macro final
Which of the following would be expected to increase the demand for U.S. currency?
Political instability rises dramatically in developing nations.
When the economy is in short-run equilibrium, there will be ________ output gap.
either a recessionary or an expansionary
The slope of the consumption function:
equals the marginal propensity to consume.
The aggregate demand curve shifts when there are changes in:
exogenous spending and the Fed's reaction function.
Government policies intended to increase planned spending and output are called ________ policies.
expansionary
A reduction in interest rates by the Fed with the intention of reducing a recessionary gap is called:
expansionary monetary policy.
An exchange rate that varies according to supply and demand for the currency in the foreign exchange market is called a ________ exchange rate.
flexible
If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ________ than the quantity supplied of money, bond prices will ________, and the nominal interest rate will ________.
greater; fall; increase
Starting from long-run equilibrium, the long-run impact of a war that raises government purchases, compared to the original equilibrium, is:
higher inflation and the same output.
Starting from long-run equilibrium, a war that raises government purchases results in ________ output in the short run and ________ output in the long run.
higher; potential
Starting from long-run equilibrium, an increase in autonomous consumption results in ________ output in the short run and ________ output in the long run.
higher; potential
Starting from long-run equilibrium, an increase in autonomous investment results in ________ output in the short run and ________ output in the long run.
higher; potential
When the Federal Reserve reduces its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.
higher; shift to the left
The aggregate demand curve is downward sloping for all of the following reasons EXCEPT for the:
impact of inflation on the consumer price index (CPI)
The money demand curve will shift to the left if:
price level decreases real income decreases
A horizontal line showing the current rate of inflation, as determined by past expectations and pricing decisions is called the:
short-run aggregate supply line
Graphically long-run equilibrium occurs at the intersection of the aggregate demand curve and the:
short-run aggregate supply line and the long-run aggregate supply line.
Refer to the given figure. In response to gradually falling inflation, this economy will eventually move from its short-run equilibrium to its long-run equilibrium. Graphically, this would be seen as:
short-run aggregate supply shifting downward.
The money demand curve relates ________ to the ________.
the aggregate quantity of money demanded; nominal interest rate
Jim has the following assets and liabilities: Credit card balance $1,000 Cash $500 Government bonds $3,000 Checking $750 Car loan balance $10,000 Car $15,000 What is Jim's money demand?
$1,250
In the short-run Keynesian model, if the mpc equals 0.8, then to increase planned aggregate spending by $20 billion at any output level, government spending must be increased by ________ or net taxes must be decreased by ________.
$20 billion; more than $20 billion
The following table shows Jay's estimated annual benefits of holding different amounts of money. Average money holdings Total benefit $100 $20 $200 $29 $300 $36 $400 $41 $500 $44 How much money will Jay hold if the nominal interest rate is 8 percent? (Assume he wants his money holdings to be in multiples of $100.)
$200
In the short-run Keynesian model, if the mpc equals 0.8, then to decrease planned aggregate spending by $30 billion at any output level, government spending must be decreased by ________ or net taxes must be increased by ________.
$30 billion; more than $30 billion
Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000 and cost an extra $80 per year in lost production. If, in addition, an armored car service is engaged to pick up cash more frequently for a fee of $120 per year, cash holdings will be further reduced to $6,000 per day. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings further to $4,000. If any reduction in cash holdings will be invested in government bonds earning 7 percent, then how much money should Jan's hold?
$6,000
The following table shows Alex's estimated annual benefits of holding different amounts of money. Average money holdings Total benefit $700 $50 $800 $59 $900 $66 $1,000 $71 $1,100 $74 How much money will Alex hold if the nominal interest rate is 8 percent? (Assume she wants her money holdings to be in multiples of $100.)
$800
If the marginal propensity to consume is 0.75, then a $100 increase in disposable income leads to a ________ increase in consumption.
%75
In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. The slope of the expenditure line is: Short run equillibrium output in this economy equals:
0.75 1,000
Data on after-tax income and consumption spending for the Adam Smith family are given below: After-Tax Income Consumption Spending $9,000 $18,100 $14,000 $22,600 $19,000 $27,100 $24,000 $31,600 Based on these data, the Adam Smith family has a marginal propensity to consume equal to:
0.9
If consumption increases by $9 when disposable income increases by $10, the marginal propensity to consume (mpc) equals:
0.9
Refer to the accompanying figure. Based on the figure, if autonomous spending increases from 400 to 600, then the new short-run equilibrium output will equal:
1,200
According to the Taylor rule, if inflation equals 3 percent and there is a recessionary gap equal to 3 percent of potential output, the Fed will set a real interest rate of ________ percent and a nominal interest rate of ________ percent.
