Exam 2 Quizzes/HW

In the IS-LM model under the usuas conditions in a closed economy, an increase in government spending increases the interest rate and crowds out A)prices. B)investment. C)the money supply. D)taxes

investment

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

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, which ___ the interest rate and ___ spending A)lower; raises; reduces B)higher; lowers; increases C)lower; lowers; increases D)higher; raises; reduces

lower; raises; reduces

The phillips curve shows a ___ relationship between inflation and unemployment, and the short run aggregate supply curve shows a ___ relationship between the price level and output A)positive; positive B)positive; negative C)negative; negative D)negative; positive

negative; positive

Equilibrium levels of income and interest rares are ___ related in the goods and services market, and equilibrium levels of income and interest rates are ___ related in the market for real money balances A) positively; positively B)positively; negatively C)negatively; negatively D)negatively; positively

negatively; positively

The assumption of rational expectations for inflation means that people will form their expectations of inflation by: A)optimally using all available information, including information about current policies, to forecast the future. B)asking the opinions of the best experts. C)subscribing to the forecasting service that uses the best econometric model. D)basing their opinions on recently observed inflation.

optimally using all available information including information about current policies, to forecast the future

Starting from a short run equilibrium greater then the natural rate of output, as the economy returns to a long run equilibrium: A)both output and the price level will increase. B)output will decrease, but the price level will increase. C)output will increase, but the price level will decrease. D)both output and the price level will decrease.

output will decrease, but the price level will increase

Along the short run aggregate supply curve, output is related to unexpected movements in the ___. Along the phillips curve, unemployment is related to unexpected movements in the ___ A)price level; inflation rate B)inflation rate; price level C)unemployment rate; price level D)price level; level of output

price level; inflation

Along a short run aggregate supply curve, output is related to unexpected movements in the ____. Along the phillips curve, unemployment is related to unexpected movements in the ___. A)price level; inflation rate B)inflation rate; price level C)unemployment rate; price level D)price level; level of output

price level; inflation rate

The macroeconomic model may be completed by adding either the Keynesian assumption that ____ or the classical assumption that ____ A)output is fixed; prices are fixed B)prices are fixed; output is fixed C)the interest rate is fixed; the money supply is fixed D)prices are flexible; output varies

prices are fixed; output is fixed

A short run aggregate supply curve shows fixed ___, and the long run aggregate supply curve shows fixed___ A) output; output B) prices; prices C) prices; output D) output; prices

prices; output

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to ___ and in an economy with fixed exchange rates, import restrictions cause net exports ___ A)increase; increase B)increase; remain unchanged C)remain unchanged; remain unchanged D)remain unchanged; increase

remain unchanged; increase

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ____, while a shift in aggregate demand curve corresponds to a change in income in the IS-LM model ____ A)resulting from a change in monetary policy; resulting from a change in fiscal policy B)resulting from a change in fiscal policy; resulting from a change in monetary policy C)at a given price level; resulting from a change in the price level D)resulting from a change in the price level; at a given price level

resulting from a change in the price level; at a given price level

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

rise; falls

The percentage of a year's real GDP that must be forgone to reduce inflation by 1 percentage point is called the: A)NAIRU. B)short-run Phillips curve. C)sacrifice ratio. D)Okun's law

sacrifice ratio

The Mundell-Fleming model is a ___ model for a ___ open economy A)short-run; small B)short-run; large C)long-run; large D)long-run; small

short-run; small

In the Mundell Fleming model with a floating exchange rate, a rise in the world interest rate will lead income: A)and net exports both to fall. B)to rise and net exports to fall. C)to fall and net exports to rise. D)and net exports both to rise.

and net exports both to rise

The theory of liquidity preference implies that: A)as the interest rate rises, the demand for real balances will fall. B)as the interest rate rises, the demand for real balances will rise. C)the interest rate will have no effect on the demand for real balances. D)as the interest rate rises, income will rise.

as the interest rate rises, the demand for real balances will fall

In a small open economy with a floating excahnge rate, a rise in government spending in the new short run equilibrium: A)chokes off investment, but not by as much as the new government spending. B)chokes off an amount of investment just equal to the new government spending. C)attracts foreign capital, thus raising the exchange r ate and reducing net exports, but not by as much as the new government spending. D)attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending.

attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by: A)taking all information into account using the best economic model available. B)asking the opinions of experts. C)basing their opinions on recently observed inflation. D)flipping a coin.

basing their opinion on recently observed inflation

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short run equilibrium the IS curve shifts to the right, raising the exchange rate A)but not raising net exports or income. B)and net exports but not income. C)and income but not net exports. D)net exports and income.

but not raising net exports or income

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ___ would drive the domestic interest rate back to the level of the world interest rate A)capital inflow B)capital outflow C)the central bank D)a decline in domestic saving

capital inflow

The Pigou effect suggests that falling prices will increase income because real balances influence ___ and will shift the ___ curve A)money demand; LM B)the money supply; LM C)consumer spending; IS D)government spending; IS

consumer spending; IS

According to the Mundell Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the: A)exchange rate. B)price level. C)level of government spending. D)tax rates.

exchange rate

In the IS-LM model when M rises but P remains constant, in short run equilibrium, in the usual case the interest rate ___ and output ___ A)rises; falls B)rises; rises C)falls; rises D)falls; falls

falls; rises

According to the Mundel-Fleming model, under: A)floating exchange rates, a monetary expansion raises income whereas a fiscal expansion does not, but under fixed exchange rates, a fiscal expansion raises income whereas a monetary expansion does not. B)both floating and fixed exchange rates, a monetary expansion raises income, but a fiscal expansion does not. C)both floating and fixed exchange rates, a fiscal expansion raises income, but a monetary expansion does not. D)floating exchange rates, a fiscal expansion raises income whereas a monetary expansion does not; but under a fixed exchange rate, a monetary expansion raises income whereas a fiscal expansion does not.

floating exchange rates, a monetary expansion raises income whereas a fiscal expansion does not, but under fixed exchange rates, a fiscal expansion raises income whereas a monetary expansion does not.

The 'impossible trinity' refers to the idea that it is impossible for a country to simultaneously have: A) low inflation, low unemployment, and a rapid rate of GDP growth. B)free capital flows, a fixed exchange rate, and an independent monetary policy. C)high interest rates, a budget deficit, and a trade deficit. D)an expansionary fiscal policy, a contractionary monetary policy, and a flexible exchange rate.

free capital flows, a fixed exchange rate, and an independent monetary policy

The basic aggregate supply equation implies that output exceeds natural output when the price level is: A)low. B)high. C)less than the expected price level. D)greater than the expected price level.

greater then the expected price level

Demand pull inflation is the result of: A)high aggregate demand. B)low aggregate demand. C)favorable supply shocks. D)adverse supply shocks

high aggregate demand

The clasical dichotomy breaks down for a phillips curve, which shows the relationship between a nominal variable____ and a real variable___ A)output; prices B)money; output C)inflation; unemployment D)unemployment; inflation

inflation; unemployment

In the Keynesian-cross model, if the MPC equals 0.75, then a 1 billion increase in government spending increases planned expenditures by ___ and increases the equilibrium level of income by ___ A) $1 billion; more than $1 billion B)$0.75 billion; more than $0.75 billion C)$0.75 billion; $0.75 billion D)$1 billion; $1 billion

1 billion; more then 1 billion

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 A)increase both output and the price level B)decrease output but increase prices C)increase output but decrease the price level D)decrease both output and the price level

Decrease output but increase prices

The U.S. recession of 2001 can be explained by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ___ curve to the ___ A)LM; right B)LM; left C)IS; right D)IS; left

IS; left

A 5 percent reduction in the money supply, will, according to most economists, reduce prices 5 percent: A) in both the short and long runs. B) in neither the short nor long run. C) in the short run but lead to unemployment in the long run. D) in the long run but lead to unemployment in the short run.

