Final exam study guide

16. Refer to Figure 32-6. If the economy were originally in equilibrium at a and g and the government removed import quotas on autos the economy would move to a. b and k. b. c and j. c. d and i. d. None of the above is correct.

d

1. Over the past three decades, the United States has a. generally had, or been very near to a trade balance. b. had trade deficits in about as many years as it has trade surpluses. c. persistently had a trade deficit. d. persistently had a trade surplus.

C

If the economy starts at point C, stagflation would be consistent with point a. A. b. B. c. C. d. D.

D

2. The slope of the supply of loanable funds is based on an increase in a. only national saving when the interest rate rises. b. both national saving and net capital outflow when the interest rate rises. c. only national saving when the interest rate falls. d. both national saving and net capital outflow when the interest rate falls.

a

22. In October 2009, the official unemployment rate rose to a. 10%. b. 8%. c. 6% d. 4%.

a

3. A country has output of $600 billion, consumption of $350 billion, government expenditures of $90 billion and investment of $60 billion. What is its supply of loanable funds? a. $160 billion b. $150 billion c. $60 billion d. $30 billion

a

According to the liquidity preference theory, an increase in the overall price level of 10 percent a. increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded. b. decreases the equilibrium interest rate, which in turn increases the quantity of goods and services demanded. c. increases the quantity of money supplied by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged. d. decreases the quantity of money demanded by 10 percent, leaving the interest rate and the quantity of goods and services demanded unchanged.

a

An increase in government purchases will a. shift aggregate demand from AD1 to AD2. b. shift aggregate demand from AD1 to AD3. c. cause movement from point A to point B along AD1. d. have no effect on aggregate demand.

a

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would a. raise both the interest rate and the real exchange rate. b. raise the interest rate and reduce the real exchange rate. c. reduce the interest rate and raise the real exchange rate. d. reduce both the interest rate and the real exchange rate.

a

In the long-run, an increase in aggregate demand increases the price level, but not real GDP. a. True b. False

a

The Fed can influence the money supply by changing the interest rate it pays banks on the reserves they are holding. a. True b. False

a

The aggregate demand is described graphically as a. sloping downward. b. a vertical line. c. a horizontal line. d. sloping upward.

a

The marginal propensity to consume for this economy is a. 0.64. b. 0.83. c. 0.56. d. 0.840.

a

7. An open economy has GDP of $1,200 billion, consumption expenditures of $900 billion government expenditures of $400 billion, domestic investment of $100 billion, and net exports of -$200 billion. What is its demand for loanable funds? a. -$200 billion b. -$100 billion c. $100 billion d. $200 billion

b

The saying "Money is a veil." means that a. while nominal variables are the first thing we may observe about an economy, what's important are the real variables and the forces that determine them. b. money is the principal medium of exchange in most economies. c. the primary determinant of short-run economic fluctuations is not real variables, but rather changes in the money supply. d. in the long run money is of no importance to the determination of either real or nominal variables.

a

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, a. production is more profitable and employment rises. b. production is more profitable and employment falls. c. production is less profitable and employment rises. d. production is less profitable and employment falls.

a

There is an excess demand for money at an interest rate of a. 2 percent. b. 3 percent. c. 4 percent. d. None of the above is correct.

a

U.S. net exports would a. rise which by itself would increase aggregate demand. b. rise which by itself would decrease aggregate demand. c. fall which by itself would increase aggregate demand. d. fall which by itself would decrease aggregate demand.

a

nvestment averages about ____ of GDP. a. 1/6 b. 1/8 c. 1/4 d. 1/2

a

Most economists use the aggregate demand and aggregate supply model primarily to analyze a. short-run fluctuations in the economy. b. the effects of macroeconomic policy on the prices of individual goods. c. the long-run effects of international trade policies. d. productivity and economic growth.

a. short-run fluctuations in the economy.

