Econ 4002 Final Exam
The quantity theory of money assumes that ___.
income velocity is constant
Tax smoothing refers to
keeping taxes stable so that extra revenues earned during expansions can be used to offset deficits during recessions
Hyperinflation is usually caused by
large government deficits
Suppose that the MPC is 0.75 and government purchases are increased by $2 billion. The level of income and production will rise by ___.
$8 billion
Given the data below, suppose that government spending increases from $700 to $800. The new equilibrium level of income and production is $___. (Round your answer to one decimal place.) Y=C+I+G C=300+0.6(Y-T) I=500-20r (M/P)^d=Y-40r G=700 T=800 M=10000 P=5
2356
Assume the rate of job finding is 25% and the rate of job separation is 10%. Suppose, instead, that the rate of job finding increases to 30%, the new natural rate of unemployment is ___%. (Round your answer to 1 decimal place.)
25
Assume we have an economy described by the information below. If the tax rate is reduced from 0.2 to 0, the new equilibrium level of income and production will be $___. (Round your answer to a whole number.) Y=C+I+G C=300+0.6(Y-T) I=500 G=700 T=800+0.2Y
2550
Suppose that the MPC is 0.73. Saving will rise by $___ if disposable income (Y - T) increases by $1,000.
270
Assume the rate of job finding is 25% and the rate of job separation is 10%, the natural rate of unemployment is ___%. (Round your answer to 1 decimal place.)
28.6
Assume that velocity is constant. If real GDP is growing at a rate of 2% and the money supply is growing at a rate of 5%, the rate of inflation is ___%.
3
Based on the following information, if the real wage is $15 the profit-maximizing number of workers to hire is ___.Worker Total Production0 01 252 453 604 705 75, chapter 3, #7
3
Suppose the demand for real money balances is equal to Y/5i. If the nominal rate of interest is 2, real income is $1,000, and the money supply is $300, the price level is equal to ___.
3
Suppose that the economy is currently at its natural rate of unemployment, there are no supply shocks, and the rate of inflation is 2.5%. All else equal, if people were to increase their expected rate of inflation by 1%, the new rate of inflation would be ___%.
3.5
An economy has an adult population of 200,000 people. 120,000 people are employed and 10,000 people are unemployed. The unemployment rate for this economy is ___%. (Use 1 decimal places)
7.7
Based on the information below, the equilibrium level of income and production is $___. C= $20000+0.9(y-t) I=50000 g=60000 t=60000
760000
Suppose a country has a nominal deficit of $20 billion, a rate of inflation of 4%, and a debt at the beginning of the year of $300 billion. The country's real deficit is $_ billion.
8
An economy has an adult population of 200,000 people. 120,000 people are employed and 10,000 people are unemployed. Suppose that 2,000 discouraged workers begin looking for jobs and half of them find employment. The new unemployment rate is ___%. (Use 1 decimal place.)
8.3
An economy is described by the information below. The Golden Rule level of capital per effective worker is ___. (Round your answer to one decimal place.) y=2k^0.2, s=0.28, d=0.04, n=0.01, g=0.02, MPK=0.4/k^0.8
8.8
Based on the following information, suppose that government spending increases from $700 to $800. The equilibrium rate of interest will be ___%. (Round your answer to one decimal point.) Y=C+I+G C=300+0.6(Y-T) I=500-20r (M/P)^d=Y-40r G=700 T=800 M=10000 P=5
8.9
Suppose the MPC is 0.9. If the government wanted to reduce the equilibrium level of income and production by $72000, it would change taxes by $___.
8000
A country has total consumption of $60,000, total investment of $15,000, and total government purchases of $20,000. Its domestic spending on consumption is $55,000, investment is $12,000, and government purchases is $19,000. This country's imports of foreign goods is $___.
9000
Given the information below, the level of planned expenditure when income is $1.0 million is $___. C= $20000+0.9(y-t) I=50000 g=60000 t=60000
976000
An increase in government purchases will shift the LM curve down and to the right.
False
Empirical studies have shown the capital stock, K, grows about 2% faster than production, Y, over time.
False
If government policymakers choose not to respond to a negative supply shock, in the long run we would expect the economy to return to full employment at a higher price level.
