ENC-362 Final

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment? a. Decrease the money supply b. Increase government expenditures c. Increase taxes d. Increase interest rates

b. Increase government expenditures

Refer to Figure 33-2. If the economy is in long-run equilibrium, then a shift to the left in short-run aggregate supply would move the economy from a. O to P. b. Q to R. c. P to O. d. R to Q.

b. Q to R.

The mathematical equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), expresses a. how the long run equilibrium adjusts to changes in money supply. b. how the quantity of output supplied deviates in the short run from its natural level. c. how the short run aggregate supply curve shifts. d. how adverse shifts in aggregate supply can cause stagflation.

b. how the quantity of output supplied deviates in the short run from its natural level.

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would a. increase the rate at which the money supply increases. This will also move inflation closer to its previous rate. b. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate. c. decrease the rate at which the money supply increases. This will also move inflation closer to its original rate. d. decrease the rate at which the money supply increases. However, this will make higher than its previous rate.

b. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate.

One determinant of the natural unemployment rate is the a. market power of unions, while the inflation rate depends primarily upon government spending. b. minimum wage, while the inflation rate depends primarily upon the money supply growth rate. c. rate of growth of the money supply, while the inflation rate depends primarily upon the market power of unions. d. existence of efficiency wages, while the inflation rate depends primarily upon the extent to which firms are competitive

b. minimum wage, while the inflation rate depends primarily upon the money supply growth rate.

If it were the case that an increase in inflation permanently reduced unemployment, then that would mean a. money would not be neutral and the long-run Phillips curve would slope upward. b. money would not be neutral and the long-run Phillips curve would slope downward. c. money would be neutral and the long-run Phillips curve would slope upward. d. money would be neutral and the long-run Phillips curve would slope downward.

b. money would not be neutral and the long-run Phillips curve would slope downward.

According to liquidity preference theory, if the price level decreases, then a. the interest rate falls because money demand shifts right. b. the interest rate falls because money demand shifts left. c. the interest rate rises because money supply shifts right. d. the interest rate rises because money supply shifts left

b. the interest rate falls because money demand shifts left.

The multiplier in a country is equal to 5, and households pay no taxes. At the current equilibrium real GDP of $14 trillion, total real consumption spending by households is $12 trillion. What is real autonomous consumption in this country? a. $0.8 trillion b. $2 trillion c. $1.2 trillion d. $11.2 trillion

a. $0.8 trillion

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is a. $60.25. b. $60.75. c. $61.33. d. $64.00

a. $60.25.

A policy that lowered the natural rate of unemployment would shift a. both the short-run and the long-run Phillips curves to the left. b. the short-run Phillips curve left but leave the long-run Phillips curve unchanged. c. the long-run Phillips curve left but leave the short-run Phillips curve unchanged. d. neither the long-run Phillips curve nor the short-run Phillips curve left.

a. both the short-run and the long-run Phillips curves to the left.

A tax cut shifts the aggregate demand curve the farthest right if a. the MPC is large and if the tax cut is permanent. b. the MPC is large and if the tax cut is temporary. c. the MPC is small and if the tax cut is permanent. d. the MPC is small and if the tax cut is temporary

a. the MPC is large and if the tax cut is permanent.

At an initial point on the aggregate demand curve, the price level is 125, the real GDP is $18 trillion. When the price level falls to a value of 120, total autonomous expenditures increase by $250 billion. The MPC is 0.75. What is the level of real GDP at a new point on the aggregate demand curve? a. $17 trillion b. $19 trillion c. $1 trillion d. $2 trillion

b. $19 trillion

Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2020, and those two points correspond to points C and D, respectively, on the left-hand graph. Also, suppose we know that the price index equaled 120 in 2019. Then the numbers 115 and 130 on the vertical axis of the left-hand graph would have to be replaced by a. 155 and 175, respectively. b. 138 and 156, respectively. c. 137.5 and 154.75, respectively. d. 135 and 150, respectively.

b. 138 and 156, respectively

Refer to Figure 35-2. Assume the figure depicts possible outcomes for the year 2022. In 2022, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2021 was a. 144. b. 150. c. 152. d. 156.

b. 150.

