Unit 8

Which piece of information would be least useful in trying to predict the effect of a $700M increase in government spending on equilibrium GDP?

The current level of structural unemployment.

Which of the statements relating full employment and full capacity is false?

At full employment there is no frictional unemployment; at full capacity there is no structural unemployment.

To reduce the possibility of inflation in the U.S. economy, the Fed should:

Raise the reserve requirement and sell securities on the open market.

Stagflation may result from which of the following:

Rapid deterioration of nation infrastructure, such as roads and telephone cable.

One important difference between adaptive and rational expectations models is that:

Rational expectations models use more information.

What will be the short-run effect of a 10% increase in the money supply for an economy operating in the Keynesian portion of the aggregate supply curve?

Real GDP will increase by 10% if velocity doesn't change.

Which of the following is not a component of aggregate demand?

Sales tax receipts

If the price level rises by 10%, which of the following must be true?

None of these must be true.

If the U.S. government conducts contractionary fiscal policy at the same time the Fed conducts expansionary monetary policy, what will be the most likely effects?

A decrease in interest rates and an indeterminate change in output.

Which of the following would be a valid statement about a government plan to eliminate a trade deficit?

A decrease in trade deficit will decrease investment in the country.

Which of the following will make monetary policy more effective in changing nominal GDP?

A flat investment demand curve.

Which of the following will lead to the greatest decrease in a country's net exports?

A large increase in interest rates in the country.

If banks become concerned about future condition and decide to hold larger excess reserves, which of the following is a likely result?

A rise in interest rates.

Which of the following will make crowding out in credit markets more serve?

A steep supply curve in the loanable funds market.

For the last several years, the money supply in the fictitious nation of Mauritania has been rising by 10% annually, and inflation has been running at 8%. The central bank is going to cut growth of the money supply back to 3% annually. Which of the following statements regarding the effects of this action is true, ceteris paribus?

According to the quantity theory of money, inflation will be 1% in the next year

An increase in autonomous expenditures will have which of the following effects?

An increase in GDP, but no increase in the price level if the economy is in the Keynesian portion of the aggregate supply curve.

Which of the following statements about an increase in aggregate demand is false?

An increase in aggregate demand can be caused by a decrease in other countries' interest rates

Which of the following is an effect of increased labor productivity?

An increase in aggregate supply.

The Fed is under no obligation to coordinate its actions with fiscal policy. And in fact, the Fed may take actions specifically designed to counteract some piece of fiscal policy. An example of fiscal and monetary policies with opposite effects is:

An increase in government spending and an increase in reserve requirements.

According to the Keynesian model, equal increases in government spending and taxes will result in which of the following?

An increase in output and no change in the price level.

Expansionary fiscal policy conducted in an economy at full employment will have which combination of effects in the short run?

An increase in real output and a larger increase in nominal output.

Given the U.S. has a current account deficit, a large increase in the demand for U.S. computer programs among Japanese residents will have all the following effects except:

An increase in the U.S. capital account surplus.

Given the nation has a capital account surplus and a federal budget deficit, which of the following is an effect of an increase in interest rates?

An increase in the trade deficit.

Assume an economy with lump sum taxes and no international trade. If there is full employment and a marginal propensity to consume of 0.8, what will be the effect of an $800 increase in autonomous expenditures?

An increase of less than $4,000 in real output.

Fiscal policy affects exchange rates because:

As government debt increases, interest rates rise, and the value of the currency rises

Which of the following is (are) true for the period described in the table below?

Both II and III.

Looking at the circular flow model, how can the saving equals investment equation be derived?

By looking at flows into and out of financial markets.

Crowding out has the effect(s) of:

Decreasing the effectiveness of fiscal policy if the crowding out occurs in financial markets and decreasing the effectiveness of both fiscal and monetary policy if the crowding out occurs in product markets.

An economy producing at a level between full employment and full capacity is likely to experience:

Demand-pull inflation.

If real GDP rises and nominal GDP falls, which of the following must be true?

Either A or B, but possibly A and B.

Which of the following is a valid statement about the Keynesian and classical models of the macroeconomy?

Fiscal policy will affect output in the Keynesian model, but only the price level in the classical model.