In the long run but lead to unemployment in the short run

Analysis of the short and long runs indicates that the ___ assumptions are most appropriate in ____ A)classical; both the short and long runs B)Keynesian; both the short and long runs C)classical; the short run whereas the Keynesian assumptions are most appropriate in the long run D)Keynesian; the short run whereas the classical assumptions are most appropriate in the long run

Keynesian; the short run whereas the classical assumptions are most appropriate in the long run

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell Fleming model with fixed exchange rates, lead to: A)a fall in income and net exports. B)no change in income or net exports. C)a fall in income but no change in net exports. D)no change in income but a fall in net exports

a fall in income and net exports

The introduction of a stylish new line of Toyotas, which makes some consumer prefered foreign cars over domestic cars will, according to the Mundell Fleming model with fixed exchange rates, lead to: A)a fall in income and net exports. B)no change in income or net exports. C)a fall in income but no change in net exports. D)no change in income but a fall in net exports

a fall in income and net exports

The equillibrium condition in the Keynesian-cross analysis in a closed economy is: A) income equals consumption plus investment plus government spending. B) planned expenditure equals consumption plus planned investment plus government spending. C) actual expenditure equals planned expenditure. D) actual saving equals actual investment

actual expenditure equals planned expenditure

cost-push inflation is the result of: A)high aggregate demand. B)low aggregate demand. C)favorable supply shocks. D)adverse supply shocks.

adverse supply shocks

Tax cuts stimulate, ___by improving worker's incentive and expand ___ by raising households' disposable income A)velocity; demand for loanable funds B)demand for loanable funds; velocity C)aggregate demand; aggregate supply D)aggregate supply; aggregate demand

aggregate supply; aggregate demand

One argument favoring a floating exchange rate system is that is: A)makes international trade less difficult. B)minimizes destabilizing speculation by international investors. C)allows monetary policy to be used for other purposes. D)helps prevent excessive growth in the money supply

allows monetary policy to be used for other purposes

In the IS-LM model, a decrease in government purchases leads to a ___ in planned expenditures, a ____ in total income, a ___ in money demand, and a ___ in the equilibrium interest rate A)decrease; decrease; decrease; decrease B)increase; increase; increase; increase C)decrease; decrease; increase; increase D)increase; increase; decrease; decrease

decrease, decrease, decrease, decrease

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short run equilibrium the exchange rate ___, and the LM curve shifts to the ___ A)decreases; left B)increases; left C)decreases; right D)increases; right

decreases; right

In the IS-LM model, which two variables are influenced by the interest rate? A) supply of nominal money balances and demand for real balances B) demand for real balances and government purchases C) supply of nominal money balances and investment spending D) demand for real money balances and investment spending

demand for real money balances and investment spending

In the Mundell Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ___ and net exports will ___ to restore the economy to its natural rate A)appreciate; increase B)appreciate; decrease C)depreciate; increase D)depreciate; decrease

depreciate; increase

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer: A)increases production. B)does not change production. C)decreases production. D)hires more workers

does not change production

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, bu t with a ______ level of output in the short run. A) higher; higher B) higher; lower C) lower; lower D) lower; higher

higher; lower

In a small open economy with a floating exchange rate, if the government decreases the money supply, then in the new short run equilibrium: A)income falls and the exchange rate rises. B)the exchange rate falls and income rises. C)income remains unchanged but the exchange rate rises. D)the exchange rate remains unchanged but income falls.

income falls and the exchange rate rises

In a small open economy with a fixed exchange rate if the central bank tries to increase the money supply, then in the new short run equilibrium: A)income rises. B)income falls. C)the exchange rate falls. D)income remains constant

income remains constant

An explanation for the slope of the LM curve is that as: A)the interest rate increases, income becomes higher. B)the interest rate increases, income becomes lower. C)income rises, money demand rises, and a higher interest rate is required. D)income rises, money demand rises, and a lower interest rate is required

income rises, money demand rises, and a higher interest rate is required

In a short run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in A)the exchange rate and a fall in net exports but has no effect on income. B)the money supply and an increase in income but has no effect on the exchange rate. C)income, the interest rate, and net exports, but a decrease in investment and in the exchange rate. D)income, the interest rate, and the exchange rate, but a decrease in investment and net exports.

income, the interest rate, and the exchange rate, but a decrease in investment and net exports

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 A)increase B)decrease C)first increase and then decrease D)first decrease and then increase

increase

In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to A)increase government spending. B)increase taxes. C)increase the money supply. D)decrease the money supply.