False
Suppose that government purchases have been reduced. The IS-LM model would predict that income and production will fall, but the interest rate will rise.
False
Suppose that real GDP grows by 4%. According to Okun's Law, unemployment will fall by 4%.
False
The GDP deflator tends to overstate the rate of inflation because of the substitution bias.
False
The IS-LM model suggests that the Great Depression was not caused by an LM shock, but monetary effects limited its severity.
False
The key difference between the Classical long-run model and the Keynesian short-run model is that the Keynesian model assumes that wages and prices are flexible.
False
When two countries begin with different levels of capital stock per effective worker, their economies will always converge over time.
False
An increase in the expected rate of inflation will ___.
Reduce real interest rates and raise production and income
Which of the following statements is true about the simple Y = AK model of endogenous technological growth?
Saving can generate a sustained growth
In the imperfect-information model, an unexpected increase in aggregate demand will ___.
all of the above: raise production and income, lower unemployment rate, raise the price level
In the short run, an exogenous increase in money demand will ___.
all of the above: reduce production and income, raise the interest rate, increase the unemployment rate
Which of the following contributes to structural unemployment?
all of the above: union monopoly power to set wages, minimum wage laws, efficiency wages
The most commonly used measure of prices in the economy is the ___
consumer price index
A leading explanation for the increase in European unemployment rates is ___.
generous unemployment benefits offered by European governments, technological changes have reduced the demand for unskilled workers relative to skilled workers
Wage rigidity creates structural unemployment by ___.
holding the real wage above the market clearing wage
A tax cut can cause a change in spending if _.
households face binding borrowing constraints
Over the business cycle consumption tends to change proportionately ___ investment.
less than
The Federal Reserve announces that reserve to deposit requirements have been reduced. We would predict that _.
output will rise in the short run and price level will rise in the long run
A mild decrease in real GDP is known as a
recession
Which of the following was the largest contributor to the decline in the U.S. labor force participation rate?
retired
The country of Bluebell is a small open economy. Bluebell exports flowers. A change in world tastes increase the demand for Bluebell's flowers. Will saving in Bluebell rise or fall?
rise
The country of Bluebell is a small open economy. Bluebell exports flowers. A change in world tastes increase the demand for Bluebell's flowers. Will the net exports in Bluebell rise or fall?
rise
A decrease in the money supply will cause the interest rate to __ and production to ____.
rise, fall
An increase in government spending will ___.
shift the AD curve to the right
An increase in the money supply will ___.
shift the AD curve to the right
Assume the economy is currently at full employment. Because it is an election year, the policymakers who determine fiscal policy decide on an expansionary policy. If the Fed decides it does not want income and production to rise, we would expect ___.
the money supply to fall and output remain the same as the interest rate rises
An increase in business confidence leads to a large increase in investment. We would predict ____.
the price level will increase in the long run
A war breaks out abroad. The war makes U.S. firms uncertain about the future, firms delay some investment projects. We would predict ___.
the real exchange rate will fall
What is the opportunity cost of holding money?
the real rate of interest + the expected rate of inflation
The value of Henry's new painting was $10. This illustrates money functioning as a ___.
unit of account
One of the most important factors explaining the rise in the U.S. government's debt as a percentage of GDP is _.
war
Assume the proportion of income that households want to hold as real balances, k, is equal to .05 and the money supply is equal to $8 trillion. Suppose the price level rises to 8, the new equilibrium value of real GDP is ____. (Use 2 decimal places in your answer.)
$20 trillion
If the real exchange rate is rising by 2%, the foreign rate of inflation is 5%, and the domestic rate of inflation is 8%, the percentage change in the nominal exchange rate is ___%.
-1
Given the information below, determine the change in the equilibrium GDP if a 1% increase in the interest rate causes planned investment to fall by $100. (Round your answer to a whole number.) Y=C+I+G C=300+0.6(Y-T) I=500 G=700 T=800+0.2Y
-192
Suppose the MPC is 0.75 and the government wants to increase income and production by $10 billion. The government would have to change taxes by $___ billion. (Round your answer to 1 decimal place.)
