ECON 211 Exam Multiple Choice

__________ law describes the negative relationship between GDP and unemployment

Okun's

Which of the following conjectures that underlie the Keynesian consumption function is not consistent with aggregate U.S. data?

The average propensity to consume decreases as income increases

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then _________ would drive the domestic interest rate back to the level of the world interest rate

capital inflow

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation

equals the inflation rate

In the graph, if firms are producing at level Y1, then inventories will _____, inducing firms to ________ production

fall; increase

Most economists believe that prices are:

flexible in the long run but many are sticky

Under a floating system, the exchange rate

fluctuates in response to changing economic conditions

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

If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must

gives up the use monetary policy for purposes of domestic stabilization

The ____________ multiplier is the change in aggregate income resulting from a one-dollar change in government purchases

government purchases

According to Friedman's permanent-income hypothesis, the marginal propensity to consume out of permanent income is __________ the marginal propensity to consume out of transitory income

greater than

The _____________ to consume is the increase in consumption resulting from a one-dollar increase in disposable income

marginal propensity to consume

The imperfect-information model bases the difference in the short-run and long-run aggregate supply curve on

temporary misperceptions about prices

In the graph, assume that the economy starts at point A and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium and point ______ represents long-run equilibrium.

E; A

According to classical theory, national income depends on __________, while Keynes proposed that _________ determined the level of national income

aggregate supply; aggregate demand

The long-run aggregate supply curve is vertical at the level of output:

at which unemployment is at its natural rate

If an example of a Keynesian consumption function is C = 2,000 + .8Y and Y is 30,000, then the average propensity to consume is about

.87

According to the Keynesian-cross analysis, if the marginal propensity to consume is .6, and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

100

Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:

2.5 percent in the short run but will return to its natural rate in the long run

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation 10 percent to 5 percent, this will cost the economy _________ percent of one year's GDP

20

Exhibit: AD-AS Shifts Starting from long-run equilibrium at A with output equal to and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the short-run nonneutrality of money is represented by the movement from:

A to G

Starting from long-run equilibrium at A with output equal to and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the short-run nonneutrality of money is represented by the movement from:

A to G

Permanent and transitory income differ in the way that permanent income is ____________ than transitory income

more persistent

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then _________ increases in the short run and _______ increase(s) in the long run.

output; prices

The sacrifice ratio measures the

percentage of a year's real gross domestic product (GDP) that must be foregone to reduce inflation by 1 percentage point

Income that people expect to persist in to the future is known as __________ income

permanent

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except

prices do not adjust when there is perfect competition

In the short run an adverse supply shock causes:

prices to rise and output to fall

A short-run aggregate supply curve shows fixed _________, and a long-run aggregate supply curve shows fixed ____________

prices; output

Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the greater the

proportion of firms with flexible prices

The _________- is the percentage points of a year's real GDP that must be foregone to reduce inflation by 1 percentage point

sacrifice ratio

According to the permanent-income hypothesis, if consumers receive a one-time income bonus, then they will

save most of it in the current year

To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange rate level, then the central bank must

sell foreign currency from reserves

Macroeconomic ___________ are exogenous changes in aggregate supply or demand

shocks

The _____________ multiplier is the change in aggregate income resulting from a one-dollar change in taxes.

tax

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases by an amount (delta G) and the planned expenditure schedule by an equal amount, then equilibrium income rises by:

the change in G divided by the quantity one minus the marginal propensity to consume

Which of the following is an example of a demand shock?

the introduction and greater availability of credit cards

According to the idea of the "impossible trinity", in a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:

attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending

According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the _________ the _________ output in response to an unexpected price increase

greater; increase

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.

higher; greater

The long-lasting influence of history on variables such as the natural rate of unemployment is called

hysteresis

The _____________ refers to the fact that a nation cannot simultaneously have free capital flows, a fixed exchange rate, and independent monetary policy

impossible trinity

The tax multiplier indicates how much _________ change(s) in responses to a $1 change in taxes

income

According to Franco Modigliani's life-cycle hypothesis, the principle determinant(s) of consumption is (are):

income and wealth

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ________ aggregate demand at a cost of generating __________ inflation

increase; higher

In the Keynesian-cross model, if the MPC equals .75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by _________

$1 billion; more than $1 billion

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ________ and the aggregate demand curve shifts ______

lower; inward

In the graph, initially the economy is at point E, with price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______.

C; B

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

decrease

Business cycles are

irregular and unpredictable

Under a fixed system, the exchange rate

is maintained at a predetermined level by the central bank

The pull of instant gratification may lead consumers to save ___________ they would like to save

less than

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

level of output but not prices

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + .6(Y-T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

600

If the equation for a country's Phillips curve is π = 0.02 - .08(u-.05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when the unemployment rate is 4 percent (.04)?

above 2 percept (.02)

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by

basing their opinions on recently observed inflation

The approach that assumes that people optimally use all available information to forecast the future is called ___________ expectations

rational

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations

A supply shock does not occur when:

the Fed increases the money supply

The hypothesis that hysteresis may play an important role in macroeconomics implies, among other things, that:

the natural rate of unemployment may increase if unemployment is high for long time period of time

Compared to a closed economy, an open economy is one that:

trades with other countries

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income

unplanned inventory investment is negative