ECON 101 Final Study

When a person purchases a 90-day Treasury bill, he or she cannot know the: a. ex post real interest rate. b. ex ante real interest rate. c. nominal interest rate. d. expected rate of inflation.

a. ex post real interest rate

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a _____ real interest rate and _____ in the quantity of investment. a. higher; an increase b. lower; an increase c. higher; no change d. lower; no change

a. higher; an increase

23. For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _____, generating a _____ quantity of output demanded. a. higher; greater b. lower; smaller c. higher; smaller d. lower; greater

a. higher; greater

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent: a. in the long run but lead to unemployment in the short run. b. in the short run but lead to unemployment in the long run. c. in both the short run and the long run. d. in neither the short nor the long run.

a. in the long run but lead to unemployment in the short run.

In the IS-LM model, a decrease in the interest rate would be the result of a(n): a. increase in the money supply. b. increase in government purchases. c. decrease in taxes. d. increase in money demand.

a. increase in the money supply.

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: a. investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. b. investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. c. investment is autonomous, whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. d. the price level is fixed, whereas in the IS-LM model it is allowed to vary.

a. investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

The world interest rate: a. is the interest rate prevailing in world financial markets which equates world savings to world investment. b. is the interest rate charged on loans by the World Bank. c. makes domestic saving equal to domestic investment. d. is equal to the domestic interest rate.

a. is the interest rate prevailing in world financial markets which equates world savings to world investment.

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. a. lower; raises; reduces b. higher; lowers; increases c. lower; lowers; increases d. higher; raises; reduces

a. lower; raises; reduces

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the moneysupply, then _____ increase(s) in the short run, and _____ increase(s) in the long run. a. output; prices b. prices; prices c. output; output d. prices; output

a. output; prices

The intersection of the IS and LM curves determines the values of: a. r and Y, given G, T, M, and P. b. r, Y, and M, given G, T, and P. c. p and Y, given G, T, and M. d. r, Y, and P, given G, T, and M.

a. r and Y, given G, T, M, and P.

According to the classical dichotomy, when the money supply decreases, _____ will decrease. a. the price level b. consumption spending c. real gross domestic product (GDP) d. investment spending

a. the price level

In a Cobb-Douglas production function, the marginal product of capital will increase if: a. the quantity of labor increases. b. average capital productivity decreases. c. labor's share of output increases. d. the quantity of capital increases.

a. the quantity of labor increases.

The real rental price of capital is the price per unit of capital measured in: a. units of output. b. units of capital. c. dollars. d. units of labor.

a. units of output.

If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in theUnited States is 6 percent and the inflation rate in Japan is 3 percent, the: a. yen will appreciate by 3 percent against the dollar. b. yen will appreciate by 6 percent against the dollar. c. dollar will appreciate by 3 percent against the yen. d. yen will appreciate by 9 percent against the dollar.

a. yen will appreciate by 3 percent against the dollar.

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals: a. $10 billion. b. -$10 billion. c. $25 billion. d. −$25 billion.

b. -$10 billion.

Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is _____ percent. a. 8 b. 6 c. 4 d. 2

b. 6

Changes in monetary policy shift the: a. money demand curve. b. LM curve. c. IS curve. d. planned spending curve.

b. LM curve.

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will: a. remain unchanged, and in the long run prices will fall. b. fall, and in the long run prices will fall. c. remain unchanged, and in the long run prices will remain unchanged. d. fall, and in the long run prices will remain unchanged.

b. fall, and in the long run prices will fall.

In the Keynesian-cross model with an MPC> 0, if government purchases increase by 250, then the equilibrium level of income: a. decreases by 250. b. increases by more than 250. c. increases by 250. d. increases but by less than 250.

b. increases by more than 250.

15. Expansionary fiscal policy in a large open economy _____ the real interest rate and _____ the real exchangerate. a. does not change; increases b. increases; increases c. increases; decreases d. decreases; increases

b. increases; increases

The interest rate determines _____ in the goods market and money _____ in the money market. a. government spending; demand b. investment spending; demand c. investment spending; supply d. government spending; supply

b. investment spending; demand

In the IS-LM model in a closed economy, an increase in government spending increases the interest rate andcrowds out: a. prices. b. investment. c. the money supply. d. taxes.

b. investment.

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their: a. supply. b. marginal productivities. c. relative political power. d. equilibrium growth rates.

b. marginal productivities.

Along an aggregate demand curve, which of these are held constant? a. nominal output and velocity b. money supply and velocity c. money supply and real output d. real output and prices

b. money supply and velocity

Economists who believe that monetary policy is more potent than fiscal policy argue that the: a. responsiveness of money demand to the interest rate is large. b. responsiveness of money demand to the interest rate is small. c. IS curve is nearly vertical. d. LM curve is nearly horizontal.

b. responsiveness of money demand to the interest rate is small.

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Inaddition, assume G = 0. In this case, equilibrium investment is: a. 2,500. b. 3,000. c. 1,500. d. 2,000.

c. 1,500.

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the _____ curve to the _____. a. LM; right b. LM; left c. IS; right d. IS; left

c. IS; right

An increase in the money supply shifts the _____ curve to the right, and the aggregate demand curve _____. a. IS; shifts to the right b. IS; does not shift c. LM: shifts to the right d. LM; does not shift

c. LM: shifts to the right

In a small, open economy, if net exports are negative, then: a. saving is greater than investment. b. imports are less than exports. c. domestic spending is greater than output. d. net capital outflows are positive.

c. domestic spending is greater than output.

