Macroeconomics chapter 17/20

When the Phillips curve was first formulated (late 1960s), many economists thought that it showed a

Correcta. "menu" of possible choices available to policy makers. b. guide to the appropriate mix of fiscal and monetary policy. c. "menu" of budget deficits from different budget policies. d. guide of political reactions to economic policy.

Which of the graphs in Figure 20-1 best illustrates the behavior of exports and imports in relation to U.S. real GDP?

Correcta. 1 b. 2 c. 3 d. 4

In an open economy, the government deficit is 400 and investment exceeds saving by 300, so in equilibrium the trade deficit (IM − X) must be

Correcta. 700. b. 200. c. 300. d. 100.

A study of the U.S. price level and real GDP from 1972 to 2007 reveals a clear upward march toward higher prices and greater output. What explains this?

Correcta. Both the aggregate demand curve and the aggregate supply curve have shifted to the right year after year. b. The aggregate supply curve has shifted to the left while the aggregate demand curve has shifted to the right. c. The aggregate supply curve has shifted to the right while the aggregate demand curve has shifted to the left. d. Both the aggregate demand curve and the aggregate supply curve have shifted to the left year after year.

In Figure 17-8, which of the following movements illustrates the response of the economy to a stimulation of aggregate demand when workers systematically underpredict inflation?

Correcta. C to A b. C to B c. C to E d. C to D

he main input into the production of Starbuck's coffee is imported coffee beans. If the dollar depreciates, how will this affect the U.S. retail coffee market?

Correcta. Input prices will rise and supply will decrease. b. Input prices will fall and supply will increase. c. Input prices will fall and supply will decrease. d. Input prices will rise and supply will increase.

What effect did the decrease in the value of the dollar have on the U.S. trade deficit in the period from 2006 to 2009?

Correcta. It decreased the trade deficit as foreigners were attracted to the increased value of U.S. products and Americans bought fewer imports. b. It increased the trade deficit as Americans bought more imports and foreigners bought fewer U.S. products. c. It decreased the trade deficit as Americans bought more U.S. capital goods. d. It increased the trade deficit as U.S. investors bought more domestic financial assets.

If actual inflation differs from expected inflation, what is the slope of the Phillips curve?

Correcta. It is downward sloping in the short run and vertical in the long run. b. It is upward sloping in the short run and vertical in the long run. c. It is vertical in the short run and upward sloping in the long run. d. It is horizontal in the short and long run.

Following the economic crisis in 1994-1995, the Mexican peso fell sharply in value. What will be the main economic effects in Mexico of such an exchange rate change?

Correcta. It will increase aggregate demand and decrease aggregate supply, so that prices will certainly rise and output may rise as well. b. It will increase aggregate demand and aggregate supply, so that output will certainly rise, and prices may rise as well. c. It will decrease aggregate demand and aggregate supply, so that output will certainly fall, and prices may fall as well. d. It will decrease aggregate demand and increase aggregate supply, so that prices will certainly fall and output may fall as well.

The trade deficit is the mirror image of the required capital inflows. So why worry about these capital inflows?

Correcta. These capital inflows create debts on which interest and principal payments will have to be made in the future. b. During the period of trade deficits, personal consumption must be reduced to build up wealth to repay the debt created. c. Trade deficits automatically cause larger budget deficits. d. Before long, the Germans, Japanese, and other foreigners will own the United States and will be dictating policy to the U.S. government.

Which of the following explains the movements in Figure 20-2?

Correcta. a decrease in the U.S. price level b. an appreciation of the U.S. dollar c. an expansionary monetary policy d. an increase in the U.S. price level

Many economists think that, in the long run, the Phillips curve is

Correcta. a vertical line. b. a 45-degree line from the origin. c. the same as the short-run curve. d. a horizontal line.

When the U.S. dollar appreciates,

Correcta. aggregate demand shifts inward. b. U.S. imports decline. c. U.S. exports rise. d. aggregate demand shifts outward.

Which of the following could trigger supply-side inflation?