Consider an economy described by the following equations Y = C + I + G C = 100 + 0.75(Y-T) I = 500 -50R G = 125 T = 100 Where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and R is the interest rate. If the economy were at full employment (that is, at its natural rate) GDP would be 2000 Refer to scenario 1. Suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 4% (r = 4). Solve for GDP. How does it compare to the full employment level? a. 1600, less than full employment level. b. 1800, less than full employment level. c. 2100, greater than full employment level. d. 2000, exactly the full employment level.

b. 1800, less than full employment level.

A decrease in Y from Y1 to Y2 is explained as follows: a. The Federal Reserve increases the money supply, causing the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. b. An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. c. A decrease in P from P2 to P1 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2. d. An increase in the price level causes the money-demand curve to shift from MD2 to MD1; this shift of MD causes r to decrease from r2 to r1; and this decrease in r causes Y to decrease from Y1 to Y2

b. An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

Refer to Figure 34-6. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events? a. The government cuts taxes, resulting in an increase in people's incomes. b. The government reduces government spending, resulting in a decrease in people's incomes. c. The Federal Reserve increases the supply of money, which decreases the interest rate. d. The Federal Reserve decreases the supply of money, which increases the interest rate.

b. The government reduces government spending, resulting in a decrease in people's incomes.

Refer to Figure 33-1. The natural level of output is a. Y1. b. Y2. c. Y3. d. both Y1 and Y3

b. Y2.

Suppose an increase in investment causes falling unemployment and rising output. To counter this, the Federal Reserve would a. decrease government spending. b. decrease the money supply. c. increase government spending. d. increase the money supply

b. decrease the money supply.

The marginal propensity to consume is equal to 0.80. An increase in household wealth causes autonomous consumption to rise by $10 million. By how much will equilibrium real GDP increase at the current price level, the other things being equal? a. $8M b. $2M c. $50M d. $12.5M

c. $50M

At an initial point on the aggregate demand curve, the price level is 100, the real GDP is $18 trillion. After the price level rises to 110, however, there is an upward movement along the aggregate demand curve, and real GDP declines to $14 trillion. If total planned spending declines by $200 billion in response to the increase in the price level, what is the MPC in this economy? a. 0.05 b. 0.02 c. 0.95 d. 0.90

c. 0.95

Refer to Figure 35-4. Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%. Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more expansionary monetary policy? a. 7% unemployment and 1% inflation b. 7% unemployment and 3% inflation c. 3% unemployment and 5% inflation d. 3% unemployment and 7% inflation

c. 3% unemployment and 5% inflation

Which of the following two effects of a decrease in the tax rate on saving would raise savings? a. The income effect and the substitution effect b. The income effect but not the substitution effect c. The substitution effect but not the income effect d. Neither the substitution effect nor the income effect

c. The substitution effect but not the income effect

"Money is a veil" best describes a. the general view of the economy. b. the historical view of the economy. c. classical view of the economy. d. economy in the short run but not the long run.

c. classical view of the economy.

Refer to Figure 34-7. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out. Instead, the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. This means that the crowding out effect, for any particular level of the price level, reduces the quantity of output by: a. $75 billion. b. $40 billion. c. $30 billion. d. $20 billion

d. $20 billion

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then, the multiplier must be a. 1.96. b. 3. c. 1.67. d. 2.5

d. 2.5

Refer to scenario 1. Assuming no change in fiscal policy what new interest rate would restore full employment level? a. 4% b. 2% c. 0% d. 3%

d. 3%

Refer to Figure 35-4. If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to a. 3% unemployment and 5% inflation. In the long run the economy moves to 5% unemployment and 5% inflation. b. 3% unemployment and 5% inflation. In the long run the economy moves to 5% unemployment and 3% inflation. c. 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 5% inflation. d. 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.

d. 7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift? a. By $90 billion b. By $60 billion c. By $20 billion d. By $30 billion

d. By $30 billion

Which of the following would not be directly included in aggregate demand? a. An increase in firms' inventories b. Purchases of goods by households c. Firms' purchases of newly produced machinery d. Government's tax revenue

d. Government's tax revenue

A tax cut shifts aggregate demand a. by more than the amount of the tax cut. b. by the same amount as the tax cut. c. by less than the tax cut. d. None of the above is necessarily correct.

d. None of the above is necessarily correct.

