Eco 029
A rise in the real interest rate will cause exports to _______ and imports to ___________
A rise in the real interest rate will cause exports to decrease and imports to increase .
A "conservative" central banker: A. has a strong aversion to inflation. B. will risk inflation to reduce unemployment. C. is more tempted to pursue overly expansionary monetary policy. D. uses conventional econometric models for his or her policy evaluation.
A. has a strong aversion to inflation.
Inflation expectations and realized inflation are likely to be more unstable with A. the appointment of a "tough dash on dash poverty" central banker. B. the appointment of a "defense hawk" central banker. C. the appointment of a "conservative" central banker. D. the appointment of a "monetarist" central banker.
A. the appointment of a "tough-on-poverty" central banker.
Suppose that there is a positive aggregate demand shock and the central bank commits to an inflation rate target. But if the commitment is not credible, then A. the short-run aggregate supply curve will rise. B. over time inflation will fall back down to the inflation target. C. the public's expected inflation will remain unchanged. D. all of the above. E. both A and B.
A. the short-run aggregate supply curve will rise.
How can establishing an exchange-rate target bring credibility to a country with a poor record of inflation stabilization? A. It can help improve the reliability of econometric models when evaluating policy options to stabilize inflation. B. Credible exchange dash rate targets can help import another country's low inflation environment to the domestic country. C. It allows policymakers to base their activities on constrained discretion rather than pure discretion. D. A credible exchange-rate target can improve the ability of a country to use fiscal policy.
B. Credible exchange dash rate targets can help import another country's low inflation environment to the domestic country.
Inflation targeting can be used to: A. minimize output fluctuations by adjusting monetary policies. B. keep inflation under control and increase the credibility of monetary policymakers' commitment to price stability. C. enhance the central bank's effectiveness of discretionary policies. D. reduce the independence of the central bank.
B. keep inflation under control and increase the credibility of monetary policymakers' commitment to price stability.
Arguments for discretionary policies include A. discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. B. policy rules can be too rigid because they cannot foresee every contingency. C. the time-inconsistency problem can lead to poor economic outcomes. D. all of the above.
B. policy rules can be too rigid because they cannot foresee every contingency.
Everything else held constant, an increase in the cost of production ________ aggregate ________. A. increases; demand B. decreases; supply C. increases; supply D. decreases; demand
B. decreases; supply
If American college students decide that drinking Mexican-brewed beer helps one get noticed, net exports will tend to fall, causing aggregate demand to ________ and the ________ curve to shift to the left, everything else held constant. A. fall; LM B. fall; IS C. rise; IS D. rise; LM
B. fall; IS
During financial crises, financial frictions __________, leading to a __________ shift of the IS curve. A. decrease; leftward B. increase; leftward C. decrease; rightward D. increase; rightward
B. increase; leftward
An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A. rise; LM; right B. rise; IS; right C. fall; LM; left D. fall; IS; left
B. rise; IS; right
Why is it necessary for the MP curve to have an upward slope? A. If the MP curve has an upward slope, it indicates an increase in output and a decrease in unemployment. B. An upward-sloping MP curve encourages consumer and business spending. C. An upward-sloping MP curve keeps inflation from spinning out of control. D. If the MP curve has an upward slope, then more liquidity will occur in the banking system.
C. An upward-sloping MP curve keeps inflation from spinning out of control.
Which of the following is not a part of this monetary policy strategy to achieve these goals? A. Increased transparency of monetary policy strategy through communication with the public and the markets. B. Public announcement of medium-term numerical targets for inflation. C. Public announcement of the procedural details of using all inflation-related policy variables. D. An institutional commitment to price stability as the primary long-run goal of monetary policy.
C. Public announcement of the procedural details of using all inflation-related policy variables.
What would be the effect on the aggregate demand curve? A. The AD curve will shift to the left. B. The AD curve will not change. C. The AD curve will shift to the right. D. The slope of the AD curve will increase.
