Economics Final

Below are pairs of GDP growth rates and unemployment rates. Economists would not be shocked to see most of these pairs in the U.S. Which pair of GDP growth rates and unemployment rates is not realistic? 3, 6 10,5 -2,2

-2 percent; 2 percent A recession in which real GDP declines by 2 percent would not have unemployment so far below the natural rate. This answer, however, would not be surprising.

If the marginal propensity to consume is 2/3, then the government purchases multiplier is 2 0.33 3 1.67

3 The multiplier for changes in government spending is calculated as 1/(1 - MPC). Since the MPC = 2/3 in this case, the multiplier is 1/(1 - 2/3) = 1/(1/3) = 3.

Which of the following is an example of crowding out? A decrease in government spending increases interest rates, causing investment to fall. A decrease in consumption increases interest rates, causing investment to fall. A decrease in taxes increases interest rates, causing investment to fall. A decrease in the money supply increases interest rates, causing investment to fall.

A decrease in taxes increases interest rates, causing investment to fall.

Which of the following shifts aggregate demand to the left? A decrease in the money supply. The Fed purchases government bonds on the open market. The price level falls. The price level rises.

A decrease in the money supply The aggregate-demand curve shows the relationship between the price level and the quantity of output. Therefore, a change in the price level results in a movement along the aggregate-demand curve, not a shift. When the Fed sells government bonds, it decreases the money supply causing the equilibrium interest rate to rise. Because the interest rate is the cost of borrowing, this results in a leftward shift of the aggregate-demand curve.

Which of the following illustrates how the investment accelerator works? An increase in government expenditures decreases the interest rate so that Starshine Inc. finds it profitable to update its car-wash equipment. An increase in government expenditures increases aggregate spending so that Starshine Inc. finds it profitable to update its car-wash equipment. An increase in government expenditures increases the interest rate so that the Starshine Inc. decides to open up new car washed in additional locations. An increase in government expenditures increases the interest rate so that the demand for stocks and bonds issued by Starshine Inc. rises.

An increase in government expenditures increases aggregate spending so that Starshine Inc. finds it profitable to update its car-wash equipment.

The interest-rate effect stems from the idea that a higher price level decreases the real value of households' money holdings. True False

False The wealth effect, not the interest-rate effect, stems from the idea that a higher price level decreases the real value of households' money holdings. Instead, the interest-rate effect depends on the idea that decreases in interest rates increase the quantity of goods and services demanded.

Which of the following is NOT true according to classical macroeconomics theory? For any given level of output, the interest rate adjusts to balance the supply of, and demand for, money. For any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds. Given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money. Output is determined by the supplies of capital and labor and the available production technology.

For any given level of output, the interest rate adjusts to balance the supply of, and demand for, money.

Sometimes during times of heightened national security, government expenditures are larger than normal. What could the Fed do to reduce the effects this spending creates on interest rates? Decrease the money supply by buying bonds. Increase the money supply by selling bonds. Increase the money supply by buying bonds. Decrease the money supply by selling bonds.

Increase the money supply by buying bonds. The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy, such as an increase in government spending or a decrease in taxes, raises the interest rate and thereby reduces investment spending. In order to counter this rise in the interest rate, the Fed would want to increase the money supply since this puts downward pressure on the interest rate in the market for money. In order to do this, the Fed could buy bonds through open-market operations.

Which of the following would decrease the price level? an increase in the expected price level. a decrease in taxes. an increase in the natural rate of unemployment. a decrease in the money supply.

a decrease in the money supply.

Which of the following events would cause the Fed to stabilize output through increasing the money supply? a decrease in interest rates an increase in government spending an increase in taxes an increase in net exports

an increase in taxes An increase in the money supply by the Fed would cause interest rates to decline. Because the interest rate is the cost of borrowing, the fall in the interest rate raises the quantity of goods and services demanded, which would increase the equilibrium level of output in an economy. This means that the event that would cause the Fed to stabilize in this way must cause output to fall. An increase in net exports, an increase in government spending, and a decrease in interest rates all cause aggregate demand to rise, whereas an increase in taxes causes aggregate demand to decline.

the government cuts government expenditures, then in the short run prices rise and unemployment rises. fall and unemployment rises. rise and unemployment falls. fall and unemployment falls.

fall and unemployment rises.

