EC111 Test 3

Other things the same if reserve requirements are decreased, the reserve ratio a. decreases, the money multiplier increases, and the money supply increases. b. increases, the money multiplier increases, and the money supply decreases. c. decreases, the money multiplier increases, and the money supply decreases. d. increases, the money multiplier increases, and the money supply increases.

a. decreases, the money multiplier increases, and the money supply increases

When there is inflation, the number of dollars needed to buy a representative basket of goods a. increases, and so the value of money falls. b. decreases, and so the value of money falls c. decreases, and so the value of money rises. d. increases, and so the value of money rises.

a. increases, and so the value of money falls

You put money in the bank. The increase in the dollar value of your savings a. is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable. b. and the change in the number of goods you can buy with your savings are both real variables. c. is a real variable, but the change in the number of goods you buy with your savings is a nominal variable. d. and the change in the number of goods you can buy with your savings are both nominal variables.

a. is a nominal variable, but the change in the number of goods you can buy with your savings is a real variable

If the MPC is 0.8 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by a. $600 billion. b. $150 billion. c. $216 billion. d. $480 billion.

a. $600 billion.

If the nominal interest rate is 4 percent and expected inflation is 2.5 percent, then what is the expected real interest rate? a. 1.5 percent b. 6.5 percent c. 1.6 percent d. 10 percent

a. 1.5 percent

If the sacrifice ratio is 4, then reducing the inflation rate from 9 percent to 5 percent would require sacrificing a. 16 percent of annual output. b. 8 percent of annual output. c. 4 percent of annual output. d. 12 percent of annual output.

a. 16 percent of annual output.

If unemployment is below its natural rate, what happens to move the economy to long-run equilibrium? a. Inflation expectations rise which shifts the short-run Phillips curve to the right. b. Inflation expectations fall which shifts the short-run Phillips curve to the right. c. Inflation expectations rise which shifts the short-run Phillips curve to the left. d. Inflation expectations fall which shifts the short-run Phillips curve to the left.

a. Inflation expectations rise which shifts the short-run Phillips curve to the right.

Which of the following reduces the interest rate? a. a decrease in government expenditures and an increase in the money supply b. an increase in government expenditures and a decrease in the money supply c. an increase in government expenditures and an increase in the money supply d. a decrease in government expenditures and a decrease in the money supply

a. a decrease in government expenditures and an increase in the money supply

Other things the same, as the price level decreases it induces greater spending on a. both net exports and investment. b. net exports but not investment. c. investment but not net exports. d. neither net exports nor investment.

a. both net exports and investment.

Suppose the central bank decreases the growth rate of the money supply. In the short run, this policy change will affect a. both the unemployment rate and the inflation rate. b. the unemployment rate but not the inflation rate. c. the inflation rate but not the unemployment rate. d. neither the inflation rate nor the unemployment rate.

a. both the unemployment rate and the inflation rate.

To decrease the interest rate the Federal Reserve could a. buy bonds. The fall in the interest rate would increase investment spending. b. sell bonds. The fall in the interest rate would increase investment spending c. buy bonds. The fall in the interest rate would decrease investment spending. d. sell bonds. The fall in the interest rate would decrease investment spending.

a. buy bonds. The fall in the interest rate would increase investment spending.

If an economy used gold as money, its money would be a. commodity money, but not fiat money. b. both fiat and commodity money. c. functioning as a store of value and as a unit of account, but not as a medium of exchange. d. fiat money, but not commodity money.

a. commodity money, but not fiat money.

In the 19th century, when crop failures often led to bank runs, banks would make relatively fewer loans and hold relatively more excess reserves. By itself, these actions by the banks should have a. decreased both the money multiplier and the money supply. b. decreased the money multiplier and increased the money supply. c. increased the money multiplier and decreased the money supply. d. increased the money multiplier and the money supply

a. decreased both the money multiplier and the money supply.

Which of the following is not a reason the aggregate-demand curve slopes downward? As the price level increases, a. firms may believe the relative price of their output has risen. b. the interest rate increases. c. the exchange rate increases. d. real wealth declines.

a. firms may believe the relative price of their output has risen.

If a central bank announced that it was going to decrease inflation by 5%, people revised their inflation expectations downward by 4%, and the central bank only lowered inflation by 1%, the short run Phillips curve would shift a. left and unemployment would fall. b. right and unemployment would rise. c. left and unemployment would rise. d. right and unemployment would fall.

a. left and unemployment would fall.

