Macro Final

Suppose each good costs $5 per unit and Megan holds $40. What is the real value of the money she holds?

8 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars.

Suppose the price of crude oil falls substantially. Which of the following is the most likely effect of the decrease in fuel prices on the economy?

A decrease in the equilibrium price level and an increase in equilibrium real GDP.

Which of the following will NOT shift a nation's long-run aggregate supply curve to the right?

A decrease in the nominal wage rate.

During the 1990-91 recession, consumers decided to decrease consumption to repay a larger portion of household debt. What happened?

Aggregate demand declined, resulting in lower levels of real output and employment

Which of the following effects helps to explain the slope of the aggregate-demand curve?

All of the above are correct.

Which of the following will NOT increase potential real GDP over the long run?

An increase in demand.

Which of the following combinations of nominal interest rates and inflation implies a real interest rate of 7 percent?

a nominal interest rate of 8 percent and an inflation rate of 1 percent

A reduction in world oil supplies is likely to cause

a reduction in aggregate supply, a rise in the equilibrium price level, and a fall in real Gross Domestic Product (GDP).

Which of the following would increase output in the short run?

a. an increase in stock prices makes people feel wealthier b. government spending increases c. firms chose to purchase more investment goods *****d. All of the above are correct.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,

b. relative to prices wages are higher and employment falls.

A tax increase has

both a crowding out and multiplier effect

An increase in the price of a key input, such as labor, will result in

both increase in prices and decrease in national production

Which of the following decreases in response to the interest-rate effect from an increase in the price level?

both investment and consumption

If the current unemployment rate is 5%, under which of the following circumstances would you expect the Fed to use expansionary monetary policy

if the natural unemployment rate is below 5%.

Imagine the U.S. economy is in long-run equilibrium. Then suppose the aggregate demand increases. We would expect that in the long-run the price level would

increase

According to the theory of liquidity preference,

the demand for money is represented by a downward-sloping line on a supply-and-demand graph.

The real interest rate effect and wealth effect are important because they help to explain

the downward-sloping nature of the aggregate demand curve

When the Fed sells government bonds,

the money supply decreases and the federal funds rate increases

When production costs rise,

the short-run aggregate supply curve shifts to the left.

When the Fed buys bonds

the supply of money increases and so aggregate demand shifts right.

Based on the quantity equation, if M = 100, V = 3, and Y = 150, then P =

2

Based on the quantity equation, if M = 150, V = 4, and Y = 300, then P =

2

The real interest rate effect provides a partial explanation for why the aggregate demand curve slopes downward. Which of the following statements best explains the real interest rate effect?

At a lower price level, the real interest rate tends to be lower; thus, the quantity of investment goods demanded is larger

When the Federal Reserve conducts open-market operations to increase the money supply, it

Buys government bonds from the public

Which of the following helps to explain the downward-sloping nature of the aggregate demand curve?

Falling prices put downward pressure on real interest rates, causing business investment to increase.

Which of the following would cause the short-run aggregate supply curve to be upward sloping?

Labor contracts make wages sticky.

If P = 2 and Y = 1000, then which of the following pairs of values are not possible?

M = $300, V = 3.

In the long run, which of the following factors is affected by money supply?

Nominal interest rates

In the long run, which of the following factor is NOT affected by money supply?

Real GDP

When looking at a graph of aggregate demand, which of the following is correct?

The variable on the vertical axis is nominal; the variable on the horizontal axis is real

According to the aggregate demand/aggregate supply model, one possible cause of a recession is:

a decrease in demand for investment goods by businesses.

Suppose the economy is in equilibrium when there is a change in environmental policy that bans all chemical fertilizers on farmland. We would expect to observe

a decrease in real output and an increase in the price level.

The long-run aggregate supply is vertical because in the long run changes in the price level do NOT:

affect the number of workers, the capital stock, or technology

Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. Which curve shifts and in which direction?

aggregate demand shifts left

Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. Which curve shifts and in which direction?

aggregate demand shifts right

Which of the following would cause prices and real GDP to rise in the short run?

aggregate demand shifts right

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left

An increase in government spending initially and primarily shifts

aggregate demand to the right.

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

aggregate demand to the right.

According to liquidity preference theory, the money-supply curve would shift rightward

if the Federal Reserve chose to increase the money supply.

Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. What happens to the price level and real GDP in the short run?

both the price level and real GDP fall.

If aggregate supply remains unchanged, a decrease in aggregate demand may

cause a recession.

An unexpected decrease in aggregate demand

causes the price level to fall and the unemployment rate to rise.

Other things the same, continued increases in technology lead to

continued increases in real GDP and continued decreases in the price level.

To increase the money supply, the Fed could

decrease in the required reserve ratio

To fight a recession, Congress and the president should

decrease taxes to increase aggregate demand.

