Economics mid term 2

If the real exchange rate is low, foreign goods:

are relatively expensive and domestic goods are relatively cheap.

In the Keynesian-cross model, a decrease in the interest rate __________ planned investment spending and ___________ the equilibrium level of income

increases, increases

why does the AD curve slope downwards?

interest rate effect --> increase r, decreases investment which decreases output

aggregate demand

plots relationship between aggregate price level and spending on economy's goods and services, all else held constant

If the short-run IS-LM equilibrium occurs at a level of income above the natural rate of output, in the long run the ___________ will ___________ in order to return to the natural rate.

price level; increase

according to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will

purchase interest earning assets in order to reduce holdings of non-interest bearing money

real exchange rate

relative price of goods of two countries

nominal exchange rate

relative price of the currency of two countries

A change in income in the IS-LM model for a fixed price level:

represents a shift in the aggregate demand curve.

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the:

right by 200

A tax cut combined with tight money, as was the case in the United States in the early 1980's should lead to a:

rise in the real interest rate and a fall in investment.

when bond traders for the federal reserve seek to increase interest rates they _______ bonds, which shifts the ________ to the left

sell, LM

what are the assumptions of a small open economy model

small open economy is a price taker, perfect capital mobility, interest rate becomes endogenous, domestic interest rate = world interest rate

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade _________ and __________ net foreign investment.

surplus; positive

Along an IS curve all the following are always true except

the demand for real balances equals the supply of real balances.

An economic change that does not shift the aggregate demand curve is a change in:

the price level.

In the Keynesian cross model, actual expenditures differ from planned expenditures by the amount of

unplanned inventory investment.

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left

a decrease in the nominal money supply, other things being equal, will shift the LM curve

upward and to the left

If the real exchange rate between the US and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the

yen will appreciate by 3 percent against the dollar.

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______

LM; right

if 60 indian rupees trade for 1 euro, the european price level equals 2 euros per good, and the indian price level equals 48 rupees per good, then the real exchange rate between indian goods and european goods is _______ india goods per european good

2.5

If 10 French francs trade for $1, the U.S. price level equals $1 per good, and the French price level equals 2 Francs per good, then the real exchange rate between French goods and U.S. goods is _________ French goods per U.S. good.

5

Assume that the money demand function is (M/P)d = 2,200 - 200 r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate in money market is ___________ percent

6

Equation for E

= e x Px/P

An increase in the trade deficit of a small open economy could be the result of

a decrease in the world interest rate

if interest rate is higher than equilibrium in the market for real money balances then people will _____ bonds and the interest rate will _______

buy, fall

the monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services

by lowering the interest rate so that investment exceeds spending

A shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will ______ in the long run, as compared to a short-run equilibrium.

decrease output but increase prices

If the short-run IS-LM equilibrium occurs at a level of income below the natural rate of output, then in the long run the price level will _________, shifting the _______ curve to the right and returning output to the natural rate

decrease; LM

how does credit card restriction affect the money supply

decreases LM

In the IS-LM model, which two variables are influenced by the interest rate?

demand for real money balances and investment spending

In a country with a small open economy, the real interest rate will always be

equal to the world real interest rate

if the real exchange rate increases domestic goods become more _______ and therefore net exports will _______

expensive, fall

if firms are producing below equilibrium then inventories will ________ inducing firms to _______ production

fall, increase

In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______

falls; rises

Other things equal, a given change in money supply has a larger effect on demand the

flatter the IS curve

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ____________ the money supply.

increase

If the real exchange rate depreciates from 1 Japanese good per US good to 0.5 Japanese good per US good, then US exports _____ and Us imports _____

increase, decrease

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will _________ the demand for real money balances and will ___________ the interest rate.

increase, increase

In the IS-LM model, an increase in government spending leads to a(n) _______ expenditures, a(n) ____________ in total income, a(n) _________ in money demand, and a(n) ___________ in the equilibrium interest rate.

increase, increase, increase, increase

An increase in investment demand for any given level of income and interest rates - due, for example, to more optimistic "animal spirits" - will, within the IS-LM framework, _______ output and _________ interest rates.

increase; raise

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

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

According to the theory of liquidity preference, the supply of nominal money balances

is chosen by the central bank

if the quantity theory of money is valid, the the LM curve

is vertical

If a country has a low rate of inflation relative to the United States, the dollar will buy:

less of the foreign currency over time

The increase in income in response to a fiscal expansion in the IS-LM is:

less than in the Keynesian-cross model unless the LM curve is horizontal

the theory of liquidity preferences implies that, other things being equal, and increase in the real money supply will

lower the interest rate

the AD curve generally slopes downward and to the right because, for any given money supply higher price level causes a _________ real money supply, which ________ the interest rate and _______ __spending

lower, raises, reduces

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending

lower; raises; reduces

is there a negative or positive relationship between E and NX

negative

In a small open economy, net exports depend _________ on the exchange rate, where the exchange rate is defined as the amount of ___________ currency per unit of ________ currency.

negatively; foreign; domestic

The IS curve generally determines

neither income nor the interest rate

What does S-I equal

net capital outflow

If investment does not depend on the interest rate and the Fed increases money supply by buying bonds, then the output will __________.

not change