-3.3
An economy is described by the information below. Output per worker will grow at a rate of ___. y=2k^0.2, s=0.28, d=0.04, n=0.01, g=0.02, MPK=0.4/k^0.8
0.02
An economy is described by the information below. The total output in the economy will grow at a rate of ___. y=2k^0.2, s=0.28, d=0.04, n=0.01, g=0.02, MPK=0.4/k^0.8
0.03
Assume the rate of depreciation is 0.04, the rate of population growth is 0.01, and the rate of efficiency growth is 0.03. The MPK at the steady state Golden rule level of capital per effective labor is ___.
0.08
You have estimated that the Golden Rule level of capital per effective worker is 16 and the output per effective worker is 8. If the rate of depreciation is 0.04, the rate of population growth is 0.01, and the rate of efficiency growth is 0.03, the Golden Rule savings rate is ___. (Express your answer as a decimal.)
0.16
Production in a country can be described with a Cobb-Douglas production function. Suppose the MPL=10 and the MPK=15. If L=120, K=20, and Y=$1,500, then capital's share of income is ___. (Show your answer in decimal form.)
0.2
Given the information below, the Golden Rule saving rate is ___. (Calculate your answer to one decimal place.) y=2k^0.3, s=0.3, d=0.05, MPK=0.6/k^0.7
0.3
When income increased by 100,000, consumption increased by 80,000. Based on this information, the value of the MPC is ___.
0.8
Suppose that salsa sells for $4 in year 1 and $5 in year 2. A bag of tortilla chips sells for $6 in year 1 and $5 in year 2. Further assume that year 1 is the base year. If 200 jars of salsa and 400 bags of tortilla chips are sold in year 2, the GDP deflator has a value of __. (Round your answer to 2 decimal places.)
0.94
Given the information below, suppose the level of income falls to $2,400. The new equilibrium rate of interest is ___%. M/P=L(r) (M/P)^d=3000-400r Y=4000 M=10000 P=5
1
Given the information below, the Golden Rule stock of capital per worker is ___. (Calculate your answer to one decimal place.) y=2k^0.3, s=0.3, d=0.05, n=0.02, MPK=0.6/k^0.7
21.5
Assume the nominal exchange rate of the euro to the dollar is .7/1. If the price of a Fiat in Europe is 12,000 euros and the price of the same Fiat in the United States is $25,000, the real exchange rate is ___. (Round your answer to 1 decimal place.)
1.5
Assume there are currently 100,000 workers employed and 15,000 workers unemployed. If the rate of job finding is 10% and the labor market is in its steady state, the rate of job separation is ___%. (Round your answer to one decimal place.)
1.5
Based on the information below, suppose the Fed increases the money supply by $2,000. The new equilibrium rate of interest will be ___%. M/P=L(r) (M/P)^d=3000-400r Y=4000 M=10000 P=5
1.5
Suppose the demand for real money balances is equal to Y/5i. If the nominal rate of interest is 2, real income is $1,000, and the money supply is $300. If the Fed announces that the money supply will be decreased by 1% next month, the new price level will be ___.
1.5
Given the information below, the Golden Rule investment per worker is ___. (Calculate your answer to one decimal place.) y=2k^0.3, s=0.3, d=0.05, MPK=0.6/k^0.7
1.7
In the economy of OverThere, the monetary base is $10,000. People hold 50% of their money assets as currency (the rest is held as deposits) and banks hold 5% of their deposits as reserves. An economic downturn causes the banks to reduce their lending. If the banks now hold 10% of their deposits as reserves, what is the new value of the money multiplier? (Express it in terms of 1 decimal.)
1.8
In the economy of OverThere, the monetary base is $10,000. People hold 50% of their money assets as currency (the rest is deposited in the banks) and banks hold 5% of their deposits as reserves. What is the value of the money multiplier? (Express it in terms of 1 decimal.)
1.9
Based on the following information, the MPL for the fourth worker is ___.Worker Total Production 0 01 252 453 604 705 75, chapter 3, #5
10
Given the following information, the equilibrium rate of interest is ___% Y = C + I + GY = 10,000G = 3,000T = 2,000C = 1,000 + 0.5(Y - T)I = 2,500 - 50r
10
Production in a country can be described with a Cobb-Douglas production function. Suppose the MPL=10 and the MPK=15. If L=120, K=20, and Y=$1,500, then the real wage is ___
10
The production function is described by the function y = 100k. If one more unit of capital is added, the marginal product of that unit of capital is ___.