Other things the same, an increase in the price level induces people to hold a. more money, so they lend less, and the interest rate rises. b. less money, so they lend less, and the interest rate rises. c. less money, so they lend more, and the interest rate falls. d. more money, so they lend more, and the interest rate falls.

a. more money, so they lend less, and the interest rate rises.

In order to understand how the economy works in the short run, we need to a. study a model in which real and nominal variables interact. b. understand that money is neutral in the short run. c. understand that "money is a veil." d. study the classical model.

a. study a model in which real and nominal variables interact.

The rate at which the Fed lends money to banks is a. the discount rate. b. the federal funds rate. c. fixed at 4%. d. the prime rate.

a. the discount rate.

The discovery of a large amount of previously-undiscovered oil in the U.S. would shift a. the long-run aggregate-supply curve to the right. b. the long-run aggregate-supply curve to the left. c. the aggregate-demand curve to the left. d. None of the above is correct.

a. the long-run aggregate-supply curve to the right.

When production costs rise, a. the short-run aggregate supply curve shifts to the left. b. the aggregate demand curve shifts to the right. c. the aggregate demand curve shifts to the left. d. the short-run aggregate supply curve shifts to the right.

a. the short-run aggregate supply curve shifts to the left.

If a central bank increases the money supply growth rate, then in the short run a. unemployment falls. In the long run the short-run Phillips curve shifts right. b. unemployment rises. In the long run the short-run Phillips curve shifts left. c. unemployment rises. In the long run the short-run Phillips curve shifts right. d. unemployment falls. In the long run the short-run Phillips curve shifts left.

a. unemployment falls. In the long run the short-run Phillips curve shifts right.

Economic variables whose values are measured in goods are called a. nominal variables. b. real variables. c. dichotomous variables. d. classical variables.

b. real variables

To decrease the money supply, the Fed can a. buy government bonds or increase the discount rate. b. sell government bonds or increase the discount rate. c. buy government bonds or decrease the discount rate. d. sell government bonds or decrease the discount rate.

b. sell government bonds or increase the discount rate

Reserve requirements are regulations concerning a. the amount banks are allowed to borrow from the Fed. b. the amount of reserves banks must hold against deposits. c. reserves banks must hold based on the number and type of loans they make. d. the interest rate at which banks can borrow from the Fed.

b. the amount of reserves banks must hold against deposits

Which of the following is correct concerning the long-run Phillips curve? a. It cannot be changed by any government policy. b. Its position depends on the natural rate of unemployment. c. Its position is determined primarily by monetary factors. d. If it shifts right, long-run aggregate supply shifts right.

b. Its position depends on the natural rate of unemployment.

Your nominal wage increases from $12 per hour to $13 per hour. At the same time, the price level increases from 140 to 147. As a result, a. The number of dollars you receive decreases and the purchasing power of the dollars you receive decreases. b. The number of dollars you receive increases and the purchasing power of the dollars you receive increases. c. The number of dollars you receive decreases and the purchasing power of the dollars you receive increases. d. The number of dollars you receive increases and the purchasing power of the dollars you receive decreases.

b. The number of dollars you receive increases and the purchasing power of the dollars you receive increases.

Which of the following would cause prices and real GDP to rise in the short run? a. an increase in the expected price level b. an increase in the money supply c. a decrease in the capital stock d. an increase in taxes

b. an increase in the money supply

In the last half of 1999, the U.S. unemployment rate was about 4 percent. Historical experience suggests that this is a. above the natural rate, so real GDP growth was likely low. b. below the natural rate, so real GDP growth was likely high. c. below the natural rate, so real GDP growth was likely low. d. above the natural rate, so real GDP growth was likely high.

b. below the natural rate, so real GDP growth was likely high.

he idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables is called the a. Fisher effect. b. classical dichotomy. c. Mankiw effect. d. velocity concept.

b. classical dichotomy.

If the economy unexpectedly went from inflation to deflation, a. debtors would gain at the expense of creditors. b. creditors would gain at the expense of debtors. c. both debtors and creditors would have increased real wealth. d. both debtors and creditors would have reduced real wealth.

b. creditors would gain at the expense of debtors.

If the Fed wants to reverse the effects of a favorable supply shock on unemployment, it should a. decrease the money supply growth rate which raises the inflation rate. b. decrease the money supply growth rate which reduces the inflation rate. c. increase the money supply growth rate which reduces the inflation rate. d. increase the money supply growth rate which raises the inflation rate.

b. decrease the money supply growth rate which reduces the inflation rate.

If money is neutral, then changes in the quantity of money a. do not affect nominal output. b. do not affect real output. c. affect both nominal and real output d. affect neither nominal nor real output.

b. do not affect real output.