Which of the following both shift aggregate-demand curve to the left? net exports rise for some reason other than a price change and taxes increase. net exports fall for some reason other than a price change and government purchases fall. net exports rise for some reason other than a price change and government purchases rise. net exports fall for some reason other than a price change and taxes fall.

net exports fall for some reason other than a price change and government purchases fall.

An adverse supply shock raises unemployment and reduces the inflation rate. reduces unemployment and raises the inflation rate. raises unemployment and the inflation rate. reduces unemployment and the inflation rate.

raises unemployment and the inflation rate.

Suppose the economy is in long-run equilibrium. If there is a decrease in the supply of labor as well as a decrease in the money supply, then we would expect that in the short run, the price level will rise, and real GDP might rise, fall, or stay the same. real GDP will rise and the price level might rise, fall, or stay the same. the price level will fall, and real GDP might rise, fall, or stay the same. real GDP will fall and the price level might rise, fall, or stay the same.

real GDP will fall and the price level might rise, fall, or stay the same. The decrease in the supply of labor will shift the short-run aggregate-supply curve to the left, causing real GDP to fall and the price level to rise. The decrease in the money supply will shift the aggregate-demand curve to the left, causing real GDP to fall and the price level to fall. The final price level will depend on the relative strength of the two shifts.

There is a temporary favorable supply shock. Given the effects of this shock, if the central bank chooses to return unemployment closer to its previous rate it would raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left. reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left. reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right. raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right.

reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.

There is a temporary favorable supply shock. Given the effects of this shock, if the central bank chooses to return unemployment closer to its previous rate it would reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left. raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right. reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve right. raise the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.

reduce the rate at which it increases the money supply. In the long run this will shift the short-run Phillips curve left.

Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time. This statement is an argument for "leaning against the wind." using fiscal policy to stabilize the economy. refraining from intervening with monetary and fiscal policy. using monetary policy to stabilize the economy.

refraining from intervening with monetary and fiscal policy.

The sticky-wage theory of the short-run aggregate-supply curve says that when the price level is higher than expected, relative to prices wages are higher and employment falls. relative to prices wages are lower and employment rises. relative to prices wages are lower and employment falls. relative to prices wages are higher and employment rises.

relative to prices wages are lower and employment rises.

Assume the MPC is 0.6. Assume there is a multiplier effect and that the crowding-out effect is $10 billion. An increase in government purchases of $20 billion will shift aggregate demand to the left by $30 billion right by $50 billion right by $40 billion left by $10 billion

right by $40 billion The spending multiplier is calculated as 1/(1 - MPC). Because the MPC = 0.6, this means the multiplier is 1/(1 - 0.6) = 1/(0.4) = 2.5. This means that in the absence of crowding out, a $20 billion increase in government purchases will shift the aggregate demand curve to the right by 2.5 x $20 billion = $50 billion. The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending. Therefore, accounting for the crowding-out effect, the aggregate demand curve will only shift to the right by $50 billion - $10 billion - $40 billion.

If money demand shifted to the left and the Federal Reserve desired to return the interest rate to its original value, it could buy bonds to decrease the money supply. sell bonds to increase the money supply. buy bonds to increase the money supply. sell bonds to decrease the money supply.

sell bonds to decrease the money supply.

If money demand shifted to the left and the Federal Reserve desired to return the interest rate to its original value, it could buy bonds to decrease the money supply. buy bonds to increase the money supply. sell bonds to increase the money supply. sell bonds to decrease the money supply.

sell bonds to decrease the money supply. If the money-demand curve shifted to the left, this lowers the interest rate. In order to return the interest rate to its original value, the Fed would need to conduct an open-market operation that decreases the money supply since that will put upward pressure on the equilibrium interest rate. This occurs when the Fed sells bonds to the public.

