Macro Exam #3 ch. 32 - 36
The recession of 2008-2009 was in many ways the worst macroeconomic event in more than half a century (33) T or F?
True
Refer to Figure 32-3. (diagram of open economy models) At an interest rate of 4 percent, the diagram indicates that (32) MC
net capital outflow + domestic investment = national saving
The time inconsistency of policy implies that (36) MC
people expect Fed policy to be more inflationary than the Fed claims
According to traditional Keynesian analysis, if the economy is in a recession, (36) MC
increases in government purchases are more effective than decreases in taxes
A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was (34) MC
likely smaller than if the cut had been permanent
Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is temporarily (33) MC
low and so supply a smaller quantity of labor
If the MPC is 0.50 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $95 billion will eventually shift the aggregate demand curve to the right by (34) MC
$190 billion
An increase in the money supply causes output to rise in the long run (33) T or F?
False
If Argentina suffers from capital flight, Argentinean domestic investment and Argentinean net exports will both decline. (32) T or F?
False
The laws that created the Fed give it some specific recommendations about what goals it should pursue so it has little discretion in making policy (36) T or F?
False
Which of the following is not an argument by those who oppose tax law changes to encourage saving? (36) MC
Saving is not an important determinant of a nation's ability to produce output
At the equilibrium real interest rate in the open-economy macroeconomic model, (32) MC
net capital outflow + domestic investment = saving
Other things the same, a higher real interest rate (32) MC
raises the quantity of loanable funds supplied
Suppose that in the first half of June 2022, the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. Refer to Scenario 35-1.In the short-run the effects of the housing and financial crises (35) MC
reduce the inflation rate and raise the unemployment rate
Some economists argue that since inflation (36) MC
reduces the real value of fixed nominal wages, a little inflation may make it easier for labor markets to adjust
Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve (34) MC
With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers
The natural rate of unemployment is the same as the socially optimal rate of unemployment (35) T or F?
False
Which of the following would not be directly included in aggregate demand? (33) MC
Government's tax collections
If U.S. net exports are negative, then net capital outflow is (32) MC
negative, so American assets bought by foreigners are greater than foreign assets bought by Americans
A goal of monetary policy and fiscal policy is to (34) MC
offset shifts in aggregate demand and thereby stabilize the economy
In liquidity preference theory, an increase in the interest rate, other things the same, decreases the quantity of money demanded, but does not shift the money demand curve (34) T or F?
True
In most of the 1970s, the Fed's policy created expectations of high inflation (35) T or F?
True
In principle, the government could increase the money supply or increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy (34) T or F?
True
The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left (33) T or F?
True
Other things the same, in the open-economy macroeconomic model, if the real exchange rate rises, the (32) MC
quantity of dollars demanded falls
In 2009, Congress and President Obama approved tax cuts and increased government spending. According to the short-run Phillips curve these policies should have (35) MC
reduced unemployment and raised inflation
In countries that have high minimum wages and require a lengthy and costly process to get permission to open a business, (33) MC
reducing the minimum wage and the time and cost to open a business would both shift the long-run aggregate supply curve to the right
Refer to Figure 34-5. An increase in taxes will (34) MC
shift aggregate demand from AD2 to AD3
Classical economist David Hume observed that as the money supply expanded after gold discoveries it took some time for prices to rise and in the meantime the economy enjoyed higher employment and production. This is inconsistent with monetary neutrality because monetary neutrality would mean that (33) MC
the prices should have risen, but production should not have changed
Aggregate demand includes (33) MC
the quantity of goods and services the government, households, firms, and customers abroad want to buy
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? (33) MC
Aggregate demand shifts left
Other things the same, which of the following would cause the real exchange rate to rise? (32) MC
Both an increase in the real interest rate and an increase in foreign demand for U.S. goods and services
A U.S. grocery chain borrows money to buy a warehouse in Ohio and another in Italy. Borrowing for which warehouse(s) is included in the demand for loanable funds in the United States? (32) MC
Both the one in Ohio and the one in Italy
From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel wealthier, then it would have shifted aggregate (33) MC
Demand right
An increase in the government budget deficit shifts the supply of domestic currency in the market for foreign exchange to the right. (32) T or F?
