Econ exam 3
Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?
The crowding out effect
When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You compute the price of jeans relative to tee-shirts.
The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable
Using the liquidity-preference model, when the Federal Reserve increases the money supply,
The equilibrium interest rate decreases
Which of the following is a example of a decrease in government purchases?
The gov. cancels an order for new military equipment
Which of the following is an example of a decrease in government purchases?
The gov. cancels an order for new military equipment
Which of the following is an example of a decrease in government purchases?
The government cancels an order for new military equipment
Suppose the Fed decreased the growth rate of the money supply. Which of the following would be lower in the long run?
The inflation rate, but not the natural rate of unemployment
Which of the following is correct?
The long run, but not the short run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables f
Which of the following is correct?
The long-run, but not the short-run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables.
Darla puts her money into a bank account that earns interest. One year later she sees that the account has 6 percent more dollars and that her money will buy 7.5 percent more goods.
The nominal interest rate was 6 percent and the inflation rate was -1.5 percent
Which of the following can a country increase in the long run by increasing its money growth rate?
The nominal wage
The money supply ins Muckland is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Muckland?
The price level is 4 and velocity is 8
Figure 30.2 On the graph, MS represents money supply and MD represents money demand. The usual quantities are measured along the axes (pic) What quantity is measured along the horizontal axis?
The quantity of money
Which of the following is an example of the menu costs of inflation
Tito's Restaurant has to print new menus to update its prices compared to other prices in the economy
Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate demand curve?
With prices down and wages fixed by contact, Fargo Concrete Company decides to lay off workers
Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate demand curve?
With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers
Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?
With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers
Suppose that M is fixed but that P falls. According to the quantity equation which of the following could both by themselves explain the decrease in P?
Y rose, V fell
Figure 33.7 (pic) Suppose the economy starts at Y. If there is a fall in aggregate demand, then the economy moves to
Z in the long run
Which of the following shifts the short run aggregate supply curve to the right?
a decrease in the expected price level
Which of the following shifts aggregate demand to the left?
a decrease in the money supply
The short run effects of an increase in the expected price level include
a lower level of output and a higher price level
For many years country A has had a lower unemployment rate than country B. According to the long run Phillips curve which of the following could explain this? Country A has
a lower minimum wage than country B
You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced
a nominal loss and a real gain
An event that directly affects firm's costs of production and thus the prices they charge is called
a supply shock
An event that directly affects firms' cost of production and thus the prices they charge is called
a supply shock
If the stock market crashes, then
aggregate demand decreases, which the Fed could offset by increasing the money supply.
If the stock market crashes, then
aggregate demand decreases, which the Fed could offset by purchasing bonds
Unemployment would decrease and prices would increase if
aggregate demand shifted right
According to the classical dichotomy, which of the following is influenced by monetary factors? - real interest rates - real GDP - real wages - all of the above
all of the above
Figure 33.5 (pic) The appearance of the long run aggregate supply curve - is consistent with the idea that point A represents a long run equilibrium and a short run equilibrium when the relevant short run aggregate supply curve is SRAS1 - is consistent with the concept of monetary neutrality - indicates that Y1 is the natural rate of output - all of the above
all of the above
For the following questions, use the diagram below (pic) Which of the following is correct? - Either fiscal or monetary policy could be used to move the economy from point b to point a - if the economy is left alone, then as the economy moves from point b to long-run equilibrium, the price level will fall farther - unemployment rises as the economy moves from point a to point b - all of the above
all of the above
If P denotes the price of goods and services measured in terms of money, then - 1/P represents the value of money measured in terms of goods and services - P can be regarded as the "overall price level" - an increase in the value of money is associated with a decrease in P - All of the above
all of the above
Other things the same, the aggregate quantity of goods demanded decreases if - the interest rate rises - real wealth falls - the dollar appreciates - all of the above
all of the above
Other things the same, which of the following happens if the price level rises? - the interest rate rises - initially there is an excess demand for money in the money market - money demand shifts rightward - all of the above
all of the above
Suppose policymakers take actions that cause a contraction of aggregate demand. Which of the following is a short-run consequence of this contraction? - the unemployment rate increases - the inflation rate decreases - the level of output decreases - all of the above
all of the above