In a small open economy, if consumer confidence falls and consumers decide to save more, then the realexchange rate: a. rises, and net exports fall. b. and net exports both fall. c. falls, and net exports rise. d. and net exports both rise.

c. falls, and net exports rise.

Starting from long-run equilibrium, without policy intervention, the long-run impact of a temporary adverse supply shock is that prices will: a. be permanently higher, and output will be restored to the natural level. b. be permanently higher, and output will be permanently lower. c. return to the old level, and output will be restored to the natural level. d. return to the old level, but output will be permanently lower.

c. return to the old level, and output will be restored to the natural level.

Given that M/P = kY, when the demand for money parameter, k, is large, the velocity of money is _____,and money is changing hands _____. a. large; infrequently b. large; frequently c. small; infrequently d. small; frequently

c. small; infrequently

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchasesschedule by an amount ∆G, then equilibrium income rises by: a. ∆G multiplied one plus the marginal propensity to consume. b. ∆G. c. ∆G divided by one minus the marginal propensity to consume. d. one unit.

c. ∆G divided by one minus the marginal propensity to consume.

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____. a. $0.75 billion; $1 billion b. $1 billion; $4 billion c. $0.75 billion; $0.75 billion d. $2 billion; $8 billion

d. $2 billion; $8 billion

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5percent, then the change in real gross domestic product (GDP) must be _____ percent. a. 9 b. 4 c. 11 d. 3

d. 3

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is _____ percent. a. 1 b. 3 c. 4 d. 7

d. 7

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y -T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: a. 120. b. 220. c. 170. d. 70.

d. 70.

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the _____ curve to the _____. a. LM; right b. LM; left c. IS; right d. IS; left

d. IS; left

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____. a. IS; shifts to the right b. IS; does not shift c. LM; shifts to the right d. LM; does not shift

d. LM; does not shift

If the Fed announces that it will raise the money supply in the future but does not change the money supplytoday, a. the nominal interest rate will decrease and the current price level will increase. b. the nominal interest rate will increase and the current price level will decrease. c. both the nominal interest rate and the current price level will decrease. d. both the nominal interest rate and the current price level will increase.

d. both the nominal interest rate and the current price level will increase.

Assuming velocity is constant, the aggregate demand curve tells us possible: a. results if the Federal Reserve reduces the money supply. b. combinations of M and P for a given value of Y. c. combinations of M and Y for a given value of P. d. combinations of P and Y for a given value of M.

d. combinations of P and Y for a given value of M.

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment_____, and this shifts the expenditure function _____, thereby decreasing income. a. increases; downward b. decreases; upward c. increases; upward d. decreases; downward

d. decreases; downward

In the Keynesian-cross model, if the MPC is greater than 0.5 and taxes are reduced by 250, then the equilibrium level of income: a. increases by 250. b. decreases by 250. c. increases, but by less than 250. d. increases by more than 250.

d. increases by more than 250.

In the Solow growth model, where s is the saving rate, y is output per worker, and i is investment perworker, consumption per worker (c) equals: a. (1 - s) y. b. (1 - s) y - i. c. sy. d. (1 + s) y.

a. (1 - s) y.

Changes in fiscal policy shift the: a. IS curve. b. money demand curve. c. LM curve. d. money supply curve.

a. IS curve.

A tax cut shifts the _____ curve to the right, and the aggregate demand curve _____. a. IS; shifts to the right b. IS; does not shift c. LM; shifts to the right d. LM; does not shift

a. IS; shifts to the right

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 _____. a. LM; right b. LM; left c. IS; right d. IS; left

a. LM; right

With the real money supply held constant, the theory of liquidity preference implies that a higher incomelevel will be consistent with: a. a higher interest rate. b. first a lower and then a higher interest rate. c. a lower interest rate. d. no change in the interest rate.

a. a higher interest rate

If the money supply is held constant, then an increase in the nominal interest rate will _____ the demand for money and _____ the price level. a. decrease; increase b. decrease; decrease c. increase; increase d. increase; decrease

a. decrease; increase

The short run refers to a period: a. during which prices are sticky and cyclical unemployment may occur. b. of several days. c. during which there are no fluctuations. d. during which capital and labor are fully employed.

a. during which prices are sticky and cyclical unemployment may occur.

If the saving rate increases, the: a. economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached. b. capital-labor ratio will increase forever. c. economy will grow at a faster rate forever. d. capital-labor ratio will eventually decline.

a. economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached.

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus theamount they want to consume today for any given level of disposable income. This shift, in a neoclassicaleconomy, will: a. raise both investment and the interest rate. b. lower both investment and the interest rate. c. raise investment and lower the interest rate. d. lower investment and raise the interest rate.

d. lower investment and raise the interest rate.

Okun's law is the _____ relationship between real gross domestic product (GDP) and the _____. a. positive; unemployment rate b. positive; inflation rate c. negative; inflation rate d. negative; unemployment rate

d. negative; unemployment rate

An economy's factors of production and its production function determine the economy's: a. labor-force participation rate. b. population growth rate. c. budget surplus or deficit. d. output of goods and services.

d. output of goods and services.