Eco 119 Final

Ch13 Q17 A small open economy with a fixed exchange rate e2 is initially at equilibrium A with IS1 * , LM1* and equilibrium output Y1.. If there is an increase in government spending to IS2 * the new equilibrium will be at ____, holding everything else constant. A B D C

D

Ch13 Q19 A small open economy with a floating exchange rate is initially in equilibrium at A with IS1* ; LM1*. If there is an increase in the risk premium, then LM1* will shift to _____ and IS1* will shift to _____. LM3* ; IS3* LM3* ; IS2* LM2* ; IS2* LM2* ; IS3*

D

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n): contractionary shift in the LM curve. expansionary shift in the IS curve. expansionary shift in the LM curve. contractionary shift in the IS curve.

D

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift: only the LM curve. only the IS curve. neither the LM nor the IS curve. both the LM and the IS curves.

D

In the IS-LM model, changes in taxes initially affect planned expenditures through: government spending. investment. consumption. the interest rate.

C

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve. movement along the; shift in the horizontal; vertical shift in the; movement along the vertical; horizontal

A

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______. LM; does not shift IS; shifts to the right LM; shifts to the right IS; does not shift

A

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LMframework, ______ output and ______ interest rates. lower; raise increase; raise increase; lower lower; lower.

A

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Federal Reserve should _____ the money supply, shifting to _____. decrease; LM3 increase; LM3 decrease; LM2 increase; LM2

A

If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must: give up the use of monetary policy for purposes of domestic stabilization. give up the use of fiscal policy for purposes of domestic stabilization. restrict its citizens from participating in world financial markets. live with exchange-rate volatility.

A

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium: imports will decrease and exports will decrease by an equal amount. imports will decrease while exports remain constant, leading to a rise in net exports. both imports and exports will remain unchanged. imports will decrease and exports will increase, leading to a rise in net exports.

A

In the Mundell-Fleming model with flexible exchange rates, an increase in the price level results in a(n) ______ in the real exchange rate and a(n) ______ in net exports. increase; decrease increase; increase decrease; decrease decrease; increase

A

In the Mundell-Fleming model, the domestic interest rate is determined by the: world interest rate. domestic rate of inflation. world rate of inflation. intersection of the LM and IS curves.

A

The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have: free capital flows, a fixed exchange rate, and an independent monetary policy. high interest rates, a budget deficit, and a trade deficit. low inflation, low unemployment, and a rapid rate of GDP growth. an expansionary fiscal policy, a contractionary monetary policy, and a flexible exchange rate.

A

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a ______ real money supply M / P, which ______ the interest rate and ______ spending. lower; raises; reduces higher; raises; reduces higher; lowers; increases lower; lowers; increases

A

The intersection of the IS* and LM* curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium. level of output; exchange rate price level; exchange rate level of output; price level interest rate; price level

A

The severity of the Great Depression may be partly explained by an increase in expected deflation, which raised real interest rates above nominal interest rates. inflation, which raised nominal interest rates above real interest rates. deflation, which raised nominal interest rates above real interest rates. inflation, which raised real interest rates above nominal interest rates.

A

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to: no change in consumption or income. no change in income but a rise in net exports. no change in income or net exports. a fall in consumption and income.

B

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______. at a given price level; resulting from a change in the price level resulting from a change in the price level; at a given price level resulting from a change in monetary policy; resulting from a change in fiscal policy resulting from a change in fiscal policy; resulting from a change in monetary policy

B

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy ______ increase income, and under fixed exchange rates, expansionary monetary policy ______ increase income. cannot; can can; cannot can; can cannot; cannot

B

Ch13 Q11 A small open economy with a fixed exchange rate e2 is initially at equilibrium A with IS1 * , LM1* and equilibrium output Y1. If there is a monetary expansion to the new equilibrium will be at ____, holding everything else constant. C A D B

B

Ch13 Q6 A small open economy with a floating exchange rate is initially at equilibrium A with IS*1, LM*1, equilibrium exchange rate e2, and equilibrium output Y1. If there is an increase in government spending to IS*2, the new equilibrium will be at ____, holding everything else constant. D A B C

B

If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must: live with exchange-rate volatility. control its citizens' access to world financial markets. give up the use of fiscal policy for purposes of domestic stabilization. give up the use of monetary policy for purposes of domestic stabilization.

B

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium, the money supply: remains unchanged to keep the interest rate at the world interest rate, so that government spending reduces income. increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income. remains unchanged, and there is no effect of government spending on income. decreases to keep the exchange rate unchanged, thus offsetting the effect of government spending on income.

