Midterm 4 QuickQuiz

A change in which of the following would shift the short-run aggregate-supply curve but now the long-run aggregated supply curve? a. the labor force b. the capital stock c. the state of technology d. the expected price level

d

A policy of inflation targeting a. removes the need for discretionary decision making by central bankers b. frees central bankers from having to respond to shocks to aggregate demand c. makes central bank policy more transparent and accountable d. has been abandoned by most central banks around the world

c

A sudden increase in business pessimism shifts the aggregate-____________ curve, leading to ____________ output a. supply; lower b. supply; higher c. demand; lower d. demand; higher

c

According to classical macroeconomic theory and monetary neutrality, changes in the money supply affect a. the unemployment rate b. real GDP c. the GDP deflator d. none of the above

c

According to traditional Keynesian analysis, which of the following increases aggregate demand the most? a. $100 billion increase in taxes b. $100 billion decrease in taxes c. $100 billion increase in government purchases d. $100 billion decrease in government purchases

c

Fiscal policy has a long lag mainly because a. policymakers at the Federal Reserve do not meet frequently b. firms making investments are slow to respond to changes in interest rates c. the political process is slow to enact changes in government spending or taxes d. consumers are slow to respond to changes in their after-tax incomes

c

A cut in income tax rates tends to _________ aggregate demand and _________ aggregate supply a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

a

Advocates for setting monetary policy by rule rather than discretion often argue that a. central bankers with discretion are tempted to renege on their announced commitments to low inflation b. central bankers following a rule will be more responsive to the needs of the political process c. fiscal policy is better than monetary policy as a tool for economic stabilization d. it is sometimes useful to give the economy a burst of surprise inflation

a

Advocates of taxing consumption rather than income argue that a. the current tax code discourages people from saving b. the rich consume a higher fraction of income than the poor c. a consumption tax is a better automatic stabilizer d. taxing consumption does not cause any deadweight losses

a

Advocates of the theory of rational expectations believe that a. the sacrifice ration can be much smaller if policymakers make a credible commitment to low inflation b. if disinflation catches people by surprise, it will have minimal impact on unemployment c. wage and price setters never expect the central bank to follow through on its announcements d. expected inflation depends on the rates of inflation that people have recently observed

a

An increase in the aggregate demand for goods and services has a larger impact on output __________ and a larger impact on the price level ____________ a. in the short-run; in the long-run b. in the long-run; in the short-run c. in the short-run; also in the short-run d. in the long-run; also in the long-run

a

If the Federal Reserve reduces the rate of money growth and maintains it at the new lower rate, eventually expected inflation will __________ and the short-run Phillips curve will shift ____________ a. decrease; downward b. decrease; upward c. increase; downward d. increase; upward

a

Most economists believe that classical macroeconomic theory a. is valid only in the long-run b. is valid only in the short-run c. is always valid d. is never valid

a

Which of the following is an example of an automatic stabilizer? When the economy goes into a recession, a. more people become eligible for unemployment insurance benefits b. stock prices decline, particularly for firms in cyclical industries c. Congress begins hearings about a possible stimulus package d. the Fed changes its target for the federal funds rate

a

According to the theory of liquidity preference, an economy's interest rate adjusts a. to balance the supply and demand for loanable funds b. to balance the supply and demand for money c. one-for-one to changes in expected inflation d. to equal the interest rate prevailing in world financial markets

b

Approximately how long does it take a change in monetary policy to influence aggregate demand? a. one month b. six months c. two years d. five years

b

From one year to the next, inflation falls from 5 to 4 percent, while unemployment rises form 6 to 7 percent. Which of the following events could be responsible for this change? a. the central bank increases the growth rate of the money supply b. the government cuts spending and raises taxes to reduce the budget deficit c. newly discovered oil reserves cause world oil prices to plummet d. the appointment of a new Fed chair increases expected inflation

b

If the government wants to expand aggregate demand, it can __________ government purchases or ______________ taxes a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

b

In the model of aggregate demand and aggregate supply, the quantity of __________ is on the horizontal axis, and the ______________ is on the vertical axis a. output; interest rate b. output; price level c. money; interest rate d. money; price level

b

The Fed's target for the federal funds rate a. is an extra policy tool for the central bank, in addition to and independent of the money supply b. commits the Fed to set a particular money supply so that it his the announced target c. is a goal that is rarely achieved because the Fed can determine only the money supply d. matter to banks that borrow and lend federal funds but does not influence aggregate demand

b

The aggregate-demand curve slopes downward because a fall in the price level causes a. real wealth to decrease b. the interest rate to decline c. the currency to appreciate d. all of the above

