expected, then output ______ natural rate of output.

exceeds the

Macroeconomic models are used to explain how ______ variables influence ______ variables.

exogenous; endogenous

In the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

falls; rises

In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ________ and output ________

falls; rises

GDP is the market value of all ______ goods and services produced within an economy in a given period of time.

final

GDP precise definition

gross domestic product (GDP) is the market value of all final goods and services produced within an economy in a given period of time.