100
What is the value of a price index in the base year?
100
An economy begins with a monetary base in the form of currency of 5,000 $1 bills and no bank reserves. Assume that people want to hold an amount of currency equal to 60% of their deposits. If banks hold 20% of their deposits as reserves, the total money supply is $___. (Use 1 decimal in your calculations and round up.)
10000
Suppose the MPC is equal to 0.9. If government spending increases by $10,000, the equilibrium level of income and production will increase by $___.
100000
Based on the following information, national saving is equal to $___.Y = $500,000C = $300,000T = $120,000G = $100,000TR = $30,000
100000.0
Given the information below, the steady-state stock of capital per worker is ___. (Calculate your answer to one decimal place.) y=2k^0.3, s=0.3, d=0.05, n=0.02, MPK=0.6/k^0.7
21.5
Using the information below, suppose that the government decided to reduce taxes from $800 to $700. If the Fed wanted to maintain a constant interest rate, the new money supply would have to be $___. (Round your answers to two decimal places.) Y=C+I+G C=300+0.6(Y-T) I=500-20r (M/P)^d=Y-40r G=700 T=800 M=10000 P=5
10750.05
Based on the following information, private saving is equal to $___.Y = $500,000C = $300,000T = $120,000G = $100,000Tr = $30,000
110000.0
Consider an economy that produces and consumes only three goods: hotdogs, volleyballs, and shorts. We have the following information on the prices and quantities of theses goods in 2014 and 2015. Use the information to calculate the rate of inflation from from 2014 to 2015 as measured by the CPI. Assume that 2015 is the base year. Round your percentage value to one decimal place. chapter 2, #10
12
The currency in Upper Lowland is the bolt. A suit of clothes in Upper Lowland costs 40,000 bolts. Suppose the same suit of clothes costs $325 in the U.S. According to purchasing power parity, the real exchange rate is predicted to be ___ bolts per dollar. (Round your answer to 1 decimal place.)
123.1
You have estimated the net export function NX = 1,500 - 250(real exchange rate). If the real exchange rate decreases from 4 to 3.5, the change in net exports will be $___.
125
In the last year there were 1,000 transactions at an average price per transaction of $50. If the transactions velocity of money is 4, the quantity of money is equal to $___.
12500
Based on the following information, the steady-state level of capital is ___. (Answer as a whole number) y =3k^3, s=0.10, d=0.05, k=64
13
You have the following information:employee compensation $3.5 trillionnet interest $1.3 trillionrental income $2 trillionproprietor's income $2.6 trillioncorporate profits $3 trillionindirect business taxes $0.8 trilliondepreciation $1 trillionNet national product is equal to $___ trillion
13.2
An economy is described by the information below. The steady state capital per effective worker is ___. (Round your answer to one decimal place.) y=2k^0.2, s=0.28, d=0.04, n=0.01, g=0.02, MPK=0.4/k^0.8
13.4
A country has total consumption of $60,000, total investment of $15,000, and total government purchases of $20,000. Its domestic spending on consumption is $55,000, investment is $12,000, and government purchases is $19,000. If the real GDP is $100,000, the country is exporting $___ of goods.
14000
Assume there are currently 100,000 workers employed and 15,000 workers unemployed. If the rate of job finding is 10%, how many unemployed workers will find jobs?
1500
Assume the rate of job finding is 25% and the rate of job separation is 10%. If the rate of job separation falls to 5%, the new natural rate of unemployment is ___%. (Round your answer to 1 decimal place.)
16.7
If the ex post real rate of interest is 3% and the ex ante real rate of interest is 5%, the expected rate of inflation differed from the actual rate of inflation by ___%.
2
Suppose the current GDP is $11.3 trillion. Assuming that consumption is $6.7 trillion, investment is $2.1 trillion, exports are$1.8 trillion, and imports are $1.4 trillion, government purchases are $___ trillion.
2.1
An economy is described by the information below. The Golden Rule level of consumption per effective worker is ___. (Round your answer to one decimal place.) y=2k^0.2, s=0.28, d=0.04, n=0.01, g=0.02, MPK=0.4/k^0.8
2.5
Assume k = 0.4, the income velocity of money is equal to ___.