C. The AD curve will shift to the right.
Will aggregate output rise or fall if an increase in autonomous consumer expenditure is matched by an equal increase in taxes? Aggregate output will ________
rise
The MP curve is ________ sloping due to the Taylor principle.
upward
Which of the following is a benefit of having a credible nominal anchor? A. It helps to solve the time-inconsistency problem. B. It enables policy makers to achieve price stability. C. It helps control inflation expectations, leading to smaller fluctuations in inflation and output. D. All of the above are correct.
D. All of the above are correct.
Which of the following is not one of the three basic approaches to establishing credibility? A. Adopting an inflation targeting framework B. Implementing an exchange rate peg C. Appointing a "conservative" central banker D. By using time-inconsistency arguments
D. By using time-inconsistency arguments Your answer is correct.
When r decreases, this causes a movement along the________ curve, and shifts the _________ curve. A. AD; MP B. MP; AD C. MP; IS D. IS; AD
D. IS, AD
If autonomous consumption declines, and there is a sharp increase in energy prices, you would expect A. an ambiguous effect on both inflation and output in the short run. B. inflation to increase, and output to have an ambiguous effect. C. inflation and output to decrease in the short run. D. inflation to have an ambiguous effect, but output to decrease.
D. inflation to have an ambiguous effect, but output to decrease.
The MP curve gives the relationship between the A. nominal interest rate and the inflation rate. B. nominal interest rate and aggregate output. C. real interest rate and aggregate output. D. real interest rate and the inflation rate.
D. real interest rate and the inflation rate.
What happens to inflation and output in the short run and the long run when government spending increases? If government spending increases, the ______ curve shifts _____ In the short run, inflation _________ and output _______ This leads to tightness in the labor market, which ________ inflation expectations and shifts the _________ curve _______ When this occurs, the economy moves to a new ________ equilibrium, output _________ and inflation _________ .
aggregate demand ; rightward ; increases ; increases ; raises ; short-run aggregate supply ; up ; long-run ; falls back to potential ; increases
A negative demand shock will ______ inflation and will _____ aggregate output in the short run.
decrease ; decrease
Determine the effects on inflation and output in the short run and the long run using AD/AS graph analysis. In the short run, output __________ and inflation _________ In the long run, output ________ to potential and inflation _____
decreases ; decreases ; rises ; falls
A temporary negative supply shock will ______ inflation and will _______ aggregate output in the short run.
increase ; decrease
A positive demand shock will ________ inflation and will _______ aggregate output in the long run
increase ; not change
A decrease in how responsive investment is to the real cost of borrowing or how net exports respond to the real interest rate makes the IS curve ________ steep
more
Approaches to establishing central bank credibility include A. exchange rate targeting. B. inflation targeting. C. appointment of a more conservative central banker. D. central bank independence. E. all of the above.
E. all of the above.
A credible nominal anchor A. can help overcome the time-inconsistency problem by providing an expected constraint on discretionary policy. B. can help to anchor inflation expectations, which leads to smaller fluctuations in inflation. C. is required for a policy rule. D. all of the above. E. both A and B.
E. both A and B.
Observe a positive demand shock in the graph to the right. In the short run, __________ In the long run, _________ In the figure, the long-run equilibrium is given by ________
"both inflation and output rise." ; "inflation rises, but output does not change." ; point 3
Why does it slope downward? A. As the real interest rate rises, consumption expenditure, planned investment spending, and net exports fall, which in turn lowers planned expenditure. Aggregate output must be lower for it to equal planned expenditure and satisfy goods market equilibrium. Hence, the IS curve is downward-sloping. B. As the real interest rate rises, consumption expenditure, planned investment spending, and net exports rise, which in turn increases planned expenditure. Aggregate output must be higher for it to equal planned expenditure and satisfy goods market equilibrium. Hence, the IS curve is downward-sloping. C. As the real interest rate falls, consumption expenditure, planned investment spending, and net exports rise, which in turn lowers planned expenditure. Aggregate output must be lower for it to equal planned expenditure and satisfy goods market equilibrium. Hence, the IS curve is downward-sloping. D. None of the above are correct.