b

Throughout U.S. history, what has been the most common cause of substantial increases in government debt? a. recessions b. wars c. financial crises d. tax cuts

b

When the Federal Reserve increase the money supply and expands aggregate demand, it moves the economy along the Phillips curve to a point with ___________ inflation and ___________ unemployment a. higher; higher b. higher; lower c. lower; higher d. lower; lower

b

Which of the following is NOT an argument for a positive rate of inflation? a. it permits real interest rates to be negative b. it increases the variability of relative prices c. it allows real wages to fall without cuts in nominal wages d. it would be costly to reduce inflation to zero

b

From one year to the next, inflation falls from 5 to 4 percent, while unemployment falls from 7 to 6 percent. Which of the following events could be responsible for this change? a. The central bank increases the growth rate of the money supply b. The government cuts spending and raises taxes to reduce the budget deficit c. Newly discovered oil reserves cause world oil prices to plummet d. the appointment of a new Fed chair increases expected inflation

c

If the central bank had instead held the money supply constant and allowed the interest rate to adjust, the change in aggregate demand resulting from the increase in government purchases would been a. larger b. the same c. smaller but still productive d. negative

c

If the central bank wants to contract aggregate demand, it can _________ the money supply and thereby _________ the interest rate a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

c

Reducing inflation will tend to be costly if a. policymakers are credibly committed to low inflation b. wages and prices are not very sticky c. expectations of inflation are slow to adjust d. central bankers exhibit a strong dislike of inflation

c

Stagflation is caused by a a. leftward shift in the aggregate-demand curve b. rightward shift in the aggregate-demand curve c. leftward shift in the aggregate-supply curve d. rightward shift in the aggregate supply-curve

c

When an adverse supply shock shifts the short-rum aggregate-supply curve to the left, it also a. moves the economy along the short-run Phillips curve to a point with higher inflation and lower unemployment b. moves the economy along the short-run Phillips curve to a point with lower inflation and higher unemployment c. shifts the short-run Phillips curve to the right d. shifts the short-run Phillips curve tot he left

c

When the economy goes into a recession, real GDP ________, and unemployment ________. a. rises; rises b. rises; falls c. falls; rises d. falls; falls

c

Critics of taxing consumption rather than income argue that a. switching to a consumption b. private saving does not respond much to tax incentives c. reducing the budget deficit is a better way to raise national saving d. all of the above

d

Monetary policy affects the economy with a lag mainly because it takes a long time a. for central banks to make policy changes b. to change the money supply after a policy decision has been made c. for a change in the money supply to affect interest rates d. for a change in interest rates to affect investment spending

d

One reason the short-run aggregate-supply curve slopes upward is that a higher price level a. raises nominal wages if real wages are sticky b. reduces nominal wages if real wages are sticky c. raises real wages if nominal wages are sticky d. reduces real wages if nominal wages are sticky

d

Other things equal, when the government runs a large budget, it _________ national saving and thereby ______________ capital formation and productivity growth a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

d

Recessions occur a. regularly, about every 3 years b. regularly, about every 7 years c. regularly, about every 12 years d. irregularly

d

Suppose a wave of negative "animal spirits" overruns the economy, and people become pessimistic about the future. To stabilize aggregate demand, the Fed could _________ its target for the federal funds rate or Congress could ___________ taxes a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

d

The Phillips curve started as an observed ___________ correlation between the inflation rate and the ___________ a. positive; nominal interest rate b. positive; unemployment rate c. negative; nominal interest rate d. negative; unemployment rate

d

The natural rate of unemployment is a. the socially optimal level of joblessness b. the level of joblessness the economy reaches in the short-run c. the amount of joblessness that cannot be reduced by public policies d. the normal level of joblessness, regardless of inflation

d

Which of the following is NOT an argument for a zero rate of inflation? a. it eliminates distortions from a non-indexed tax code b. it encourages people to hold a greater quantity of money c. it reduces the menu costs that firms have to incur d. it stops real wages from falling if nominal wages cannot be cut

d

Which of the following would shift the aggregate-demand curve to the left? a. a decline in the stock market b. an increase in taxes c. a decrease in government spending d. all of the above

d

With the economy in a recession due to inadequate aggregate demand, the government increases its purchases by $1200. Suppose the central bank adjusts the money supply to hold the interest rate constant, investment spending remains unchanged, and the marginal propensity to consume is 2/3. How large is the increase in aggregate demand? a. $400 b. $800 c. $1800 d. $3600

d