2.5
Based on the information below, the equilibrium rate of interest in the money market is ___%. M/P=L(r) (M/P)^d=3000-400r M=10000 P=5
2.5
A production function is described by the function y = 100k. If k is 20, output will be equal to ___.
2000
Given the following information, national saving is $___. Y = C + I + GY = 10,000G = 3,000T = 2,000C = 1,000 + 0.5(Y - T)I = 2,500 - 50r
2000
A country has total consumption of $60,000, total investment of $15,000, and total government purchases of $20,000. Its domestic spending on consumption is $55,000, investment is $12,000, and government purchases is $19,000. If exports are $14,000, saving is equal to $___.
20000
An economy begins with a monetary base in the form of currency of 5,000 $1 bills and no bank reserves. Assume that people want to hold an amount of currency equal to 60% of their deposits. Also assume banks hold 20% of their deposits as reserves. If the Fed wanted to increase the money supply by $6,000, they would buy $___ of bonds.
3000
Suppose that salsa sells for $4 in year 1 and $5 in year 2. A bag of tortilla chips sells for $6 in year 1 and $5 in year 2. Further assume that year 1 is the base year. If 200 jars of salsa and 400 bags of tortilla chips are sold in year 2, the real gdp is $___.
3200
Given the information below, the Golden Rule level of capital is ___. (Calculate your answer to one decimal.) y=2k^0.3, s=0.3, d=0.05, MPK=0.6/k^0.7
34.8
Assume that the nominal rate of interest is 6% and the rate of inflation is 2%. The real rate of interest is ___%
4
Assume that Okun's Law is correct. Suppose a 3% reduction in the rate of inflation caused a rise in cyclical unemployment of 6%. The sacrifice ratio is ___.
4.0
Given the information below, the Golden Rule consumption per worker is ___. (Calculate your answer to one decimal place.) y=2k^0.3, s=0.3, d=0.05, MPK=0.6/k^0.7
4.1
Assume there are 9,000 workers employed and 400 workers unemployed. The unemployment rate is ___% (Round your answer to one decimal place.)
4.3
Assume the real exchange rate is 4. If the foreign price level is 121 and the domestic price level is 110, the nominal exchange rate is ___. (Round your answer to 1 decimal place.)
4.4
The following table shows three investment projects with their estimated rates of return. Assume each project requires an investment of $20,000. If the interest rate is 7%, investment will be equal to $___.Project Rate of Return1 12%2 8%3 4%
40000
A bank has $25,000 in capital, $80,000 of deposits, and $20,000 of debt. What is the bank's leverage ratio?
5
Given the following information, the equilibrium rate of interest is ___%. M/P=L(r) (M/P)^d=3000-400r Y=4000 M=10000 P=5
5
Given the information below, the steady-state level of output per capita is ___. (Calculate your answer to one decimal place.) y=2k^0.3, s=0.3, d=0.05, n=0.02, MPK=0.6/k^0.7
5
Assume the proportion of income that households want to hold as real balances, k, is equal to .05 and the money supply is equal to $8 trillion. If the level of real GDP is $30 trillion, the price level is equal to ____. (Use 2 decimal places in your answer.)
5.33
Given the information below, the Golden Rule output per capita is ___. (Calculate your answer to one decimal place.) y=2k^0.3, s=0.3, d=0.05, MPK=0.6/k^0.7
5.8
About ___% of all unemployment spells in the U.S. end with the unemployed worker leaving the labor force.
50
Use the information below to determine the equilibrium output in the market described by the two equations. Chapter 1, #4
500
A country has total consumption of $60,000, total investment of $15,000, and total government purchases of $20,000. Its domestic spending on consumption is $55,000, investment is $12,000, and government purchases is $19,000. This country's net exports are equal to $___.
5000
Suppose a country has a total consumption of $60,000 and consumes $55,000 of domestically produced goods. Its consumption of foreign produced goods is $___.
5000
In the last year there were 1,000 transactions at an average price of $50 per transaction. The value of the transactions is $___.
50000
Suppose the demand for real money balances is equal to Y/5i. The velocity of money is ___.
5i
In the last year the price level has increased from 156 to 166. The rate of inflation was ___% (Calculate to 1 decimal place.)