A. As the real interest rate rises, consumption expenditure, planned investment spending, and net exports fall, which in turn lowers planned expenditure. Aggregate output must be lower for it to equal planned expenditure and satisfy goods market equilibrium. Hence, the IS curve is downward-sloping.
When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected? A. Changes in interest rates represent a movement along the IS curve, and so the IS curve does not shift. B. The IS curve shifts to the right. C. The IS curve shifts to the left. D. The change in the IS curve is uncertain, as it depends on the total amount of the interest rate reduction.
A. Changes in interest rates represent a movement along the IS curve, and so the IS curve does not shift.
Which of the following represents a movement along a given AD curve? A. Inflation decreases, the real interest rate decreases, and aggregate output increases. B. Inflation decreases, the real interest rate decreases, and aggregate output decreases. C. Inflation increases, the real interest rate decreases, and aggregate output increases. D. Inflation increases, the real interest rate increases, and aggregate output increases.
A. Inflation decreases, the real interest rate decreases, and aggregate output increases.
What condition is required for equilibrium in the goods market? A. Planned expenditure on goods and services must equal the actual amount of goods and services produced. B. Planned expenditure on goods and services must equal net exports. C. Consumption expenditure must equal planned investment spending. D. Planned expenditure on goods and services must equal the sum of net exports and planned investment spending.
A. Planned expenditure on goods and services must equal the actual amount of goods and services produced.
Why do increases in the real interest rate lead to decreases in net exports, and vice versa? A. Rises in the real interest rate lead to a higher value of the dollar, which in turn leads to a decline in net exports. B. Interest rate rises lead to pessimistic expectations about the value of the dollar, which causes net exports to fall. C. Rises in the real interest rate lead to a lower value of the dollar, which in turn leads to a decline in net exports. D. This situation is usually not the case; interest rates and net exports are positively related so net exports will rise.
A. Rises in the real interest rate lead to a higher value of the dollar, which in turn leads to a decline in net exports.
Suppose that taxes are decreased and the central bank conducts an autonomous easing of monetary policy. What will be the result? A. The IS curve shifts right, the MP curve shifts down, and the AD curve shifts right. B. The IS curve shifts left, the MP curve shifts down, and the AD curve shifts right. C. The IS curve shifts right, the MP curve shifts up, and there is an ambiguous effect on the AD curve. D. The IS curve shifts left, the MP curve shifts up, and the AD curve shifts left .
A. The IS curve shifts right, the MP curve shifts down, and the AD curve shifts right.
How can use of macro econometric models that do not assume expectations are rational be problematic for policy analysis? A. They are unreliable for evaluating policy options. B. They are only reliable when they are used to set the policy rule. C. They are unreliable only when they use the wrong policy rule. D. The statement applies to all macro econometric models.
A. They are unreliable for evaluating policy options.
Classify the following situation as a supply or demand shock: Financial frictions increase. A. Upper A negative demand shock. B. Upper A negative left parenthesis temporary right parenthesis supply shock. C. Upper A positive demand shock. D. Upper A positive left parenthesis temporary right parenthesis supply shock.
A. Upper A negative demand shock.
How does an autonomous tightening or easing of monetary policy by the Fed affect the MP curve? A. When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve downward. B. When the Fed decides to lower the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to raise the real interest rate at any given inflation rate, shifts the MP curve downward. C. When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts downward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve upward. D. None of the above are correct.
A. When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve downward.
A negative supply shock that raises production costs will cause the A. aggregate supply curve to shift up. B. aggregate demand curve to shift right. C. aggregate supply curve to shift down. D. aggregate demand curve to shift left.
A. aggregate supply curve to shift up.
Which of the following causes the MP curve to shift down? A. an autonomous easing of monetary policy B. an increase in inflation C. a decrease in inflation D. an autonomous tightening of monetary policy
A. an autonomous easing of monetary policy
The Lucas critique indicates that A. expectations are important in determining the outcome of a discretionary policy. B. expectations are not important in determining the outcome of a discretionary policy. C. advocates of discretionary policies' criticisms of rational expectations models are not well-founded. D. advocates of discretionary policies' criticisms of rational expectations models are well-founded.
