Macro Exam 3
If MPC=0.75 (and there are no income taxes), when G increases by 100, then the IS curve for any given interest rate shifts to the right by: (A) 100 (B) 200 (C) 300 (D) 400
D
If expected inflation equals 3% and monetary policymakers push nominal interest rate to 1%, the real interest rate equals _____% (A) 4 (B) 1 (C) 0 (D) -2
D
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. (A) increase; lower (B) increase; raise (C) lower; lower (D) lower; raise
(B)
A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is: (A) increased (B) Decreased (C) allowed to float (D) kept fixed within a band
(A)
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 & then decrease (D) first decrease & then increase
(A)
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: (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
A
A shift in the aggregate demand curve, starting from a 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
B
According to the IS-LM model, when the government increases taxes and government purchases by equal amounts: (A) Income, the interest rate, consumption, and investment are unchanged (B) Income and the interest rate rise, whereas consumption and investment fall (C) income and the interest rate fall, whereas consumption and interest rise (D) income, the interest rate, consumption, and investment all rise
B
If the money supply increases, then in the IS-LM analysis the _____ curve shifts to the _____. (A) LM; left (B) LM; right (C) IS; left (D) IS: right
B
In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports: (A) Decrease but the money supply falls and income falls (B) Increase, the money supply increases, and income increases (C) are unchanged but the money supply falls and income falls (D) are unchanged, the money supply is unchanged, and income is unchanged
B
One argument favoring a fixed-exchange-rate system is that it: (A) Allows monetary policy to be used for stabilizing output and prices (B) Reduces exchange-rate uncertainty, thereby promoting more international trade (C) Leads to excessive growth of the money supply (D) Requires no actions on the part of the central bank to implement
B
An economic change that does not shift the aggregate demand curve is a change in: (A) The money supply (B) The investment function (C) The price level (D) Taxes
C
An increase in the money supply shifts the _____ curve to the right, and the aggregate demand curve _____. (A) IS; shifts to the right (B) IS; does not shift (C) LM; shifts to the right (D) LM; does not shift
C
The increase in income in response to a fiscal expansion in the IS-LM model is: (A) always less than in the Keynesian-cross model (B) less than in the Keynesian-cross model unless the LM curve is vertical (C) less than in the Keynesian-cross model unless the LM curve is horizontal (D) less than in the Keynesian-cross model unless the IS curve is vertical
C
Under a fixed-exchange rate system, the central bank of a small open economy must: (A) have a reserve of its own currency, which it must have accumulated in past transactions (B) Have a reserve of foreign currency, which it can print (C) Allows the money supply to adjust to whatever level will ensure that the equilibrium exchange rate equals the announced exchange rate (D) Follow a rule specifying a constant growth rate for the money supply
C
A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____. (A) IS; shifts to the right (B) IS; does not shift (C) LM; shifts to the right (D) LM; does not shift
D
A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _____, while a shift in an 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 give price level; resulting from a change in the price level (D) resulting from a change in the price level; at a given price level
D
In the iS-LM model under the usual 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
(B)
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
(B)
Under a fixed system, the exchange rate: (A) Fluctuates in response to changing economic conditions (B) is maintained at a predetermined level by the central bank (C) is changed at regular intervals by the central bank (D) fluctuates in response to changes in the price of gold
(B)
When a country abandons its national currency and adopts the currency of the United States, this is known as: (A) A floating-exchange rate system (B) Dollarization (C) A speculative attack on the US ()D A currency board
(B)
A liquidity trap occurs when: (A) banks have too much currency and close their doors to new customers (B) The central bank mistakenly prints too much money generating hyperinflation (C) interest rates fall so low that monetary policy is no longer effective (D) dams and locks are built to prevent flooding
(C)
An increase in consumer saving for any given level of income will shift the: (A) LM curve upward & to the left (B) LM curve downward & to the right (C) IS curve downward & to the left (D) IS curve upward & to the right
(C)
