ECON Test 3

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All of the following central banks have announced numerical targets for inflation EXCEPT the:

A. United States Federal Reserve System.

In the Keynesian cross diagram, the 45° line represents the short-run equilibrium condition that:

A. Y = PAE.

Central bank independence refers to situations in which central bankers:

C. are insulated from short-term political considerations.

the decision whether to change prices frequently or infrequently is an application of the:

Cost benefit principle

In the short-run Keynesian model, if the mpc equals 0.8, then to increase planned aggregate spending by $20 billion at any output level, government spending must be increased by ______ or net taxes must be decreased by _____.

D. $20 billion; more than $20 billion

The decision about how much money to hold is an application of the:

D. cost-benefit principle.

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will ______ their loans and deposits, and the money supply will _____.

D. decrease; decrease

In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ______, planned aggregate expenditure ______, and short-run equilibrium output _______.

D. decrease; decreases; decreases

To close a recessionary gap, the Federal Reserve must ______ real interest rates by ______ the money supply.

D. decrease; increasing

If potential output equals 3,000 and short-run equilibrium output equals 3,500, there is a(n) ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

D. expansionary; raise

If potential output equals 8,000 and short-run equilibrium output equals 8,500, there is a(n) ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

D. expansionary; raise

An inflation _____ may be more likely to stabilize output as well as inflation because they have established credibility and _____.

D. hawk; anchored inflationary expectations.

One of the serious drawbacks of the deposit insurance system instituted in the United States is that:

D. if insured intermediaries make bad loans, the taxpayers may be responsible for covering the losses.

An increase in aggregate supply is usually shown by a ______ shift of the AS curve.

RIGHTWARD

In an open economy, the domestic real interest rate is determined by:

domestic saving, domestic investment, and net capital inflows.

When the economy is in short-run equilibrium, there will be ______ output gap.

either a recessionary or an expansionary

Shifts in ______ can return the economy to long-run equilibrium.

either the AD curve or the AS curve

An argument against a central bank policy of announcing numerical inflation targets is that inflation targeting policies:

emphasize inflation at the expense of output stabilization

the slope of consumption function

equals MPC

Short-run equilibrium output is the level of output at which actual output:

equals planned aggregate expenditure

If the rate of inflation equals zero then the real rate of interest:

equals the nominal rate of interest

If the rate of inflation equals zero then the nominal rate of interest:

equals the real rate of interest

When a U.S. oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from its sale of oil to the U.S. to buy transportation services from the U.S., U.S. net exports ______ and the capital inflow to the United States ______.

equals zero; equals zero

If planned aggregate expenditure (PAE) in an economy equals 1,000 + 0.9Y and potential output (Y*) equals 9,000, then this economy has:

expansionary gap

The self-correcting tendency of the economy means that rising inflation eventually eliminates:

expansionary gaps

An exchange rate that varies according to the supply and demand for the currency in the foreign exchange market is called a ______ exchange rate.

flexible

The principal demanders of U.S. dollars in the foreign exchange market are:

foreigners wishing to purchase U.S. goods or assets.

all of the following would be included in planned aggregate expenditure EXCEPT: A. spending on consumer durables. B. planned changes in inventories. C. sales of domestically produced goods to foreigners. D. interest paid on the government debt.

iNTREST PAID ON THE GOVERNMENT DEBT

A trade deficit occurs when:

imports exceed exports.

If the interest rate in the U.S. rises, U.S. financial assets become ______ attractive to buyers and the ______ U.S. dollars will rise.

more; demand for

As U.S. real GDP rises, wealthier households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar.

more; depreciation

All else equal, relative to the case of a closed economy, monetary policy is ______ effective in an open economy with a ______ exchange rate.

more; flexible

A sudden increase in household wealth is an example of a ______ demand shock, which would shift the AD curve to the ______.

positive; right

The law of one price states that if transportation costs are relatively small, then the:

price of an internationally traded commodity must be the same in all locations.

The real exchange rate is the:

price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.

Graphically, short-run equilibrium occurs at the intersection of the aggregate demand curve and:

the aggregate supply curve

Graphically, long-run equilibrium occurs at the intersection of the aggregate demand curve and:

the aggregate supply curve and potential output

An economy with a trade surplus must also have:

positive net capital outflows.

The Federal Reserve can decrease the money supply by:

A. increasing reserve requirements.

A negative demand shock will shift the ______ curve to the ______.

AD; left

A positive demand shock will shift the ______ curve to the ______.

AD; right

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds then, if the price of oil is 200 pesos per barrel in Mexico, the price of oil is ______ per barrel in the United States.

$25

Suppose the stock market crashed, wiping out $5 trillion of household wealth. Consistent with economic models based on historical trends, consumption spending might fall by as much as, but probably not more than, ______.

$350 billion

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,250,000 worth of mirrors in the coming year. The company purchases $300,000 worth of new equipment during the year. Sales for the year turn out to be $900,000. Actual investment by Dave's Mirror Company equals ______ and planned investment equals _______.

$650,000; $550,000

If the marginal propensity to consume equals 0.75, then a $100 increase in after-tax disposable income leads to a ______ increase in consumption.

$75

historically speaking, a one dollar decrease in household wealth will cause consumer spending to fall by

.03 to .07

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are ______ Jordanian dinars per U.S. dollar.

.712

In Macroland autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Induced expenditure equals:

.74 Y

.75

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. The slope of the Expenditure Line is:

.80

A currency depreciation is a(n):

decrease in the value of a currency relative to other currencies.

.80Y

Data on after-tax income and consumption spending for the Adam Smith family are given below: after tax income: $9000 $14000 $19000 $24000 Consumption spending $18,100 $22,600 $27,100 $31,600 Based on these data, the Adam Smith family has a marginal propensity to consume of:

If consumption increases by $9 when after-tax disposable income increases by $10, the marginal propensity to consume (mpc) equals:

According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ______ in the long run.

The price of gold is 300 U.S. dollars per ounce in New York and 435 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ______ Canadian dollars per U.S. dollar.

1.45

Suppose the price of gold is initially 300 U.S. dollars per ounce in New York and 450 Canadian dollars per ounce in Toronto, Canada. If the law of one price holds for gold, the nominal exchange rate is ______ Canadian dollars per U.S. dollar. If Canada experiences inflation, such that the price of gold rises to 510 Canadian dollars per ounce, but the U.S. does not experience any inflation, the nominal exchange rate would be ______ Canadian dollars per U.S. dollar.

1.50; 1.70

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Short-run equilibrium output in this economy equals:

1000

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, the mpc equals 0.9, and potential output (Y*) equals 9,000, then taxes must be increased by approximately ______ to eliminate any output gap.

111

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, the mpc equals 0.9, and potential output (Y*) equals 9,000, then transfers must be decreased by approximately ______ to eliminate any output gap.

111

Suppose the price of gold is $300 per ounce in the United States and 2,400 pesos per ounce in Mexico. If purchasing power parity holds then, if the price of oil is $25 per barrel in the United States, the price of oil is ______ pesos per barrel in Mexico.