6.4
A bank has $50,000 of capital, $100,000 of reserves, $400,000 of loans, and $300,000 of securities. If the value of the bank's securities falls by 10%, the banks capital will fall by ___%
60
The demand for real money balances is $25,000. If k=.4, the level of real GDP is $___.
62500
An economy has an adult population of 200,000. 120,000 people are employed and 10,000 people are unemployed. The labor force participation rate is ___%. (Use 1 decimal place)
65.0
Which of the following would be a justification for the use of industrial policy?
Economic activities that spin off technological advances should be encouraged
The market for goods and services is represented by the ___ curve.
IS
If you were interested in studying fluctuations in production and income (ie, the business cycle), you would want to use the ___.
Keynesian fixed price model
Entrepreneurs rely on venture capital to bring innovations to market. Successful start-ups often generate large capital gains for their investors. If a government wants to encourage growth through investment and technological growth, should it increase taxes on capital gains or lower taxes on capital gains?
Lower the capital gains tax
Which of the following is an example of a Paashe index?
PCE Deflator
Which price index does the Federal Reserve prefer for measuring the rate of inflation?
PCE Deflator
Which of the following represents the shoe leather cost of inflation?
People will have to convert bonds to money more often
Which of the following statements is TRUE?
Policy lags mean that policymakers must formulate their stabilization policies to address problems that will exist 6-12 months in the future
Which of the following is a macroeconomic goal for policy makers?
Stable growth
What is the central bank for the United States?
The Federal Reserve System
A potential benefit of inflation is ___.
The labor market works more efficiently
Suppose that the diagram below shows the market for bowls of soup. What can we predict if the cost of the soup's ingredients decreases? chapter 1, #5
The price will fall and the quantity will rise
Joe buys a bond with a nominal interest rate of 6% that will mature in 2 years. In the next year, prices unexpectedly double. What is the cost of the inflation demonstrated by this example.
There is an arbitrary distribution of income from lenders to borrowers
The domestic government has decided to raise taxes. We would predict ___.
all of the above: net exports will rise, net capital outflows will rise, the real exchange rate will fall
The lowest point of business cycle is the ___.
Trough
A life insurance company is an example of a financial intermediary.
True
Empirical evidence shows that real wages grow faster than the real rental price of capital over time.
True
Employing the "rule of thumb" for business cycles, if the economy is experiencing at least two consecutive quarters of rising real GDP, the economy is in the expansionary phase of the business cycle.
True
If the FED was engaging in stabilization policy, they would respond to a negative demand shock by increasing the money supply.
True
In a two-sector model of endogenous technological growth, production of knowledge by research institutions increase output in both sectors.
True
Suppose that the government decided to increase taxes. The IS-LM model would predict the fall in income and production would be less than what the Keynesian Cross model predicts.
True
Which of the following is a stock variable
Wealth
An increase in the interest rate will cause _.
a decrease in planned investment and a decrease in the equilibrium GDP
In a large open economy the capital flow is shown as ___ line
a downward-sloping
Economists believe that the spike in the duration of unemployment in the U.S. in the 2008 recession was caused by ___.
a lack of demand for workers, extending the unemployment benefit period from 28 to 99 weeks
Households decide to reduce their currency to deposit ratio from 0.05 to 0.04. This will cause _.
a rightward shift in the aggregate demand curve
Which of the following would be considered a negative supply shock?
a world-wide pandemic causes many businesses to shut down and lay off workers
Suppose that the Federal Reserve is following a nominal GDP target seeks an annual increase in the nominal GDP of 4%. Further suppose that the real GDP has decreased by 1% and inflation has increased by 6%. Which of the following statements is true.
according to the policy rule, the money supply should be decreased
Factor accumulation and the efficiency with which factors of production are used tend to be positively correlated. This can be explained by __.
all of the above: factor accumulation providing an incentive to use the factor more efficiently, an economy that uses its resources efficiently creates an incentive to accumulate additional resources, limited government interference creates incentives to both accumulate more factors of production and to use them more efficiently
The cyclically adjusted budget _.