Between 1995 and 2005, China chose to: (A) Conduct independent monetary policy, allow free international-capital flows, and maintain a fixed exchange rate (B) Maintain a fixed exchange rate, allow free international-capital flows, and give up the use of monetary policy for domestic stabilization (C) Conduct an independent monetary policy, restrict international-capital flows, and maintain a fixed exchange rate (D) Allow a flexible exchange rate, conduct an independent monetary policy, and allow free international-capital flows
(C)
Compared to a closed economy, an open economy is one that: (A) Allows the exchange rate to float (B) Fixes the exchange rate (C) Trades with other countries (D) Does not trade with other countries
(C)
If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must: (A) Live with exchange-rate volatility (B) Restrict its citizens from participating in world financial markets (C) Give up the use of monetary policy for purposes of domestic stabilization (D) Give up the use of fiscal policy for purposes of domestic stabilization
(C)
If taxes are raised, but the Fed prevents income from falling by raising the money supply, then: (A) both consumption and investment remain unchanged (B) consumption rises but investment falls (C) investment rises but consumption falls (D) both consumption and investment fall
(C)
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
(C)
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
(C)
In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to decrease the money supply: (A) Lead to a lower equilibrium level of income (B) Lead to a higher equilibrium level of income (C) Must be abandoned in order to maintain the fixed exchange rate (D) Must be offset by expansionary fiscal policy
(C)
One argument favoring a floating-exchange-rate system is that i: (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
(C)
The intersection of the IS* an LM* curves shows the _____ and the _____ at which both the goods market and the money market are in equilibrium (A) Interest rate; price level (B) Price level; exchange rate (C) level of output; exchange rate (D) level of output; price level
(C)
The interaction of the IS curve and the LM curve together determine: (A) The price level & the inflation rate (B) The interest rate & the price level (C) Investment & the money supply (D) The interest rate & the level of output
(D)
In a small open economy with a floating exchange rate, the exchange rate will appreciate if: (A) the money supply is increased (B) the money supply is decreased (C) government spending is decreased (D) taxes are decreased
(B)
According to the Mundell-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
(A)
All of the following may have contributed to the financial crisis and economic downturn of 2008-09 except: (A) high inflation (B) low interest rates (C) stock market volatility (D) Falling house prices
(A)
If a country chooses to have free capital flows and t conduct an independent monetary policy, then it must: (A) Live with exchange-rate volatility (B) Restricts its citizens from participating in world financial markets (C) Give up the use of monetary policy for purposes of domestic stabilization (D) Have a fixed exchange rate
(A)
In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium, the money supply: (A) Increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income (B) Decreases to keep the exchange rate unchanged, thus offsetting the effect of government spending on income (C) Remains unchanged, and there's no effect of government spending on income (D) Remains unchanged to keep the interest rate at the world interest, so that government spending reduces income
(A)
In the IS-LM model, a decrease in government purchases leads to a(n) _____ in planned expenditures, a(n) _____ in total income, a(n) _____ in money demand, and a(n) _____ 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
(A)
In the IS-LM model, changes in taxes initially affect planned expenditures through: (A) Consumption (B) Investment (C) Government Spending (D) The interest rate
(A)
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
(A)
Under a floating system, the exchange rate: (A) Fluctuates in response to changing economic conditions (B) is maintained at a predetermined level by the central bank (C) is changed at regular intervals by the central bank (D) fluctuates in response to changes in the price of gold
(A)
According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must _____ the money supply. (A) increase (B) decrease (C) first increase and then decrease (D) first decrease and then increase
(B)
If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must: (A) Live with exchange-rate volatility (B) Control its citizen's access to world financial markets (C) give up the use of monetary policy for purposes of domestic stabilization (D) Give up the use of fiscal policy for purposes of domestic stabilization
(B)
In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium: (A) income and the exchange rate will both rise (B) the exchange rate will rise, but income will remain unchanged (C) income will rise, but the exchange rate will remain unchanged (D) both income and the interest rate will rise