False
Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then 1 + MPC + MPC2 + MPC3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of (34) MC
2.5
The following facts apply to a small economy. • Consumption spending is $6,720 when income is $8,000.• Consumption spending is $7,040 when income is $8,500. Refer to Scenario 34-2.In response to which of the following events could aggregate demand increase by $1,500? (34) MC
A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect
Other things constant, which of the following would increase unemployment and reduce inflation (35) MC
Businesses become pessimistic about the future of the economy
Suppose economic growth in Japan increases U.S. net exports at every price level. Which of the following would you expect to occur in the U.S. as a result of this change (35) MC
In the short run, unemployment will decrease and inflation will rise
If unemployment is above its natural rate, what happens to move the economy to long-run equilibrium (35) MC
Inflation expectations fall, which shifts the short-run Phillips curve to the left
If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result (35) MC
Output but not the price level
Refer to Figure 33-5. If the economy starts at Point R, then a recession occurs at (33) MC
Point P
In an open economy, national saving equals (32) MC
domestic investment plus net capital outflow
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.In the long run, what happens to the expected price level and what impact does this have on wage bargaining? (33) MC
The expected price level falls. New wage contracts are negotiated at lower wages
A year ago a country reduced the tax rate on all interest income from 40% to 10%. During the year private saving was $600 billion as compared to $500 billion the year before the tax reform. Taxes collected on interest income fell by $150 billion. Assuming no other changes in government revenues or spending which of the following is correct? (36) MC
The substitution effect was larger than the income effect; national saving fell
Both the multiplier effect and the investment accelerator tend to make the aggregate-demand curve shift further than it does due to an initial increase in government expenditures (34) T or F?
True
Economists who are skeptical about the relevance of "liquidity traps" argue that (34) MC
a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero
Refer to Figure 35-5. A significant increase in the world price of oil could explain (35) MC
both the shift of the aggregate-supply curve from AS1 to AS2 and the shift of the Phillips curve from PC1 to PC2
The national debt (36) MC
exists because of past government budget deficits
In recent years, the Federal Reserve has conducted policy by setting a target for the (34) MC
federal funds rate
In the early 1980s the Fed tightened monetary policy. Over the next few years inflation (36) MC
fell but unemployment rose temporarily
When the interest rate increase, the opportunity cost of holding money (34) MC
increases, so the quantity of money demanded decreases
If inflation falls, people choose to put in (36) MC
less effort to keep money balances low. When inflation is unexpectedly low it redistributes wealth from borrowers to lenders
If the quantity of loanable funds supplied is greater than the quantity demanded, then there is a (32) MC
surplus of loanable funds and the interest rate will fall
Which of the following might stabilize an economy that is at risk of inflation (36) MC
the Fed to sell government bonds
In the open-economy macroeconomic model, a higher domestic interest rate reduces the quantity of loanable funds demanded. (32) T or F?
True
The automatic stabilizers in the U.S. economy are sufficiently strong to prevent recessions (34) T or F?
False
The only way to rationalize an upward slope for the short-run aggregate-supply curve is to argue that wages are sticky in the short run (33) T or F?
False
The purchase of a capital asset adds to the demand for loanable funds only if that asset is a domestic one. (32) T or F?
False
The short-run Phillips curve is based on the classical dichotomy (35) T or F?
False
For a country such as the U.S., the wealth effect exerts a very important influence on the slope of the aggregate-demand curve, since U.S. wealth is large relative to wealth in most other countries (34) T or F?
False
In the open-economy macroeconomic model, the supply of dollars in the market for foreign-currency exchange is upward sloping. (32) T or F?
False
Proponents and opponents of balanced-budget policies agree that the government debt cannot continue to increase forever (36) T or F?
False
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 will raise inflation and lower unemployment (35) T or F?
True
It is possible that the cost of inflation reduction might be quite large compared to the annual costs of moderate inflation (36) T or F?
True
Other things the same, an increase in aggregate demand reduces unemployment and raises inflation in the short run (35) T or F?
True
People's skepticism about central bankers' announcements of their intentions stems from the fact that policymakers may act in a fashion that is time inconsistent (36) T or F?
True
Social Security transfers wealth from younger generations to older generations (36) T or F?
True
The downward slope of the aggregate demand curve is based on logic that as the price level rises, consumption, investment, and net exports all fall (33) T or F?
True
A politician blames the Federal Reserve for being "soft on unemployment" and claims that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate. The politician's argument is (35) MC
inconsistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would increase inflation
One determinant of the long-run average unemployment rate is the (35) MC
minimum wage, while the inflation rate depends primarily upon the money supply growth rate
Refer to Figure 33-2. If the economy starts at O and moves to R in the short run, the economy (33) MC
moves to Q in the long run
If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation, the short-run Phillips curve will remain far to the (36) MC
right, and the sacrifice ratio will be high
In the market for foreign-currency exchange, capital flight shifts the (32) MC
supply curve right
According to the long-run Phillips curve, in the long run monetary policy influences (35) MC
the inflation rate but not the unemployment rate