Printing money to finance government expenditures a. causes the value of money to rise. b. imposes a tax on everyone who holds money. c. is the principal method by which the U.S. government finances its expenditures. d. causes prices to fall.

b. imposes a tax on everyone who holds money.

When taxes decrease, consumption a. increases as shown by a movement to the right along a given aggregate-demand curve. b. increases as shown by a shift of the aggregate demand curve to the right. c. decreases as shown by a shift of the aggregate demand curve to the left. d. decreases as shown by a movement to the left along a given aggregate-demand curve.

b. increases as shown by a shift of the aggregate demand curve to the right.

If the Federal Reserve increases the growth rate of the money supply, in the long run a. inflation is higher and the unemployment rate is lower. b. inflation is higher while the unemployment rate is unchanged. c. inflation is unchanged while the unemployment rate is lower. d. None of the above is correct.

b. inflation is higher while the unemployment rate is unchanged.

If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result? a. both the price level and output b. output but not the price level c. neither output nor the price level d. the price level but not output

b. output but not the price level

If policymakers decrease aggregate demand, then in the long run a. prices will be lower and unemployment will be higher. b. prices will be lower and unemployment will be unchanged. c. prices and unemployment will be unchanged. d. None of the above is correct.

b. prices will be lower and unemployment will be unchanged.

If wages are sticky, then a greater than expected increase in the price level a. reduces the real costs of production, so the short-run aggregate supply curve shifts right. b. reduces the real costs of production, so the aggregate quantity of goods and services rises. c. raises the real costs of production, so the short-run aggregate supply curve shifts left. d. raises the real costs of production, so the aggregate quantity of goods and services declines.

b. reduces the real costs of production, so the aggregate quantity of goods and services rises.

The lag problem associated with fiscal policy is due mostly to a. the fact that business firms make investment plans far in advance. b. the political system of checks and balances that slows down the process of implementing fiscal policy. c. the time it takes for changes in government spending or taxes to affect the interest rate. d. All of the above are correct.

b. the political system of checks and balances that slows down the process of implementing fiscal policy.

Wealth is redistributed from debtors to creditors when inflation is a. low, whether it is expected or not. b. unexpectedly low. c. unexpectedly high. d. high, whether it is expected or not.

b. unexpectedly low.

The arguments of Friedman and Phelps would suggest that other things the same, a country that pursues a disinflationary policy that the public does not find completely credible a. should not see an increase in the unemployment rate even in the short run. b. will having rising unemployment for a while, but then return to the natural rate of unemployment. c. will have a permanently higher unemployment rate. d. None of the above is suggested by the arguments of Friedman and Phelps.

b. will having rising unemployment for a while, but then return to the natural rate of unemployment.

In 1979, when the Fed was deciding how aggressively to fight inflation, the typical estimate of the sacrifice ratio was a. 1. b. 10. c. 5. d. 7.

c. 5.

Which of the following is correct? a. During recessions employment rises. b. Because of government policy the U.S. had zero recessions in the last 25 years. c. Over the business cycle investment fluctuates more than consumption. d. Economic fluctuations are easy to predict.

c. Over the business cycle investment fluctuates more than consumption.

Which of the following shifts short-run, but not long-run aggregate supply right? a. a decrease in the actual price level b. an increase in the money supply c. a decrease in the expected price level d. a decrease in the capital stock

c. a decrease in the expected price level

Most economists believe that in the long run, changes in the money supply a. affect real but not nominal variables. This view that money is ultimately neutral is inconsistent with classical theory. b. affect nominal but not real variables. This view that money is ultimately neutral is inconsistent with classical theory. c. affect nominal but not real variables. This view that money is ultimately neutral is consistent with classical theory. d. affect real but not nominal variables. This view that money is ultimately neutral is consistent with classical theory.

c. affect nominal but not real variables. This view that money is ultimately neutral is consistent with classical theory.

Opponents of active stabilization policy a. advocate a monetary policy designed to offset changes in the unemployment rate. b. argue that fiscal policy is unable to change aggregate demand or aggregate supply. c. believe that the political process creates lags in the implementation of fiscal policy. d. None of the above is correct.

c. believe that the political process creates lags in the implementation of fiscal policy.

Higher inflation a. causes firms to change prices less frequently and makes relative prices more variable. b. causes firms to change prices less frequently and makes relative prices less variable. c. causes firms to change prices more frequently and makes relative prices more variable. d. causes firms to change prices more frequently and makes relative prices less variable.

c. causes firms to change prices more frequently and makes relative prices more variable.