(B)
In the IS-LM model when government spending rises, 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
(B)
One policy response to the US economic slowdown of 2001 was to increase money growth. This policy response 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
A
A given increase in taxes shifts the IS curve more to the left the: (A) larger the marginal propensity to consume (B) smaller the marginal propensity to consume (C) larger the government spending (D) Smaller the government spending
A
A monetary union with a common currency is an example of a: (A) Fixed-exchange-rate system (B) Flexible-exchange-rate system (C) Small open economy (D) Large open economy
A
A tax cut shifts the _____ to the right, and the aggregate demand curve _____. (A) IS; shifts to the right (B) IS; does not shift (C) LM; shifts to the right (D) LM; does not shift
A
According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot after 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
A
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
A
If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS* curve: (A) Slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market. (B) Is vertical because there is only one investment level that is consistent with the world interest rate (C) is vertical because the exchange rate does not enter into the IS* equation (D) Slopes downward and to the right because the higher the exchange rate, the higher the level of net exports and, therefore, of short-run equilibrium income in the goods market
A
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 shits 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
A
In a small open economy, a decrease in it exchange rate will _____ net exports and shift the _____ curve (A) increase; IS (B) Decrease; IS (C) Increase; LM (D) Decrease; LM
A
In the IS-LM model when M remains constant but P rises, 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
A
In the IS-LM model, a decrease in the interest rate would be the result of a(n): (A) increase in the money supply (B) increase in government purchases (C) decrease in taxes (D) increase in money demand
A
The principal economic loss when a country dollarizes the loss of: (A) Seigniorage revenue (B) Income tax revenue (C) Monetary stability (D) A fixed exchange rate with the dollar
A
An unexpected deflation can change demand by redistributing wealth from: (A) creditors to debtors, thus raising consumption (B) creditors to debtors, thus lowering consumption (C) debtors to creditors, thus lowering consumption (D) debtors to creditors, thus raising consumption
C
If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM* curve: (A) Slopes upward and to the right because at a higher income a higher interest rate is needed to increase velocity (B) Is vertical because monetary velocity is independent of the interest rate (C) is vertical because the exchange rate does not enter into the LM* equation (D) slopes upward and to the right because a higher exchange rate leads to a higher income
C
One policy response to the US economic slowdown of 2001 were tax cuts. This policy response 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
C
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
D
If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate was 150 yen per dollar, then: (A) Arbitrageurs would sell yen in the marketplace (B) arbitrageurs would buy yen from the Fed (C) The money supply would fall until the market exchange rate was 100 yen per dollar (D) the money supply would rise until the market exchange rate was 100 yen per dollar
D
If the short-run, IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _____, shifting the _____ curve to the right and returning output to the natural level (A) Increase; IS (B) Decrease; IS (C) Increase; LM (D) Decrease; LM
D
In the IS-LM model when taxation increases, 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
D
In the Mundell-Fleming model, the domestic interest rate is determined by the: (A) Intersection of the LM & IS curves (B) Domestic rate of inflation (C) world rate of inflation (D) world interest rate
D
In the Mundell-Fleming model, the exogenous variables are the: (A) World interest rate, the price level, and the exchange rate (B) level of government spending, taxes, and income (C) exchange rate and level of income (D) price level, world interest rate, monetary policy, and fiscal policy
D
In the Mundell-Fleming model: (A) The exchange rate system must have a floating exchange rate (B) The exchange rate system must have a fixed exchange rate (C) It makes no difference whether the exchange rate system has a floating or a fixed exchange rate (D) The behavior of the economy depends on whether the exchange rate system has a floating or a fixed exchange rate
D
The US recession of 2001 can be explained in part 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
D
When bond traders for the Federal Reserve seeks to increase interest rates, they _____ bonds, which shifts the _____ curve to the left. (A) Buy; IS (B) Buy; LM (C) Sell; IS (D) Sell; LM
D