To stabilize interest rates, the Federal Reserve will respond to a decrease in money demand by buying government bonds, which increases the supply of money. buying government bonds, which decreases the supply of money. selling government bonds, which increases the supply of money. selling government bonds, which decreases the supply of money.

selling government bonds, which decreases the supply of money. A decrease in money demand causes the interest rate to fall. If the Federal Reserve wants to stabilize the interest rate, it needs to decrease the supply of money to put upward pressure on interest rates. When the Fed sells government bonds, this open-market operation causes money supply to fall.

Suppose that a small economy that produces mostly agricultural goods experiences a year with exceptionally bad conditions for growing crops. The bad weather would shift both the short-run aggregate-supply and the short-run Phillips curves right. shift both the short-run aggregate-supply and the short-run Phillips curves left. shift the short-run aggregate-supply curve to the right, and the short-run Phillips curve to the left. shift the short-run aggregate-supply curve to the left, and the short-run Phillips curve to the right.

shift the short-run aggregate-supply curve to the left, and the short-run Phillips curve to the right.

When prices and unemployment rise, such an event is sometimes called expansion. inflation. stagflation. depreciation.

stagflation. Stagflation is a period of falling output, rising unemployment, and rising prices.

Imagine two economies that are identical except that, for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $1,500 billion. It follows that real GDP, but not the price level, is higher in country B. real GDP and the price level are higher in country B. the price level, but not real GDP is higher in country B. neither the price level or real GDP is higher in country B.

the price level, but not real GDP is higher in country B.

If there is a decrease in the price of oil, then unemployment rises. If the central bank tries to counter this increase, inflation falls. unemployment rises. If the central bank tries to counter this increase, inflation rises. unemployment falls. If the central bank tries to counter this decrease, inflation rises. unemployment falls. If the central bank tries to counter this decrease, inflation falls.

unemployment falls. If the central bank tries to counter this decrease, inflation falls.

In a certain economy, when income is $200, consumer spending is $160. The value of the multiplier for this economy is 4. It follows that, when income is $300, consumer spending is $260 $240 $235 $560

$235 The spending multiplier is calculated as 1/(1 - MPC). Rearranging this equation yields MPC = 1 - (1/Multiplier). Therefore, if the multiplier is 4, then the MPC is 1- (1/4) = 0.75. If income increases by $300 - $200 = $100, then consumer spending will rise by 0.75 x $100 = $75, to $160 + $75 = $235.

Which economic policy may lead people to expect that in the future taxes will rise and create greater distortions? An increase in government expenditures A decrease in government expenditures Doing nothing A tax cut

An increase in government expenditures

Which of the following is NOT correct? As the interest rate falls, the quantity of money demanded falls. A lower interest rate increases the quantity of goods and services demanded. When money demand shifts leftward, the interest rate falls. A lower price level shifts money demand leftward.

As the interest rate falls, the quantity of money demanded falls.

Which of the following is NOT correct? As the interest rate falls, the quantity of money demanded falls. When money demand shifts leftward, the interest rate falls. A lower interest rate increases the quantity of goods and services demanded. A lower price level shifts money demand leftward.

As the interest rate falls, the quantity of money demanded falls.

Although wages, incomes, and interest rates are most often discussed in real terms, what matters most are their nominal values. T F

False

Increased optimism about the future leads to falling prices and falling unemployment in the short run. True False

False

If the Fed conducts open-market purchases, the money supply decreases and aggregate demand shifts right. True False

False If the Fed buys government bonds in open-market operations, it will increase the money supply. This reduces the equilibrium interest rate which raises the quantity of goods and services demanded at a given price level. Therefore, the aggregate-demand curve also shifts to the right.

