ECON Exam 3

Federal Reserve and policy to tighten money supply?

-conducts open market operations by selling bonds and done with federal funds

What are the appropriate models to distinguish the short run for money tightening policy?

-liquidity preferences model -market for real money balances (IS-LM model)

What are the appropriate models to distinguish the Long run for money tightening policy?

-quantity theory of money -Fisher equation

Look at #20 & #25 graph

??

Changes in monetary policy shift the: A) LM curve. B) planned spending curve. C) money demand curve. D) IS curve.

A) LM curve.

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. B) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. C) investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. D) the price level is fixed whereas in the IS-LM model it is allowed to vary.

A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

In the long run, prices are..

flexible money neutrality does exist

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate. A) lower; lower B) lower; higher C) no change in; lower D) no change in; higher

A) lower; lower

Okun's law is the ______ relationship between real GDP and the ______. A) negative; unemployment rate B) negative; inflation rate C) positive; unemployment rate D) positive; inflation rate

A.) negative; unemployment rate

10. The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run. A) Above B) Below C) equal to D) either above or below

B) Below

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. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

B) increase; decrease

Which of the following is an example of a demand shock? A) a large oil-price increase B) the introduction and greater availability of credit cards C) a drought that destroys agricultural crops D) unions obtain a substantial wage increase

B) the introduction and greater availability of credit cards

When Paul Volcker tightened the money supply: A) the inflation rate immediately fell. B) nominal interest rates fell in the short run. C) nominal interest rates fell in the long run. D) real balances rose in the short run.

C) nominal interest rates fell in the long run.

Stagflation occurs when prices ______ and output ______. A) fall; falls B) fall; increases C) rise; falls D) rise; increases

C) rise; falls

Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in advance of the overall economy. D) standardized statistics compiled by the National Bureau of Economic Research.

C) variables that tend to fluctuate in advance of the overall economy.

Tightening monetary policy in the SR=

Decreases money supply, increases interest rates

In the short run, price level is..

Fixed money neutrality does not exist

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run. a.) below b.) equal to c.) above d.) either above or below

a.) below

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money: a.) both Central Bank A and Central Bank B should increase the quantity of money. b.) both Central Bank A and Central Bank B should keep the quantity of money stable. c.) Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it. d.) Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable.

a.) both Central Bank A and Central Bank B should increase the quantity of money.

The short run refers to a period: a.) during which prices are sticky and unemployment may occur. b.) of several days. c.) during which there are no fluctuations. d.) during which capital and labor are fully employed.

a.) during which prices are sticky and unemployment may occur.

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ______ prices and ______ output in the short run. a.) higher; lower b.) higher; higher c.) lower; lower d.) lower; higher

a.) higher; lower

One argument in favor of tax cuts over spending-based fiscal stimulus is that: a.) historically tax cuts have been more successful than spending-based fiscal stimulus. b.) in theory the tax multiplier is larger than the government spending multiplier. c.) tax cuts increase the MPC by a larger amount than government spending. d.) tax cuts temporarily increase planned spending, but government spending permanently increases private spending.

a.) historically tax cuts have been more successful than spending-based fiscal stimulus.

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the: a.) interest rate. b.) nominal money supply. c.) price level. d.) consumption function.

a.) interest rate

In the short run an adverse supply shock causes: a.) prices to rise and output to fall. b.) prices to fall and output to rise. c.) both prices and output to fall. d.) both prices and output to rise.

a.) prices to rise and output to fall.

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on: a.) the money supply. b.) the supply of capital. c.) the labor supply. d.) technology.

a.) the money supply.

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: a.) 250. b.) 260. c.) 240. d.) 200.

b.) 260.

The aggregate demand curve tells us possible: a.) combinations of M and P for a given value of Y. b.) combinations of P and Y for a given value of M. c.) results if the Federal Reserve reduces the money supply. d.) combinations of M and Y for a given value of P.

b.) combinations of P and Y for a given value of M

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: a.) remain unchanged. b.) drop by 2 percent. c.) drop by 1 percent. d.) drop by 4 percent.

b.) drop by 2 percent.

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P. a.) higher; higher b.) higher; lower c.) lower; higher d.) lower; lower

b.) higher; lower

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in: a.) in the short run, but not in the long run. b.) in the long run, but not in the short run. c.) in neither the short run nor the long run. d.) both the short run and the long run.

b.) in the long run, but not in the short run.

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by: a.) increasing the money supply, which would restore the original price level. b.) increasing the money supply, but at the cost of permanently higher prices. c.) decreasing the money supply, but at the cost of permanently lower prices. d.) decreasing the money supply, which would restore the original price level.

b.) increasing the money supply, but at the cost of permanently higher prices.

