Midterm 3 questions

27. According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes a. the interest rate to fall, so aggregate demand shifts right. b. the interest rate to fall, so aggregate demand shifts left. c. the interest rate to rise, so aggregate demand shifts right. d. the interest rate to rise, so aggregate demand shifts left.

A. the interest rate to fall, so aggregate demand shifts right.

31. The interest rate falls if a. the price level falls or the money supply falls. b. the price level falls or the money supply rises. c. the price level rises or the money supply falls. d. the price level rises or the money supply rises.

B. the price level falls or the money supply rises

34. In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is a. $816. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand. b. $816. For this economy, an initial increase of $100 in consumer spending translates into a $400 increase in aggregate demand. c. $812. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand. d. $812. For this economy, an initial increase of $100 in consumer spending translates into an $800 increase in aggregate demand.

C. $812. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand.

32. If the Fed conducts open-market sales, which of the following quantities increase(s)? a. interest rates, prices, and investment spending b. interest rates and prices, but not investment spending c. interest rates and investment, but not prices d. interest rates, but not investment or prices

D. interest rates, but not investment or prices

24. Which of the following shifts the short-run aggregate supply curve right? a. both an increase in the price level that is greater than expected and an increase in the expected price level. b. an increase in the price level that is greater than expected, but not an increase in the expected price level. c. an increase in the expected price level, but not an increase in the price level that is greater than expected. d. neither an increase in the price level that is greater than expected nor an increase in the expected price level.

D. neither an increase in the price level that is greater than expected nor an increase in the expected price level.

38. If the natural rate of unemployment falls, a. both the short-run Phillips curve and the long-run Phillips curve shift. b. only the short-run Phillips curve shifts. c. only the long-run Phillips curve shifts. d. neither the short-run nor the long-run Phillips curves shift.

a. both the short-run Phillips curve and the long-run Phillips curve shift

39. A policy that raised the natural rate of unemployment would shift a. both the short-run and the long-run Phillips curves to the right. b. the short-run Phillips curve right but leave the long-run Phillips curve unchanged. c. the long-run Phillips curve right but leave the short-run Phillips curve unchanged. d. neither the long-run Phillips curve nor the short-run Phillips curve right

a. both the short-run and the long-run Phillips curves to the right

44. If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run a. both the unemployment rate and the inflation rate would be lower. b. the unemployment rate would be lower and the inflation rate would be higher. c. the unemployment rate would be higher and the inflation rate would be lower. d. the unemployment rate and the inflation rate would be higher.

a. both the unemployment rate and the inflation rate would be lower.

33. If money demand shifted to the right and the Federal Reserve desired to return the interest rate to its original value, it could a. buy bonds to increase the money supply. b. buy bonds to decrease the money supply. c. sell bonds to increase the money supply. d. sell bonds to decrease the money supply.

a. buy bonds to increase the money supply.

40. If the long-run Phillips curve shifts to the right, then for any given rate of money growth and inflation the economy has a. higher unemployment and lower output. b. higher unemployment and higher output. c. lower unemployment and lower output. d. lower unemployment and higher output

a. higher unemployment and lower output.

19. In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households a. increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve. b. decreases and as a result consumption spending increases. This effect contributes to the upward slope of the aggregate-supply curve. c. increases and as a result households increase their money holdings; in turn, interest rates increase and investment spending decreases. This effect contributes to the downward slope of the aggregate-demand curve. d. decreases and as a result households increase their money holdings; in turn, interest rates increase and investment spending decreases. This effect contributes to the upward slope of the aggregate-supply curve.

a. increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.

43. If inflation expectations decline, then the short-run Phillips curve shifts a. left, so that at any inflation rate unemployment is lower in the short run than before. b. right, so that at any inflation rate unemployment is lower in the short run than before. c. right, so that at any inflation rate unemployment is higher in the short run than before. d. left, so that at any inflation rate unemployment is higher in the short run than before

a. left, so that at any inflation rate unemployment is lower in the short run than before.

18. 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.

16. The country of Lessidinia has a tax system identical to that of the United States. Suppose someone in Lessidinia bought a parcel of land for 20,000 foci (the local currency) in 1960 when the price index equaled 100. In 2002, the person sold the land for 100,000 foci, and the price index equaled 600. The tax rate on nominal gains was 20 percent. Compute the taxes on the nominal gain and the change in the real value of the land in terms of 2002 prices to find the after-tax real rate of capital gain. a. -60 percent b. -30 percent c. 30 percent d. 60 percent

b. -30 percent

5. Suppose that some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were unemployed? a. 1.425 million b. 1.5 million c. 2.5 million d. 5 million

b. 1.5 million

4. Suppose that some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were employed? a. 1.5 million b. 28.5 million c. 30 million d. 47.5 million

b. 28.5 million

3. Suppose that the adult population is 4 million, the number of unemployed is 0.25 million, and the labor-force participation rate is 75%. What is the unemployment rate? a. 6.25% b. 8.3% c. 9.1% d. 18.75%

b. 8.3%

22. Other things the same, which of the following is correct? a. A decrease in the price level causes the dollar to appreciate. Aggregate demand shifts right. b. A decrease in the price level causes the dollar to depreciate. Aggregate demand shifts right. c. If speculators lose confidence in the American economy, the dollar appreciates. Aggregate demand shifts right. d. If speculators lose confidence in the American economy, the dollar depreciates. Aggregate demand shifts right.

b. A decrease in the price level causes the dollar to depreciate. Aggregate demand shifts right. d. If speculators lose confidence in the American economy, the dollar depreciates. Aggregate demand shifts right.