Suppose the US unexpectedly decided to pay off its debt by printing new money. Which of the following would happen? - prices would rise - people who held money would feel poorer - people who had lent money at a fixed interest rate would feel poorer - all of the above
all of the above
The Fed can influence the money supply by - changing the interest rate it pays banks on the reserves they are holding - using open market operations - changing how much it lends to banks - all of the above
all of the above
The long run aggregate supply curve - indicates monetary neutrality in the long run - is vertical - is a graphical representation of the classical dichotomy -all of the above
all of the above
The long run aggregate supply curve - is a graphical representation of the classical dichotomy - is vertical - indicates monetary neutrality in the long run - all of the above
all of the above
The long run aggregate supply curve - is vertical - indicates monetary neutrality in the long run - is a graphical representation of the classical dichotomy
all of the above
Which of the following policy actions shifts the aggregate demand curve? - an increase in taxes - an increase in government spending - an increase in the money supply - all of the above
all of the above
Figure 33.5 (pic) The appearance of the long run aggregate supply curve - is consistent with the idea that point A represents a long run equilibrium and a short run equilibrium when the relevant short run aggregate supply curve is SRAS1 - indicates that Y1 is the natural rate of output -is consistent with the concept of monetary neutrality - all of the above are correct
all of the above are correct
Other things the same, which of the following happens if the price level rises? - Money demand shifts rightward - The interest rate rises - Initially there is an excess demand for money in the money market - All of the above
all of the above are correct
Figure 35.9 The left hand graph shows a short run aggregate supply curve and two aggregate demand (AD) curves. On the right hand diagram, "Inf Rate" means "Inflation rate" (pic) The shift of the aggregate supply curve from AS1 to AS2 could be a consequence of
an adverse supply shock
Figure 35.9 The left hand graph shows a short run aggregate supply curve and two aggregate demand curves. On the right hand diagram, "Inf rate" means "Inflation rate." (pic) The shift of the aggregate supply curve from AS1 to AS2 could be a consequence of
an adverse supply shock
Which of the following results in higher inflation and higher unemployment in the short run?
an adverse supply shock such as an increase in the price of oil
Which of the following is an example of crowding out?
an increase in government spending increases interest rates, causing investment to fall
You observe people going to the bank more frequently. Other things the same this could result from
an increase in inflation which reduces money demand
Other things the same, as the price level rises, exchange rates
and interest rates
Other things the same, as the price level rises, exchange rates
and interest rates rise
The evidence form hyperinflations indicates that money growth and inflation
are positively related, which is consistent with the quantity theory of money
In the late 1960s, economist Edmund Phelps published a paper that
argued that there was no long run trade off between inflation and unemployment
Any policy change that reduced the natural rate of unemployment
would shift the long run aggregate supply curve to the right
Your boss give you an increase in the number of dollars you earn per hour. This increase in pay makes
your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased
The Federal Funds rate is the interest rate
banks charge each other for short term loans
A policy change that changes the natural rate of unemployment changes
both the long run Phillips curve and the long run aggregate supply curve
A policy change that changes the natural rate of unemployment changes
both the long-run Phillips curve and the long-run aggregate supply curve
The Central Bank of Wiknam increases the money supply at the same time the Parliament of Wiknam passes a new investment tax credit. Which of these policies shift aggregate demand to the right?
both the money supply increase and the investment tax credit
Suppose that the money supply increases. In the short run this decreases unemployment according to
both the short run Phillips curve and the aggregate demand and aggregate supply model
If the natural rate of unemployment falls
both the short run Phillips curve and the long run Phillips curve shift
If the natural rate of unemployment falls
both the short-run Phillips curve and the long-run Phillips curve shift.
Suppose that the Federal reserve is concerned abut the effects of falling stock prices on the economy. What could it do?
buy bonds to lower the interest rate
During recessions which type of spending falls?
consumption and investment
According to the Phillips curve, policymakers can reduce inflation by
contracting aggregate demand. This contraction results in a temporarily higher unemployment rate
If inflation is higher than what was expected,
creditors receive a lower real interest rate than they had anticipated
If inflation is lower than what was expected
debtors pay a higher real interest rate than they had anticipated `
Other things the same, if the long run aggregate supply curve shifts right, prices
decrease and output increases
What actions could be taken to stabilize output in response to a large decrease in U.S. net exports?
decrease taxes or increase the money supply
Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would
decrease the money supply
In the short run, an increase in the money supply causes interest rates to
decrease, and aggregate demand to shift right
People will want to hold less money if the price level
decreases or if the interest rate increases
The opportunity cost of holding money
decreases when the interest rate decreases, so people desire to hold more of it
The opportunity cost of holding money
decreases when the interest rate decreases, so people desire to hold more of it.