200

290

290+.75Y

Data on output and planned aggregate expenditure in Macroland are given below. output (Y) PAE 2,000 2300 3,000 3200 4,000 4100 5,000 5000 6,000 5900 Based on these data, the short-run equilibrium level of output is _____.

5000

The price of gold is $300 per ounce in New York and 2,550 pesos per ounce in Mexico City. If the law of one price holds for gold, the nominal exchange rate is ______ pesos per U.S. dollar.

8.5

900

900+ .80Y

Which of the following events will increase the domestic real interest rate in an open economy?

A decrease in the domestic saving.

When using the AD-AS model to understand business cycles, the question, "what are the fundamental causes of business cycles?" can be thought of as the question:

A. "what factors move the economy away from long-run equilibrium?"

The U.S. Congress instituted a system of deposit insurance for banks in:

A. 1934.

72. Which of the following would be expected to increase the demand for money in the U.S.? A. Financial investors become concerned about increasing riskiness of stocks. B. The economy enters a recession. C. Political instability decreases dramatically in developing nations. D. On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.

A. Financial investors become concerned about increasing riskiness of stocks.

74. Which of the following would be expected to decrease the demand for money in the U.S.? A. Grocery stores begin to accept credit cards in payment. B. The economy enters a boom period. C. Political instability increases dramatically in developing nations. D. Households fear increasing computer glitches will severely limit their ability to use ATMs.

A. Grocery stores begin to accept credit cards in payment.

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r Ip = 200 - 400r G = 200 NX = 10 T = 150 Given the information about the economy above, which expression below gives planned aggregate expenditure (PAE)?

A. [790 - 700r] + 0.8Y

A large decrease in oil prices is an example of:

A. a positive inflation shock.

One drawback in using fiscal policy as a stabilization tool is that fiscal policy:

A. affects potential output as well as planned aggregate expenditure.

When actual output exceeds potential output, there is ______ output gap and the inflation rate will ____.

A. an expansionary; exceed the expected rate of inflation

Total taxes paid divided by total before-tax income is called the:

A. average tax rate.

If the quantity supplied of money exceeds the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.

A. buy; rise; fall

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

A. conducting open-market operations.

Deposit insurance is a system in which the government guarantees that:

A. depositors will not lose any money even if their bank goes bankrupt.

A banking panic is an episode in which:

A. depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system.

One problem with using monetary policy to address "bubbles" in asset markets is that:

A. doing so presupposes that the Federal Reserve is better than financial-market professionals at identifying bubbles.

By changing the incentives, reductions in marginal tax rates can increase potential output in each of the following ways EXCEPT by encouraging households to:

A. enjoy more hours of leisure.

For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n):

A. expansionary output gap.

For an economy starting at potential output, an increase in planned investment in the short run results in a(n):

A. expansionary output gap.

When commercial banks borrow reserves from the Fed, the quantity of reserves in the banking system ______ and, ultimately, the money supply _____.

A. increases; increases

House prices in the U.S. increased dramatically _____, and decreased dramatically ______.

A. from 2001 to 2006; from 2007 to 2009

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.

A. greater; fall; increase

During the Christmas shopping season, the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will ____.

A. increase

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. If the Fed took no actions to offset this increase in money demand, then nominal interest rates would _____.

A. increase

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must ______ to eliminate any output gap.

A. increase by 200

A fiscal policy action to close an expansionary gap is to:

A. increase taxes.

Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to avoid a recession.

A. increase the target inflation rate.

During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must ______ the money supply, which will put ______ pressure on nominal interest rates.

A. increase; downward

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. To offset this increase in money demand, the Fed would have had to ______ the money supply, which would have put ______ pressure on nominal interest rates.

A. increase; downward

If commercial banks are maintaining a 5 percent reserve/deposit ratio and the Fed lowers the required reserve ratio to 3 percent, then banks may ______ their loans and deposits, and the money supply may _____.

A. increase; increase

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:

A. increased by $1 billion.

Higher real income ______ the demand for money and a higher price level ______ the demand for money.

A. increases; increases

The larger the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.

A. larger; larger

Reserve requirements set by the Federal Reserve are the:

A. minimum value of the ratio of reserves to bank deposits that commercial banks are allowed to maintain.

The Federal Open Market Committee makes decisions about ______ policy.

A. monetary

The inside lag is relatively shorter for _____ policy and the outside lag is relatively shorter for _____ policy.

A. monetary; fiscal

In the short run with predetermined prices, when output is greater than planned aggregate expenditure, firms will:

A. reduce production.

In the basic Keynesian model, a decline in autonomous spending:

A. reduces short-run equilibrium output.

In the basic Keynesian model, a decrease in government purchases:

A. reduces short-run equilibrium output.

In the basic Keynesian model, a decrease in transfer payments:

A. reduces short-run equilibrium output.

In the basic Keynesian model, a tax increase:

A. reduces short-run equilibrium output.

To close a recessionary gap, the Fed ______ interest rates which ______ planned aggregate spending and ______ short-run equilibrium output.

A. reduces; increases; increases

The Federal Reserve can increase the money supply by:

A. reducing reserve requirements.

If the quantity supplied of money is less than the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal.

A. sell; fall; rise

The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional:

A. spending.

One potential problem with using fiscal policy to close recessionary output gaps is that:

A. sustained government deficits can be harmful to long-run economic growth.

All of the following are examples of the independence of the U.S. Federal Reserve System EXCEPT that:

A. the Federal Reserve Act does not explicitly prohibit legislative interference in monetary policy.

The Federal Reserve discount rate is the rate of interest charged on loans from ______ to _____.

A. the Federal Reserve; commercial banks

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:

A. the direct changes in spending change the income of producers which leads to additional changes in spending.

Three macroeconomic factors that affect the demand for money are:

A. the nominal interest rate; real income, and the price level.

Real wages can be cut without cutting nominal wages if:

A. the rate of inflation is positive.

The average tax rate is:

A. total taxes divided by total before-tax income.

Which of the following events will decrease the domestic real interest rate in an open economy?

An increase in domestic saving.

Automatic stabilizers are provisions in the law that imply automatic ______ in government spending or ______ in taxes when real output declines.

B. increases; decreases

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

B. 0.03

The Federal Reserve consists of ______ regional Banks, ______ governors on the Board of Governors, and ______ voting members of the Federal Open Market Committee.

B. 12; 7; 12

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r Ip = 200 - 400r G = 200 NX = 10 T = 150 Given the information about the economy above, what would be the impact on induced expenditures of a one-percentage-point increase in the real interest rate?

B. Induced expenditures would not change.

B. [790 - 700r]

The aggregate supply curve will shift downward in response to:

B. a decrease in the expected rate of inflation.

A sudden change in the normal behavior of inflation, unrelated to the nation's output gap is called:

C. an inflation shock.

In the Keynesian model, a $1 billion increase in autonomous consumption leads to ______ in short-run equilibrium output.

B. a greater than $1 billion increase

In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output.