. Refer to Figure 32-2. What are the equilibrium values of the real exchange rate and net exports? a. 1, 300 b. .8, 400 c. .6, 500 d. None of the above are correct.

b

11. Other things the same, if foreign companies desired to buy more U.S. medical equipment and U.S. residents desired to buy more foreign bonds a. net exports and the exchange rate would rise. b. net exports would rise, but what would happen to the exchange rate is uncertain. c. net exports would fall, but what would happen to the exchange rate is uncertain. d. net exports and the exchange rate would fall.

b

20. If C+I+G>Y, then net exports and net capital outflow are both greater than zero. a. True b. False

b

5. Refer to Figure 32-1. The loanable funds market is in equilibrium at a. 2 percent, $20 billion. b. 4 percent, $40 billion. c. 6 percent, $60 billion. d. None of the above is correct.

b

A change in the expected price level is likely to cause which of the following? a. a shift in the short-run aggregate supply curve and long-run aggregate supply curve b. a shift in the short run aggregate supply curve c. a shift in the aggregate demand curve d. a shift in the long-run aggregate supply curve

b

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a a. liquidity preference. b. liquidity trap. c. open-market trap. d. interest-rate contraction.

b

According to classical macroeconomic theory, changes in the money supply change real GDP but not the price level. a. True b. False

b

In 1986, OPEC countries increased their production of oil. This caused a. the price level to rise. b. aggregate supply to shift right. c. unemployment to rise. d. None of the above is correct.

b

In the 1970's the Federal Reserve responded to an adverse supply shock. Its policy made a. the recession that followed smaller and so provided a more favorable tradeoff between inflation and unemployment. b. the recession that followed smaller, but in doing so produced a less favorable tradeoff between inflation and unemployment. c. the recession that followed larger, but in doing so provided a more favorable tradeoff between inflation and unemployment. d. the recession that followed larger and also produced a less favorable tradeoff between inflation and unemployment.

b

In this order, which curve is a long-run Phillips curve and which is a short-run Phillips curve? a. A, B b. A, D c. C, B d. None of the above is correct.

b

Refer to Figure 32-4. Suppose that U.S. firms desire to purchase more equipment and build more factories and stores in the U.S. The effects of this are illustrated by a. shifting the demand curve in panel a to the right and the demand curve in panel c to the left. b. shifting the demand curve in panel a to the right and the supply curve in panel c to the left. c. shifting the supply curve in panel a to the right and the demand curve in panel c to the left. d. shifting the supply curve in panel a to the right and the supply curve in panel c to the right.

b

Refer to Figure 33-1. Line A is a. investment spending. b. real GDP. c. unemployment rate. d. CPI.

b

Samuelson and Solow reasoned that when aggregate demand was low, unemployment was a. high, so there was upward pressure on wages and prices. b. high, so there was downward pressure on wages and prices. c. low, so there was upward pressure on wages and prices. d. low, so there was downward pressure on wages and prices.

b

Suppose that during the Great Depression long-run aggregate supply shifted left. To be consistent with what happened to the price level and output, what would have had to happen to aggregate demand? a. It would have to have shifted left by less than aggregate supply. b. It would have to have shifted left by more than aggregate supply. c. It would have to have shifted right by less than aggregate supply. d. It would have to have shifted right by more than aggregate supply.

b

The Employment Act of 1946 states that a. the Fed should use monetary policy only to control the rate of inflation. b. the government should promote full employment and production. c. the government should periodically increase the minimum wage and unemployment insurance benefits. d. All of the above are correct.

b

The classical dichotomy and monetary neutrality are represented graphically by a. an upward-sloping long-run aggregate-supply curve. b. a vertical long-run aggregate-supply curve. c. an upward-sloping short-run aggregate-curve. d. a downward-sloping aggregate-demand curve.

b

Which of the following depends primarily on the growth rate of the money supply? a. inflation and the natural rate of unemployment b. inflation but not the natural rate of unemployment c. the natural rate of unemployment but not inflation d. neither inflation nor the natural rate of unemployment

b

Which of the following statements concerning the aggregate demand and aggregate supply model is correct? a. The aggregate demand and aggregate supply model is nothing more than a large version of the model of market demand and supply. b. The price level and quantity of output adjust to bring aggregate demand and supply into balance. c. The aggregate supply curve shows the quantity of goods and services that households, firms, and the government want to buy at each price. d. The aggregate demand shows the quantity of goods and services that firms are willing to produce at a given price level.

b

the natural rate of output occurs at a. Y1. b. Y2. c. Y3. d. both Y1 and Y3.

b

12. A rise in the budget deficit a. shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars in the market for foreign-currency exchange right. b. shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars in the market for foreign-currency exchange left. c. shifts both the demand for loanable funds in the market for loanable funds and the demand for dollars in the market for foreign-currency exchange right. d. shifts both the demand for loanable funds in the market for loanable funds and the demand for dollars in the market for foreign-currency exchange left.

b. shifts both the supply of loanable funds in the market for loanable funds and the supply of dollars in the market for foreign-currency exchange left.