When the money market is drawn with the value of money on the vertical axis, as the price level increases the quantity of money
demanded increases
If there is excess money supply, people will
deposit more into interest bearing accounts, and the interest rate will fall
The classical dichotomy refers to the idea that the supply of money
determines nominal variables, but not real variables
Monetary neutrality means that a change in the money supply
does not change real GDP. Most economists think this is a good description of the economy in the long run but not the short run
If Y and M are constant and V doubles, the quantity equation implies that the price level
doubles
If Y and V are constant and M doubles, the quantity equation implies that the price level
doubles
A basis for the slope of the short-run Phillips curve is that when unemployment is high there are
downward pressures on prices and wages
When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an
excess demand for money, so the price level will fall
When the dollar appreciates, U.S.
exports decrease, while imports increase
Other things the same, when the price level falls, interest rates
fall, which means consumers will want to spend more on home building
Other things the same, when the price level falls, interest rates
fall, which means consumers will want to spend more on homebuilding
Other things the same, as the price level rises, the real value of money
falls and the exchange rate rises
During recessions, income
falls and unemployment rises
The value of money rises as the price level
falls, because the number of dollars needed to buy a representative basket of goods falls.
If the number of dollars needed to buy a representative basket of goods falls, the price level
falls, so the value of money rises
Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment
falls. As inflation expectations adjust the short run Phillips curve shifts right
Suppose a central bank takes actions that will lead to a higher inflation rate. The public, however, is slow to adjust its expectation of inflation. Then, in the short run, unemployment
falls. As inflation expectations adjust, the short run Phillips curve shifts right
If aggregate demand shifts right then in the short run
firms will increase production. In the long run increased price expectations shift the short run aggregate supply curve to the left
High and unexpected inflation has a greater cost
for those who have fixed nominal wages than for those who have nominal wages that adjust with inflation
If inflation is less than expected, then the unemployment rate is
greater than the natural rate. In the long run the short run Phillips curve will shift left
Other things the same, a country decides to reduce inflation will
have a higher unemployment rate only in the short run
Wealth is redistributed from debtors to creditors when inflation was expected to be
high and it turns out to be low
According to the Philips curve diagram, if a central bank takes action to reduce the inflation rate, unemployment is
higher in the short run only
A policy intended to reduce unemployment by taking advantage of a tradeoff between inflation and unemployment leads to
higher inflation and no change in unemployment in the long run
Other things the same, if the money supply rises by 2% and people were expecting it to rise by 5% then some firms have
higher than desired prices, which depressed their sales
Other things the same, if the money supply rises by 2% and people were expecting it to rise by 5%, then some firms have
higher than desired prices, which depresses their sales
Shoeleather costs arise when higher inflation rates induce people to
hold less money
Which of the following shifts aggregate demand to the left?
households decide to save a larger fraction of their income
Money demand refers to
how much wealth people want to hold in liquid form
The long run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long run change
in the price level, but not output
Other things the same, if the long run aggregate supply curve shifts left, prices
increase and output decreases
Other things the same, if the price level falls, people
increase foreign bond purchases, so the dollar depreciates
According to the interest rate effect, an increase in the price level will
increase money demand and interest rates. Investment declines
According to liquidity preference theory, an increase in the price level causes the interest rate to
increase, which decreases the quantity of goods and services demanded
In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households
increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate demand curve
When taxes decrease, consumption
increases as shown by a shift of the aggregate demand curve to the right.