In the long run, a decrease in the money supply will

decrease the price level.

If taxes

decrease, then consumption increases, and aggregate demand shifts rightward.

To keep the budget balanced during the recession when tax revenue is low and government purchase is high, the federal government must _________ government spending, or ________ taxes, and which will ________ aggregate demand.

decrease; increase; reduce

The Fed initiates a contractionary monetary policy that is correctly anticipated by economic agents in the economy. The result is

decreased prices, but no change in real GDP.

If the Fed conducts open-market sales, the money supply

decreases and aggregate demand shifts left.

Suppose government spending is cut. Other things being equal, the aggregate demand for national production will

fall

During recessions, taxes tend to

fall and thereby increase aggregate demand.

Suppose an economy produces only ice cream cones. If the price level rises, the value of currency

falls, because one unit of currency buys fewer ice cream cones.

If aggregate demand shifts right then in the short run

firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.

Aggregate demand shifts right if

government purchases increase and shifts left if stock prices fall

Money demand refers to

how much wealth people want to hold in liquid form, i.e. cash.

According to the interest-rate effect, an increase in the price level will

increase money demand and interest rates. Investment declines.

In the long run, the effect of an increase in the money supply is to

increase the price level only.

Open-market purchases by the Fed make the money supply

increase, which makes the value of money decrease.

An increase in government spending

increases the interest rate and so investment spending decreases.

If crowding out occurs, an increase in government spending

increases the real interest rate and consumption and investment spending decline.

Which of the following is not a tool of monetary policy?

increasing the government budget deficit

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

increasing the money supply, which lowers interest rates.

According to monetary neutrality and the Fisher effect, an increase in the money supply growth rate eventually increases

inflation and nominal interest rates, but does not change real interest rates.

Which of the following would be most likely to induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

investment spending.

Increases in government spending will lower the long term growth rate of GDP, if it lowers ________ spending and if the government purchases ________ and not ________ goods.

investment; consumption; investment

The supply of money increases when

the Fed makes open-market purchases.

If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level

is lower and output is the same as the original long-run equilibrium.

If government purchases increased by $50 billion, then Aggregate Demand would be ________ $50 billion.

may be greater than or less than

An increase in the price level will

move the economy up along a stationary aggregate demand curve

Suppose there are constant returns to scale. Now suppose that over time a country doubles its physical capital but its technology is unchanged. Which of the following would double?

neither productivity nor output

Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her

nominal income increased, but their real income decreased

Monetary policy in Japan since the early 1990s has had limited effectiveness even though the Bank of Japan lowered

nominal interest rates to almost zero, because deflation (a negative rate of inflation) kept real interest rates up.

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy.

A key implication of the policy irrelevance (policy ineffectiveness) proposition is that

only unanticipated policy actions can influence real Gross Domestic Product (GDP).

As the price level falls

people will want to buy more bonds, so the interest rate falls.

In the basic aggregate demand and aggregate supply model, which of the following could cause a recession? An increase in:

personal income taxes.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,

production is more profitable and employment rises.

To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the

quantity theory of money.

An increase in the U.S. interest rate

raises the opportunity cost of holding dollars.

Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the change in output?

real wages rise, so firms choose to produce less

Factors that influence the long-run aggregate supply curve are

resource availability and technology. improvements in productivity. labor, capital, and equipment. *****All of the above.

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level

rises, shifting aggregate supply left.

Which of the following would cause stagflation?

rising oil prices

To decrease the money supply, the Fed could

sell government bonds, increase the discount rate, and increase the reserve requirement

In the mid-1970s the price of oil rose dramatically. This

shifted aggregate supply left, the price level rose, and real GDP fell.

Other things the same, an increase in the expected price level shifts

short-run aggregate supply left.

A decrease in the money supply might indicate that the Fed had

sold bonds in an attempt to increase the federal funds rate.

Money demand and money supply determine

the nominal interest rate

The real rate of interest is

the nominal rate of interest minus the anticipated rate of inflation.

Which of the following affects Money demand?

the price level but not the nominal interest rate.

A\In the short run, an unexpected increase in aggregate demand typically causes

the price level to increase and the unemployment rate to fall.

Suppose the economy is in long-run equilibrium. If there is a sharp decline in government purchases combined with a significant increase in immigration of skilled workers, then in the short run,

the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

An decrease in taxes shifts aggregate demand

to the right. The larger the multiplier is, the farther it shifts.

The primary reason people hold money is

to use it as a medium of exchange

Ashley puts money in a savings account at her bank earning 2 percent interest. One year later she takes her money out and notes that prices rose 3 percent. Ashley earned a

​real interest rate of -1 percent due to inflation.