all of the above: is based on estimates of the natural levels of output and employment, is used to separate the effects of changes in automatic stabilizers from discretionary changes in fiscal policy, takes out the effect of changes in the business cycle on the deficit
Which of the following would increase the rate of steady-state growth?
an increase in the proportion of labor applied to research
Policy lags _
are long and variable
The idea that many variables in an economy will grow at at the same rate in the steady state is known as ____.
balanced growth
When one good or service is traded directly for another good or service, we have a ___ (barter/money) system.
barter
If the Fed wanted to use open market operations to increase the money supply they should ___ bonds.
buy
If expectations are formed rationally, _.
credible policy announcements are likely to achieve the desired outcome more quickly and with less pain
Assume the money supply is $1 trillion and the velocity of money is 3. If real GDP is initially $2 trillion, an increase in the price level from 1.5 to 2, will cause real GDP to ___.
decrease to $1.5 trillion
One reason to be concerned about large budget deficits is _.
deficits financed by printing money can be inflationary
Someone that favors policy rules _.
does not trust political decision makers
In this model, government spending is an example of a variable and investment is an example of a variable.
exogenous, endogenous
Suppose that businesses become pessimistic and decrease their investment at any interest rate. We would predict that the interest rate will __ and production will __.
fall, fall
A medium of exchange must exist before a barter exchange can take place.
false
A production function is described by the function y = 100k. This production function exhibits diminishing marginal returns.
false
A production has the form F(K,L) = KL + L, where initially K = 1 and L = 2. This production function exhibits constant returns to scale.
false
According to the Employment Act of 1946, the government should maintain full employment and balance its budget.
false
According to the Solow model, an economy in its steady state experiences a constant rate of growth.
false
An increase in government spending will increase both the rate of inflation and the rate of unemployment.
false
An increase in the price level will increase aggregate demand
false
An open market sale of securities by the Fed will shift the aggregate demand curve to the right.
false
Assume a country is currently running a deficit. If the government decides to sell off some of its assets, the size of the net deficit will shrink.
false
Assume a small open economy begins with a balanced trade position. An increase in saving will cause a trade deficit.
false
Automatic stabilizers can help to make monetary policy more successful in stabilizing the economy.
false
Because the number of long-term unemployed in the U.S. is a minority of the unemployed workers, the average weeks of unemployment tend to be small.
false
Economist Joseph Schumpeter argued that technological innovation was beneficial for everyone in society.
false
Equilibrium in the IS-LM model occurs at the point where the money supply is equal to planned expenditures.
false
Fiscal policy involves changing the money supply to correct for problems in the economy
false
Given the information below, the government should increase the saving rate. y=2k^0.3, s=0.3, d=0.05, n=0.02, MPK=0.6/k^0.7
false
Government transfer payments are an example of a leakage in the economy.
false
Groups with high rates of unemployment tend to have both low rates of job finding and low rates of job separation.
false
In the sticky-price model, all producers have fixed prices.
false
Policy rules are only favored by economists that also favor passive economic policies.
false
Savings deposits are included in the M1 definition of money.
false
The Phillips curve is horizontal in the long run.
false
The economic data since the Great Depression demonstrates that activist polices have created more economic stability.
false
The real exchange rate represents the relative prices of currencies.
false
The short-run aggregate supply curve is vertical.
false
Uncertainty about government policy decisions has little real effect on the economy.
false
changes in production in the long-run are most likely the result of changes in the money supply
false
In the short run, an increase in aggregate demand will ___.
increase production
Suppose households decide to save more than before. If the Fed wants to prevent that household decision from affecting production and employment, they would ___.
increase the money supply
According to the Fisher effect, an increase of 3% in the money supply will ___
increase the nominal rate of interest by 3%
In the long run, an increase in the money supply will ___.
increase the price level
Consider the Solow model modified with two-sector endogenous growth. Shifting labor from manufacturing to research will _
increase the rate of growth in Y
Suppose the Fed enters the market and sells bonds. According to the IS-LM model ___.
interest rates will rise and production will fall
Suppose the Fed unexpectedly reduces the money supply. We would predict that will ___ in the long run.
lower the price level
The irrelevance of money in determining the values of real variable is known as ___.
monetary neutrality
Why do people hold money?
money provides liquidity
Generally speaking, in the short-run the unemployment rate is <__> related to changes in real GDP and is <__> related to changes in the rate of inflation.