1; 4
According to the Taylor rule, if inflation equals 4 percent and there is a recessionary gap equal to 4 percent of potential output, the Fed will set a real interest rate of ________ percent and a nominal interest rate of ________ percent.
1; 5
The Fed has announced it views its long term target for the inflation rate as:
2 percent
Refer to the accompanying figure. Based on the figure, the income-expenditure multiplier equals:
2.
If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y − 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?
3 percent
According to the Taylor rule, if there is an expansionary gap of 2 percent of potential output and inflation is 3 percent, what real interest rate will the Fed set?
3.5 percent
Refer to the accompanying figure Based on the figure, when PAE = 200 + 0.5Y, short-run equilibrium output equals:
400
Refer to the accompanying figure. Based on the figure, if autonomous spending falls from 400 to 200, then the new short-run equilibrium output will equal:
400
Refer to the given figure. Based on the diagram, the nominal interest rate equals ________ and the money supply equals ________.
5 percent; 500
Data on output and planned aggregate expenditure in Macroland are given below. Output (Y) Planned Aggregate Expenditure (PAE) 2,000 2,300 3,000 3,200 4,000 4,100 5,000 5,000 6,000 5,900 Based on these data, the short-run equilibrium level of output is:
5,000
In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. The vertical intercept of the expenditure line is: Planned aggregate expenditure equals: Induced expenditure equals:
900 900 + 0.80Y 0.80Y
Refer to the accompanying figure. Starting from long-run equilibrium at point C, a favorable inflation shock that decreases inflation from π to π 1 will lead to a short-run equilibrium at point ________ creating ________ gap.
A; an expansionary
Refer to the accompanying figure. Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from π to π 1 will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________, if left to self-correcting tendencies.
A;C
Which of the following will shift the aggregate demand curve to the left?
Income taxes are raised.
Jim has the following assets and liabilities: Credit card balance $2,000 Cash $500 Government bonds $2,000 Checking $750 Car loan balance $5,000 Car $15,000 Which of the following actions would increase Jim's money demand by $200?
Jim gets a $200 cash advance on his credit card and puts the proceeds in his checking account.
Jim has the following assets and liabilities: Credit card balance $2,000 Cash $500 Government bonds $2,000 Stock $5,000 Checking $750 Car loan balance $5,000 Car $15,000 Which of the following actions would decrease Jim's money demand by $200?
Jim writes a check for $200 to pay down his credit card balance.
Refer to the given figure. ________ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ________ to long-run equilibrium at point ________.
Rising; A; C
If households and firms expect higher rates of inflation, the ________ curve will shift ________.
SRAS; upward
In the Keynesian cross diagram, the 45-degree line represents the short-run equilibrium condition that:
Y=PAE
In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r I P = 200 - 400r G = 200 NX = 10 T = 150 Given the information about the economy above, which expression also states planned aggregate expenditure (PAE)? Given the information about the economy above, what would be the impact on autonomous expenditures of a one-percentage-point increase in the real interest rate (r )? Given the information about the economy above, what would be the impact on induced expenditures of a one-percentage-point increase in the real interest rate? Given the information about the economy above, which expression gives autonomous expenditures?
[790 − 700r ] + 0.8Y Autonomous expenditures would decrease by 7 units. Induced expenditures would not change. [790 − 700r ]
Each of the following would decrease the supply of U.S. dollars, shifting the supply curve for dollars to the left, EXCEPT:
a depreciation of the U.S. dollar relative to other currencies.
A large decrease in oil prices is an example of:
a favorable inflation shock
In the Keynesian model, a $1 billion increase in autonomous consumption leads to ________ in short-run equilibrium output.
a greater than $1 increase
Quantitative easing (QE) refers to:
a process similar to open-market purchases.
If planned aggregate expenditure (PAE ) in an economy equals 2,000 + 0.8Y and potential output (Y*) equals 11,000, then this economy has:
a recessionary gap
Refer to the accompanying figure. Based on the figure, if the economy is in short-run equilibrium with output equal to 16,000, then there is ________, and ________ could return the economy to potential output (Y*).
a recessionary gap; an increase in autonomous expenditures of 1,000
When actual output is less than potential output, there is ________ output gap and the rate of inflation will tend to ________.
a recessionary; decrease
Based on the given figure, the economy is initially in long-run equilibrium at point A. If there is a favorable supply shock that increases potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then there is initially ________ gap and the short-run aggregate supply curve will ________.
a recessionary; eventually shift to SRAS"
Based on the diagram, if potential output equals 5,000 and the real interest rate is 5 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.
a recessionary; reduce
An example of an adverse inflation shock is:
a significant rise in oil prices.