A. expectations are important in determining the outcome of a discretionary policy.
If autonomous consumption declines, then the AD curve A. shifts to the left. B. shifts to the right. C. does not change, but does move along the curve. D. does not shift or move along the curve.
A. shifts to the left.
The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships is known as A. the Lucas critique. B. the monetarist revolution. C. public choice theory. D. new Keynesian theory.
A. the Lucas critique.
The IS curve shows the combinations of interest rates and aggregate output for which A. the goods market is in equilibrium. B. the labor market is in equilibrium. C. the financial market is in equilibrium. D. the money market is in equilibrium.
A. the goods market is in equilibrium.
The aggregate demand curve slopes downward because a rise in inflation leads: A. the monetary policy authorities to raise real interest rates. B. consumers and businesses to increase autonomous expenditures. C. the fiscal policy authorities to impose contractionary fiscal measures. D. the monetary policy authorities to impose credit controls.
A. the monetary policy authorities to raise real interest rates.
The rational expectations hypothesis implies that when macroeconomic policy changes, A. the way expectations are formed will change. B. people will make systematic mistakes. C. the economy will become highly unstable. D. people will be slow to catch on to the change.
A. the way expectations are formed will change.
Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply. A. above; rise B. above; fall C. below; fall D. below; rise
A. above; rise
If aggregate demand falls short of current output, business firms will ________ production to ________ inventories. A. cut; keep from accumulating B. cut; build up C. expand; keep from accumulating D. expand; build up
A. cut; keep from accumulating
Everything else held constant, an appreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________. A. left; decrease B. right; increase C. left; increase D. right; decrease
A. left; decrease
An autonomous appreciation of the U.S. dollar makes American goods ________ expensive relative to foreign goods which ________ net exports in the U.S. A. more; decreases B. less; increases C. more; increases D. less; decreases
A. more; decreases
If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________. A. rises; leftward B. falls; rightward C. rises; rightward D. falls; leftward
A. rises; leftward
Aggregate supply adjusts less quickly to policy announcements when compared to another country. A. Country Upper A. B. Country Upper B.
B. Country Upper B.
What causes the IS curve to shift? A. A shift in the IS curve occurs when equilibrium output changes at each given real interest rate. The factors of shifting are autonomous consumption, autonomous investment, and the real interest rate. B. A shift in the IS curve occurs when equilibrium output changes at each given real interest rate. The factors of shifting are autonomous consumption, autonomous investment, autonomous net exports, taxes, and government purchases. C. A shift in the IS curve occurs when the real interest rate changes at each given level of equilibrium output. D. None of the above are correct.
B. A shift in the IS curve occurs when equilibrium output changes at each given real interest rate. The factors of shifting are autonomous consumption, autonomous investment, autonomous net exports, taxes, and government purchases.
Output is more stable when compared to another country. A. Country Upper B. B. Country Upper A.
B. Country Upper A.
Suppose country A has a central bank with full credibility, and country B has a central bank with no credibility. Determine which country is most likely affected by each of the following situations: The public is more likely to believe announcements about future policy changes. A. Country Upper B. B. Country Upper A.
B. Country Upper A.
What relationship does the aggregate supply curve describe? A. It describes the relationship between the total quantity of money supplied and the inflation rate. B. It describes the relationship between the total quantity of output supplied and the inflation rate. C. It describes the relationship between the total quantity of money supplied and the interest rate. D. It describes the relationship between the total quantity of output supplied and the unemployment rate.
B. It describes the relationship between the total quantity of output supplied and the inflation rate.
What is the significance of the Lucas critique of econometric policy evaluation? A. It states the public's expectations about a policy have no impact on the success of the policy. B. It points out an econometric model based on past data may prove to be unreliable for evaluating policy options. C. It confirms an econometric model based on past data is highly accurate for evaluating policy options. D. It proves equations used in econometric models incorporate expectations correctly and may furnish valuable predictions with which to evaluate the effects of proposed policies.