Over the business cycle, investment spending ______ consumption spending. a.) has about the same volatility as b.) is more volatile than c.) is inversely correlated with d.) is less volatile than

b.) is more volatile than

In the short run, a favorable supply shock causes: a.) prices to rise and output to fall. b.) prices to fall and output to rise. c.) both prices and output to fall. d.) both prices and output to rise.

b.) prices to fall and output to rise.

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending? a.) planned spending b.) production c.) the interest rate d.) the price level

b.) production

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will: a.) be permanently higher and output will be restored to the natural rate. b.) return to the old level and output will be restored to the natural rate. c.) return to the old level, but output will be permanently lower. d.) be permanently higher and output will be permanently lower.

b.) return to the old level and output will be restored to the natural rate.

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with: a.) no change in the interest rate. b.) a lower interest rate. c.) a higher interest rate. d.) first a lower and then a higher interest rate.

c.) a higher interest rate.

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: a.) increasing the money supply. b.) increasing the price level. c.) decreasing the money supply. d.) decreasing the price level.

c.) decreasing the money supply.

The Keynesian cross shows: a.) determination of equilibrium income and the interest rate in the short run. b.) determination of equilibrium income and the interest rate in the long run. c.) equality of planned expenditure and income in the short run. d.) equality of planned expenditure and income in the long run.

c.) equality of planned expenditure and income in the short run.

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______. a.) lower; inward b.) greater; inward c.) greater; outward d.) lower; outward

c.) greater; outward

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income. a.) decreases; increases b.) decreases; decreases c.) increases; increases d.) increases; decreases

c.) increases; increases

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. a.) prices; output b.) output; output c.) output; prices d.) prices; prices

c.) output; prices

If the Fed reduces the money supply by 5 percent, then the real interest rate will: a.) be unaffected in both the short run and the long run. b.) rise in the short run but will fall below its original equilibrium level in the long run. c.) rise in the short run but return to its original equilibrium level in the long run. d.) rise in both the short run and the long run.

c.) rise in the short run but return to its original equilibrium level in the long run.

If the interest rate is above the equilibrium value, the: a.) market for real balances clears. b.) demand for real balances exceeds the supply. c.) supply of real balances exceeds the demand. d.) demand for real balances increases.

c.) supply of real balances exceeds the demand.

Which of the following is an example of a demand shock? a.) a large oil-price increase b.) unions obtain a substantial wage increase c.) the introduction and greater availability of credit cards d.) a drought that destroys agricultural crops

c.) the introduction and greater availability of credit cards

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: a.) liquidity preference. b.) real money balances. c.) unplanned inventory investment. d.) the government-purchases multiplier.

c.) unplanned inventory investment.

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: a.) 1,800. b.) 2,000. c.) 1,400. d.) 1,600.

d.) 1,600.

The IS and LM curves together generally determine: a.) income, the interest rate, and the price level. b.) the interest rate only. c.) income only. d.) both income and the interest rate.

d.) both income and the interest rate.

A decrease in the price level, holding nominal money supply constant, will shift the LM curve: a.) upward and to the right. b.) downward and to the left. c.) upward and to the left. d.) downward and to the right.

d.) downward and to the right.

The long run refers to a period: a.) of decades. b.) during which output deviates from the full-employment level. c.) during which capital and labor are sometimes not fully employed. d.) during which prices are flexible.

d.) during which prices are flexible.

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: a.) slopes downward and to the right. b.) is vertical. c.) slopes upward and to the right. d.) is horizontal.

d.) is horizontal.

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. a.) positively; negatively b.) negatively; negatively c.) positively; positively d.) negatively; positively

d.) negatively; positively

Stagflation occurs when prices ______ and output ______. a.) fall; falls b.) fall; increases c.) rise; increases d.) rise; falls

d.) rise; falls

A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production. a.) increase; increase b.) increase; slowdown c.) slowdown; increase d.) slowdown; slowdown

d.) slowdown; slowdown

A supply shock does not occur when: a.) a drought destroys crops. b.) unions push wages up. c.) an oil cartel increases world oil prices. d.) the Fed increases the money supply.

d.) the Fed increases the money supply.

Tightening monetary policy in the LR=

decreases money supply, decreases interest rates

High interest rate makes investments

fall

High income/output=

high interest rates

Low income/output=

low equilibrium interest rates

Monetary neutrality

property that changes money but doesn't change real variables

When do investments crowd out?

when G is increased