Trade within a country typically involves ________, while trade between countries normally involves ________.
a single currency; different currencies
For a given level of inflation, if a rise in the stock market makes consumers more willing to spend, known as the wealth effect, then the ________ shifts ________.
aggregate demand curve; right
Each of the following would increase the supply of U.S. dollars, shifting the supply curve for dollars to the right, EXCEPT:
an appreciation of the U.S. dollar relative to other currencies
If planned aggregate expenditure (PAE) in an economy equals 1,000 + 0.9Y and potential output (Y*) equals 9,000, then this economy has:
an expansionary gap
When actual output exceeds potential output there is ________ output gap and the rate of inflation will tend to ________.
an expansionary; increase
Based on the diagram, if potential output equals 8,000 and the real interest rate is 2 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.
an expansionary; raise
Purchasing power parity is the theory that nominal exchange rates are determined:
as necessary for the law of one price to hold.
The AD curve can be shifted by:
both fiscal and monetary policy
If the Federal Reserve wants to decrease the money supply, it should:
conduct open-market sales.
The decision about how much money to hold is an application of the:
cost-benefit principle.
When there is a recessionary gap, inflation will ________, in response to which the Federal Reserve will ________ real interest rates, and output will ________.
decline; lower; expand
The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 3 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:
decrease by 3,000 dollars per period
In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ________, planned aggregate expenditure ________, and short-run equilibrium output ________.
decrease; decreases; decreases
When a currency is overvalued, international reserves ________ and the country has a balance-of-payments ________.
decrease; deficit
Holding all else constant, a decrease in the real interest rate on Mexican assets will ________ the supply of dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.
decrease; increase
Higher nominal interest rates ________ the amount of money demanded and higher real income ________ the amount of money demanded.
decrease; increases
In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:
decreased by less than $10 billion.
The aggregate demand curve shifts to the left when the Fed:
decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function.
The economy moves down a stationary aggregate demand curve when the Fed:
decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.
A higher real interest rate ________ investment spending and ________ consumption spending.
decreases; decreases
Lower real income ________ the demand for money and a lower price level ________ the demand for money.
decreases; decreases
When housing prices decrease, household wealth ________, and consumption ________.
decreases; decreases
A lower real interest rate ________ saving and ________ consumption spending.
decreases; increases
Induced expenditure is the portion of planned aggregate expenditure that:
depends on output
A decrease in the nominal exchange rate, e, defined as the number of units of the foreign currency that one unit of the domestic currency will buy, indicates that the domestic currency has ________ relative to the foreign currency.
depreciated
If the nominal exchange rate were to be expressed as the number of units of domestic currency per unit of foreign currency, and that rate increases, then the domestic currency has:
depreciated
When the nominal exchange rate changes from 10 pesos per dollar to 8 pesos per dollar, the dollar has:
depreciated
If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 12 Mexican pesos per U.S. dollar, then the Mexican peso has ________ and the U.S. dollar has ________.
depreciated; appreciated
Suppose the government of South Island fixes the exchange rate of its currency, the Islandia, in terms of the U.S. dollar. Initially the exchange rate is set at $1 per Islandia. In a crisis, the government changes the exchange rate to $0.50 per Islandia. This is an example of a(n):
devaluation
Changes in government purchases affect planned spending:
directly, by changing autonomous expenditures
Changes in government purchases affect planned spending ________, and changes in taxes and/or transfers affect planned spending ________.
directly; indirectly
The ________ is the interest rate commercial banks pay to the Fed; the ________ is the interest rate commercial banks charge each other for short-term loans.
discount rate; federal funds rate
When the Federal Reserve lends reserves to commercial banks, this is an example of:
discount window lending.
