Section 6 Review Quiz

***Scenario 35-2: The Quantity Theory of Money Suppose the money supply is equal to $10 billion and the velocity of money is 6. Use Scenario 35-2. Refer to the information provided. If the aggregate price level is 4, then the nominal GDP is:

$60 billion.

In the classical model, it is thought that the long-run:

and short-run aggregate supply curves are both vertical.

In the classical model of the price level, prices are _________, and the short-run aggregate supply curve is vertical. As a result, a decrease in the money supply leads to _________ in the aggregate price level.

flexible; an equal proportional decrease

Scenario 31-1: Money and Interest Rates Banks decide to do away with fees charged to noncustomers when they use another bank's ATM. Use Scenario 31-1. If the Fed wants to maintain the same federal funds rate, it should:

sell Treasury bills.

Suppose there is supply shock due to a fall in commodity prices, the short-run Phillips curve will:

shift down.

A supply shock:

shifts the short-run Phillips curve and the short-run aggregate supply curve..

***Crowding out is MOST likely to occur when expansionary fiscal policy is accompanied by:

slow growth of the money supply.

Because in the Keynesian model, prices and nominal wages are _________, the short-run aggregate supply curve is upward sloping and, as a result, an increase in the money supply leads to _________ in the aggregate price level.

sticky; a less than proportional increase

The modern consensus regarding the use of monetary or fiscal policy to reduce unemployment in the long run is that:

the natural rate of unemployment serves as a limit to what monetary and fiscal policy can accomplish.

If the money supply increases by 10%, in the long run:

the price level increases by 10%.

Seignorage is:

the revenue generated by the government's right to print money.

The long-run Phillips curve is:

vertical at the non-accelerating-inflation rate of unemployment (NAIRU).

Suppose that U.S. debt is $7 trillion dollars at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion.

Use the "Short-Run Phillips Curve" Figure 34-2.SRPC1 is based on an expected inflation rate of:

0%.

Use the "Short-Run Phillips Curve" Figure 34-3. The natural rate of unemployment is:

5%.

Suppose that commodity prices across the economy begin to fall and consumers and firms begin to expect a lower rate of future inflation. What do we expect to happen to the SRAS curve and short-run Phillips curve?

The SRAS curve will shift to the right, and the short-run Phillips curve will shift downward.

According to the liquidity preference model, what will happen to the money supply curve, the equilibrium interest rate, and the equilibrium quantity of money, if the Fed sells Treasury bonds in an open market operation?

Money Supply Curve shifts leftward, Interest Rate increases , Quantity of Money decreases

Suppose you are told that the short-run Phillips curve has shifted upward. Which of the following must have happened?

The SRAS curve has shifted to the left.

Use the "Short-Run Phillips Curve" Figure 34-2. Which of the following could have caused SRPC2 to shift to SRPC1?

The SRAS curve shifted to the right.

Which of the following statements is broadly agreed upon by modern macroeconomists?

Discretionary monetary and fiscal policy cannot affect the long-run level of unemployment.

Which one of the following statements is TRUE?

Keynes emphasized the short-run effects of shifts in aggregate demand on aggregate output, employment, and prices whereas the classical economists focused on the long-run determination of the aggregate price level.

Which of the following schools of thought is the MOST likely to advocate the use of fiscal policy in fighting recessions?

Keynesian

The government budget balance equals:

Taxes - Government purchases - Government transfers.

***Use the "AD-AS Model" Figure 32-1. Suppose the economy is currently at YEwith a price level of P1. Which of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD1 to AD2 as a result of an increase in the money supply?

YE and P3

Contractionary monetary policy causes _______ in the price level in the short run and _______ in the price level in the long run.

a decrease; a decrease

When the output gap is negative, the actual unemployment rate is:

above the natural rate.

According to Keynes, changes in "animal spirits" will affect actual output through changes in:

business investment.

Use the "Money Market I" Figure 31-1. If the money market is initially in equilibrium at point E and the central bank _____ bonds, then the interest rate will:

buys; move toward point L.

The notion that the real quantity of money is always at its long-run equilibrium level is associated with the _______ of the price level.

classical model

The federal funds rate is:

determined in the money market by the supply and demand for money.

If the Fed conducts an open market purchase, holding everything else constant:

in the long run, there will be an increase in the aggregate price level.

Politicians may like moderate inflation in an election year since the:

increase in aggregate demand serves to increase employment.

Suppose the Fed buys bonds. We can expect this transaction to:

increase the money supply, increase bond prices, and decrease interest rates.

Economists expect budget deficits to:

increase when unemployment increases and fall when unemployment falls.

If the natural rate of unemployment is 5%, and the actual rate of unemployment is 4%:

inflation will increase.

To bring disinflation to an economy, policy makers need to:

lower expectations about inflation.

***All else equal, expansionary fiscal policies:

make the budget surplus smaller.

Ricardo is an economist who believes that short-run changes in aggregate demand affect aggregate output as well as the price level. He believes that there is a role for monetary policy in managing the economy, but he advocates a simple monetary rule that would increase the money supply at a constant rate to grow the economy. Ricardo is best described as a _____.

monetarist

A liquidity trap isa situation in which:

monetary policy becomes ineffective because the nominal interest rate is already very close to zero.

The economic policy of changing the quantity of money to influence the interest rate and affect overall spending in the economy, is known as:

monetary policy.

When the Treasury Department borrows from the public to finance the government's purchases of goods and services, and the Fed purchases the debt back from the public in the form of Treasury bills, it is known as:

monetizing the debt.

Suppose that the economy experiences an increase in the unemployment rate at the same time that the inflation rate declines. This situation would be consistent with a movement along the:

negatively sloped Phillips curve.

The velocity of money is equal to:

nominal GDP / money supply.

If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will:

not change. The idea that a 1% increase in the output gap will decrease the unemployment rate by 0.5% is known as: Okun's law.

If a high inflation rate leads people to ______ their money holdings, this may lead to a further increase in the money supply and ______ inflation.

reduce; higher