Econ 211 VCU Scotese Exam 2
In response to an economic shock, some firms will find it profitable to change prices, but other firms may find it more profitable not to change prices
True
When the MPC is equal to three-fifths, the value of the spending multiplier is
2.5
Assume MPC is 0.72. The multiplier is
3.57
At any meeting of the Federal Open Market Committee, that committee's voting members consist of
5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors
Which of the following is not a component of spending
Taxes
Monetary policy decisions are made by
The Federal Open Market Committee
From 2006 to 2008 there was a dramatic fall in the price of houses. If this fall made people feel less wealthy, then it would have shifted
aggregate demand left
other things the same, an increase in the price level makes the dollars people hold worth
less, so they can buy less
The Federal Open Market Committee is
the group at the Federal Reserve that sets monetary policy
Fiscal policy is determined by
the president and Congress and involves changing government spending and taxation
The variables on the vertical and horizontal axes of the aggregate demand and supply graph are
the price level and real output
Aggregate demand includes
the quantity of goods and services the government, households, firms, and customers abroad want to buy
The aggregate supply curve is upward sloping in
the short run, but no the long run
While some prices adjust fairly quickly, other prices tend to be more sticky. Which of the reasons below is NOT a possible explanation for sticky price adjustment
there are always government guidelines that govern how much prices can change
The logic of the multiplier effect applies
to any change in spending on any component of GDP
Wealth is redistributed from creditors to debtors when inflation is
unexpectedly high
Keynesian economics advocates the use of monetary or fiscal policy in response to a recessionary period because
when prices are sticky, the economy's self-adjustment mechanism will be slow
The average price level is measured by
the GDP deflator or the CPI
Suppose that government spending increases by $100 billion and that MPC is equal to three-fifths. How much will total spending change as a result of the government purchases and all of the subsequent rounds of the multiplier process?
$250 Billion
Suppose that government purchases increase by $100 billion and that the MPC is equal to three-fifths. In the 3rd round of the spending multiplier process, consumption increases by
$36 billion
The sticky-price theory implies that
(1) the short run aggregate supply curve is upward sloping (2) an unexpected fall in the price level induces firms to reduce the quantity of goods and services they produce (3) menu costs influence the speed of adjustment of prices
If the value of the US dollar appreciates against the currencies of our major trading partners, we would expect
- US exports to fall - US imports to rise - US net exports to decline
Which of the following is included in the aggregate demand for goods and services
- consumption demand - investment demand - net exports
Monetary policy in the United States aims to keep inflation in the vicinity of
2%
Deflation is economically very damaging because
-People will postpone spending -Asset values decline -The real value of debt rises
Wages tend to be downward rigid because
-firms tend to prefer to keep worker morale high to maintain productivity - firms tend to believe that productivity will be higher if costs are cut by laying off some workers rather than lowering wages across the board -Many employees have either explicit or implicit wage contracts
Moderately high levels of inflation can be economically harmful because
-inflation is rarely balanced -inflation changes relative prices -a change in relative prices driven by inflation creates economic inefficiency
When monetary policy lowers interest rates we would expect
-spending to rise -output to rise -employment to rise
If the multiplier is 6, then the MPC is
0.83
Deflation is
A decline in prices
All of the following are examples of investment spending EXCEPT
A household purchases 1000 shares of Google stock
Which of the following would help explain why the aggregate demand curve slopes downward?
A lower price level reduces the interest rate, which encourages greater spending on investment goods
When interest rates increase, the value of the US dollar in the foreign exchange market
Appreciates because foreigner purchase more US interest bearing assets
A long-run equilibrium occurs when aggregate demand and aggregate supply are in equilibrium
At potential output
The following expression represents total spending on all United States goods and services
C + I + G + EX - IM
Which of the following investment determinants is NOT negatively related to investment spending
Capital productivity
if the value of the stock market rise, we might expect
Consumption to increase
If the MPC is equal to three-fifths, then if income increases by $100
Consumption will increase by $60
The only type of unemployment that can be affected by monetary policy is
Cyclical
Those who lost their jobs due to the recession's impact on business
Cyclical
Which of the following is an example of the shoe leather costs of inflation?
During Bolivia's hyperinflation, workers rushed to immediately convert their wages from pesos t black-market dollars
The agency responsible for regulating the U.S. monetary system is the
Federal Reserve
Classical economics is associated with ____ and ____ while Keynesian economics is associated with ____ and ____.