Correcta. an increase in raw materials' prices b. an increase in productivity of capital c. an increase in the labor force d. a decrease in the wage rate for all workers

If AD increases at a faster rate than AS, the result will be

Correcta. demand-side inflation. b. stable prices. c. falling prices. d. supply-side inflation.

If a currency appreciates, a country's net exports

Correcta. fall and AD decreases. b. fall and AD increases. c. rise and AD increases. d. rise and AD decreases.

If AS increases at a faster rate than AD, the result will be

Correcta. falling prices. b. supply-side inflation. c. demand-side inflation. d. stable prices.

The Phillips curve is built on the assumption that business fluctuations are

Correcta. from the demand side. b. from the supply side. c. from both the demand and supply side. d. purely random events.

An increase in the price level in Japan relative to the price level in the United States would

Correcta. increase U.S. net exports and increase aggregate demand. b. increase U.S. net exports and increase aggregate supply. c. reduce U.S. net exports and reduce aggregate demand. d. reduce U.S. net exports and increase aggregate demand.

If economic fluctuations originate on the supply side,

Correcta. inflation and unemployment will be positively related. b. there will be no relationship between unemployment and inflation. c. inflation and unemployment will be negatively related. d. real wage increases will be necessary to eliminate unemployment.

If the short-run Phillips curve has a very steep slope, the

Correcta. inflation costs of reducing unemployment are relatively high. b. structural deficit will fall during recession. c. structural deficit will grow during inflation. d. inflation costs of reducing unemployment are relatively low.

The international trade response to a contractionary monetary policy will cause aggregate demand to shift ____ and aggregate supply to shift ____.

Correcta. inward, outward b. inward, inward c. outward, inward d. outward, outward

If currency depreciates:

Correcta. net exports rise and the aggregate demand curve shifts outward b. ​net exports fall and the aggregate demand curve shifts inward c. ​net exports fall and the aggregate demand curve shifts outward d. ​net exports rise and the aggregate demand curve shifts inward

According to the theory of rational expectations, the government can influence output

Correcta. only by making unexpected changes in aggregate demand. b. without affecting the price level. c. in the short run, but not in the long run. d. with appropriate fiscal and monetary policy.

If workers expect inflation, and tend to overestimate actual inflation when they negotiate wage increases, the result will be a continuing

Correcta. recessionary gap. b. shift of AD to the right. c. shift of AD to the left. d. inflationary gap.

Demand-side inflation is normally accompanied by

Correcta. rising real GDP, while supply-side inflation may be accompanied by falling real GDP. b. rising real GDP; the same is true of supply-side inflation. c. falling real GDP, while supply-side inflation may be accompanied by rising real GDP. d. falling real GDP; the same is true of supply-side inflation.

A main reason why the U.S. trade deficit grew so large from 1997 to 2000 was that

Correcta. the international value of the dollar rose in the last half of the 1990s, which encouraged U.S. imports and damaged U.S. exports. b. Congress removed all tariffs and trade restrictions on imports. c. the international value of the dollar fell during the 1990s, which encouraged U.S. exports. d. NAFTA was introduced and Mexican exports flooded the United States.

Theoretically, when a currency depreciates one can predict that

Correcta. the price level will rise, but real GDP change is not predictable. b. real GDP will rise, but price change is not predictable. c. the price level will rise and real GDP will rise. d. the price level will fall and real GDP will fall.

Based on the evidence, most economists believe that the self-correcting mechanism operates

Correcta. very slowly with wages. b. slowly with prices, but quickly with wages. c. efficiently, so that stabilization policy is not necessary. d. slowly with wages, but quickly with prices.

If you believe that expectations react slowly, you are likely:

Correcta. ​a Keynesian b. ​a believer in rational expectations c. ​None of these. d. ​a theoretical economist

If you believe that expectations react quickly, you are likely:

Correcta. ​a believer in rational expectations b. ​a Keynesian c. ​a theoretical economist d. ​None of these.