Sometimes during times of heightened national security, government expenditures are larger than normal. What could the Fed do to reduce the effects this spending creates on interest rates? Decrease the money supply by selling bonds. Increase the money supply by selling bonds. Decrease the money supply by buying bonds. Increase the money supply by buying bonds.

Increase the money supply by buying bonds.

Which of the following scenarios is consistent with typical estimates of the sacrifice ratio? Inflation is reduced from 7 percent to 4 percent, and annual output falls by 8 percent. Inflation is reduced from 2 percent to 1 percent, and annual output falls by 5 percent. Inflation is reduced from 3 percent to 2 percent, and annual output falls by 3 percent. Inflation is reduced from 4 percent to 1 percent, and annual output falls by 10 percent.

Inflation is reduced from 2 percent to 1 percent, and annual output falls by 5 percent. typical sacrifice ratio is 5%

According to the theory of liquidity preference, which of the following is NOT true? The supply of money depends on the interest rate. If the interest rate is above the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created. The demand for money is represented by a downward-sloping line on a supply-and-demand graph. If the interest rate is below the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created.

The supply of money depends on the interest rate.

Economists cannot predict the business cycle well enough; therefore, stabilization policy is not likely to work. True False

True

Suppose the economy is in long-run equilibrium. If the government decreases its expenditures, eventually the decrease in aggregate demand causes price expectations to fall. This fall in price expectations shifts the short-run aggregate-supply curve to the left. rise. This rise in price expectations shifts the short-run aggregate-supply curve to the left. fall. This fall in price expectations shifts the short-run aggregate-supply curve to the right. rise. This rise in price expectations shifts the short-run aggregate-supply curve to the right.

all. This fall in price expectations shifts the short-run aggregate-supply curve to the right.

Fluctuations in real GDP are caused only by changes in aggregate supply. only by changes in aggregate demand. by changes in aggregate demand and/or changes in aggregate supply. not at all by changes in aggregate demand nor changes in aggregate supply.

by changes in aggregate demand and/or changes in aggregate supply.

A change in weather patterns that makes farming more difficult would ____ decrease long-run aggregate supply. increase long-run aggregate supply. increase aggregate demand. have no impact on long-run aggregate supply.

decrease long-run aggregate supply.

If the Fed wants to reverse the effects of an adverse supply shock on inflation, it should increase the money supply growth rate which reduces the unemployment rate. increase the money supply growth rate which raises the unemployment rate. decrease the money supply growth rate which reduces the unemployment rate. decrease the money supply growth rate which raises the unemployment rate.

decrease the money supply growth rate which raises the unemployment rate.

If the economy is initially at long-run equilibrium and aggregate demand expands, then in the long run the price level and output are lower than in the original long-run equilibrium. and output are higher than in the original long-run equilibrium. is higher and output is the same as the original long-run equilibrium. is the same and output is lower than in the original long-run equilibrium.

is higher and output is the same as the original long-run equilibrium. An expansion in aggregate demand is represented with a rightward shift in the aggregate-demand curve. In the short run, output and the price level rise, but over time, as the expected price level adjusts, the short-run aggregate-supply curve shifts to the left. In the long run, the price level rises and output returns to the natural level.

Temporary tax cuts shift the aggregate-demand curve not as far to the left as do permanent tax cuts. farther to the right than do permanent tax cuts. not as far to the right as do permanent tax cuts. farther to the left than do permanent tax cuts.

not as far to the right as do permanent tax cuts.

The sticky-wage theory of the short-run aggregate-supply curve says that when the price level is higher than expected, relative to prices wages are higher and employment falls. relative to prices wages are higher and employment rises. relative to prices wages are lower and employment rises. relative to prices wages are lower and employment falls.

relative to prices wages are lower and employment rises.

According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes the interest rate to fall, so aggregate demand shifts right. the interest rate to rise, so aggregate demand shifts right. the interest rate to fall, so aggregate demand shifts left. the interest rate to rise, so aggregate demand shifts left.

the interest rate to rise, so aggregate demand shifts left.