B. a greater than $5 billion decrease

A large increase in oil prices is an example of:

B. a negative inflation shock.

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following EXCEPT:

B. a negative inflation shock.

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following EXCEPT:

B. a positive inflation shock.

If planned aggregate expenditure (PAE) in an economy equals 2,000 + 0.8Y and potential output (Y*) equals 11,000, then this economy has:

B. a recessionary gap.

The marginal propensity to consume (mpc) is the:

B. amount by which consumption increases when disposable income increases by $1.

Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines are called:

B. automatic stabilizers.

Fiscal policy can shift

B. both aggregate demand and potential output.

The bursting of the housing bubble in 2006 caused ______ to cut back on their spending, thereby shifting the PAE line _____.

B. businesses and households; downward

Federal Reserve actions that increase nominal interest rates and decrease the money supply:

B. close an expansionary gap.

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ______ to eliminate any output gap.

B. decrease by 100

Starting from full employment at the initial target inflation rate, if there is a favorable inflation shock, then the Federal Reserve must _____ in order to return output to potential.

B. decrease the target inflation rate.

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be:

B. decreased by $1 billion.

Innovations in the United States, such as credit cards, debit cards, and ATMs have:

B. decreased the demand for money.

The credibility of monetary policy is the:

B. degree to which the public believes the central bank's promises to keep inflation low, even if doing so may impose short-run costs.

The inside lag of macroeconomic policy is the:

B. delay between when a policy change is needed and the policy is implemented.

Changes in government purchases affect planned spending _____, and changes in taxes and/or transfers affect planned spending _______.

B. directly; indirectly

The ______ is the interest rate commercial banks pay to the Fed; the ______ is the interest rate commercial banks charge each other for short-term loans.

B. discount rate; federal funds rate

The interest rate that commercial banks charge each other for very short-term loans is called the:

B. federal funds rate.

Starting from long-run equilibrium, a negative inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

B. higher; lower

All of the following tend to make economic policymaking difficult and inexact EXCEPT the:

B. inability to develop statistical models of the economy.

In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:

B. increase production.

A fiscal policy action to close a recessionary gap is to:

B. increase transfer payments.

Lower nominal interest rates ______ the amount of money demanded and a lower price level ______ the amount of money demanded.

B. increase; decreases

Lower nominal interest rates ______ the amount of money demanded and lower real income ______ the amount of money demanded.

B. increase; decreases

In the basic Keynesian model, a tax cut:

B. increases short-run equilibrium output.

In the basic Keynesian model, an increase in government purchases:

B. increases short-run equilibrium output.

In the basic Keynesian model, an increase in transfer payments:

B. increases short-run equilibrium output.

A higher real interest rate ______ saving and ______ consumption spending.

B. increases; decreases

An economic expansion in the U.S. ______ the demand for exports from Mexico resulting in an increase in Mexican autonomous expenditures and a(n) ______ output gap in Mexico.

B. increases; expansionary

Financial markets pay close attention to changes in the federal funds rate because these changes:

B. indicate the Fed's plans for monetary policy.

Someone who is not strongly committed to achieving and maintaining low inflation is called a(n):

B. inflation dove.

An inflation hawk is someone who:

B. is committed to maintaining low inflation even at the cost of reduced output and employment.

An inflation dove is someone who

B. is not strongly committed to maintaining low inflation.

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is ______ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.

B. less; rise; decrease

Evidence from work hours and marginal tax rates in different countries suggests that

B. lower marginal tax rates encourage more work hours.

One problem with using monetary policy to address "bubbles" in asset markets is that:

B. monetary policy is not a very good tool for addressing the problem of inappropriately high asset prices.

If the Federal Reserve is currently paying 0.75% interest on bank reserves, but then increases that interest rate to 1%, banks may decide to hold ______ reserves, and the money supply may _____.

B. more; decrease

If the Federal Reserve sets a target nominal interest rate, it can:

B. only set a money supply target that is consistent with the target nominal interest rate target.

The decision about the forms in which to hold one's wealth is called the ______ decision.

B. portfolio allocation

Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy affects ______ as well as aggregate demand and fiscal policy is _______.

B. potential output; not flexible enough

To accommodate an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____.

B. raise the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run.

77. The money demand curve will shift to the right if: A. the nominal interest rate increases. B. real income increases. C. ATM machines are introduced. D. the price level decreases.

B. real income increases.

For an economy starting at potential output, a decrease in autonomous expenditure in the short run results in a(n):

B. recessionary output gap.

For an economy starting at potential output, a decrease in planned investment in the short run results in a(n):

B. recessionary output gap.

If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

B. recessionary; reduce

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r, the interest rate is currently 5 percent (0.05). If potential output equals 11,750, the central bank must ______ the interest rate to close the ____________ gap.

B. reduce; recessionary

The expenditure line in the Keynesian cross diagram represents the:

B. relationship between planned expenditure and output.

If the Fed wishes to increase nominal interest rates, it must engage in an open market ______ of bonds that ______ the money supply.

B. sale; decreases

A supply-side policy is a policy that

B. shifts the long-run aggregate supply curve.

The Federal Reserve System is:

B. the central bank of the United States.

Any value of the nominal interest rate chosen by the Federal Reserve implies a specific value for ______.

B. the money supply

Any value of the money supply chosen by the Federal Reserve implies a specific value for ______.

B. the nominal interest rate

If inflation equals zero, then a worker's real wage will fall when:

B. the nominal wage decreases.

The time between when the fed funds rate is cut and investment spending increases is an example of:

B. the outside lag in macroeconomic policy.

Bank depositors will not lose their deposits in a banking panic if:

B. there is 100% reserve banking.

If the professional opinions of economists regarding the natural rate of unemployment vary between 4.5 and 6 percent, then when the actual rate of unemployment equals 10.5 percent:

B. there is a probably recessionary gap.

The economy is in short-run equilibrium:

B. when the AD and AS curves intersect at a level of real GDP that is above or below Y*.

planned aggregate expenditure equals:

C+I+G+NX

C. 0.8Y

The Federal Reserve System first began operations in:

C. 1914.

78. The money demand curve will shift to the left if: A. the nominal interest rate increases. B. the nominal interest rate decreases. C. ATM machines are introduced. D. the price level increases.

C. ATM machines are introduced.

The seven Fed governors, the president of the Federal Reserve Bank of New York, and four of the presidents of the other regional Federal Reserve Banks constitute the:

C. Federal Open Market Committee.

Which of the following statements about inflation targeting is true?

C. Inflation targets have been used in both developed and developing countries.

73. Which of the following would be expected to increase the demand for U.S. currency? A. Competition among brokers forces down the commission charge for selling bonds or stocks. B. The economy enters a recession. C. Political instability increases dramatically in developing nations. D. On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.

C. Political instability increases dramatically in developing nations.

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r Ip = 200 - 400r G = 200 NX = 10 T = 150 Given the information about the economy above, what would be the impact on short-run equilibrium output of a one-percentage-point increase in the real interest rate, assuming that the multiplier is equal to 5?

C. Short-run equilibrium output would decrease by 35 units.

When actual output is less than potential output, there is ______ output gap and the inflation rate will ____.