Which panel in Figure 17-4 shows the movement associated with a demand-side inflation?

a. 1 Correctb. 2 c. 3 d. 4

In an open economy, the government deficit is 600 and saving exceeds investment by 500, so in equilibrium the trade deficit (IM − X) must be

a. 700. b. 300. c. 200. Correctd. 100.

In Figure 17-8, which of the following movements reflects the closing of an inflationary gap through the economy's automatic adjustment mechanism?

a. A to C Correctb. A to B c. C to E d. D to E

In Figure 17-8, policy makers can choose any of the following points as sustainable inflation-unemployment combinations:

a. A, B, C, D, E. b. A or B. Correctc. B, E, C. d. only E.

In Figure 17-7, the case for restrictive monetary and fiscal policy is strongest at point

a. A. b. B. c. C. Correctd. D.

A decrease in AS will trigger more inflation under which of the following conditions?

a. AD is relatively flat. b. AS is relatively steep. c. AS is relatively flat. Correctd. AD is relatively steep.

An increase in AD will trigger less inflation under which of the following conditions?

a. AD is relatively steep. b. AD is relatively flat. c. AS is relatively steep. Correctd. AS is relatively flat.

Which of the following is most likely to result in inflation?

a. Aggregate demand and aggregate supply grow at the same rate. Correctb. Aggregate demand grows more rapidly than aggregate supply. c. Aggregate supply grows more rapidly than aggregate demand. d. Neither aggregate demand nor aggregate supply grows at all.

In Figure 17-8, which of the following movements illustrates the response of the economy to an increase in aggregate demand when expectations are "rational"?

a. C to A b. C to D c. C to E Correctd. C to B

Assume that Country X and Country Y are trading partners and the exchange rates are fixed. If prices in Country Y fall, which of the following is expected to happen?

a. Country Y will import more. b. Net exports will rise for Country X. c. Country X will export more. Correctd. Economy of Country X will be depressed.

The main input into the production of Starbuck's coffee is imported coffee beans. If the dollar depreciates, how will this affect the U.S. retail coffee market?

a. Input prices will rise and supply will increase. Correctb. Input prices will rise and supply will decrease. c. Input prices will fall and supply will decrease. d. Input prices will fall and supply will increase.

Suppose the dollar depreciates from 89 Japanese yen to 79 Japanese yen. One would expect

a. Japanese net exports to increase. b. Japanese exports to increase. c. U.S. imports to increase Correctd. U.S. exports to increase.

Which of the following led to the collapse of the Phillips Curve?

a. Rightward shift in the demand for labor curve b. Rightward shift of the aggregate demand curve. Correctc. Leftward shift of the aggregate supply curve d. Leftward shift of the Phillips curve

Which term refers to provisions in a law or a contract whereby monetary payments are automatically adjusted whenever a specified price index changes?

a. Swap b. Averaging c. Contango Correctd. Indexing

Which of the factors below contributed to the collapse of the Phillips curve in the 1970s?

a. The aggregate demand curve shifted to the left at the end of the Vietnam War. b. The U.S. government was running triple-digit deficits in the 1970s, compounding the normal shifts in aggregate demand. c. Economic research proved there was no relationship between inflation and unemployment rates. Correctd. The 1970s were full of adverse supply shocks such as the oil price increases of 1973-1974.

Suppose that the Fed decides to increase the growth rate of the money supply in the United States. What is most likely to happen to the U.S. trade deficit and to GDP?

a. The trade deficit will rise; GDP will rise. b. The trade deficit will fall; GDP will fall. c. The trade deficit will rise; GDP will fall. Correctd. The trade deficit will fall; GDP will rise.