12. According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also a. either a rise in output or a rise in velocity. b. either a rise in output or a fall in velocity. c. either a fall in output or a rise in velocity. d. either a fall in output or a fall in velocity.

b. either a rise in output or a fall in velocity.

8. When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an a. excess demand for money, so the price level will rise. b. excess demand for money, so the price level will fall. c. excess supply of money, so the price level will rise. d. excess supply of money, so the price level will fall.

b. excess demand for money, so the price level will fall.

23. The mathematical equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), expresses a. how the long run equilibrium adjusts to changes in money supply. b. how output deviates in the short run from its long run natural rate. c. how the short run aggregate supply curve shifts. d. how adverse shifts in aggregate supply can cause stagflation.

b. how output deviates in the short run from its long run natural rate.

45. If an increase in inflation permanently reduced unemployment, then a. money would not be neutral and the long-run Phillips curve would slope upward. b. money would not be neutral and the long-run Phillips curve would slope downward. c. money would be neutral and the long-run Phillips curve would slope upward. d. money would be neutral and the long-run Phillips curve would slope downward.

b. money would not be neutral and the long-run Phillips curve would slope downward.

21. In which case can we be sure aggregate demand shifts left overall? a. people want to save more for retirement and the Fed increases the money supply. b. people want to save more for retirement and the Fed decreases the money supply. c. people want to save less for retirement and the Fed increases the money supply. d. people want to save less for retirement and the Fed decreases the money supply

b. people want to save more for retirement and the Fed decreases the money supply.

35. Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand a. right by more than $100 billion. b. right by $100 billion. c. left by more than $100 billion. d. left by $100 billion.

b. right by $100 billion.

13. There is evidence that the rate at which money changed hands rose during the German hyperinflation. This means that a. velocity rose. If monetary neutrality holds the rise in velocity increased the ratio M/P. b. velocity rose. If monetary neutrality holds the rise in velocity decreased the ratio M/P. c. velocity fell. If monetary neutrality holds the fall in velocity increased the ratio M/P. d. velocity fell. If monetary neutrality holds the fall in velocity decreased the ratio M/P.

b. velocity rose. If monetary neutrality holds the rise in velocity decreased the ratio M/P.

14. You put money into an account and earn an after-tax real interest rate of 2.5 percent. If the nominal interest rate on the account is 8 percent and the inflation rate is 2 percent, then what is the tax rate? a. 28.00 percent b. 36.25 percent c. 43.75 percent d. 67.50 percent

c. 43.75 percent

7. When inflation rises people will a. demand more money so the price level rises. b. demand more money so the price level falls. c. demand less money so the price level rises. d. demand less money so the price level falls.

c. demand less money so the price level rises.

17. Which of the following rises when the U.S. price level falls? a. interest rates b. the value of the dollar in the market for foreign-currency exchange c. real wealth d. All of the above are correct.

c. real wealth

9. When the money market is drawn with the value of money on the vertical axis, if money supply and money demand both shift to the right a. the price level must have risen b. the price level must have fallen. c. the price level rises if money supply shifts farther than money demand. d. the price level falls if money supply shifts farther than money demand.

c. the price level rises if money supply shifts farther than money demand.

15. You put money into an account and earn a real interest rate of 6 percent. Inflation is 3 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? a. 4.8 percent b. 5.4 percent c. 7.2 percent d. 4.2 percent.

d. 4.2 percent.

1. Who of the following would necessarily be included in the Bureau of Labor Statistics' "unemployed" category? a. Huey, who did not work during the previous four weeks b. Dewey, who tried to find new employment during the previous four weeks c. Louie, who was an unpaid worker during the previous four weeks d. None of the above is correct.

d. None of the above is correct.

2. President Bigego is running for re-election against Senator Pander. Bigego proclaims that more people are working now than when he took office. Pander says that the unemployment rate is higher now than when Bigego took office. You conclude that a. one of them must be lying. b. both of them could be telling the truth if the labor force, and employment grew at the exact same rate. c. both of them could be telling the truth if the labor force grew slower than employment. d. both of them could be telling the truth if the labor force grew faster than employment.

d. both of them could be telling the truth if the labor force grew faster than employment.

20. As the price level rises, the exchange rate a. falls, so exports rise and imports fall. b. falls, so exports fall and imports rise. c. rises, so exports rise and imports fall. d. rises, so exports fall and imports rise.

d. rises, so exports fall and imports rise.