C. a recessionary; be lower than the expected rate of inflation

An example of an negative inflation shock is:

C. a significant rise in oil prices.

An inflation shock is:

C. a sudden change in the normal behavior of inflation, unrelated to the nation's output gap.

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will shift the ______ curve to the left and generate ______.

C. aggregate demand; an expansionary output gap

Changes in consumption and planned investment spending resulting from changes in the real interest rate alter:

C. autonomous expenditures.

Regarding the fiscal policy responses to the 2007-2009 recession, the Congressional Budget Office (CBO) found that:

C. both the Bush Administration's fiscal policy and the Obama Administration's fiscal policy worked.

The situation in which central bankers are insulated from short-term political considerations and are allowed to take a long-term view of the economy is called:

C. central bank independence.

If the Federal Reserve wants to increase the money supply, it should:

C. conduct open-market purchases.

Higher nominal interest rates ______ the amount of money demanded and a higher price level ______ the amount of money demanded.

C. decrease; increases

Higher nominal interest rates ______ the amount of money demanded and higher real income ______ the amount of money demanded.

C. decrease; increases

A tax increase that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.

C. decrease; may increase, decrease, or remain unchanged

A higher real interest rate ______ investment spending and ______ consumption spending.

C. decreases; decreases

81. When Argentines increase their savings in U.S. dollars, the U.S. money: A. supply curve shifts left. B. supply curve shifts right. C. demand curve shifts right. D. demand curve shifts left.

C. demand curve shifts right.

Changes in government purchases affect planned spending:

C. directly, by changing autonomous expenditures.

The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the ______ rate.

C. discount

Shifts in ______ can PUSH the economy to long-run equilibrium.

C. either the AD curve or the AS curve

Shifts in ______ can push the economy out of long-run equilibrium.

C. either the AD curve or the AS curve

If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000, then this economy has a(n) ______ gap that can be closed by _________.

C. expansionary; decreasing government purchases

In the Keynesian cross diagram, the ______ line relates planned aggregate expenditure to output and the ______ line represents the condition that planned aggregate expenditure equals short-run equilibrium output.

C. expenditure; 45°

Relative to workers in Western Europe, workers in the U.S.

C. face a lower marginal tax rate and work more hours per year.

If the Federal Reserve is currently paying 1% interest on bank reserves, but then reduces that interest rate to 0.5%, banks may decide to hold ______ reserves, and the money supply may _____.

C. fewer; increase

The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, disruptions in the financial market made it difficult:

C. for businesses and consumers to borrow money.

Most economists believe that the reduced variability of inflation in the U.S. is the result of:

C. improved monetary policymaking by the Fed.

A fiscal policy action to close a recessionary gap is to:

C. increase government purchases.

Lower taxes on interest income

C. increase growth rates by increasing saving and thus investment.

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will ______ to ______ econs, assuming that the public does not wish to change the amount of currency it holds.

C. increase; 4,667

A tax cut that affects both aggregate demand and potential output is predicted to _____ the long-run equilibrium level of output, while inflation _____.

C. increase; may increase, decrease, or remain unchanged

Government policy actions intended to decrease planned spending and output are called ______ policies.

D. contractionary

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, transfers must be:

C. increased by $1.33 billion.

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, taxes must be:

C. increased by $1.33 billion.

The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, the ensuing financial crisis:

C. increased the level of uncertainty about the future.

During the Great Depression in the United States between 1929 and 1933, banks' reserve/deposit ratio ______ and the amount of currency held by the public ____, while the money supply ______.

C. increased; increased; decreased

A reduction in the marginal tax rate can cause potential output to increase by

C. increasing the incentive to invest more in education and earn advanced degrees.

If the income-expenditure multiplier equals 2.5 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ______ the real interest rate by ______ percentage points.

C. increasing; 2.0

Following an adverse supply shock, people with anchored inflation expectations believe the Fed will:

C. keep its target inflation rate unchanged.

Starting from long-run equilibrium, a positive inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

C. lower; higher

Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to keep inflation at the initial target level.

C. maintain the initial target inflation rate.

Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to keep inflation from becoming permanently higher.

C. maintain the initial target inflation rate.

83. Because the Fed determines the money supply, the: A. money supply curve is downward sloping. B. money supply curve is upward sloping. C. money supply curve is vertical. D. money supply curve is horizontal.

C. money supply curve is vertical.

If planned aggregate expenditure (PAE) in an economy equals 3,000 + 0.75Y and potential output (Y*) equals 12,000, then this economy has:

C. no output gap.

When actual output equals potential output, there is ______ output gap and the inflation rate will ____.

C. no; be equal to the expected rate of inflation

The Federal Reserve can:

C. only set a money supply target that is consistent with a nominal interest rate target, and vice versa.

In the short run with predetermined prices, when output is greater than planned aggregate expenditure:

C. planned investment is less than actual investment.

To close an expansionary gap, the Fed ______ interest rates which ______ planned aggregate spending and ______ short-run equilibrium output.

C. raises; decreases; decreases

An increase in marginal tax rates

C. reduces the opportunity cost of leisure (not working).

An economic recession in Japan ______ the demand for exports from East Asian countries resulting in a reduction in autonomous expenditures in these East Asian countries and a(n) ______ output gap in the East Asian countries.

C. reduces; recessionary

An economic recession in the U.S. ______ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ______ output gap in Canada.

C. reduces; recessionary

When prices are predetermined, the level of output that equals planned aggregate expenditure is called ______ output.

C. short-run equilibrium

Anchored inflationary expectations are beneficial to an economy because they:

C. shorten recessions caused by adverse inflation shocks.

The smaller the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output.

C. smaller; smaller

B. shifts the long-run aggregate supply curve.

C. tax policy and government expenditures.

84. The equilibrium quantity of money in circulation is determined by: A. the interaction of money supply and money demand. B. the nominal interest rate, real income, and the price level. C. the Federal Reserve. D. individuals, households, and businesses.

C. the Federal Reserve.

The marginal tax rate is:

C. the amount by which taxes increase when before-tax income rises by an additional dollar.

The demand for money is:

C. the amount of wealth an individual chooses to hold in the form of money.

Which of the following characteristics of a central bank is expected to enhance monetary policy credibility?

C. the central bank announces a numerical inflation target.

For the past 40 years, the Federal Reserve has expressed policy in terms of a target value for:

C. the federal funds rate.

The opportunity cost of money is:

C. the nominal interest rate.

Suppose last year Moe faced a 25% marginal tax rate. This year tax rates increased and now Moe faces a 30% marginal tax rate. Moe chooses to work fewer hours this year because

C. the opportunity cost of leisure - not working - has fallen.

The time between when income taxes are cut and consumption spending increases is an example of:

C. the outside lag in fiscal policy.

76. The money demand curve will shift to the right if: A. the nominal interest rate increases. B. the nominal interest rate decreases. C. the price level increases. D. the price level decreases.

C. the price level increases.

In response to the 2007-2009 recession, the Economic Stimulus Act of 2008, under President Bush, was composed of approximately _____; the American Recovery and Reinvestment Act, under President Obama, was composed of approximately ______.