B. It points out an econometric model based on past data may prove to be unreliable for evaluating policy options.
Which of the following best describes the adjustment to long-run equilibrium if an economy's short-run equilibrium output is above potential output? A. Since unemployment is less than its natural rate, there will be excessive tightness in the labor market and, consequently, pressure on firms to raise their prices at a more rapid rate. This acceleration of inflation shifts the short-run aggregate supply curve up, pushing the economy's potential output up toward its short-run output. B. Since unemployment is less than its natural rate, there will be excessive tightness in the labor market and, consequently, pressure on firms to raise their prices at a more rapid rate. This acceleration of inflation shifts the short-run aggregate supply curve up, pushing the economy's output down toward potential output. C. Since unemployment is greater than its natural rate, there will be excessive tightness in the labor market and, consequently, pressure on firms to raise their prices at a more rapid rate. This acceleration of inflation shifts the short-run aggregate supply curve down, pushing the economy's output down toward potential output. D. Since unemployment is greater than its natural rate, there will be excess slack in the labor market and, consequently, pressure on firms to raise their prices at a less rapid rate. This deceleration of inflation shifts the short-run aggregate supply curve down, pushing the economy's output up toward its potential output.
B. Since unemployment is less than its natural rate, there will be excessive tightness in the labor market and, consequently, pressure on firms to raise their prices at a more rapid rate. This acceleration of inflation shifts the short-run aggregate supply curve up, pushing the economy's output down toward potential output.
Describe how (if at all) the IS curve, MP curve, and AD curve are affected in the following situation: Firms become more optimistic about the future of the economy. A. The IS curve is not affected, the MP curve shifts to the right comma and the slope of the AD curve becomes flatter. B. The IS and AD curves shift to the right, and the MP curve does not shift. nbsp C. The IS curve shifts to the right comma the MP curve does not shift, and there is a movement along it and the AD curve shifts to the left. D. All the curves shift to the right, and there is a movement along the AD curve E. The MP and AD curves shift to the left, and there is a movement along the IS curve to lower output.
B. The IS and AD curves shift to the right, and the MP curve does not shift.
In general, how does a Central Bank's lack of credibility as an inflation fighter affect the aggregate supply curve? A. The public will have higher inflation expectations, which will result in movement down along the aggregate supply curve; thus, reducing output. B. The public will have higher inflation expectations, which will shift the aggregate supply curve up and to the left; thus, reducing output. C. The central bank will not be able to stabilize inflation and output by shifting the aggregate supply curve because of higher inflation expectations by the public. D. Because of the higher inflation expectations, the central bank will have to stabilize inflation by shifting the aggregate supply curve up, which reduces output.
B. The public will have higher inflation expectations, which will shift the aggregate supply curve up and to the left; thus, reducing output.
"The more credible the policymakers who pursue an anti-inflation policy, the more successful that policy will be." Is this statement true, false, or uncertain? Explain your answer. A. False. The credibility of policymakers is not important to the wage- and price-setting process, and thus has no effect on the success of inflation policy. B. True. If expectations affect the wage- and price-setting process, a credible anti-inflation policy will reduce inflation faster and at lower costs. C. Uncertain. The success of inflation policy depends on timing and size, not on credibility and expectations. D. Uncertain. Expectations and credibility are only important in the classical model, and so have no effect in other models of the economy.
B. True. If expectations affect the wage- and price-setting process, a credible anti-inflation policy will reduce inflation faster and at lower costs.
How is an autonomous tightening or easing of monetary policy different than a change in the real interest rate due to a change in the current inflation rate? A. Autonomous tightening or easing of monetary policy is based on a change in the nominal interest rate, not the real interest rate. B. With a tightening or easing of monetary policy, some projected changes in monetary policy independent of the current inflation rate may occur. C. Tightening or easing of monetary policy may cause a change in the responsiveness of the real interest rate to the inflation rate, not in its autonomous component. D. Tightening or easing of monetary policy is reflected as a movement along the monetary curve rather than an upward or downward shift of the curve.