The two parts of the Keynesian consumption function are consumption that depends on ________ and consumption that depends on ________.
disposable income; factors other than disposable income
Refer to the accompanying figure. An economy in short-run equilibrium at point A has a(n) ________ gap. The gap could be eliminated by the self-correcting mechanism of the economy and eventually achieve long-run equilibrium at point ________ or the central bank could intervene with monetary easing and the long-run equilibrium would be at point ________.
expansionary; C; B
If short-run equilibrium output equals 50,000 and potential output (Y*) equals 45,000, then this economy has a(n) ________ gap that can be closed by ________.
expansionary; decreasing government purchases
Starting from long-run equilibrium, a large increase in government purchases will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
expansionary; higher; potential
Compared to an initial long-run equilibrium, an aggregate supply shock that reduces potential output results in a(n) ________ gap in the short run and ________ output and ________ inflation in the long run.
expansionary; lower; higher
Starting from long-run equilibrium, a large tax increase will result in a(n) ________ gap in the short-run and ________ inflation and ________ output in the long-run.
expansionary; lower; potential
In the Keynesian cross diagram, the ________ line shows the relationship between planned aggregate expenditure and output, and the ________ line represents the condition that planned aggregate expenditure and output are equal.
expenditure; 45-degree
The basic Keynesian model is built on the key assumption that:
firms meet the demand for their products at preset prices.
Suppose that the owner of a local ice cream store, knowing that demand for ice cream is higher when the weather is warmer, always charges a price in cents for a scoop of ice cream that is equal to two times the current outdoor temperature, measured in Fahrenheit (so that if it is 90 degrees outside, the ice cream is $1.80 per scoop). This type of behavior is ________.
inconsistent with the key assumption upon which the basic Keynesian model is built
The demand for the Franconian franc in the foreign exchange market equals 14,000 - 3,000e and the supply of francs in the foreign exchange market equals 2,000 + 2,000e, where e is the nominal exchange rate expressed in U.S. dollars per franc. If the franc is fixed at 2 U.S. dollars per franc, then to maintain this fixed rate Franconia's international reserves must:
increase by 2,000 francs per period.
If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must ________ to eliminate any output gap.
increase by 200
A fiscal policy action to close an expansionary gap is to:
increase taxes
In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will ________, assuming that the public does not wish to change the amount of currency it holds.
increase to 4,667 econs
A fiscal policy action to close a recessionary gap is to:
increase transfer payments.
If inflation does not adjust rapidly in the short run, then when the Federal Reserve increases the nominal interest rate, the real interest rate in the short run will:
increase.
An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ________ in the inflation rate, leading to a(n) ________ in output.
increase; decrease
Lower nominal interest rates ________ the amount of money demanded and a lower price level ________ the amount of money demanded.
increase; decreases
During the Christmas shopping season, the demand for money increases significantly. To offset the increase in money demand, the Fed must ________ the money supply, which will put ________ pressure on nominal interest rates.
increase; downward
Holding all else constant, an increase in Mexican real GDP will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.
increase; increase
Holding all else constant, an increase in the real interest rate on U.S. assets will ________ the demand for dollars in the foreign exchange market and ________ the equilibrium Mexican peso/U.S. dollar exchange rate.
increase; increase
In the short-run, if the Federal Reserve decreases interest rates, then consumption and investment ________, planned aggregate expenditure ________, and short-run equilibrium output ________.
increase; increases; increases
When a currency is undervalued, international reserves ________ and the country has a balance-of-payments ________.
increase; surplus
Easy monetary policy will ________ net exports as a result of a ________ currency.
increase; weaker
In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, transfers must be: Taxes must be:
increased by $1 billion increased by $1 billion
The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, the ensuing financial crisis:
increased the level of uncertainty about the future.
If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the mpc equals 0.8, and potential output (Y*) equals 9,000, then transfers must be ________ by approximately ________ to eliminate any output gap.
increased; 200
The economy moves up a stationary aggregate demand curve when the Fed:
increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function
A higher real interest rate ________ saving and ________ consumption spending.
increases; decreases
Automatic stabilizers are provisions in the law that create automatic ________ in government spending or ________ in taxes when real output declines.
increases; decreases
When the Fed engages in an open market purchase, the money supply ________ and the nominal interest rate ________.
increases; decreases
An economic expansion in the United States ________ the demand for exports from Mexico resulting in an term-10increase in Mexican autonomous expenditures and a(n) ________ output gap in Mexico.
increases; expansionary
When commercial banks borrow reserves from the Fed, the quantity of reserves in the banking system ________ and, ultimately, the money supply ________.
increases; increases
The Federal Reserve can decrease the money supply by:
increasing reserve requirements.
Changes in taxes and transfers affect planned spending:
indirectly, by changing disposable income and, consequently, consumption.