C. two-thirds tax cuts and one-third spending increases; one-fourth tax cuts and three-fourths spending increases

135. In the short-run Keynesian model, if the mpc equals 0.8, then to decrease planned aggregate spending by $30 billion at any output level, government spending must be decreased by ______ or net taxes must be increased by _____. A. $30 billion; $30 billion B. more than $30 billion; more than $30 billion C. less than $30 billion; less than $30 billion D. $30 billion; more than $30 billion

D. $30 billion; more than $30 billion

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 35,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

D. 0.05

The Board of Governors consists of ______ governors appointed for staggered ___-year terms.

D. 7; 14

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r Ip = 200 - 400r G = 200 NX = 10 T = 150 Given the information about the economy above, what would be the impact on autonomous expenditures of a one-percentage-point increase in the real interest rate?

D. Autonomous expenditures would decrease by 7 units.

The seven leaders of the Federal Reserve System headquartered in Washington, D.C. constitute the:

D. Board of Governors.

Suppose last year Moe faced a 25% marginal tax rate. This year tax rates increased and now Moe faces a 30% marginal tax rate. Moe chooses to work more hours this year because

D. Moe must work more hours to have the same after-tax income this year.

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following EXCEPT:

D. a decrease in the inflation rate.

All of the following are characteristics of independent central banks EXCEPT:

D. ability of executive branch to overrule central bank actions.

Shocks to _____ require the Fed to choose between inflation and output stability, while shocks to _____ do not require the Fed to choose between inflation and output stability.

D. aggregate supply; aggregate demand

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following EXCEPT:

D. an increase in the inflation rate.

In the Keynesian cross diagram, the vertical intercept of the expenditure line equals ______ and the slope of the expenditure line equals _____.

D. autonomous expenditures; the mpc

The federal funds rate is the interest rate on short-term loans made by:

D. commercial banks to other commercial banks.

The two main responsibilities of the Federal Reserve System are to ______ and to ______.

D. conduct monetary policy; oversee financial markets

If the Federal Reserve wants to decrease the money supply, it should:

D. conduct open-market sales.

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, taxes must be:

D. decreased by $1.33 billion.

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, transfers must be:

D. decreased by $1.33 billion.

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:

D. decreased by less than $10 billion.

Lower real income ______ the demand for money and a lower price level ______ the demand for money.

D. decreases; decreases

A lower real interest rate ______ saving and ______ consumption spending.

D. decreases; increases

If the income-expenditure multiplier equals 4 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 100 units, then a 1,000 unit recessionary gap can be eliminated by ______ the real interest rate by ______ percentage points.

D. decreasing; 2.5

The outside lag of macroeconomic policy is the:

D. delay between when a policy change is implemented and when most of the effects of policy have occurred in the economy.

When the Federal Reserve lends reserves to commercial banks, this is an example of:

D. discount window lending.

Shocks to aggregate demand _____ require the Fed to choose between inflation and output stability, while shocks to aggregate supply ____ require the Fed to choose between inflation and output stability.

D. do not; do

Shocks to aggregate demand ______ require the Fed to choose between inflation and output stability; shocks to aggregate supply ______ require the Fed to choose between inflation and output stability.

D. do not; do

Announced numerical inflation targets are advocated for all of the following reasons EXCEPT that inflation targets:

D. eliminate the tradeoff between maintaining output or inflation in the event of adverse inflationary shocks.

Government policy actions intended to increase planned spending and output are called ______ policies.

D. expansionary

In the short-run Keynesian model, to close a recessionary gap of $1 billion dollars government purchases must be:

D. increased by less than $1 billion.

The second round increase in inflation following an adverse supply shock is the result of:

D. increases in long-term inflationary expectations.

Changes in taxes and transfers affect planned spending:

D. indirectly, by changing disposable income and, consequently, consumption.

Someone who is committed to maintaining low inflation even at the short-run cost of reduced output and employment is called a(n):

D. inflation hawk.

The delay between the date a policy change is needed and the date it is implemented is called the:

D. inside lag.

The benefit of holding money is _______, while the opportunity cost of holding money is _______.

D. its usefulness in carrying out transactions; the nominal interest rate

To prevent inflation from becoming permanently higher following an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____.

D. maintain the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run.

All of the following are ways to enhance central bank credibility EXCEPT to:

D. make central bank actions subject to frequent review and veto by the executive and legislative branches of government.

The amount by which taxes increase when before-tax income rises by an additional dollar is called the:

D. marginal tax rate.

In the short run with predetermined prices, when output is less than planned aggregate expenditure:

D. planned investment is greater than actual investment.

Contractionary policies are government stabilization policy actions intended to decrease:

D. planned spending.

Expansionary policies are government stabilization policy actions intended to increase:

D. planned spending.

If the Fed wishes to reduce nominal interest rates, it must engage in an open market ______ of bonds that ______ the money supply.

D. purchase; increases

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r, the interest rate is currently 2 percent (0.02). If potential output equals 8,000, the central bank must ______ the interest rate to close the ______ gap.

D. raise; expansionary

80. The money demand curve will shift to the left if: A. the nominal interest rate increases. B. the nominal interest rate decreases. C. price level increases. D. real income decreases.

D. real income decreases.

If short-run equilibrium output equals 20,000 and potential output (Y*) equals 25,000, then this economy has a(n) ______ gap that can be closed by _________.

D. recessionary; increasing government purchases

82. Because an increase in the nominal interest rate raises the opportunity costs of holding money, the money demand curve: A. shifts to the right. B. shifts to the left. C. slopes upward. D. slopes downward.

D. slopes downward.

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ______ policies.

D. stabilization

The central bank of the United States is:

D. the Federal Reserve System.

75. The money demand curve relates ______ to the ________. A. the aggregate quantity of money demanded; aggregate demand B. aggregate demand; nominal interest rate C. the aggregate quantity of money demanded; price level D. the aggregate quantity of money demanded; nominal interest rate

D. the aggregate quantity of money demanded; nominal interest rate

The effect of a one-unit increase in autonomous expenditure on short-run equilibrium output is called:

D. the income-expenditure multiplier.

The time between when Congress decides to cut taxes to stimulate aggregate demand and when the tax cuts are implemented is an example of:

D. the inside lag in fiscal policy.

The time between when Federal Reserve policymakers decide to close an output gap and when they act to change the fed funds rate is an example of:

D. the inside lag in macroeconomic policy.

79. The money demand curve will shift to the left if: A. the nominal interest rate increases. B. the nominal interest rate decreases. C. price level increases. D. the price level decreases.

D. the price level decreases.

The speed at which an economy returns to potential following an adverse inflation shock depends on:

D. the public's expectations of how the Federal Reserve will act.

If the professional opinions of economists regarding the natural rate of unemployment vary between 4.5 and 6 percent, then when the actual rate of unemployment equals 5 percent:

D. there could be either an expansionary or recessionary gap, or the economy could be at potential depending on the accuracy of measurement.

In an open economy, domestic investment equals:

domestic saving plus net capital inflows.

A fiscal policy action to close an expansionary gap is to:

DECREASE GOVERNMENT PURCHASES

Which of the following equations is equivalent to the equation S - NX = I?