The source of hyperinflation is primarily
increases in money-supply growth
According to the liquidity preference theory, an increase in the overall price level of 10 percent
increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded
Aggregate demand shifts right when the Federal Reserve
increases the money supply
An increase in the MPC
increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand
An increase in the MPC
increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
Suppose monetary neutrality holds and velocity is constant. A 4 percent increase in the money supply
increases the price level by 4 percent
When the price level rises, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls
When there is inflation, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls
When the money market is drawn with the value of money on the vertical axis, as the price level decreases, the value of money
increases, so the quantity of money demanded decreases
As the MPC gets close to 1, the value of the multiplier approaches
infinity
According to monetary neutrality and the Fisher effect, an increase in the money supply growth rate eventually increases
inflation and nominal interest rates, but does not change real interest rates
According to the long run Phillips curve, in the long run monetary policy influences
inflation but not the unemployment rate; this is consistent with classical theory
If consumption expenditures fall, then in the short run
inflation falls and unemployment rises
Suppose the Federal Reserve makes monetary policy more expansionary. In the long run
inflation is higher and the unemployment rate is the same as it was prior to the change in policy
According to theory of liquidity preference, a decrease in the price level causes the
interest rate to fall and investment to rise
Figure 34.9 (pic) Suppose the economy is currently at point A. To restore full employment, the appropriate fiscal response
is a reduction in government purchases
Governments may prefer an inflation tax to some other type of tax because the inflation tax
is easier to impose
contractionary monetary policy
leads to disinflation and makes the short-run Phillips curve shift left.
If the Fed announced a policy to reduce inflation and people found it credible, the short-run Phillips curve would shift
left and the sacrifice ratio would fall
Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the
left by $500 billion
Other things the same, an increase in the price level makes the dollars people hold worth
less, so they can buy less
Which of the following, other things the same, would make the price level increase and real GDP decrease?
long run aggregate supply shifts left
Which of the following, other things the same, would make the price level decrease and real GDP increase?
long run aggregate supply shifts right
Sticky nominal wages can result in
lower profits for firms when the price level is lower than expected
In the long run, an increase in the stock of human capital
makes the price level fall, while increases in the money supply makes prices rise
The costs of changing price tags and price listings are known as
menu costs
Inflation costs are minimized during periods of
moderate inflation
If people decide to hold less money, then
money demand decreases, there is an excess supply of money, and interest rates fall
If people decide to hold less money, then
money demand decreases, there is an excess supply of money, and interest rates fall.
The price level rises if either
money demand shifts leftward or money supply shifts rightward; this rise in the price level is associated with a fall in the value of money.
If an increase in inflation permanently reduced unemployment, then
money would not be neutral and the long run Phillips curve would slope downward
Other things the same, an increase in the price level induces people to hold
more money, so they lend less, and the interest rate rises
Real GDP
moves in the opposite direction as unemployment
Suppose the central ban pursues an unexpectedly tight monetary policy. In the short run the effects of this are shown by
moving to the right along the short run Phillips curve
Suppose the central bank pursues an unexpectedly tight monetary policy. In the short run the effects of this are shown by
moving to the right along the short run Phillips curve
Which of the following events would shift money demand to the left?
neither an increase in the interest rate nor an increase in the price level
According to the Phillips curve, unemployment and inflation are positively related in
neither the long run nor the short run
When the dollar appreciates, U.S.
net exports fall, which decreases the aggregate quantity of goods and services demanded
When the dollar depreciates, US
net exports rise, which increases the aggregate quantity of goods and services demanded
When the government reduces taxes, which of the following decreases? - consumption - take home pay - household saving - none of the above
none of the above
When there is an excess supply of money
people will try to get rid of money causing interest rates to fall. Investment increases
Inflation can be measured by the
percentage change in the consumer price index
In 2001, Congress and President Bush instituted tax cuts. According to the short run Phillips curve, in the short run this change should have
raised inflation and reduced unemployment
In the long run, an increase in the money supply growth rate
raises expected inflation so the short run Phillips curve shifts right
Which of the following decreases during a recession
real GDP
The classical dichotomy refers to the separation of
real and nominal variables
Ashley puts money in a savings account at her bank earning 2 percent interest. One year later she takes her money out and notes that prices rose 3 percent. Ashley earned a
real interest rate of -1 percent due to inflation
The aggregate quantity of goods and services demanded changes as the price level rises because
real wealth falls, interest rates rise, and the dollar appreciates
The sticky-wage theory of the short run aggregate supply curve says that when the price level is lower than expected
relative to price wages are higher and employment falls
The sticky wage theory of the short run aggregate supply curve says that when the price level is lower than expected
relative to prices wages are higher and employment falls
Assuming no crowding-out, investment-accelerator, or multiplier effects, a $100 billion increase in government expenditures shifts aggregate demand
right by $100 billion
Assume the MPC is 0.625. Assume there is a multiplier effect and that the total crowding out effect is $12 billion. An increase in government purchases of $30 billion will shift aggregate demand to the
right by $68 billion
A decrease in the expected price level shifts short run aggregate supply to the
right, and an increase in the actual price level does not shift short run aggregate supply
A favorable supply shock will shift short run aggregate supply
right, making output rise
Other things the same, a decrease in the price level causes real wealth to
rise, interest rates to fall, and the dollar to depreciate
Other things the same, if the price level rises, then domestic interest rates
rise, so domestic residents will want to hold fewer foreign bonds
If the central bank increases the money supply, in the short run, the price level
rises and unemployment falls
Suppose an economy produces only smart phones. If the price level falls, the value of currency
rises, because one unit of currency buys more smart phones. This is called deflation
As the price level rises, the interest rate
rises, so the supply of dollars in the market for foreign currency exchange shifts left
According to liquidity preference theory, if the price level
rose, the interest rate would rise, and induce investment spending to fall
The Fisher effect
says there is a one for one adjustment of the nominal interest rate to the inflation rate.