If inflation is higher than what was expected, a. debtors receive a higher real interest rate than they had anticipated. b. creditors pay a lower real interest rate than they had anticipated. c. creditors receive a lower real interest rate than they had anticipated. d. debtors pay a higher real interest rate than they had anticipated.

c. creditors receive a lower real interest rate than they had anticipated.

If the economy unexpectedly went from inflation to deflation, a. both debtors and creditors would have reduced real wealth. b. both debtors and creditors would have increased real wealth. c. creditors would gain at the expense of debtors. d. debtors would gain at the expense of creditors.

c. creditors would gain at the expense of debtors.

If the Fed wants to reverse the effects of a favorable supply shock on unemployment, it should a. increase the money supply growth rate which reduces the inflation rate. b. decrease the money supply growth rate which raises the inflation rate. c. decrease the money supply growth rate which reduces the inflation rate. d. increase the money supply growth rate which raises the inflation rate.

c. decrease the money supply growth rate which reduces the inflation rate.

The long-run aggregate supply curve would shift left if the amount of labor available a. decreased or Congress abolished the minimum wage. b. increased or Congress made a substantial increase in the minimum wage. c. decreased or Congress made a substantial increase in the minimum wage. d. increased or Congress abolished the minimum wage.

c. decreased or Congress made a substantial increase in the minimum wage.

When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes a. upward, because at higher prices people want to hold less money. b. upward, because at higher prices people want to hold more money. c. downward, because at higher prices people want to hold more money. d. downward, because at higher price people want to hold less money.

c. downward, because at higher prices people want to hold more money.

High and unexpected inflation has a greater cost a. All of the above are correct. b. for those who borrow than for those who save. c. for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation. d. for those who hold a little money than for those who hold a lot of money.

c. for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation.

Which of the following shifts aggregate demand to the left? a. an increase in net exports. b. an increase in the price level. c. households decide to save a larger fraction of their income. d. Congress passes a new investment tax credit.

c. households decide to save a larger fraction of their income.

During recessions, automatic stabilizers tend to make the government's budget a. move toward balance. b. not necessarily move the budget in any particular direction. c. move toward deficit. d. move toward surplus.

c. move toward deficit.

As the price level falls a. people will want to hold more money, so the interest rate rises. b. people will want to hold more money, so the interest rate falls. c. people will want to hold less money, so the interest rate falls. d. people will want to hold less money, so the interest rate rises.

c. people will want to hold less money, so the interest rate falls.

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the change in output? a. real wages fall, so firms choose to produce more b. real wages rise, so firms choose to produce more c. real wages rise, so firms choose to produce less d. real wages fall, so firms choose to produce less

c. real wages rise, so firms choose to produce less

If the interest rate is below the Fed's target, the Fed should a. sell bonds to increase bank reserves. b. buy bonds to decrease bank reserves. c. sell bonds to decrease bank reserves. d. buy bonds to increase bank reserves.

c. sell bonds to decrease bank reserves.

Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. In the long run, the change in price expectations created by optimism shifts a. short-run aggregate supply right. b. long-run aggregate supply left. c. short-run aggregate supply left. d. long-run aggregate supply right.

c. short-run aggregate supply left.

Which of the following can banks use to borrow from the Federal Reserve? a. the term auction facility but not the discount window b. Banks cannot borrow from the Federal Reserve, only the government can. c. the discount window or the term auction facility d. the discount window but not the term auction facility

c. the discount window or the term auction facility

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more, a. the smaller the MPC and the weaker the influence of income on money demand. b. the larger the MPC and the stronger the influence of income on money demand. c. the larger the MPC and the weaker the influence of income on money demand. d. the smaller the MPC and the stronger the influence of income on money demand.

c. the larger the MPC and the weaker the influence of income on money demand.

Money is a. neither the most liquid asset and nor a perfect store of value. b. not the most liquid asset but a perfect store of value. c. the most liquid asset but an imperfect store of value. d. the most liquid asset and a perfect store of value.

c. the most liquid asset but an imperfect store of value.

The long-run effect of an increase in household consumption is to raise a. both real output and the price level. b. real output and leave the price level unchanged. c. the price level and leave real output unchanged. d. real output and lower the price level.

c. the price level and leave real output unchanged.

Assume the analysis of Friedman and Phelps is correct, so that the following equation is valid: Unemployment rate = Natural rate of unemployment - a × (Αctual inflation - x). In this equation, a. a is a parameter that measures how much actual inflation responds to expected inflation. b. a = 0 at the point of intersection of the short-run and long-run Phillips curves. c. x is the expected rate of inflation. d. All of the above are correct.

c. x is the expected rate of inflation.