S + KI = I

all of the following would be included in planned aggregate expenditure EXCEPT: A. purchases of services provided by government employees. B. planned changes in inventories. C. sales of domestically produced goods to foreigners. D. social security payments.

SOCIAL SECURITY PAYMENTS

the Assumption that firms meet the demand for their products at present prices is the key assumption which ____ is built on.

The basic Keynesian model

The principal suppliers of U.S. dollars to the foreign exchange market are:

U.S. households or firms wishing to purchase foreign goods or assets.

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

a decline in national saving caused largely by rapidly rising government budget deficits.

A leftward shift of the AS curve indicates:

a decrease in aggregate supply.

Each of the following would decrease the demand for U.S. dollars, shifting the demand curve for dollars to the left, EXCEPT:

a depreciation of foreign currencies relative to the U.S. dollar.

Each of the following would decrease the supply of U.S. dollars, shifting the supply curve for dollars to the left, EXCEPT:

a depreciation of the U.S. dollar relative to other currencies.

The U.S. trade deficit has been mainly caused by:

a low rate of national saving.

When actual output is less than potential output, there is ____ output gap and the rate of inflation will tend to ____.

a recessionary; decrease

Changes in planned spending not caused by changes in output or the inflation rate will shift the:

aggregate demand curve.

For a given inflation rate if a resolution of international disputes leads to a cutback in government military spending, then the ______ shifts _____.

aggregate demand curve; left

For a given inflation rate, if a stock market crash makes consumers less willing to spend, then the ______ shifts _____.

aggregate demand curve; left

For a given inflation rate, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the ______ shifts _____.

aggregate demand curve; left

For a given inflation rate, if a rise in the stock market makes consumers more willing to spend, then the ______ shifts _____.

aggregate demand curve; right

For a given inflation rate, if an increase in threats to domestic security causes the government to increase military spending, then the ______ shifts _____.

aggregate demand curve; right

For a given inflation rate, if bright prospects for the future of the economy cause businesses to increase their spending on new capital, then the ______ shifts _____.

aggregate demand curve; right

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will shift the ______ curve to the left and generate ______.

aggregate demand; a recessionary output gap

Starting from potential output, if firms become more optimistic about the future and decide to increase their investment in new capital, then this will shift the ______ curve to the right and generate ______.

aggregate demand; an expansionary output gap

as the quality of available resources becomes worse:

aggregate supply falls

As the available technology improves, ______ shifts to the _____.

aggregate supply; right

As the number or quality of available resources improves, ______ shifts to the _____.

aggregate supply; right

Reduced macroeconomic variability in the U.S. since the 1981 has all of the following benefits EXCEPT:

allowing the fed to pursue accomodating policy

Each of the following would increase the demand for U.S. dollars, shifting the demand curve for dollars to the right, EXCEPT:

an appreciation of foreign currencies relative to the U.S. dollar.

Each of the following would increase the supply of U.S. dollars, shifting the supply curve for dollars to the right, EXCEPT:

an appreciation of the U.S. dollar relative to other currencies.

When actual output exceeds potential output there is ____ output gap and the rate of inflation will tend to ____.

an expansionary; increase

An increase in the aggregate demand for goods and services will result in an increase in the amount of output firms are willing to produce, and this increase in output will be accompanied by:

an increase in the inflation rate.

People's expectations of future inflation that do not change even if inflation rises temporarily are called _____ inflationary expectations.

anchored

Due to menu costs, many firms in the economy will increase their output:

and then raise the price at which they are willing to sell their output.

Which of the following policies is likely to enhance a central bank's credibility?

announce inflation targets

An increase in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

appreciated

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has:

appreciated

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has ______ and the U.S. dollar has _____.

appreciated; depreciated

An increase in the value of a currency relative to other currencies is called a(n):

appreciation

Purchasing power parity is the theory that nominal exchange rates are determined:

as necessary for the law of one price to hold.

If households and firms increase their expectation for the rate of inflation, the ______ curve will shift _____.

as; upward

The portion of planned aggregate expenditure that is independent of output is called ______ expenditure.

autonomous

the vertical intercept of the consumption function equals____ and the slope equals____

autonomous consumption: the MPC

The two parts of planned aggregate expenditure are ______ expenditures and ______ expenditures.

autonomous; induced

When the interest rate in the U.S. falls, U.S. financial assets:

become less attractive to both foreign and domestic buyers.

When the interest rate in the U.S. rises, U.S. financial assets:

become more attractive to both foreign and domestic buyers.

The AD curve can be shifted by:

both fiscal and monetary policy.

When the Chinese government buys U.S. government bonds, from the perspective of the United States, this is a(n):

capital inflow.

When a Peruvian buys a U.S. government bond, from the perspective of Peru, this is a(n):

capital outflow.

When an American buys stock in a French company, from the perspective of the United States, this is a(n):

capital outflow.

Net capital outflows equal:

capital outflows minus capital inflows.

Inflation inertia is the tendency for inflation to:

change relatively slowly from year to year.

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm:

changes the production levels to meet the demand

changes in autonomous consumption could be the result fo

changing in houseing prices

menu cost are the cost of:

changing prices

the largest component of planned aggregate expenditure is

consumption

In an open economy with flexible exchange rates, monetary policy affects ______ through changes in the real interest rate and affects ______ through changes in the exchange rate.

consumption and investment; net exports

the four components of planned aggregate expenditure are;

consumption, planned investment, government purchases, and net exports

The degree to which the public believes the central bank's promises to keep inflation low, even if doing so may impose short-run economic costs is the _____ of monetary policy.

credibility

The foreign exchange market is the market on which ______ of various nations are traded for one another.

currencies

The two negative demand shocks that caused the Great Recession were:

declining housing prices and the 2008 financial panic

To achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the inflation rate must:

decrease

Holding all else constant, a decrease in the real interest rate on U.S. assets will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

decrease; decrease

An increase in the real exchange rate will tend to ______ exports and to ______ imports.

decrease; increase

Holding all else constant, a decrease in the real interest rate on Mexican assets will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

decrease; increase

In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will ______ capital inflows and ______ the equilibrium domestic real interest rate.

decrease; increase

In an open economy, a decrease in the government's budget deficit will ______ the domestic real interest rate and ______ the level of capital investment in the country, holding other factors constant.

decrease; increase

In an open economy, if domestic citizens decide to save more, then the domestic real interest rate will ______ and the level of capital investment in the country will _____, holding other factors constant.

decrease; increase

At each value of the domestic interest rate, increases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

decrease; increase; decrease

Holding constant risk and the real returns available abroad, lower domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

decrease; increase; decrease

Tight monetary policy will ______ net exports as a result of a ______ currency.

decrease; stronger

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the mpc equals 0.8, and potential output (Y*) equals 9,000, then transfers must be ______ by approximately ______ to eliminate any output gap.

decreased 250

For a given domestic and foreign price level, a decrease in the nominal exchange rate ______ the real exchange rate.

decreases

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level ______ the real exchange rate.

decreases

as disposable income decreases consumption

decreases

when house prises decrease house wealth _________ and consumption ________

decreases and decreases

As the dollar exchange rate, e, decreases, the quantity of dollars supplied in the foreign exchange market ____, and the quantity of dollars demanded in the foreign exchange market ____.

decreases; increases

In an open economy, an increase in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment.

decreases; increases

Easy monetary policy reduces the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

decreases; increases; decreases

a decrease in stock prices alters the consumption function by :

decreasing the constant term

European firms wishing to purchase American goods and services are ______ the foreign exchange market.

demanders of U.S. dollars in

European households wishing to purchase shares of stock in an American company are ______ the foreign exchange market.

demanders of U.S. dollars in

Induced expenditure is the portion of planned aggregate expenditure that:

depends on output

Based on the purchasing power parity theory, in the long run, currencies of countries with significant inflation will tend to:

depreciate.

