ECON 362 All Quizzes and MC HW #3

If the equation for a country's Phillips curve is π = 0.02 - 0.8(u - 0.05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?

above 2 percent (0.02)

Which of the following will shift the aggregate supply curve up to the left?

an increase in the expected price level

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease, decrease, decrease, decrease

Other things equal, when the interest rate rises, demand for goods and services

decreases

According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer:

decreases production

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

does not change production

The short run refers to a period

during which prices are sticky and unemployment may occur

According to the Phillips curve, other things being equal, inflation depends positively on:

expected inflation

The short-run aggregate supply curve is drawn for a given:

expected price level

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______, inducing firms to ________ production

fall, increase

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

falls rises

The basic aggregate supply equation implies that output exceeds natural output when the price level is:

greater than the expected price level

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 ______ in output in response to an unexpected price increase

greater, increase

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

greater, outward

An explanation for the slope of the LM curve is that as

income rises, money demand rises, and a higher interest rate is required

According to the theory of liquidity preference, tightening the money supply will ________ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will _______ nominal interest rates in the long run

increase, decrease

If the bond of a price increases, then its interest rate

increases

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income

increases by more than 250

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the

interest rate

Over the business cycle, investment spending ______ consumption spending

is more volatile

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will

lower the interest rate

Planned expenditure is a function of

national income and planned investment, government spending, and taxes

The IS curve plots the relationship between the interest rate and _______ that arises for _________

national income, goods and services

The Phillips curve shows a ______ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a ______ relationship between the price level and output.

negative, positive

Okun's law is the ______ relationship between real GDP and the ______

negative, unemployment rate

Equilibrium levels of income and interest rates are ________ related in the goods and services market, and equilibrium levels of income and interest rates are _______ related in the market for real money balances

negatively, positively

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run.

only output, only prices

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) 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 forgone to reduce inflation by 1 percentage point

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

According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will:

purchase interest bearing assets in order to reduce holdings of non-interest-bearing money

(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income:

r2,Y2

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:

r2,Y3

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium condition of interest rate and income:

r3,Y2

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______

right, accumulation

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 ______

rises, falls

In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income

sell, rises, decrease

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.

smaller than the multiplier

According to the stick-price model

some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on

the money supply

The imperfect-information model assumes that producers find it difficult to distinguish between changes in:

the overall level of prices and relative prices

According to the sticky-price model, output will be at the natural level if:

the price level equals the expected price level

According to the imperfect-information model, in countries in which there is a great deal of variability of prices:

the response of output to unexpected changes in prices will be relatively small

Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP

two

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of

unplanned inventory investment

The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately:

0

Assume that an economy has the Phillips curve π = π-1 - 0.5 (u - 0.06). Then the natural rate of unemployment is:

0.06

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ____________ and increases the equilibrium level of income by __________

0.75 billion, more than 0.75 billion

The estimate of the sacrifice ratio from the Volcker disinflation is approximately:

2.5-3

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

20

If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:

400

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ________ and increases the equilibrium level of income by _________

$1 billion, more than $1 billion

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

basing their opinions on recently observed inflation

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

between zero and one

In the IS-LM model, changes in taxes initially affect planned expenditures through:

consumption