increase the money supply

In a small open economy, a decrease in its exchange rate will ___ net exports and shift the __ curve A)increase; IS B)decrease; IS C)increase; LM D)decrease; LM

increase; IS

If a short run equillibrium occurs at a level of output above the natural rate, then in the transition to the long run, prices will ___and output will ___ A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase

increase; decrease

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a ___ in money ___ A)increase; supply B)increase; demand C)decrease; supply D)decrease; demand

increase; demand

Analysis of the short-run phillips curve suggests that policymakers who want to reduce unemployment in the short run should ___ aggregate demand at a cost of generating ___ inflation A)increase; higher B)increase; lower C)decrease; higher D)decrease; lower

increase; higher

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

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

If the short run aggregate supply curve is horizontal, then changes in the aggregate demand affect: A) level of output but not prices. B) prices but not level of output. C) both prices and level of output. D) neither prices nor level of output.

level of output but not prices

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ___ and the aggregate demand curve shifts ___: A) greater; inward B) greater; outward C) lower; inward D) lower; outward

lower; inward

According to the sticky price model: A) all firms announce their prices in advance. B)all firms set their prices in accord with observed prices and output. C)some firms set their prices acc ording to the aggregate supply equation. D)some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.

some firms announce their prices in advance and some firms set their prices in accord with observed prices and output

Each of the two models of short run aggregate supply is based on some market imperfection. In the sticky price model, the imperfection is that: A)some firms do not adjust their prices instantly to changes in demand B)expectations are formed adaptively rather than rationally. C)firms confuse changes in the overall level of prices with changes in relative prices. D)the real wage adjusts to bring labor supply and labor demand into equilibrium

some firms do not adjust their prices instantly to changes in demand

In a short run model of a large open economy with a floating exchange rate, a monetary expansion causes a decrease in the interest and: A)the exchange rate but has no effect on income. B)the exchange rate, and increases in income, net capital outflow, and net exports. C)the exchange rate and net capital outflow, and increases in income and net exports. D)net exports and net capital outflow, but increases in investment and income.

the exchange rate, and increase in income, net capital outflow, and net exports

To illustrate inflation inertia in an aggregate demand aggregate supply model, the short run aggregate supply curve shifts upwards because of an increase in___ and the aggregate demand curve shifts upwards because of an increase in ___ A)the expected price level; the money supply B) the money supply; the expected price level C)output; the price level D)the price level; output

the expected price level; the money supply

Based on the Keynesian model, one reason to support spending increases over tax cuts as measures to increase output is that: A) government spending increases the MPC more than tax cuts. B) the government spending multiplier is larger than the tax multiplier. C) government spending increases do not lead to unplanned changes in inventories, but tax cuts do. D)increases in government spending increase planned spending, but tax cuts reduce planned spending

the government spending multiplier is larger then the tax multiplier

In the case of demand pull inflation, other things being equal: A)both the inflation rate and the unemployment rate rise at the same time. B)the unemployment rate rises but the inflation rate falls. C)the inflation rate rises but the unemployment rate falls. D)both the inflation rate and the unemployment rate fall.

the inflation rate rises but the unemployment rate falls

The IS curve shifts when any of the following economic variables change except: A)the interest rate. B)government spendi ng. C)tax rates. D)the marginal propensity to consume

the interest rate

If there is a fixed exchange rate system, then in the long run: A)the nominal exchange rate is fixed, but the real exchange rate is free to vary. B)the real exchange rate is fixed, but the nominal exchange rate is free to vary. C)both the nominal and real exchange rates are fixed. D)the nominal and real exchange rates vary by a fixed amount.

the nominal exchange rate is fixed but the real exchange rate is free to vary

the imperfect information model assumes that producers find it difficult to distinguish changes in: A)real wages and nominal wages. B)the overall level of prices and relative prices. C)the overall level of prices and the expected level of prices. D)cost-push inflation and demand-pull inflation.

the overall level of prices and relative prices

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: A) liquidity preference. B) the government purchases multiplier. C) unplanned inventory investment. D) real money balances

unplanned inventory investment

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium rises by A)G/(1 -MPC). B)more than zero but less than G/(1 -MPC). C)G. D)zero.

zero; IS curve handles fiscal policy