Unit 6 Quiz

The Fed can influence the money supply by changing how much it lends to banks. changing the interest rate it pays banks on the reserves they are holding. using open-market operations. All of the above are correct.

All of the above are correct. Feedback: All of the above are tools of monetary policy.

When monetary and fiscal policymakers expand aggregate demand, which of the following costs is incurred in the short run? Short-run aggregate supply decreases The natural rate of unemployment increases. The price level increases more rapidly. The money supply increases less rapidly.

The price level increases more rapidly.

Which of the following events would shift money demand to the left? an increase in the price level a decrease in the price level an increase in the interest rate a decrease in the interest rate

a decrease in the price level Feedback: (A) This would shift money demand to the right, as people wanted to hold more money for higher priced goods and services. (B) Correct; people need hold less money. (C) and (D): these would cause movement along the money demand curve, but it wouldn't shift. We have already accounted for different interest rates.

One way to express the classical idea of monetary neutrality is to draw a downward-sloping short-run Phillips curve. an upward-sloping short-run Phillips curve. a downward-sloping long-run Phillips curve. a vertical long-run Phillips curve.

a vertical long-run Phillips curve. Feedback: Money neutrality refers to the idea that the money supply has no effect on real variables, such as the unemployment rate. So this will be constant, regardless of prices or inflation. This results in a vertical long run Phillips curve.

The classical dichotomy and monetary neutrality are represented graphically by an upward-sloping long-run aggregate-supply curve. a vertical long-run aggregate-supply curve. an upward-sloping short-run aggregate-curve. a downward-sloping aggregate-demand curve.

a vertical long-run aggregate-supply curve. Feedback: Money neutrality refers to the idea that the money supply has no effect on real variables, like real GDP. The LRAS is vertical because real GDP remains at potential regardless of prices (or the related money supply).

A decrease in government spending initially and primarily shifts aggregate demand to the right. aggregate demand to the left. aggregate supply to the right. neither aggregate demand nor aggregate supply.

aggregate demand to the left. Feedback: Aggregate demand reflects spending in the economy. A drop in government spending reduces aggregate demand.

A policy change that changes the natural rate of unemployment changes neither the long-run Phillips curve nor the long-run aggregate supply curve. both the long-run Phillips curve and the long-run aggregate supply curve. the long-run Phillips curve, but not the long-run aggregate supply curve. the long-run aggregate supply curve, but not the long-run Phillips curve.

both the long-run Phillips curve and the long-run aggregate supply curve. Feedback: The long run Phillips curve is tied to the natural rate of unemployment. If this rate changes, the LRPC will shift. The long run aggregate supply curve is tied to potential or natural real GDP. This is tied to the natural rate of unemployment.

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to increase by $250 billion. increase by $333 billion. increase by $360 billion. None of the above are correct.

increase by $360 billion. Feedback: $60 billion increase in spending X 6 = $360 billion increase in real GDP.

The misperceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has decreased, so they increase production. decreased, so they decrease production. increased, so they increase production. increased, so they decrease production.

increased, so they increase production. Feedback: The misperceptions theory states that firms mistake inflation for increased demand for their goods. Increased demand leads to higher prices, which encourages firms to produce more in order to make more money.

Aggregate demand shifts right when the Federal Reserve raises personal income taxes. increases the money supply. institutes an investment tax credit. All of the above are correct.

increases the money supply. Feedback: (A) and (C) are not things the Federal Reserve has the power to do.

A decrease in the price level increases the quantity of goods and services supplied in the short run. decreases the quantity of goods and services supplied in the long run. decreases the quantity of goods and services demanded. increases the quantity of goods and services demanded.

increases the quantity of goods and services demanded. Feedback: (A) - Lower prices decrease quantity supplied in the short run. Firms expect demand to be lower, prices and wages are sticky, etc. So firms expect to earn less money. (B) In the long run, prices and wages adjust to maintain full employment. So there is no effect in the long run. (C) Lower price encourage greater real spending, due to the wealth effect, interest rate effect, and exchange rate effect.

The sacrifice ratio is the sum of the inflation and unemployment rates. inflation rate divided by the unemployment rate. number of percentage points annual output falls for each percentage point reduction in inflation. number of percentage points unemployment rises for each percentage point reduction in inflation.

number of percentage points annual output falls for each percentage point reduction in inflation.

According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is operating at full capacity. in recession. experiencing zero inflation. experiencing high rates of inflation.

operating at full capacity.

Other things the same, if technology increases, then in the long run both output and prices are higher. output is higher and prices are lower. output is lower and prices are higher. both output and prices are lower.

output is higher and prices are lower. Feedback: New technology increased economic growth. This results in higher output. Since this can be done more efficiently, prices will be relatively lower.

If the interest rate is below the equilibrium interest rate there is an excess supply of money. people will sell more bonds, which drives interest rates up. as the money market moves to equilibrium, people will buy more goods. All of the above are correct.

people will sell more bonds, which drives interest rates up. Feedback: (A) The money supply is actually less than money demand. If the interest rate is below equilibrium, people will want more money than there is available, since households will want to hold cash on hand and businesses will want to borrow and invest. (B) Since the interest rate is low, people will not want to hold bonds. Dumping bonds results in lower bond prices, which drives up interest rates. (C) Higher interest rates will likely result in less spending.

An increase in the U.S. interest rate raises the opportunity cost of holding dollars. induces households to increase consumption. shifts money demand to the right. leads to a depreciation of the U.S. dollar.

raises the opportunity cost of holding dollars. Feedback: Interest rates are what you earn by saving money. So, by holding dollars, you are sacrificing interest earnings.

Which of the following decreases during recessions?​ real GDP unemployment ​layoffs and consumer spending

real GDP Feedback: As the economy enters a recession, firms lay off more workers (due to lower demand for their labor). This increases the unemployment rate. But as fewer people are working, this will result in lower real GDP (as fewer goods and services are produced).

If inflation expectations rise, the short-run Phillips curve shifts right, so that at any unemployment rate inflation is higher in the short run than before. left, so that at any unemployment rate inflation is higher in the short run the before. right, so that at any unemployment rate inflation is lower in the short run than before. left, so that at any unemployment rate inflation is lower in the short run than before.

right, so that at any unemployment rate inflation is higher in the short run than before. Feedback: If people expect higher inflation, then they will demand higher wages and input prices. This will result in greater inflation, regardless of the unemployment rate. This shifts the short run Phillips curve to the right.

Which of the following adjust to bring aggregate supply and demand into balance? the price level and real output the real rate of interest and the money supply government expenditures and taxes the saving rate and net exports

the price level and real output Feedback: You can see this fron the AS-AD graph. Real GDP and price level are the relevant variables.

In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance undertakes a public relations campaign to convince people that it will soon change monetary policy to reduce inflation to 12.5%. If Flosserlanders believe their government then which, if any, curve(s) shift left? the short-run and the long-run Phillips curve the short-run but not the long run Phillips curve the long-run but not the short-run Phillips curve neither the short-run nor the long-run Phillips curve

the short-run but not the long run Phillips curve

Other things the same, as the price level falls, the value of the dollar increases. the interest rate rises. people feel less wealthy. All of the above are correct.

the value of the dollar increases. Feedback: The value of the dollar refers to how much it will buy. If the price level falls, the dollar will buy more and it increases in value.