Refer to Figure 33-2. If the economy is at O and there is a reduction in aggregate demand, in the short run the economy a. stays at O. b. moves to P. c. moves to Q. d. moves to R.

d. moves to R.

Refer to Figure 34-1. There is an excess demand for money at an interest rate of a. 3.25 percent. b. 4.25 percent. c. 5.25 percent. d. 6.25 percent.

a. 3.25 percent.

Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2. Which curve shifts and in which direction? a. Aggregate demand shifts left. b. Aggregate demand shifts right. c. Aggregate supply shifts left. d. Aggregate supply shifts right.

a. Aggregate demand shifts left.

An economy is operating with output that is $400 billion below its natural level, and fiscal policy makers want to close the recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The MPC is 0.2, and the price level is completely fixed in the short-run. In what direction and by how much would the government funding need to change to close the recessionary gap? a. Government spending must increase by $80 billion b. Government spending must increase by $2000 billion c. Government spending must decrease by $80 billion d. Government spending must decrease by $2000 billion

a. Government spending must increase by $80 billion

Which of the following policies would Keynesians support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium? a. Increase taxes b. Increase government expenditures c. Increase the money supply d. Lower interest rates

a. Increase taxes

Monetary Policy in MokaniaMokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate. Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct? a. Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3. b. Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 1. c. Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 3. d. Initially people's inflation expectations had been lower than 5%. The sacrifice ratio was 1.

a. Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.

Refer to Figure 33-4. The short-run equilibrium is defined by the given AD and SRAS curves. Which of the long-run aggregate-supply curves is consistent with the economy experiencing an inflationary expansion? a. LRAS1 b. LRAS2 c. LRAS3 d. Both LRAS1 and LRAS3

a. LRAS1

Scenario 33-1Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. Refer to Scenario 33-1. What would the decrease in the interest rate created by foreigners wanting to buy more U.S. assets do to investment spending in the United States? a. Make it rise which by itself would increase U.S. aggregate demand. b. Make it rise which by itself would decrease U.S. aggregate demand. c. Make it fall which by itself would increase U.S. aggregate demand. d. Make it fall which by itself would decrease U.S. aggregate demand.

a. Make it rise which by itself would increase U.S. aggregate demand.

Which of the following is not a determinant of the long-run level of real GDP? a. The price level b. The amount of capital used by firms c. Available stock of human capital d. Available technology

a. The price level

According to the theory of liquidity preference, a. an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right. b. an increase in the interest rate increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand leftward. c. an increase in the price level reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand rightward. d. an increase in the price level increases the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the interest rate shifts money demand leftward.

a. an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.

If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run a. both the unemployment rate and the inflation rate would be lower. b. the unemployment rate would be lower and the inflation rate would be higher. c. the unemployment rate would be higher and the inflation rate would be lower. d. the unemployment rate and the inflation rate would be higher.

a. both the unemployment rate and the inflation rate would be lower.

If the Federal Reserve accommodates an adverse supply shock, a. inflation expectations may rise which shifts the short-run Phillips curve right. b. inflation expectations may rise which shifts the short-run Phillips curve left. c. inflation expectations may fall which shifts the short-run Phillips curve right. d. inflation expectations may fall which shifts the short-run Phillips curve left

a. inflation expectations may rise which shifts the short-run Phillips curve right.

If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher in the short run than before. b. left, so that at any inflation rate unemployment is higher in the short run than before. c. right, so that at any inflation rate unemployment is lower in the short run than before. d. left, so that at any inflation rate unemployment is lower in the short run than before.

a. right, so that at any inflation rate unemployment is higher in the short run than before.