Which of the following Fed actions would both decrease the money supply?
sell bonds and raise the reserve requirement
If the Federal Reserve decided to raise interest rates, it could
sell bonds to lower the money supply
Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could
sell bonds to raise interest rates
In the long run, a decrease in the money supply growth rate
shifts the short run Phillips curve left so unemployment returns to its natural rate
Figure 35.6 (pic) Curve 2 is the
short tun Phillips curve
If the Federal Reserve decreases the money supply, the initially there is a
shortage in the money market, so people will want to sell bonds
If the Federal Reserve decreases the money supply, then initially there is a
shortage in the money market, so people will want to sell bonds
Figure 34.1 (pic) At an interest rate of 4 percent, there is an excess
supply of money equal to the distance between points a and b
Which of the following tends to make the size of a shift in aggregate demand resulting from an increase in government purchases smaller than it otherwise would be?
the crowding out effect
According to the theory of liquidity preference,
the demand for money is represented by a downward sloping line on a supply and demand graph
According to the theory of liquidity preference
the demand for money is represented by a downward-sloping line on a supply-and-demand graph.
Using the liquidity preference model, when the Federal Reserve increases the money supply
the equilibrium interest rate decreases
Using the liquidity-preference model, when the Federal Reserve increases the money supply,
the equilibrium interest rate decreases
Using the liquidity-preference model, when the Federal Reserve decreases the money supply,
the equilibrium interest rate increases
Figure 30.1 (pic) When the money supply curve shifts from MS1 to MS2
the equilibrium value of money decreases
If a bank posts a nominal interest rate of 4 percent, and inflation is expected to be 3 percent, then
the expected real interest rate is 1 percent
Suppose the Fed decreased the growth rate of the money supply. Which of the following would be lower in the long run
the inflation rate, but not the natural rate of unemployment
Suppose the Fed decreased the growth rate of the money supply. Which of the following would be lower in the long run?
the inflation rate, but not the natural rate of unemployment
If the Fed increases the money supply
the interest rate decreases, which tends to raise stock prices
If the Fed increases the money supply,
the interest rate decreases, which tends to raise stock prices
According to liquidity preference theory, if the price level decreases then
the interest rate falls because money demand shifts left
When the money market is drawn with the value of money on the vertical axis, if the Fed sells bonds then
the money supply and the price level decrease
Banks advertise
the nominal interest rate, which is how fast the dollar value of savings grows.
Which of the following can a country increase in the long run by increasing its money growth rate?
the nominal wage
If aggregate demand shifts left, then in the short run
the price and real GDP both fall
According to the classical dichotomy, when the money supply doubles which of the following doubles?
the price level and nominal GDP
Money demand depends on
the price level and the interest rate
The sticky wage theory of the short run aggregate supply curve says that the quantity of output firms supply will increase if
the price level is higher than expected making production more profitable
The sticky-wage theory of the short run aggregate supply curve says that the quantity of output firms supply will increase if
the price level is higher than expected making production more profitable
When the money market is drawn with the value of money on the vertical axis, if the money supply rises
the price level rises and the value of money falls
Suppose the economy is in long run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, we would expect
the price level to fall and real GDP to rise
Suppose the economy is in long-run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, we would expect
the price level to fall and real GDP to rise
Aggregate demand includes
the quantity of goods and services households, firms, the government, and customer abroad want to buy
Figure 30.2 On the graph, MS represents the money supply and MD represents money demand. The usual quantities are measured along the axes (pic) What quantity is measured along the horizontal axis?