For a major country with extensive capital flows, what is the effect of a decrease in interest rates?

a. a currency appreciation and increased net exports Correctb. a currency depreciation and increased net exports c. a currency depreciation and reduced net exports d. a currency appreciation and reduced net exports

Which of the following explains the movements in Figure 20-2?

a. a decrease in U.S. exports Correctb. an increase in U.S. exports c. a decrease in U.S. net exports d. an increase in U.S. imports

If Mexico experiences a period of stable prices while the United States experiences rapid inflation, what will happen in the United States?

a. a decrease in U.S. imports b. an increase in U.S. exports Correctc. an increase in U.S. imports d. an increase in U.S. net exports

If an economy's resources are fully employed,

a. a great deal of unemployment will be needed to achieve even a small reduction in inflation. b. the aggregate supply curve (and thus the Phillips curve) will be flat. Correctc. the aggregate supply curve (and thus the Phillips curve) will be steep. d. Both a and c are correct.

One way in which the Phillips curve is misinterpreted is to think of it as

a. a model of economic activity that explains changes in unemployment and inflation by changes in aggregate demand. b. a statistical relationship between inflation and unemployment. Correctc. depicting a number of alternative equilibrium points the economy could achieve. d. All of the above.

If strong fiscal policy stimulus is used to combat a recessionary gap, what will happen?

a. a rapid movement toward lower unemployment and lower inflation b. a slow movement toward lower unemployment and higher inflation Correctc. a rapid movement toward lower unemployment and higher inflation d. a slow movement toward lower unemployment and lower inflation. Question 2

The rapid advance in computer technology is one of the reasons given for the shift of the

a. aggregate demand curve outward. b. aggregate supply curve inward. c. total expenditures curve upward. Correctd. aggregate supply curve outward.

If the international value of the dollar rises, the

a. aggregate demand curve will shift inward. b. aggregate supply curve will shift outward. c. U.S. price level will fall. Correctd. All of the above are correct.

Many economists think that, in the long run, the economy tends to move toward

a. an accelerating rate of inflation. Correctb. the natural or full-employment rate of unemployment. c. the natural or full-employment rate of inflation. d. a severe slump with high unemployment.

Which of the following is most likely to lead to demand-side inflation?

a. an increase in government spending b. a decrease in taxes c. an increase in the money supply Correctd. All of the above are correct.

Which of the following could trigger demand-side inflation?

a. an increase in interest rates b. an increase in taxes c. a decrease in the money supply Correctd. an increase in government spending

In the short run, fiscal and monetary policy cause unemployment and inflation to move in opposite directions because

a. both policies control only aggregate supply. b. one controls aggregate demand, the other controls aggregate supply. c. the Fed and Congress rarely agree on policy. Correctd. both policies control only aggregate demand.

In the 1990s, the United States benefited from a series of favorable supply shocks. This caused a(n)

a. decrease in inflation and an increase in unemployment. b. increase in inflation and a decrease in unemployment. Correctc. decrease in inflation and unemployment. d. increase in inflation and unemployment.

If the favorable supply shocks of the 1990s were reversed in the future, we should expect a(n)

a. decrease in inflation and unemployment. b. increase in inflation and a decrease in unemployment. Correctc. increase in inflation and unemployment. d. decrease in inflation and an increase in unemployment.

The reason that higher interest rates reduce aggregate demand in an open economy with capital flows is that investment

a. decreases generated by higher interest rates are offset by net export increases. b. increases generated by higher interest rates are offset by net export decreases. Correctc. decreases generated by higher interest rates are coupled with net export decreases. d. increases generated by higher interest rates are coupled with net export increases.

Demand-side inflation differs from supply-side inflation in the following way:

a. demand-side inflation has a self-correcting mechanism; supply-side inflation does not. b. demand-side inflation has lower output; supply-side inflation has higher output. c. demand-side inflation is always followed by stagflation; supply-side inflation is always followed by demand-side inflation. Correctd. demand-side inflation has higher output; supply-side inflation has lower output.

The theory of rational expectations says that

a. economists make rational expectations of inflation. b. economists expect workers to be rational. c. workers make excellent choices of places to work. Correctd. workers make the best possible forecasts of inflation.

If a currency depreciates, a country's net exports

a. fall and AD decreases. Correctb. rise and AD increases. c. rise and AD decreases. d. fall and AD increases.