When production costs fall, the aggregate-demand curve shifts to the right. the short-run aggregate-supply curve shifts to the left. the short-run aggregate-supply curve shifts to the right. the aggregate-demand curve shifts to the left.

the short-run aggregate-supply curve shifts to the right.

Which of the following would not tend to shorten recessions associated with anti-inflation policies by central banks? The long-run Phillips curve shifts to the right. People believe policy announcements made by central bank officials. The short-run Phillips curve shifts rapidly. People adjust their expectations of inflation rapidly.

The long-run Phillips curve shifts to the right. Monetary policy does not shift the long-run Phillips curve. Even if a central bank could shift the curve, a shift to the right would mean higher unemployment.

An increase in the capital stock shifts long-run aggregate-supply curve to the right but does not shift short-run aggregate-supply curve. short-run aggregate-supply curve to the left and long-run aggregate-supply curve to the right. both short-run and long-run aggregate-supply curve to the right. short-run aggregate-supply curve to the right but does not shift long-run aggregate-supply curve.

both short-run and long-run aggregate-supply curve to the right.

The aggregate-demand curve shows that an increase in the price level decreases the real value of goods and services demanded in the economy. increases the real value of goods and services demanded in the economy. decreases the dollar value of goods and services demanded in the economy. increases the dollar value of goods and services demanded in the economy.

decreases the real value of goods and services demanded in the economy.

When U.S. net exports rise, which increases the aggregate quantity of goods and services demanded, the dollar must have equivocated. appreciated. depreciated reciprocated.

depreciated

An increase in inflation expectations shifts the short-run Phillips curve right while the long-run Phillips curve shifts to the right. shifts to the left. shifts to the right and then shifts back to the left. is not affected.

is not affected.

If inflation expectations fall, the short-run Phillips curve shifts right. If inflation remains the same, unemployment falls. left. If inflation remains the same, unemployment rises. right. If inflation remains the same, unemployment rises. left. If inflation remains the same, unemployment falls.

left. If inflation remains the same, unemployment falls.

Other things the same, if the money supply rises by 5% and people were expecting it to rise by 2%, then some firms have higher than desired prices, which depresses their sales. higher than desired prices, which increases their sales. lower than desired prices, which increases their sales. lower than desired prices, which depresses their sales.

lower than desired prices, which increases their sales. According to sticky-price theory, after an unexpected rise in the money supply and, therefore, in the price level, some firms may temporarily lag behind in raising their prices. Because these lagging firms have prices that are less than the firms desire, their sales increase and the firms increase production.

Steve is having a policy debate with his brother Brian. He points the fact that business firms make investment plans far in advance. This is a lag problem associated with neither monetary policy nor fiscal policy. fiscal policy. both monetary policy and fiscal policy. monetary policy.

monetary policy.

When the price level rises less than expected, a firm with a sticky price will sell its output at a price that is less than the firm desires and increase its production. more than the firm desires and increase its production. less than the firm desires and decrease its production. more than the firm desires and decrease its production.

more than the firm desires and decrease its production.

Which of the following both shift aggregate-demand curve to the left? net exports fall for some reason other than a price change and government purchases fall. net exports fall for some reason other than a price change and taxes fall. net exports rise for some reason other than a price change and taxes increase. net exports rise for some reason other than a price change and government purchases rise.

net exports fall for some reason other than a price change and government purchases fall.

Suppose the economy is in long-run equilibrium. Senator A succeeds in getting taxes lowered. At the same time, Senator B succeeds in getting major restrictions on logging enacted. In the short run real GDP will fall and the price level might rise, fall, or stay the same. real GDP will rise and the price level might rise, fall, or stay the same. the price level will fall, and real GDP might rise, fall, or stay the same. the price level will rise, and real GDP might rise, fall, or stay the same.

the price level will rise, and real GDP might rise, fall, or stay the same.

Which of the following is an example of an automatic stabilizer? an increase in tax rates in response to an expansion the unemployment compensation system an increase in money demand the minimum wage

the unemployment compensation system