When real output increases, planned aggregate expenditures increase because:
induced expenditures increase
The tendency for inflation to change relatively slowly from year to year in industrial countries is called:
inflation inertia
Stagflation is a combination of ________ and ________.
inflation; recession
All of the following would be included in planned aggregate expenditure EXCEPT:
interest paid on government debt
If firms sell more output than expected, planned investment:
is greater than actual investment
Autonomous expenditure is the portion of planned aggregate expenditure that:
is independent of output
When a recessionary gap exists, actual output ________ potential output and the rate of inflation will tend to ________.
is less than; decrease
If monetary policy must be used to set the market equilibrium value of the exchange rate equal to the official value, it:
is no longer available to stabilize the domestic economy.
High expected inflation leads to ________ increases in wages and costs and to ________ actual inflation.
large; high
The larger the mpc, the ________ the income-expenditure multiplier and the ________ the effect of a change in autonomous spending on short-run equilibrium output.
larger; larger
When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ________ equilibrium.
long-run
When actual output equals potential output and the inflation rate is stable, the economy is said to be in ________ equilibrium.
long-run
Graphically the intersection of the aggregate demand curve, the short-run and long-run aggregate supply curves determines:
long-run equilibrium.
In an economy where planned aggregate spending is given by PAE = 3,000 + .75Y − 10,000r, the central bank is currently setting the interest rate at 0.06 (6 percent). If potential output equals 9,500, the central bank must ________ the interest rate to close the ________ gap.
lower; expansionary
A reserve requirement set by the Federal Reserve is the:
minimum ratio of reserves to bank deposits that commercial banks are allowed to maintain.
One problem with using monetary policy to address "bubbles" in asset markets is that:
monetary policy is not a very good tool for addressing the problem of inappropriately high asset prices.
If a country pegs its currency to a foreign currency, it no longer has the ability to use monetary policy to stabilize the economy because:
monetary policy must be used to keep the exchange rate's market equilibrium value at its official value.
For a fixed inflation rate target, a decrease in the inflation rate corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.
movement down; shift left of
A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.
movement down; shift right of
Based on the diagram, if potential output equals 5,000 and the real interest rate is 3 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.
no output; not change
If the Federal Reserve sets a target nominal interest rate, it can:
only set a money supply target that is consistent with the nominal interest rate target.
C + I p + G + NX equals:
planned aggregate expenditure
Stabilization policies are government policies used to affect ________, with the objective of eliminating output gaps.
planned aggregate expenditure
Expansionary policies are government stabilization policies intended to increase:
planned spending
The real exchange rate is the:
price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency.
In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes:
production levels to meet the demand
Refer to the given figure. If the Federal Reserve wants to set the nominal interest rate at 1 percent, it must conduct open market ________ to set the money supply at ________.
purchases; 900
If the Fed wishes to reduce nominal interest rates, it must engage in an open market ________ of bonds that ________ the money supply.
purchases; increases
In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 2 percent (0.02). If potential output equals 8,000, the central bank must ________ the interest rate to close the ________ gap.
raise; expansionary
The nominal exchange rate is the:
rate at which two currencies can be traded for each other.
The U.S. dollar exchange rate, e, expressed as Japanese yen per U.S. dollar, will appreciate when:
real GDP in the U.S. decreases
For an economy starting at potential output, a decrease in planned investment in the short run results in a(n):
recessionary output gap
The economy pictured in the given figure has a(n) ________ gap with a short-run equilibrium combination of inflation and output indicated by point ________.
recessionary; A
Refer to the accompanying figure. An economy in short-run equilibrium at point A has a(n) ________ gap. The gap could be eliminated by the self-correcting mechanism of the economy and eventually achieve long-run equilibrium at point ________ or the central bank could intervene with monetary easing establishing the long-run equilibrium at point ________.
recessionary; C; B
Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will generate a(n) ________ gap and inflation will ________.
recessionary; decrease
Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) ________ gap and inflation will ________.
recessionary; decrease
If short-run equilibrium output equals 20,000 and potential output (Y*) equals 25,000, then this economy has a(n) ________ gap that can be closed by ________.
recessionary; increasing government purchases
Based on the diagram, if potential output equals 8,000 and the real interest rate is 6 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.
recessionary; reduce
In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:
reduce production
High levels of inflation ________ the real value of money and, hence, ________ short-run equilibrium output.
reduce; decrease
In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y − 20,000r, the interest rate is currently 5 percent (0.05). If potential output equals 11,750, the central bank must ________ the interest rate to close the ________ gap.
reduce; recessionary
In the basic Keynesian model, a tax increase:
reduces short-run equilibrium output.