B

In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short-run equilibrium, the: exchange rate falls but net exports do not increase. exchange rate falls and net exports increase. interest rate falls but the level of investment does not rise. interest rate falls and the level of investment rises.

B

In the IS-LM analysis, the increase in income resulting from a tax cut is ______ the increase in income resulting from an equal rise in government spending. sometimes less and sometimes greater than usually less than usually greater than usually equal to

B

In the Mundell-Fleming model: it makes no difference whether the exchange-rate system has a floating or a fixed exchange rate. the behavior of the economy depends on whether the exchange-rate system has a floating or fixed exchange rate. the exchange-rate system must have a floating exchange rate. the exchange-rate system must have a fixed exchange rate.

B

The money hypothesis suggests that the Great Depression was caused by a: leftward shift in the IS curve. leftward shift in the LM curve. rightward shift in the IS curve. rightward shift in the LM curve.

B

The risk premium included in the interest rate of small open economies incorporates: inefficient activity by arbitrageurs. country risk and expectations of future exchange-rate changes. capital mobility. the law of one price.

B

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS* curve shifts to the right, raising the exchange rate: and income but not net exports. and net exports but not income. but not raising net exports or income. net exports and income.

C

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts: income, the interest rate, consumption, and investment are unchanged. income, the interest rate, consumption, and investment all rise. income and the interest rate rise, whereas consumption and investment fall. income and the interest rate fall, whereas consumption and interest rise.

C

According to the Mundell-Fleming model, under fixed exchange rates, expansionary fiscal policy causes income to ______, and under flexible exchange rates expansionary fiscal policy causes income to ______. increase; increase remain unchanged; increase increase; remain unchanged remain unchanged; remain unchanged

C

Ch13 Q8 A small open economy with a floating exchange rate is initially in equilibrium at A with IS1*. Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____. LM1* ; LM2* IS1* ; IS2* IS1* ; IS3* LM1* ; LM3*

C

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium: neither income nor the exchange rate rises, as the money supply contracts. the exchange rate rises, but income does not rise. income rises, but the exchange rate does not rise. both income and the exchange rate rise.

C

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______. falls; rises rises; rises rises; falls falls; falls

C

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to ______ the central bank, which causes the money supply to ______. buy domestic currency from; decrease buy domestic currency from; increase sell domestic currency to; decrease sell domestic currency to; increase

C

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium: both output and the price level will decrease. both output and the price level will increase. output will decrease, but the price level will increase. output will increase, but the price level will decrease.

C

The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve. money demand; LM government spending; IS consumer spending; IS the money supply; LM

C

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to: a fall in income but no change in net exports. no change in income or net exports. a fall in income and net exports. no change in income but a fall in net exports.

C

A given increase in taxes shifts the IS curve more to the left the: smaller the marginal propensity to consume. larger the government spending. smaller the government spending. larger the marginal propensity to consume.

D

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to ______, and in an economy with fixed exchange rates, import restrictions cause net exports to ______. increase; increase increase; remain unchanged remain unchanged; remain unchanged remain unchanged; increase

D

Ch12 Q12 Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____, with a _____ price level. B; higher B; lower C; lower C; higher

D

Ch12 Q5: Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income: r3, Y2. r2, Y2. r3, Y3. r2, Y3.

D

In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to: increase government spending. decrease the money supply. increase taxes. increase the money supply.

D

In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate. appreciate; increase depreciate; decrease appreciate; decrease depreciate; increase

D

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______. LM; left IS; right IS; left LM; right

D

Suppose that a heightened risk of terrorist attack reduces consumer confidence, inducing people to save more. To stabilize aggregate demand, the Fed should decrease the money supply to raise the interest rate. increase the money supply to raise the interest rate. decrease the money supply to lower the interest rate. increase the money supply to lower the interest rate.

D

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have a ______ propensity to consume than debtors. from creditors to debtors; smaller from debtors to creditors; larger from creditors to debtors; larger from debtors to creditors; smaller

D

The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to ______ spending on goods and services. expected; increase unexpected; increase expected; reduce unexpected; reduce

D

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with fixed exchange rates, lead to: no change in income but a rise in net exports. a rise in income but no change in net exports. a rise in income and net exports. no change in income or net exports.

D

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency? The government has a budget surplus. The central bank's foreign-currency reserves are decreasing. The government has a budget deficit. The central bank's foreign-currency reserves are increasing.

D