B. With a tightening or easing of monetary policy, some projected changes in monetary policy independent of the current inflation rate may occur.
The short-run aggregate supply curve has: A. a positive slope because as the inflation rate increases, the quantity of output supplied decreases. B. a positive slope because as the inflation rate increases, so does the quantity of output supplied. C. a negative slope because as the inflation rate increases, the quantity of output supplied decreases. D. a negative slope because as the inflation rate increases, so does the quantity of output supplied.
B. a positive slope because as the inflation rate increases, so does the quantity of output supplied.
Lucas argues that when policies change, expectations will change thereby A. making it easier to predict the effects of policy changes. B. changing the relationships in econometric models. C. causing the government to abandon its discretionary stance. D. forcing the Fed to keep its deliberations secret.
B. changing the relationships in econometric models.
The Lucas critique is an attack on the usefulness of A. conventional econometric models as forecasting tools. B. conventional econometric models as indicators of the potential impacts on the economy of particular policies. C. rational expectations models of macroeconomic activity. D. the relationship between the quantity theory of money and aggregate demand.
B. conventional econometric models as indicators of the potential impacts on the economy of particular policies.
Arguments for adopting a policy rule include A. discretion avoids the straight-jacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. B. discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. C. discretion enables policy makers to change policy settings when an economy undergoes structural changes. D. all of the above.
B. discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run.
Under a negative supply shock with a fully credible monetary policy, the AD curve __________ and the AS curve __________ in the short run. A. shifts left; shifts up B. does not shift; shifts up, but by less than under a non-credible monetary policy C. shifts right; does not shift D. does not shift; shifts down, but by more than under a non-credible monetary policy
B. does not shift; shifts up, but by less than under a non-credible monetary policy
The Taylor principle A. leads to higher real interest rates when inflation decreases. B. holds when lambda greater than 0. C. implies the IS curve is downward sloping. D. leads a raise of the nominal interest rate equal to the rise in inflation.
B. holds when lambda greater than 0.
Everything else held constant, changes in the interest rate affect planned investment spending and hence the equilibrium level of output, but this change in investment spending ________. A. is crowded out by higher government spending B. merely causes a movement along the IS curve and not a shift C. is crowded out by lower consumer expenditures D. is crowded out by higher taxes
B. merely causes a movement along the IS curve and not a shift
The self-correcting mechanism describes how the economy eventually returns to the _______ regardless of where output is initially. A. real level of consumption B. natural rate level of output C. real level of output D. natural rate level of consumption
B. natural rate level of output
A decrease in the availability of raw materials that increases the price level is called a ________ shock A. negative demand B. negative supply C. positive supply D. positive demand
B. negative supply
Everything else held constant, if workers expect an increase in the price level, ________ aggregate supply ________. A. short-run; increases B. short-run; decreases C. long-run; increases D. long-run; decreases
B. short-run; decreases
Greater central bank independence can make the time-inconsistency problem worse because: A. central bankers are not willing to deviate from long-run plans to accommodate a short-run objective, thereby raising expectations of future inflation. B. there is less formal accountability by central banks to pursue stable inflation policies. C. policymakers may abandon a policy of discretion and instead adopt a rules-based policy objective. D. central banks are more transparent, and thus unable to pursue overly inflationary policies.
B. there is less formal accountability by central banks to pursue stable inflation policies.
The long-run aggregate supply curve is: A. upward-sloping because the output an economy can produce increases as does the inflation rate in the long run. B. vertical because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run. C. vertical because the output an economy can produce increases as does the inflation rate in the long run. D. upward-sloping because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run.