To close a recessionary gap, the Fed ________ interest rates which ________ aggregate spending and ________ short-run equilibrium output.
reduces; increases; increases
Suppose the government of South Island fixes the exchange rate of its currency, the Islandia, in terms of the U.S. dollar. Initially the exchange rate is set at $1 per Islandia. Later the government changes the exchange rate to $2 per Islandia. This is an example of a(n):
revaluation
Refer to the given figure. If the Federal Reserve wants to set the nominal interest rate at 9 percent, it must conduct open market ________ to set the money supply at ________.
sales; 100
Refer to the given figure where the nominal interest rate equals 6 percent and the money supply equals 600. If the Federal Reserve wants to set the nominal interest rate at 10 percent, it must conduct open market ________ to set the money supply at ________.
sales; 200
An upward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and an increase in exogenous spending corresponds to a ________ the aggregate demand curve.
shift left of; shift right of
A downward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.
shift right of; shift left of
Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF 1 ) and the aggregate demand curve (AD 1 ). The actual rate of inflation is π' and the Federal Reserve's target inflation rate is π* 1 . If the Federal Reserve lowers its target inflation rate to π* 2, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________. If the Federal Reserve raises its target inflation rate to π* 3 , then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.
shift to RF 2 ; shift to AD 3 shift to RF 3 ; shift to AD 2
The aggregate demand curve shows the relationship between inflation and:
short-run equilibrium output
Because a decrease in the nominal interest rate reduces the opportunity costs of holding money, the money demand curve:
slopes downward.
Because an increase in the nominal interest rate raises the opportunity costs of holding money, the money demand curve:
slopes downward.
The smaller the mpc, the ________ the income-expenditure multiplier and the ________ the effect of a change in autonomous spending on short-run equilibrium output.
smaller; smaller
All of the following would be included in planned aggregate expenditure EXCEPT:
social security payments
Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ________ policies.
stabilization
Flexible exchange rates ________ of monetary policy to stabilize the economy and fixed exchange rates ________ of monetary policy to stabilize the economy.
strengthen the ability; prevent the use
U.S. firms wishing to purchase European goods and services are ________ the foreign exchange market.
suppliers of U.S. dollars in
The output losses from an adverse inflation shock are ________ and the output losses from a fall in potential output are ________.
temporary; permanent
For the past half century, the Federal Reserve has expressed policy in terms of a target value for:
the federal funds rate.
According to the Taylor rule, the Federal Reserve sets interest rates in response to:
the inflation rate and the current output gap.
The Federal Reserve's policy reaction function provides information about:
the long-run target for inflation and how aggressively targets will be pursued.
Higher rates of inflation reduce planned spending because:
the reduction in wealth, resulting from the reduced real value of money, restricts spending
Starting from long-run equilibrium, the long-run impact(s) of a sharp drop in oil prices, compared to the original equilibrium, is(are):
the same inflation and the same output.
Refer to the accompanying figure. Based on the Keynesian cross diagram, at short-run equilibrium output,
there is an expansionary gap
If policymakers attempt to offset a favorable inflation shock with monetary ________, the resulting long-run equilibrium will be at ________ inflation rate compared to allowing the self-correcting mechanism return the economy to potential output.
tightening; a lower
If policymakers deem inflation as being too high, then the policy response should be monetary ________, which shifts aggregate demand ________.
tightening; left
An upward shift in the Fed's policy reaction function is a(n) ________ of monetary policy, and the aggregate demand curve ________.
tightening; shifts left
An exchange rate that has an officially fixed value less than its fundamental or market equilibrium value is called a(n) ________ exchange rate.
undervalued
Based on this figure, if the krone exchange rate is fixed at $0.09 dollars per krone, the krone is:
undervalued
Based on this figure, if the official value of krone is fixed at $0.09 per krone, then the Norwegian krone is ________ and the international reserves of Norway will ________ krone per period.
undervalued; increase by 5,500
The demand for euros in the foreign exchange market equals 8,000 - 2,000 e and the supply of euros in the foreign exchange market equals 3,000 + 3,000 e, where e is the nominal exchange rate expressed in U.S. dollars per euro. If the euro is fixed at 1.25 U.S. dollars per euro, then the euro is ________ and Euroland has a balance-of-payments ________.
undervalued; surplus of 1,250 euros
Contractionary policies are government stabilization policies intended to decrease:
unemployment
The long-run aggregate supply line is:
vertical at the economy's potential output.