Which of the following is a store of value? a. cash and stocks b. cash but not stocks c. stocks but not cash d. neither cash nor stocks

cash and stocks

The New York Federal Reserve Bank a. president always gets to vote at the FOMC meetings. b. conducts open market transactions. c. is one of 12 regional Federal Reserve Banks. d. All of the above are correct.

d. All of the above are correct

The long-run aggregate supply curve a. is vertical. b. is a graphical representation of the classical dichotomy. c. indicates monetary neutrality in the long run. d. All of the above are correct.

d. All of the above are correct.

The evidence from hyperinflations indicates that money growth and inflation a. are not related in a discernible fashion, which is not consistent with the quantity theory of money. b. are positively related, which is not consistent with the quantity theory of money. c. are not related in a discernible fashion, which is consistent with the quantity theory of money. d. are positively related, which is consistent with the quantity theory of money.

d. are positively related, which is consistent with the quantity theory of money

According to classical macroeconomic theory, a. output is determined by the supplies of capital and labor and the available production technology. b. for any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds. c. given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money. d. All of the above are correct

d. All of the above are correct.

Which of the following has been suggested as a cause of the Great Depression? a. a decline in the money supply b. a decrease in stock prices c. the collapse of the banking system d. All of the above are correct.

d. All of the above are correct.

Which of the following institutions is a central bank? a. the Federal Reserve System b. the Bank of Japan c. the Bank of England d. All of the above are correct

d. All of the above are correct.

Which of the following shifts the long-run aggregate supply curve to the left? a. neither an increase in the price of imported natural resources or a reduction in trade restrictions. b. either an increase in the price of imported natural resources or a reduction in trade restrictions. c. an increase in trade restrictions and a decrease in the price of imported natural resources. d. an increase in the price of imported natural resources and an increase in trade restrictions.

d. an increase in the price of imported natural resources and an increase in trade restrictions.

Which particular interest rate(s) do we attempt to explain using the theory of liquidity preference? a. only the interest rate on long-term bonds b. only the interest rate on short-term government bonds c. only the nominal interest rate d. both the nominal interest rate and the real interest rate

d. both the nominal interest rate and the real interest rate

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate towards its previous level it would a. decrease the rate at which the money supply increases. However, this will make higher than its previous rate. b. increase the rate at which the money supply increases. This will also move inflation closer to its previous rate.. c. decrease the rate at which the money supply increases. This will also move inflation closer to its original rate d. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate

d. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate

Money is the most liquid asset available because a. it is a unit of account. b. it has intrinsic value. c. it is a store of value. d. it is a medium of exchange.

d. it is a medium of exchange.

In the fourteenth century, the Western African Emperor Kankan Musa traveled to Cairo where he gave away much gold, which was in use as a medium of exchange. We would predict that this increase in gold a. lowered the price level, but increased the value of gold in Cairo. b. lowered both the price level and the value of gold in Cairo. c. raised both the price level and the value of gold in Cairo. d. raised the price level, but decreased the value of gold in Cairo.

d. raised the price level, but decreased the value of gold in Cairo.

As the price level rises, the interest rate a. falls, so the supply of dollars in the market for foreign currency exchange shifts right. b. falls, so the supply of dollars in the market for foreign currency exchange shifts left. c. rises, so the supply of dollars in the market for foreign currency exchange shifts right. d. rises, so the supply of dollars in the market for foreign currency exchange shifts left.

d. rises, so the supply of dollars in the market for foreign currency exchange shifts left.

Which of the following entities actually executes open-market operations? a. the Federal Open Market Committee b. the Open Market Committees of the regional Federal Reserve Banks c. the Board of Governors d. the New York Federal Reserve Bank

d. the New York Federal Reserve Bank

The aggregate demand and aggregate supply graph has a. the price level on the horizontal axis. The price level can be measured by the GDP deflator. b. the price level on the vertical axis. The price level can be measured by GDP. c. the price level on the horizontal axis. The price level can be measured by real GDP. d. the price level on the vertical axis. The price level can be measured by the GDP deflator.

d. the price level on the vertical axis. The price level can be measured by the GDP deflator.

Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy? the Central Bank Policy Commission b. the Board of Governors c. the FOMC d. the regional Federal Reserve Bank presidents

the FOMC

For purposes of analyzing the money stock and its relationship to relevant economic variables, money is best thought of as a. currency only. b. currency plus all bank accounts. c. currency plus all bank accounts plus bonds. d. those items that can be readily accessed and used to buy goods and services.

those items that can be readily accessed and used to buy goods and services.