. In the open-economy macroeconomic model, the market for loanable funds identity can be written as a. S = NCO - I b. S = NCO c. S = I - NCO d. S = I + NCO

d

. In 1995 House Speaker Newt Gingrich threatened to send the United States into default on its debt. During the day of this announcement, U.S. interest rates rose and the real exchange rate of the U.S. dollar depreciated. Which of these changes is consistent with the results of the open-economy macroeconomic model? a. the increase in U.S. interest rates b. the depreciation of the real exchange rate of the U.S. dollar c. Both a and b are consistent. d. Neither a nor b are consistent.

c

10. Refer to Figure 32-3. National saving is represented by the a. demand curve in panel a. b. demand curve in panel c. c. supply curve in panel a. d. supply curve in panel c.

c

39. Refer to Stock Market Boom 2015. What happens to the expected price level and what impact does this have on wage bargaining? a. The expected price level falls. Bargains are struck for higher wages. b. The expected price level falls. Bargains are struck for lower wages. c. The expected price level rises. Bargains are struck for higher wages. d. The expected price level rises. Bargains are struck for lower wages.

c

4. A country has I = $200 billion, S = $400 billion, and purchased $600 billion of foreign assets, how many of its assets did foreigners purchase? a. $0 b. $200 billion c. $400 billion d. $800 billion

c

9. In the open-economy macroeconomic model, if investment demand increases, then a. net exports and the real exchange rate rise. b. net exports rise and the real exchange rate falls. c. net exports fall and the real exchange rate rises. d. net exports and the real exchange rate fall.

c

Assuming the price level in the previous year was 100, point G on the right-hand graph corresponds to a. point A on the left-hand graph. b. point B on the left-hand graph. c. point C on the left-hand graph. d. point D on the left-hand graph.

c

If the Canadian government raises it budget deficit, then Canada's net capital outflows will a. increase, so its exchange rate will rise. b. increase, so its exchange rate will fall. c. decrease, so its exchange rate will rise. d. decrease, so its exchange rate will fall.

c

If the MPC = 0.75, then the government purchases multiplier is about a. 1.33. b. 7. c. 4. d. 3.

c

In 1936, John Maynard Keynes published a book, The General Theory, which attempted to explain a. stagflation. b. the classical dichotomy. c. short-run economic fluctuations. d. how changes in the money supply had created the Great Depression.

c

In 1968, economist Milton Friedman published a paper criticizing the Phillips curve on the grounds that a. it seemed to work for wages but not for inflation. b. monetary policy was ineffective in combating inflation. c. the Phillips curve did not apply in the long run. d. Phillips had made errors in collecting his data.

c

In 2009 Congress and President Obama approved tax cuts and increased government spending. According to the short- run Phillips curve these policies should have a. raised unemployment and inflation. b. raised unemployment and reduced inflation. c. reduced unemployment and raised inflation. d. reduced unemployment and inflation.

c

In 2009 Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right? a. only the increased funding for states b. only the tax cuts c. both the increased funding for states and the tax cuts d. neither the increased funding for states nor the tax cuts

c

In a certain economy, when income is $1000, consumer spending is $800. The value of the multiplier for this economy is 2.5. It follows that, when income is $1020, consumer spending is a. $816. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand. b. $816. For this economy, an initial increase of $100 in consumer spending translates into a $400 increase in aggregate demand. c. $812. For this economy, an initial increase of $100 in consumer spending translates into a $250 increase in aggregate demand. d. $812. For this economy, an initial increase of $100 in consumer spending translates into an $800 increase in aggregate demand.

c

Keynes believed that economies experiencing high unemployment should adopt policies to a. reduce the money supply. b. reduce government expenditures. c. increase aggregate demand. d. increase aggregate supply.

c

Suppose the money-demand curve is currently MD2. If the current interest rate is r2, then a. in response, the money-demand curve will shift rightward from its current position to establish equilibrium in the money market. b. people will respond by selling interest-bearing bonds or by withdrawing money from interest-bearing bank accounts. c. bond issuers and banks will respond by lowering the interest rates they offer. d. there is a shortage of money.

c

The Volcker disinflation a. had virtually no impact on output, just as the classical dichotomy suggested. b. was associated with rising output, perhaps due to expansionary fiscal policy. c. caused output to fall, but by less than the typical estimate of the sacrifice ratio suggested. d. None of the above is correct.