negatively, negatively
Suppose that a depositor withdrew $200 from their checking deposits in the bank. We can say __.
neither m1 nor m2 changed
Suppose the Fed unexpectedly reduces the money supply. We would predict that ___ in the short run.
none of the above: the price level will rise, the level of output and income will rise, the unemployment rate will fall
The country of Bluebell is a small open economy. Bluebell exports flowers. A change in world tastes increase the demand for Bluebell's flowers. Will the real rate of interest in Bluebell rise, fall, or not change?
not change
Credit cards are ___.
not included in money supply
The Federal Reserve's primary tool for controlling the money supply is __.
open market operations
According to the theory of political business cycles, _.
politicians try to stimulate the economy right before an election
According to the quantity theory of money, the quantity of money and the price level are ___.
proportionally and positively related
In the long run, an exogenous increase in money demand will ___.
raise the interest rate
According to the traditional view of budget deficits and debt, an increase in government spending will _.
raise the level of income and the interest rate in the short run
One feature of the Affordable Care Act (ACA) is that firms with 49 workers do not have to provide health insurance to their workers, but firms with 50 workers or more must provide health insurance. All else equal, we would predict this provision of the ACA would ___.
raise the rate of natural unemployment
Which of the following Fed policies would affect the reserve to deposit ratio, but not the monetary base?
raising the interest paid on reserve deposits
The downward sloping IS curve shows there is a negative relationship between ____.
real GDP and the interest rate
Households have become more optimistic and decided to save less than before. We would predict that ___.
the IS curve will shift up and to the right
An increase in the price level causes ___.
the LM curve to shift to the left
According to the imperfect information model, when the actual price level falls below the expected price level and the value of alpha is zero ___.
the aggregate supply curve will be vertical
In 2009 Greece experienced a banking crisis which caused the government to temporarily close the banks. As result, we would expect ___.
the currency-to-deposit ratio to rise
The value of a three stage production process is $97 million. The last two stages added $30 million and $50 million respectively. Therefore, first stage of the process has added $17 million.
true
One explanation for why blacks have a higher unemployment rate than whites is ___.
they lack access to job-finding networks
In the 1980s the U.S. Congress passed a law setting a ceiling on the amount of national debt to be allowed. Once the ceiling was reached, the U.S. government could not issue any additional debt. In the year since, every time the national debt has approached the ceiling the Congress has simply voted to increase the ceiling. This is an example of _.
time-inconsistent policy
All of the following are uncounted liabilities EXCEPT _.
transfer payments
A beneficial supply shock will shift the Phillips curve down.
true
A decrease in government spending will shift the IS curve to the left
true
An increase in the money supply will shift the LM curve downward.
true
Based on the information below, we can say this economy is producing its Golden Rule level of output per capita. y=2k^0.3, s=0.3, d=0.05, MPK=0.6/k^0.7
true
Discouraged workers are included in the U6 unemployment rate, but not the U3 unemployment rate.
true
In a previous problem we calculated that the steady state level of output per effective worker was 13.1 and the Golden Rule steady state capital per effective worker was 8.8. In this case saving and investment is too high. y=2k^0.2, s=0.28, d=0.04, n=0.01, g=0.02, MPK=0.4/k^0.8
true
In the short run, an increase in taxes will affect production and the nominal interest rate because the price level is assumed to be sticky.
true
Income and expenditures for the economy have the same value
true
Large numbers of deaths occur as a result of the outbreak of a disease. The proper counter-cyclical policy would involve the Federal Reserve lowering the discount rate.
true
The Federal Reserve is more likely to have difficulties with outside lags.
true
The Lucas critique says that policymakers do not take the effects of a policy change on private decision makers' expectations and are therefore likely to make incorrect predictions about the policy's effects.
true
The Ricardian Equivalence requires private decision-makers to be forward looking.
true
The percentage of the labor force that is unionized is positively correlated with the unemployment rate.
true
The real exchange rate is also known as the terms of trade.
true
The short-run aggregate supply curve is horizontal because wages and prices are assumed to be fixed.
true
The theory of rational expectations says the sacrifice ratio should be close to zero.
true
Unemployment spells in the U.S. tend to be short term.
true