A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ______ relative to the foreign currency.

depreciated

If the nominal exchange rate is expressed as the number of units of domestic currency per unit of foreign currency, and that rate increases, then the domestic currency has:

depreciated

When the nominal exchange changes from 120 yen per dollar to 110 yen per dollar, the dollar has:

depreciated

A decrease in the value of a currency relative to other currencies is called a(n):

depreciation

in the Keynesian model consumption depends on

disposable income

the two parts of the keynesian consumption function are consumption that depends on ________and consumption that depends on ________

disposable income: factors other than disposable income

Anchored inflationary expectations are people's expectations of future inflation that:

do not change if inflation rises temporarily

The sum of national saving and capital inflows from abroad must equal:

domestic investment in new capital goods.

Starting from long-run equilibrium, a large increase in government purchases will result in a(n) ______ gap in the short-run and ____ inflation and ____ output in the long-run

expansionary; higher; potential

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n) _____ gap and inflation will _____.

expansionary; increase

Starting from potential output, if firms become more optimistic about the future and decide to increase their investment in new capital, then this will generate a(n) _____ gap and inflation will _____.

expansionary; increase

A trade surplus occurs when:

exports exceed imports.

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will:

fall

All else equal, if U.S. stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S. dollar will:

fall

When the Fed eases U.S. monetary policy, domestic interest rates ______, making U.S. assets relatively less attractive to foreign investors, and ______ the equilibrium exchange rate.

fall; decreasing

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______.

falls; fall

When the inflation rate increases, PAE ______, which in turn causes Y to ______ because of ______.

falls; fall; the income-expenditure multiplier

As U.S. real GDP falls, poorer households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar.

fewer; appreciation

when actual investment is greater than planned investment

firms sold less output than expected

when actual investment is less than planned investment

firms sold more output than expected

An exchange rate that is set by official government policy is called a ______ exchange rate.

fixed

The gold standard is an example of a ______ exchange rate system.

fixed

The aggregate demand curve shifts when there are changes in:

planned spending that are not caused by changes in output or the inflation rate.

When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S. ______ and there is a capital ______ to/from the United States.

imports increase; inflow

The purchasing power parity theory is a reasonably good explanation for nominal exchange rate determination:

in the long run.

Suppose that the owner of a local ice cream store, knowing that demand for ice cream is higher when the weather is warmer, always charges a price in cents for a scoop of ice cream that is equal to two times the current outdoor temperature, measured in Fahrenheit (so that if it is 90 degrees outside, the ice cream is $1.80 per scoop). This type of behavior is ______.

inconsistent with the key assumption upon which the basic keynesian model is built

Technological improvements:

increase aggregate supply.

A currency appreciation is a(n):

increase in the value of a currency relative to other currencies.

A decrease in the real exchange rate will tend to ______ exports and to ______ imports.

increase; decrease

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ______ in the inflation rate, leading to a(n) ______ in output.

increase; decrease

Holding all else constant, an increase in the preferences of Americans for Mexican goods will ______ the supply of dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

increase; decrease

In an open economy with a given level of real interest rates and risk, a decrease in real interest rates abroad will ______ capital inflows and ______ the equilibrium domestic real interest rate.

increase; decrease

In an open economy, an increase in the government's budget deficit will ______ the domestic real interest rate and ______ the level of capital investment in the country, holding other factors constant.

increase; decrease

At each value of the domestic interest rate, decreases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

increase; decrease; increase

Holding constant risk and the real returns available abroad, higher domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

increase; decrease; increase

Holding all else constant, an increase in Mexican real GDP will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

increase; increase

Holding all else constant, an increase in preferences by Mexicans for U.S. goods will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate.

increase; increase

Easy monetary policy will ______ net exports as a result of a ______ currency.

increase; weaker

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the mpc equals 0.8, and potential output (Y*) equals 9,000, then taxes must be ______ by approximately ______ to eliminate any output gap.

increased; 250

As disposable income increases consumption

increases

For a given domestic and foreign price level, an increase in the nominal exchange rate ______ the real exchange rate.

increases

For a given nominal exchange rate and domestic price level, a decrease in the foreign price level ______ the real exchange rate.

increases

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ______ the real exchange rate.

increases

A central bank that attempts to achieve a zero rate of inflation:

increases the risk of deflation

Proponents of fixed exchange rates argue that the predictability of the fixed exchange rate:

increases trade and economic integration.

As the dollar exchange rate, e, increases, the quantity of dollars supplied in the foreign exchange market ____, and the quantity of dollars demanded in the foreign exchange market ____.

increases; decreases

Tight monetary policy raises the real interest rate, which ______ the demand for dollars, ______ the supply of dollars, and ______ the equilibrium value of the dollar.

increases; decreases; increases

Firms that face menu costs react to a sustained increase in demand by:

increasing output and then raising the price at which they are willing to sell their output.

When real output decreases, planned aggregate expenditures decrease because:

induced expenditures decrease

When real output increases, planned aggregate expenditures increase because:

induced expenditures increase

Inflation inertia is the result of the behavior of ____ and the existence of ______.

inflation expectations; long-term wage and price contracts

The tendency for inflation to change relatively slowly from year to year in industrial countries is called:

inflation inertia.

The aggregate demand curve shows the relationship between planned spending and the ______.

inflation rate

The aggregate supply curve shows the relationship between the amount of output firms want to produce and the ______.

inflation rate

Following an adverse inflation shock the economy will return to potential more rapidly if:

inflationary expectations are anchored

Benefits of net capital inflows to a country include all of the following EXCEPT:

interest and dividend payments owed to foreign investors.

if firms sell more output than expected, planned investment

is greater than actual investment

Net exports will tend to be low when the real exchange rate ____.

is high

Autonomous expenditure is the portion of planned aggregate expenditure that:

is independent of output

If a certain automotive part can be purchased in Mexico for 60 pesos or in the United States for $6.25 and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

is less expensive in the United States.

An economy with a trade deficit must also have:

positive net capital inflows.

If a certain automotive part can be purchased in Mexico for 32 pesos or in the United States for $5.25, and if the nominal exchange rate is 8 pesos per U.S. dollar, then the automotive part:

is more expensive in the unite states

If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it

is no longer available to stabilize the domestic economy.