B. vertical because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run.
Any factor that shifts the __________ curve shifts the __________ curve in the __________ direction. A. MP; IS; same B. IS; AD; same C. MP; IS; opposite D. IS; AD; opposite
B. IS; AD; same
A shift in tastes toward foreign goods ________ net exports in the U.S. and causes the quantity of aggregate output demanded to ________ in the U.S., everything else held constant. A. decreases; rise B. decreases; fall C. increases; rise D. increases; fall
B. decreases; fall
What does the IS curve show? A. It shows equilibrium points in the goods market long - the combinations of planned investment spending and net exports. B. It shows equilibrium points in the goods market long - the combinations of the real interest rate and net exports. C. It shows equilibrium points in the goods market long - the combinations of the real interest rate and equilibrium output. D. It shows equilibrium points in the goods market long - the combinations of planned expenditure and equilibrium output.
C. It shows equilibrium points in the goods market long - the combinations of the real interest rate and equilibrium output.
Suppose that a new Fed chair is appointed, and his or her approach to monetary policy can be summarized by the following statement: "I care only about increasing employment; inflation has been at very low levels for quite some time; my priority is to ease monetary policy to promote employment." How would you expect the monetary policy curve to be affected, if at all? A. The MP curve will shift upward because decreasing unemployment results in a loosening of monetary policy. B. The MP curve will shift downward because decreasing unemployment results in a tightening of monetary policy. C. The MP curve will shift downward because decreasing unemployment results in a loosening of monetary policy. D. The MP curve will shift upward because decreasing unemployment results in a tightening of monetary policy.
C. The MP curve will shift downward because decreasing unemployment results in a loosening of monetary policy.
How do changes in planned expenditures affect the aggregate demand curve? A. The aggregate demand curve shifts to the left if autonomous consumption, autonomous investment, autonomous net exports, or government purchases increase, or if taxes decrease. B. The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, government purchases, or taxes increase. C. The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, or government purchases increase, or if taxes decrease. D. The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, government purchases, or taxes decrease.
C. The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, or government purchases increase, or if taxes decrease.
The marginal propensity to consume (mpc) can be defined as the fraction of A. a change in income that is saved. B. income that is spent. C. a change in income that is spent. D. income that is saved.
C. a change in income that is spent.
In the long run, a permanent negative supply shock leads to A. a decline in both output and in inflation. B. an increase in output and a decline in inflation. C. a decline in output and a rise in inflation. D. no change in output and a rise in inflation
C. a decline in output and a rise in inflation.
Everything else held constant, an increase in government spending will cause ________. A. aggregate demand to decrease B. the quantity of aggregate demand to decrease C. aggregate demand to increase D. the quantity of aggregate demand to increase
C. aggregate demand to increase
Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.) A. a decrease; a decrease B. no change; a decrease C. an increase; an increase D. no change; an increase
C. an increase; an increase
A movement to the right along a given MP curve means A. expected future inflation has increased. B. an autonomous policy tightening has occurred. C. inflation is increasing. D. the federal funds rate is held constant.
C. inflation is increasing.
An increase in the interest rate will cause A. investment spending to rise and net exports to rise. B. investment spending to fall and net exports to rise. C. investment spending to fall and net exports to fall. D. investment spending to rise and net exports to fall.
C. investment spending to fall and net exports to fall.
If taxes decrease and autonomous consumption expenditure decrease, the IS curve A. will shift left. B. will not shift. C. may shift right left or not shift at all. D. will shift right.
C. may shift right left or not shift at all.
Under a positive demand shock with a fully credible monetary policy, the AD curve __________ and the AS curve __________ in the short run. A. shifts right; shifts up B. shifts left; shifts up C. shifts right; does not shift D. shifts left; does not shift
C. shifts right; does not shift
An upward shift in aggregate supply ultimately causes A. the inflation rate to rise and output to rise. B. the inflation rate to rise and output to remain unchanged. C. the inflation rate to remain unchanged and output to remain unchanged. D. the inflation rate to fall and output to rise.
C. the inflation rate to remain unchanged and output to remain unchanged.
When the financial crisis started in August 2007, inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate, which indicated that A. there was a downward movement along the monetary policy curve. B. there was an upward movement along the monetary policy curve. C. the monetary policy curve shifted downward. D. the monetary policy curve shifted upward.