Flexible prices, the long run Sticky prices, the short run
If a person is unemployed because they have just graduated college and are in the process of searching for full-time employment, that person's unemployment is categorized as
Frictional
Fiscal policy creates a multiplier effect because
Government spending and tax changes will generate additional changes in consumer spending, creating more jobs, production and even more ripples of additional spending
Which of the following consumption determinants is NOT an aggregate demand shock and therefore doesn't shift the aggregate demand curve
Income
Which of the following consumption determinants is NOT positively related to consumption
Income Taxes
An increase in budget deficit will tend to
Increase interest rates
When taxes fall, spending
Increases
Which of the following does NOT describe an economic mechanism that makes total spending on goods and services negatively related to the price level
Inflation effect
A decrease in government spending
Is a negative aggregate demand shock and will shift the curve to the left
A foreign increase in tariffs on US goods
Is a negative aggregate demand shock and will shift the curve to the left
Effectively, the Fed's stable price mandate means that monetary policy aims to
Keep inflation low and stable
If cyclical unemployment is high monetary policy would try to lower unemployment by
Lower interest rates to increase spending and production
The aggregate demand curve shows the ____ relationship between total spending and the price level
Negative
A higher price level tends to increase interest rates because
People shift funds out of short-term interest bearing assets and into cash or checking accounts
The Federal Reserve follows a dual mandate when conducting monetary policy. the two economic variables referred to in the dual mandate are
Prices and employment
When there is excess supply or demand in a market, _____ adjust to return the economy to _____.
Prices, Euilibrium
If the Federal Reserve thought inflation was too high, the appropriate monetary policy action would be to
Raise interest rates to lower spending and production
Output levels that remain below potential output are associated with ______ while output levels that exceed potential output can generate _____.
Recessions, Inflation
If the MPC is equal to three-fifths, then if income increases by $100
Saving will increase by $40
If the economy begins in a long-run equilibrium when a negative aggregate demand shock hits, the economy will initially lead to a _____ equilibrium in a _____ period.
Short-Run, Recessionary
John Maynard Keynes described the economy's protracted recovery from the Great Depression as due, at least in part, to
Sluggish price adjustment
If a person is unemployed because the skills they have are outdated and employers are looking for workers with other skills, that person's unemployment is categorized as
Structural
Monetary policy can DIRECTLY affect which interest rate?
The federal funds rate
All of the following are examples of government purchases of goods & services EXCEPT
The government makes social security payment to your grandmother
Fiscal policy is
The government's decisions on spending and taxation
A $50 billion increase in government spending will increase overall spending more than a $50 billion tax cut because
The initial spending change is larger for the $50 government spending change
According to the wealth effect, when the price level rises
The purchasing power of cash and checking accounts falls
If income in our major trading partners rises we would expect
US exports to rise
Downward wage rigidity refers to the observation that
Wages tend to adjust downwards more slowly than they adjust upwards
Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift
aggregate demand left
Other things the same, and increase in the amount of capital firms wish to purchase would initially shift
aggregate demand right
Other things the same, when government spends more, the initial effect is that
aggregate demand shifts right
The Federal Reserve Board of Governors
are appointed by the president and confirmed by the senate
Other things the same, as the price level decreases it induces greater spending on
both net exports and investment
When inflation causes relative price variability
consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired
Suppose a fall in stock prices makes people feel poorer. the decrease in wealth would increase people to
decrease consumption, shown by shifting the aggregate-demand curve to the left
The marginal propensity to consume (MPC) is defined as the fraction of
extra income that a household consumes rather than saves
During recessions, income
falls and unemployment rises
Inflation is problematic if
it distorts relative prices, causing a misallocation of resources
When taxes decrease, consumption
increases as shown by a shift of the aggregate demand curve to the right.
Which part of real GDP fluctuates most over the course of the business cycle?
investment expenditures
A decrease in income taxes
is a positive aggregate demand shock and will shift the curve to the right
An increase in capital productivity
is a positive aggregate demand shock and will shift the curve to the right
At full employment, the unemployment rate
is at the natural rate of unemployment
Most economists believe that the classical model is the appropriate model for analysis of the economy in the
long run, because real and nominal variables are essentially determined separately in the long run
Sticky nominal wages can result in
lower profits for firms when the price level is lower than expected
The sticky-price theory of the short-run aggregate supply curve says that wen the price level is higher than expected, some forms will have
lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied
Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. The real interest rate she earns is
lower than she had expected, and the real value of the loan is lower than she had expected
When inflation rises, firms make
more frequent price changes. This raises their menu costs
Economic fluctuations are
output movements away from potential output
As the price level rises
people will want to buy fewer bonds, so the interest rate rises
If the price level rises above what was expected and nominal wages are fixed, then
production becomes more profitable so firms will hire more workers
A relatively mild period of falling incomes and rising unemployment is called a(n)
recession
Market economies rely on which of the following to allocate scarce resources?
relative prices
other things the same, when price level rises, interest rates
rise, so firms decrease investment
The aggregate demand is described graphically as
sloping downward
Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy?
the FOMC
Monetary policy is determined by
the Federal Reserve and involves changing the money supply