the quantity of money
Figure 30.1 (pic) If the money supply is MS2 and the value of money is 2, then
the quantity of money supplied is greater than the quantity demanded; the price level will rise
If the actual price level is 165, but people had been expecting it to be 160, then
the quantity of output is supplied rises, but only in the short run
If the actual price level is 165, but people had been expecting it to be 160, then
the quantity of output supplied rises, but only in the short run
An increase in expected inflation shifts
the short run Phillips curve right
Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long run
the short run Phillips curve shifts left
If the Federal Reserve decreases the rate at which it increases the money supply, then unemployment is higher in
the short run but not the long run
The aggregate supply curve is upward sloping in
the short run, but not the long run
The economy of Mainland uses gold as its money. If the government discovers a large reserve of gold on their land
the supply of money increases and the value of money falls
Other things the same, if there is an increase in the money supply growth rate that is larger than expected, then in the short run
the unemployment rate will be below its natural rate
In the long run, money demand and money supply determine
the value of money but not the real interest rate
When the Consumer Price Index falls from 110 to 100
there is deflation of 9.1% and the value of money increases
In order to maintain stable prices, a central bank must
tightly control the money supply
The government of Blenova considers two polices. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A will lead
to a lower unemployment rate and a higher inflation rate than policy B
During periods of expansion, automatic stabilizers cause government expenditures
to fall and taxes to rise
If a central bank increases the money supply growth rate, then in the short run
unemployment falls. In the long run the short run Phillips curve shifts right
As the aggregate demand curve shifts leftward along a given aggregate supply curve
unemployment is higher and inflation is lower
As the aggregate demand curve shifts rightward along a given aggregate supply curve,
unemployment is lower and inflation is higher
When aggregate demand shifts left along the short run aggregate supply curve
unemployment rises and prices fall
According to classical macroeconomic theory, changes in the money supply affect
variables measured in terms of money but not variables measured in terms of quantities or relative prices
If the MPC is 0.8 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by
$600 billion
Figure 34.4 On the figure, MS represents money supply and MD represents money demand (pic) Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease? - The Federal Reserve increases the money supply - Money demand decreases - The price level decreases - All of the above are correct
- All of the above
Figure 34.2 On the left hand graph, MS represents the supply of money and MD represents the demand for money; on the right hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs (pics) If the money supply curve MS on the left hand graph were to shift left, this would - represent an action taken by the Federal Reserve - create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift - shift the AD curve to the left - all of the above
- all of the above
Proponents of rational expectations theory argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations, the sacrifice ratio could be as small as
0
Scenario 34.2. The following facts apply to a small, imaginary economy - Consumption spending is $6720 when income is $8000 - Consumption spending is $7040 when income is $8500 Refer to the scenario: The marginal propensity to consume for this economy is
0.64
Scenario 34.1 Take the following information as given for a small, imaginary economy - When income $10000, consumption spending is $6500 - When income is $11000, consumption spending is $7250 The marginal propensity to consume for this economy is
0.750
If a $1000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is
0.8 and the multiplier is 5
If the multiplier is 6, then the MPC is
0.83
If M = 9000, P = 6, and Y = 1500, what is velocity
1
If the MPC is 0, then the multiplier is
1
If real output in an economy is 1,000 goods per year, the money supply is $300, and each dollar is spent an average of 4 times per year, then according to the quantity equation, the average price level is
1.20
If the nominal interest rate is 4 percent and expected inflation is 2.5 percent, then what is the expected real interest rate?
1.5 percent
Suppose over some period of time the money supply tripled, velocity was unchanged, and real GDP doubled. According to the quantity equation the price level is now
1.5 times is old value
If the sacrifice ratio is 4, then reducing the inflation rate from 9 percent to 5 percent would require sacrificing
16 percent of annual output
Based on the quantity equation, if M = 150, V = 4, and Y = 300, then P =
2
The nominal interest rate is 3.5 percent and the inflation is 1.5 percent. What is the real interest rate?
2 percent
The nominal interest rate is 5 percent and the real interest rate is 3 percent. What is the inflation rate?
2 percent
Suppose that reducing inflation by 2 percentage points would cost a country 5 percent of its annual output. This country's sacrifice ratio is
2.5
Suppose that reducing inflation by 2 percentage points would cost a country 5 percent of its annual output. This country sacrifice ratio is
2.5 (5/2)
You put money into an account and earn a real interest rate of 4 percent. Inflation is 2 percent, and your marginal tax rate is 25 percent. What is your after-tax real rate of interest?