C. the monetary policy curve shifted downward.
According to Lucas, the public's expectations about a policy A. will not influence the response to that policy. B. change the monetary rule. C. will influence the response to that policy. D. change the political business cycle.
C. will influence the response to that policy.
________ flexible wages and prices imply that the short-run aggregate supply curve is ________. A. less; vertical B. More; flatter C. More; steeper D. Less; steeper
C. More; steeper
When the interest rate is ________, ________ investments in physical capital will earn more than the cost of borrowed funds, so planned investment spending is ________. A. low; few; high B. high; few; high C. high; few; low D. high; many; high E. low; many; low
C. high; few; low
Everything else held constant, a decrease in autonomous consumer spending will cause the IS curve to shift to the ________ and aggregate demand will ________. A. left; increase B. right; increase C. left; decrease D. right; decrease
C. left; decrease
Aggregate output is ________ related to autonomous consumer expenditure, and is ________ related to planned investment spending. A. negatively; negatively B. negatively; positively C. positively; positively D. positively; negatively
C. positively; positively
An increase in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant. A. fall; LM; left B. fall; IS; left C. rise; IS; right D. rise; LM; right
C. rise; IS; right
Arguments for adopting a policy rule include A. policy makers and politicians cannot be trusted. B. the time-inconsistency problem can lead to poor economic outcomes. C. discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run. D. all of the above.
D. all of the above.
Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run. A. a decrease; an increase B. a decrease; a decrease C. no change; no change D. an increase; an increase
D. an increase; an increase
Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. A. no change; an increase B. no change; a decrease C. a decrease; a decrease D. an increase; an increase
D. an increase; an increase
The short-run aggregate supply curve slopes upward because an increase in output relative to potential output: A. induces aggregate demand to increase, increasing inflation. B. causes markets to have excess supplies, putting upward pressure on inflation. C. leads to unstable markets and higher inflation. D. creates tight labor and product markets that cause inflation to rise.
D. creates tight labor and product markets that cause inflation to rise.
When the natural rate of unemployment decreases, A. inflation and output are higher in the long run. B. inflation is higher, and output is lower in the long run. C. inflation and output are lower in the long run. D. inflation is lower, and output is higher in the long run.
D. inflation is lower, and output is higher in the long run.
If the interest rate falls, other things being equal, investment spending will ________. A. not be affected B. fall C. either rise, fall, or remain unchanged D. rise
D. rise
An upward shift in aggregate supply initially causes A. the inflation rate to rise and output to rise. B. the inflation rate to fall and output to fall. C. the inflation rate to fall and output to rise. D. the inflation rate to rise and output to fall.
D. the inflation rate to rise and output to fall.
When inflation and inflation expectations adjust to move output to potential, this is an example of A. stabilization policy. B. the real business cycle theory. C. autonomous monetary policy. D. the self-correcting mechanism.
D. the self-correcting mechanism.
Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. A. demand; fall B. supply; fall C. supply; rise D. demand; rise
D. demand; rise
Everything else held constant, if aggregate output is to the right of the IS curve, then there is an excess ________ of goods which will cause aggregate output to ________. A. demand; fall B. supply; rise C. demand; rise D. supply; fall
D. supply; fall
Arguments for discretionary policies include A. discretion avoids the straight-jacket that would lock in the wrong policy if the model that was used to derive the policy rule proved to be incorrect. B. discretion enables policy makers to change policy settings when an economy undergoes structural changes. C. policy rules can be too rigid because they cannot foresee every contingency. D. policy rules do not easily incorporate the use of judgment. E. all of the above.
E. all of the above.
A tax cut initially A. reduces consumption expenditure by an amount that is less than the value of the tax cut. B. increases consumption expenditure by an amount equal to the tax cut. C. increases consumption expenditure by an amount greater than the tax cut. D. has no effect on consumption expenditure. E. increases consumption expenditure by an amount that is less than the value of the tax cut.
E. increases consumption expenditure by an amount that is less than the value of the tax cut.
A temporary positive supply shock will ______ inflation and will ______ aggregate output in the long run.
not change ; not change