If the economy is at the point where the short-run Phillips curve intersects the long-run Phillips curve, a. unemployment equals the natural rate and expected inflation equals actual inflation. b. unemployment is above the natural rate and expected inflation equals actual inflation. c. unemployment equals the natural rate and expected inflation is greater than actual inflation. d. there is no unemployment or inflation.

a. unemployment equals the natural rate and expected inflation equals actual inflation.

The government of Blenova considers two policies. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A will lead a. to a lower unemployment rate and a lower inflation rate than policy B. b. to a lower unemployment rate and a higher inflation rate than policy B. c. to a higher unemployment rate and lower inflation rate than policy B. d. to a higher unemployment rate and higher inflation rate than policy B

b. to a lower unemployment rate and a higher inflation rate than policy B.

Monetary policy a. must be described in terms of interest-rate targets. b. must be described in terms of money-supply targets. c. can be described either in terms of the money supply or in terms of the interest rate. d. cannot be accurately described in terms of the interest rate or in terms of the money supply

c. can be described either in terms of the money supply or in terms of the interest rate.

During recessions, taxes tend to a. rise and thereby increase aggregate demand. b. rise and thereby decrease aggregate demand. c. fall and thereby increase aggregate demand. d. fall and thereby decrease aggregate demand

c. fall and thereby increase aggregate demand.

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action a. lowers both inflation and unemployment. b. lowers inflation but raises unemployment. c. raises inflation but lowers unemployment. d. raises both inflation and unemployment.

c. raises inflation but lowers unemployment.

When measured over a long span of time, a tax on interest income a. removes all benefits from saving. b. reduces the benefits from saving by a small amount. c. reduces the benefits from saving by a large amount. d. does nor reduce any of the benefits from saving.

c. reduces the benefits from saving by a large amount

If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate output is higher in the short run than before. b. left, so that at any inflation rate output is higher in the short run than before. c. right, so that at any inflation rate output is lower in the short run than before. d. left, so that at any inflation rate output is lower in the short run than before

c. right, so that at any inflation rate output is lower in the short run than before.

Changes in the interest rate a. shift aggregate demand whether they are caused by changes in the price level or by changes in fiscal or monetary policy. b. shift aggregate demand if they are caused by changes in the price level, but not if they are caused by changes in fiscal or monetary policy. c. shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level. d. do not shift aggregate demand.

c. shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. There is no crowding out. What should the government do if it wants to offset the decrease in aggregate demand? a. Raise both taxes and expenditures by $5.56 billion dollars. b. Raise taxes by $40 billion dollars and increase expenditures by $50 billion dollars. c. Reduce taxes by $10 billion dollars and increase expenditures by $10 billion dollars. d. Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.

d. Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.

An increase in household's saving out of disposable income causes consumption to a. rise and aggregate demand to increase. b. rise and aggregate demand to decrease. c. fall and aggregate demand to increase. d. fall and aggregate demand to decrease

d. fall and aggregate demand to decrease

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will. a. rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. b. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be unaffected. c. rise and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower. d. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

d. fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

If the unemployment rate is below the natural rate, then a. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift right. b. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left. c. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift left. d. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

d. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

The Federal Reserve would want to tighten monetary policy with the goal is to stabilize the economy when a. interest rates are rising too rapidly. b. it thinks the unemployment rate is too high. c. the growth rate of real GDP is quite sluggish. d. it thinks inflation is too high today, or will become too high in the future

d. it thinks inflation is too high today, or will become too high in the future

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged, then a. the central bank would have to raise interest rates which would decrease output. b. the central bank would have to raise interest rates which would increase output. c. the central bank would have to reduce interest rates which would decrease output. d. the central bank would have to reduce interest rates which would increase output

d. the central bank would have to reduce interest rates which would increase output

Assume there is a multiplier effect, some crowding out. An increase in government expenditures changes aggregate demand more, a. the smaller the MPC and the stronger the influence of income on money demand. b. the smaller the MPC and the weaker the influence of income on money demand. c. the larger the MPC and the stronger the influence of income on money demand. d. the larger the MPC and the weaker the influence of income on money demand.

d. the larger the MPC and the weaker the influence of income on money demand.