2.5 percent
You put money into an account and earn a real interest rate of 5 percent. Inflation is 2 percent, and your marginal tax rate is 35 percent. What is your after-tax real rate of interest?
2.55 percent
If the multiplier is 3, then the MPC is
2/3
The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate
3 percent
The nominal interest rate is 6 percent and the inflation rate is 3 percent. What is the real interest rate?
3 percent
If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year, the sacrifice ratio is
3/2
If the MPC = 0.75, then the government purchases multiplier is about
4
If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate?
4 percent
If the MPC = 4/5, then the government purchases multiplier is
5
Inflation costs are minimized under which inflation rate?
5 percent
If M = 2000, P = 2.25, and Y = 6000, what is velocity?
6.75
If M = 2000, P = 2.55 and Y = 6000, what is velocity?
6.75
If the MPC is 0.8 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $120 billion will eventually shift the aggregate demand curve to the right by
600 billion
Which of the following shifts aggregate demand to the left?
A decrease in the money supply
Figure 34.4 On the figure, MS represents money supply and MD represents money demand (pic) Suppose the current equilibrium interest rate is r3. Which of the following events would cause the equilibrium interest rate to decrease? - Money demand decreases - The price level decreases - The Federal Reserve increases the money supply - all of the above
All of the above
Which of the following decreases in response to the interest rate effect from an increase in the price level?
Both investment and consumption
Consider the exhibit below for the following questions (pic) If the economy is in long run equilibrium, then an adverse shift in aggregate supply would move the economy from
C to D
Samuelson and Solow argued that when unemployment is high, there is (prob. wont be on exam)
Downward pressure on wages and prices
According to liquidity preference theory, the money-supply curve would shift if the Fed
Engaged in open market operations
The theory of liquidity preference assumes that the nominal supply of money is determined by the
Federal Reserve
According to the Phillips curve diagram, if a central bank takes action to reduce the inflation rate, unemployment is
Higher in the short run only
Which of the following is correct?
If the Fed purchases bonds in the open market, then the money supply curve shifts right. A change in the price level does not shift the money supply curve
Which of the following is correct?
If the Fed purchases bonds in the open market, then the money supply curve shifts right. A change in the price level does not shift the money supply curve.
Suppose a recession in Europe reduces US net exports at every price level. Which of the following would you expect to occur in the US as a result of this change
In the short run, unemployment will increase and inflation will fall
Suppose a recession in Europe reduces US net exports at every price level. Which of the following would you expect to occur in the US as a result of this change?
In the short run, unemployment will increase and inflation will fall
Suppose a recession in Europe reduces US net exports at every price level. Which of the following would you expect to occur in the US as a result of this changes?
In the short run, unemployment will increase and inflation will fall
If unemployment is above its natural rate, what happens to move the economy to long run equilibrium
Inflation expectations fall which shifts the short run Phillips curve to the left
Given a nominal interest rate of 6 percent, in which of the following cases would you earn the lowest after tax real rate of interest?
Inflation is 4 percent; the tax rate is 5 percent
Which of the following would we not expect if government policy moved the economy up along a given short run Phillips curve?
Jackie gets fewer job offers
Which of the following rises during recessions?
Layoffs but not consumer spending
The costs of changing price tags and price listings are known as
Menu costs
Which of the following is correct according to the long run Phillips curve?
Monetary policy cannot change the natural rate of unemployment, but other government polices can
Which of the following is correct according to the long-run Phillips curve?
Monetary policy cannot change the natural rate of unemployment, but other government policies can
In the long run, an increase in the money supply growth rate - shifts the long run Phillips curve right and the short run Phillips curve left - shifts the long run Phillips curve left and the short run Phillips curve right - shifts both the long run and short run Phillips curve right -none of the above
None of the above
When the gov. reduces taxes, which of the following decreases? - household saving - take home pay - consumption - none of the above
None of the above
Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?
Raise both taxes and expenditures by $80 billion dollars
Which of the following decreases during recessions?
Real GDP
A decrease in the expected price level shifts short-run aggregate supply to the
Right, and an increase in the actual price does not shift short run aggregate supply
Figure 35.6 (pic) Curve 2 is the
Short run Phillips curve