c

The idea that expansionary fiscal policy has a positive affect on investment is known as a. monetary policy. b. crowding out. c. the investment accelerator. d. the multiplier.

c

The natural rate of unemployment a. is constant over time. b. varies over time, but can't be changed by the government. c. is the unemployment rate that the economy tends to move to in the long run. d. depends on the rate at which the Fed increases the money supply.

c

According to liquidity preference theory, if the quantity of money supplied is greater than the quantity demanded, then the interest rate will a. increase and the quantity of money demanded will decrease. b. increase and the quantity of money demanded will increase. c. decrease and the quantity of money demanded will decrease. d. decrease and the quantity of money demanded will increase.

d

During the 2008-2009 recession real GDP fell by about a. 2% b. 4% c. 6% d. 8%

d

Economist A.W. Phillips found a negative correlation between a. output and unemployment. b. unemployment and the interest rate. c. output and the interest rate. d. wage inflation and unemployment.

d

If China experienced capital flight, the supply of Chinese yuan in the market for foreign-currency exchange would shift a. left, which would make the real exchange rate of the Chinese yuan appreciate. b. left, which would make the real exchange rate of the Chinese yuan depreciate. c. right, which would make the real exchange rate of the Chinese yuan appreciate. d. right, which would make the real exchange rate of the Chinese yuan depreciate.

d

If a central bank is independent, a. it has the ability to alter taxes. b. it allocates savings to firms. c. it restricts trade to increase domestic employment. d. it operations are not controlled by the political process.

d

If the economy is at A and there is a fall in aggregate demand, in the short run the economy a. stays at A. b. moves to B. c. moves to C. d. moves to D.

d

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller? a. the interest rate falls and aggregate supply is relatively flat b. the interest rate falls and aggregate supply is relatively steep c. the interest rate rises and aggregate supply is relatively flat d. the interest rate rises and aggregate supply is relatively steep

d

Monetary policy is determined by a. the president and Congress and involves changing government spending and taxation. b. the president and Congress and involves changing the money supply. c. the Federal Reserve and involves changing government spending and taxation. d. the Federal Reserve and involves changing the money supply.

d

Most economists believe that classical macroeconomic theory is a good description of the economy a. in neither the short nor long run. b. in the short run and in the long run. c. in the short run, but not in the long run. d. in the long run, but not in the short run.

d

Real GDP a. is the current dollar value of all goods produced by the citizens of an economy within a given time. b. measures economic activity and income. c. is used primarily to measure long-run changes rather than short-run fluctuations. d. All of the above are correct.

d

Suppose the economy is currently at point A. To restore full employment, the Federal Reserve should a. purchase government bonds, which will increase the money supply. b. purchase government bonds, which will reduce the money supply. c. sell government bonds, which will increase the money supply. d. sell government bonds, which will reduce the money supply.

d

Suppose the graphs are drawn to show the effects of an increase in government purchases. If it were not for the increase in r from r1 to r2, then a. there would be no crowding out. b. the full multiplier effect of the increase in government purchases would be realized. c. the AD curves that actually apply, before and after the change in government purchases, would be separated horizontally by the distance equal to the multiplier times the change in government purchases. d. All of the above are correct.

d

The aggregate-demand curve shows that a decrease in the price level a. decreases the dollar value of goods and services demanded in the economy. b. decreases the real value of goods and services demanded in the economy. c. increases the dollar value of goods and services demanded in the economy. d. increases the real value of goods and services demanded in the economy.

d

Which of the following is correct? a. Short run fluctuations in economic activity happen only in developing countries. b. During economic contractions most firms experience rising profits. c. Recessions come at irregular intervals and are easy to predict. d. When real GDP falls, the rate of unemployment generally rises.

d

Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect? a. 1, 2, 3, 4 b. 1, 4, 3, 2 c. 3, 4, 2, 1 d. 3, 2, 1, 4

d

. If the U.S. were to impose import quotas a. the demand for loanable funds and the demand for dollars in the market for foreign-currency exchange would both increase. b. nether the demand for loanable funds nor the demand for dollars in the market for foreign-currency exchange would increase. c. the demand for loanable funds would increase, but the demand for dollars in the market for foreign-currency exchange would not. d. the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable funds would not.

d. the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable funds would not.