ECN-362 Final

If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to

7% unemployment and 3% inflation. In the long run, the economy moves to 5% unemployment and 3% inflation.

If inflation expectations rise, the short-run Phillips curve shifts

right, so that at any inflation rate unemployment is higher in the short run than before

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will

fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

$60.75

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then, the multiplier must be

2.5

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

By $30 billion

An economy is operating with output that is $400 billion below its natural level, and fiscal policy makers want to close the recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The MPC is 0.2, and the price level is completely fixed in the short-run. In what direction and by how much would the government funding need to change to close the recessionary gap?

Government spending must increase by $80 billion

The short-run equilibrium is defined by the given AD and SRAS curves. Which of the long-run aggregate-supply curves is consistent with the economy experiencing an inflationary expansion?

LRAS1 (left)

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. What would the change in the interest rate created by foreigners wanting to buy more U.S. assets do to investment spending in the United States?

Make it rise which by itself would increase U.S. aggregate demand

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand?

Net exports would fall which by itself would decrease U.S. aggregate demand

The natural level of output is

Y2 (middle line)

According to the theory of liquidity preference

an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right

A policy that lowered the natural rate of unemployment would shift

both the short-run and the long-run Phillips curves to the left

If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run

both the unemployment rate and the inflation rate would be lower

An increase in inflation

causes unemployment to decrease

Suppose an increase in investment causes falling unemployment and rising output. To counter this, the Federal Reserve would

decrease the money supply

If U.S. speculators gained greater confidence in foreign economies so that they wanted to move more of their wealth into foreign countries, the dollar would

depreciate which would cause aggregate demand to shift right

A tax cut shifts the aggregate demand curve the farthest right if

the MPC is large and if the tax cut is permanent

Which of the following two effects of a decrease in the tax rate on saving would raise savings?

The substitution effect but not the income effect

If the unemployment rate is below the natural rate, then

inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action

raises inflation but lowers unemployment

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would

rise which by itself would increase aggregate demand

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more

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

The government of Blenova considers two policies. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A will lead

to a lower unemployment rate and a higher inflation rate than policy B

If the economy is at the point where the short-run Phillips curve intersects the long-run Phillips curve

unemployment equals the natural rate and expected inflation equals actual inflation