When the dollar depreciates, the prices of imported inputs

a. fall and aggregate supply shifts inward. b. fall and aggregate supply shifts outward. c. rise and aggregate supply shifts outward. Correctd. rise and aggregate supply shifts inward.

When the dollar depreciates, the cost to Americans of foreign goods

a. falls and the CPI rises. Correctb. rises and the CPI rises. c. rises and the CPI falls. d. falls and the CPI falls.

Which of the following usually leads to currency appreciation?

a. fixed exchange rates Correctb. declining real GDP c. relatively low interest rates d. galloping inflation

If unemployment and inflation always move in the same direction, then we can infer that business fluctuations are

a. from both the demand and supply side. Correctb. from the supply side. c. from the demand side. d. purely random events.

International capital flows are purchases and sales of ____ across national borders.

a. goods Correctb. financial assets c. commodities d. services

A non-policy reason for the reduction in the natural rate of unemployment is the

a. growing federal budget surplus. b. decline in interest rates. c. expansionary nature of monetary policy. Correctd. aging of the U.S. labor force.

If workers demand wage compensation in advance of inflation, the economy's aggregate supply curve will

a. have a negative slope. b. have a positive slope. c. be horizontal. Correctd. be vertical.

A favorable supply shock abroad would

a. increase U.S. imports and decrease aggregate demand. Correctb. decrease U.S. net exports and decrease national income. c. decrease U.S. net exports and reduce aggregate supply. d. increase U.S. net exports and increase aggregate demand.

An increase in the U.S. price level relative to the price level of other countries would

a. increase U.S. net exports and increase aggregate supply. Correctb. reduce U.S. net exports and reduce aggregate demand. c. increase U.S. net exports and increase aggregate demand. d. reduce U.S. net exports and increase aggregate demand.

An appreciation of the Japanese yen relative to the U.S. dollar will ($ depreciates)

a. increase aggregate demand in Japan. Correctb. increase aggregate demand in the United States. c. increase aggregate supply in the United States. d. decrease aggregate supply in Japan.

An increase in the value of the U.S. dollar relative to the Japanese yen will

a. increase aggregate demand in the United States. b. increase aggregate supply in Japan. c. decrease aggregate supply in the United States. Correctd. increase aggregate demand in Japan.

A movement from an upper point to a lower point on the Phillips curve shows

a. increase in the inflation and decrease in the employment. Correctb. decrease in the inflation and increase in the unemployment. c. increase in the inflation and increase in the employment. d. decrease in the inflation and decrease in the unemployment.

In 2008-2010, American policy makers decided to risk

a. increasing taxes for the sake of reducing the budget deficit. Correctb. higher inflation for the sake of decreasing unemployment. c. higher unemployment to hold down inflation. d. reducing government spending for the sake of balancing the budget.

A fall in the domestic interest rate leads to capital

a. inflows and exchange rate depreciation. b. outflows and exchange rate appreciation. Correctc. outflows and exchange rate depreciation. d. inflows and exchange rate appreciation.

The short-run Phillips curve in Figure 17-6 would include which of the following points?

a. j, e, m b. j, e, r c. g, e, m Correctd. g, e, r

If fluctuations in economic activity come from the supply side, higher inflation is associated with

a. lower interest rates. b. structural deficits. Correctc. higher rates of unemployment. d. lower rates of unemployment.

Policies to lower the natural rate of unemployment include

a. mandated prison sentences for drug dealers. Correctb. retraining programs and employment services. c. changes in the tax laws. d. proposals to raise the minimum wage rate.

If business fluctuations are from demand-side forces,

a. monetary and fiscal policy will move inversely. b. unemployment and budget deficits will move inversely. c. interest rates and budget deficits will move inversely. Correctd. unemployment and inflation will move inversely.

Since the U.S. economy expanded rapidly from 1992 to 2000, it must be true that

a. monetary contraction overwhelmed fiscal expansion. b. fiscal contraction overwhelmed monetary expansion. Correctc. monetary expansion overwhelmed fiscal contraction. d. monetary expansion exactly offset fiscal contraction.