Which type(s) of unemployment exist in an economy at full employment?

Frictional and structural.

Which of the following parts of actions suggest that fiscal policy and monetary policy are working in the same direction?

Government spending and taxes decrease by the same amount, and the Fed sells bonds on the open market.

How do gross domestic product and gross national product differ?

Gross national product does not include goods produced domestically by foreign companies.

In early 2000, the U.S. was at full employment. Despite this, a number of presidential candidates were proposing tax cuts and government spending increases. The most likely effect of these actions under such circumstances would be:

Higher price levels and little or no change in GDP.

If an economy with no foreign trade and a marginal propensity to consumer of 0.8, which of the following will be true?

If taxes are decreased by $100M, GDP will increase by $400M.

Which statement correctly describes the relationship between policy actions, interest rates, and bond prices?

If the Fed conducts expansionary monetary policy, the demand for bonds will increase, their price will increase, and interest rates will decrease.

A particular economy has consumption of $400M, a government deficit of $100M, taxes of $250M, and income of $800M. Which of the following statements must be true?

If the capital account surplus is $50M, investment will be equal to $100M.

Suppose the government spends $500M on a project that has absolutely no value to the country. Which statement about this project is correct?

If the marginal propensity to save in the economy is equal to 0.25, the Keynesian model predicts that this project will result in a $200M increase in GDP.

Which of the following is an important criticism of the consumer price index?

It fails to recognize that consumers change their behavior in response to changes in the relative prices of goods and, as a result, generates an inflation rate that is too high.

Which of the following statements about stagflation is correct?

It implies an upward shift in the Phillips curve.

Japan imports almost all the oil it uses. Which of the following statements about the effects of an increase in world oil prices is true?

It may cause the Japanese economy to experience stagflation

The classical model may have contributed to the severity of the Great Depression of the 1930s because:

It prescribed no fiscal response by the government.

Which of the following will be an effect of unexpectedly low inflation?

Lenders will benefit at the expense of borrowers.

Which of the following is true if cyclical unemployment is high?

Monetary policy has little effect on the price level.

According to the Keynesian model, expansionary fiscal policy will have what effect?

No change in the price level and an increase in output.

The Fed is conducting expansionary monetary policy if it:

Sets a lower target for the federal funds rate and buy bonds in the open market

Why is stagflation inconsistent with the idea of a Phillips curve?

Stagflation is inconsistent with the classical model of the economy.

. Saving that leakages equal injections give the equation:

T + S + M=G + I + X.

For an economy operating all full employment, which of the following is true?

The Keynesian model will over-estimate the effect of a change in expenditures on GDP.

What would be the effect of a law requiring that government spending equal tax revenues in each year?

The government spending multiplier would be effectively set to 1.0.

The total value of T-bonds, including T-notes and T-bills, in existence at any point in time is:

The national debt.

Suppose the Irish economy is at full employment. Suppose in a few months, the exchange rate of the Irish national currency, the punt, will decline, giving the Irish relatively less purchasing power in foreign markets. What will happen to the price level and real GDP in Ireland?

The price level will fall, and real GDP will fall.

Which of the following must be true in an economy with a government but with no foreign trade?

The sum of household income and business profits must be equal to the sum, of consumption, government spending, and investment

Which of the following goals of economic policymakers is generally false?

They find low inflation desirable because it helps to keep unemployment under control.

There are many kinds of trade restrictions, and trade restrictions are put into place for many reasons. Which of the following is not a reason to use trade restrictions?

To create a lower price for domestic consumers.

If the value of the U.S. dollar in foreign exchange markets rise:

U.S. exports will likely decrease.

According to the Keynesian model, under which conditions will an open market operation by the Fed have the greatest effect on national income?

When the marginal propensity to consume is high.

Over the course of the business cycle, which of the following is must often true?

When unemployment is high, economic growth rates are low

In the fictitious nation of Zagora, a worker can produce either 5 bonds or 10 televisions in an hour. In neighboring Plovdiv, a worker can produce either 3 books or 5 televisions in an hour. Which statements about this situation is true?

Zagora has comparative advantage in the production of televisions.