All of the following are reasonable arguments against adopting a zero inflation target EXCEPT that a zero inflation target:

is not consistent with long run price stability

A fixed exchange rate is an exchange rate whose value:

is set by official government policy.

firms do not change prices frequently because

it is costly to do so

the consumption function is relationship between consumption and

its determinants, such a disposable income

if firms sell less output than expected, planned investment is

less than actual investment

If the interest rate in the U.S. falls, U.S. financial assets become ______ attractive to buyers and the ______ U.S. dollars will fall.

less; demand for

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ______ equilibrium.

long-run

The PPP theory would be most useful in predicting:

long-run changes in the exchange rate for a country that mainly produces heavily-traded standardized goods.

A low rate of expected inflation tends to lead to a ___ rate of actual inflation and a high rate of expected inflation tends to lead to a ____ rate of actual inflation.

low; high

The purchasing power parity theory is not a good explanation of nominal exchange rate determination in the short-run because:

many goods and services are not traded internationally and not all internationally-traded goods are standardized.

The exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market is called the ______ exchange rate.

market equilibrium value of the

If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:

monetary policy must be used to keep the exchange rate's market equilibrium value at its official value.

Central banks that practice flexible inflation targeting are ____ than central banks that practice strict inflation targeting.

more likely to adjust policy in response to output gaps

The greater the credibility of monetary policy the ____ likely inflationary expectations are to be anchored and the _____ the recessions caused by adverse inflation shocks.

more; shorter

Large economies, like the United States should ______ employ a flexible exchange rate, because giving up the power to stabilize the domestic economy via monetary policy _____.

nearly always; makes little sense

Firms suddenly becoming pessimistic about future business prospects is an example of a ______ demand shock, which would shift the AD curve to the ______.

negative; left

If the United States has a $300 billion trade deficit, then there must be:

net capital inflows of $300 billion.

Because many European nations have adopted the euro as their common currency, they are ______ able to conduct independent ______ policy.

no longer; monetary

There is ______ connection between the strength of a country's currency and the strength of its ______.

no simple; economy

When actual output equals potential output there is ____ output gap and the rate of inflation will tend to ____.

no; remain the same

A demand shock is a change in planned spending that is:

not caused by changes in output or changes in the inflation rate.

Changes in planned spending that shift the aggregate demand curve are those:

not caused by changes in output or changes in the inflation rate.

The delay between the date a policy change is implemented and the date when most of its effects have occurred in the economy is called the:

outside

An increase in the interest rate directly affects ______, but also has an indirect effect on ______ because of its effect on exchange rates.

planned consumption and investment; net exports

in the basic keynesian model all of the following are true except:A. planned consumption always equals actual consumption. B. planned investment always equals actual investment. C. planned government spending always equals actual government spending. D. planned net exports always equal actual net exports.

planned investment always equals actuallinvestment

unplanned inventory investment equal zero when

planned investment equals actual investment

Planned aggregate expenditure is total

planned spending on final goods and services

From the point of view of a particular country, capital inflows are:

purchases of domestic assets by foreigners.

From the point of view of a particular country, capital outflows are:

purchases of foreign assets by domestic households or firms.

International capital flows are:

purchases or sales of real and financial assets across international borders.

The theory that nominal exchange rates are determined so that the law of one price holds is called:

purchasing power parity.

The nominal exchange rate is the:

rate at which two currencies can be traded for each other.

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency is called the ______ exchange rate.

real

The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will appreciate when:

real GDP in Japan increases

The U.S. dollar exchange rate, e, where e is the nominal exchange rate expressed as Japanese yen per U.S. dollar, will depreciate when:

real GDP in the US increases

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the ______ and affects net exports by changing the _____.

real interest rate; exchange rate

The self-correcting tendency of the economy means that falling inflation eventually eliminates:

recessionary gaps

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will generate a(n) _____ gap and inflation will _____.

recessionary; decrease

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) _____ gap and inflation will _____.

recessionary; decrease

Starting from long-run equilibrium, a large decrease in government purchases will result in a(n) ______ gap in the short-run and ____ inflation and ____ output in the long-run

recessionary; lower; potential

The impact of monetary policy through exchange rates tends to ______ the impact of monetary policy through real interest rates.

reinforce

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S. dollar will:

rise

When the Fed tightens U.S. monetary policy, domestic interest rates ______, making U.S. assets relatively more attractive to foreign investors, and ______ the equilibrium exchange rate.

rise; increasing

When the inflation rate decreases, PAE ______, which in turn causes Y to ______ because of ______.

rises; rise; the income-expenditure multiplier

The self-correcting property of the economy means that output gaps are eventually eliminated by:

rising or falling prices

The fact that output gaps will not last indefinitely, but will be closed by rising or falling prices is the economy's:

self-correcting property

changes in the expected rate of inflation will:

shift the AS curve upward or downward

The AD curve ______ because, holding all else constant, an increase in ______ causes C, IP and NX to fall.

slopes downward; the inflation rate

policymakers use of stabilization policy to eliminate output gaps is more appropriate when an economy self corrects very______and when the output gap is very ________-

slowly; large

A circle of low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

small; low

The AS curve slopes upward because:

some firms will increase their prices and their output in response to an increase in aggregate demand.

Someone who wants both the U.S. dollar to be ______ compared to other currencies and the value of U.S. net exports to be ______ wants two things that may be contradictory.

strong; large

U.S. firms wishing to purchase European goods and services are ______ the foreign exchange market.

suppliers of U.S. dollars in

U.S. households wishing to purchase shares of stock in a European company are ______ the foreign exchange market.

suppliers of U.S. dollars in

Proponents of fixed exchange rates, who argue that fixed exchange rates eliminate uncertainty and therefore promote international trade, sometimes fail to recognize:

that fixed exchange rates may not remain fixed forever.

The nominal exchange rate, e, is defined as the number of units of:

the foreign currency that one unit of domestic currency will buy.

The AD curve slopes downward because an increase in ______ causes ______ to fall, which in turn causes real GDP to fall.

the inflation rate; planned spending

The Fed cannot achieve a negative real interest rate if the inflation rate is zero or negative because:

the nominal interest rate cannot fall below zero

If one euro nation is experiencing rapid growth and inflation while another is facing sluggish growth and recession:

the two countries will disagree about the monetary policy that ought to be employed by the European Central Bank.

if firms sell less than expected, actual investment increases because____which is counted as investment

the unsold goods are added to inventory

A country's trade balance equals:

the value of exports minus the value of imports.

If the United States has a $300 billion net capital inflow, then there must be a:

trade deficit of $300 billion.

If domestic saving is less than domestic investment, then a country will have a ______ and positive net capital ______.

trade deficit; inflows

If domestic saving is greater than domestic investment, then a country will have a ______ and positive net capital ______.

trade surplus; outflows

The Great Recession was the result of:

two negative demand shocks

PANNED INVESTMENT MAY DIFFER FROM ACTUAL INVESTMENT BECAUSE OF

unplanned changes in inventories

A flexible exchange rate is an exchange rate whose value:

varies according to the supply and demand for the currency in the foreign exchange market.

the tendency of changes in assest prices to affect spending on consumption goods is called the _____effect

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