In Figure 20-9, the C + I + G + (X − IM)1 line is flatter than the C + I + G + (X − IM)0 line because the

a. multiplier is greater for the (X − IM)1 line. b. (X − IM)1 line indicates that tariffs, quotas, and other trade barriers are keeping net exports below their full potential. c. (X − IM)1 line indicates that net exports rise as GDP rises. Correctd. (X − IM)1 line indicates that net exports decline as GDP rises.

Aggregate demand grows because

a. patent laws protect and stimulate new inventions. b. there is more machinery and technology improves. Correctc. the government increases its spending, a growing population increases consumer spending, and the Fed increases the money supply. d. All of the above are correct.

A reduction in aggregate demand will normally reduce

a. prices. b. real GDP. c. employment. Correctd. All of the above are correct.

The main international repercussion of either a fiscal expansion or monetary contraction is to

a. raise interest rates and lower the exchange rate, thereby crowding in net exports. Correctb. raise interest rates and the exchange rate, thereby crowding out net exports. c. lower interest rates and raise the exchange rate, thereby crowding out net exports. d. lower interest rates and the exchange rate, thereby crowding in net exports.

A currency appreciation should

a. raise net exports and therefore increase aggregate demand. Correctb. reduce net exports and therefore decrease aggregate demand. c. reduce net exports and therefore increase aggregate demand. d. raise net exports and therefore decrease aggregate demand.

A sizable appreciation of the U.S. dollar in the mid-1980s

a. raised U.S. exports and reduced imports. b. raised U.S. exports and imports. c. reduced U.S. exports and imports. Correctd. reduced U.S. exports and raised imports.

If a currency depreciates, a country's net exports

a. rise and AD decreases. b. fall and AD increases. Correctc. rise and AD increases. d. fall and AD decreases.

An increase in the price level in the economies of U.S. trading partners will cause the aggregate expenditures function in the United States to

a. shift down. b. get steeper. c. get flatter. Correctd. shift up.

An increase in the U.S. price level relative to the price level of U.S. trading partners will cause the aggregate expenditures function in the United States to

a. shift up. b. get steeper. c. get flatter. Correctd. shift down.

A rise in net exports shifts the aggregate

a. supply curve inward. b. supply curve outward. Correctc. demand curve outward. d. demand curve inward.

A reduction in net exports shifts the aggregate

a. supply curve outward. b. demand curve outward. c. supply curve inward. Correctd. demand curve inward.

The data illustrated in Figure 17-5 would be most representative of which decade?

a. the 1980s b. the 1990s Correctc. the 1970s d. the 1960s

One of the results of the strong economic growth in the United States relative to the rest of the world is a

a. trade deficit for U.S. trading partners. b. growing U.S. net exports. Correctc. U.S. trade deficit. d. U.S. trade surplus.

If the fluctuations in the economy's real growth rate from year to year are caused primarily by variations in the rate at which aggregate demand increases, then data would show the most rapid inflation occurs when

a. unemployment is the highest, and the lowest inflation occurs when unemployment is the lowest. b. AD rises most slowly, and the lowest inflation occurs when AD rises most rapidly. c. AS grows most rapidly, and the lowest inflation occurs when AS grows most slowly. Correctd. output grows most rapidly and the lowest inflation when output grows most slowly.

Over a five-year period, economists observed that the unemployment-inflation relationship appeared as in Figure 17-5. Economic theory would conclude that the period

a. was dominated by demand-side changes. b. was affected by both supply and demand shocks, with demand shocks dominating. c. cannot be explained because the relationship is the opposite of what the Phillips curve would predict. Correctd. was dominated by supply shocks such as increased energy and food costs.

The economy's self-correcting mechanism

a. works better at correcting inflationary gaps than recessionary gaps. b. ensures that the economy will not have to endure a long period of high unemployment. Correctc. tends to push unemployment toward a specific point called the natural rate of unemployment. d. cannot work if the Phillips curve is vertical.