Macroeconomics Final (JHU)

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In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by _______

$0.75 billion; more than $0.75 billion.

In the Keynesian cross model if the MPC is 0.75, a $1 billion decrease in taxes increases planned expenditure by ___________ and increases the equilibrium level of income by _________

$0.75b, $3b

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$1 billion; more than $1 billion

If total consumption (measured in billions of current dollars) equals $3,657, consumption of durable goods is $480, and consumption of nondurable goods is $1,194, then consumption of services is:

$1,983

Assume that a rancher sells McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, the value included in GDP should be:

Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is:

$20,000

The banking system of country ABC holds 25% of reserves out of its deposits. In this context, if the overall deposit base of the system is $10,000 million, banks could create a total money of

$40,000 million

Consumer Price Index (CPI)

(see image)

How to calculate nominal GDP (hot dogs and burgers example)

(see image)

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 1,000. Government spending is 600. In this case, equilibrium investment is:

1,500

What does the consumer price index measure? List three ways in which it differs from the GDP deflator.

1. The consumer price index (CPI) measures the overall level of prices in the economy. It tells us the price of a fixed basket of goods relative to the price of the same basket in the base year. The GDP deflator is the ratio of nominal GDP to real GDP in a given year. The GDP deflator measures the prices of all goods and services produced, whereas the CPI only measures prices of goods and services bought by consumers. The GDP deflator includes only domestically produced goods, whereas the CPI includes domestic and foreign goods bought by consumers. Finally, the CPI is a Laspeyres index that assigns fixed weights to the prices of different goods, whereas the GDP deflator is a Paasche index that assigns changing weights to the prices of different goods. In practice, the two price indices tend to move together and do not often diverge.

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $0.50 in 2009. If 10 apples and 5 oranges were purchased in 2002, and 5 apples and 10 oranges were purchased in 2009, the CPI for 2009, using 2002 as the base year, is:

1.25

For a country A, the real GDP growth rate is 8% and inflation is 4%. If the velocity of money remains constant, what is the required change in real money balances to keep inflation constant?

12%

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is:

13 percent

If nominal GDP grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately ______ percent.

If the currency deposit ratio equals 0.5 and the reserve deposit ratio equals 0.1, then the money multiplier equals:

2.5

All of the following transactions that took place in 2009 would be included in GDP for 2009 except the purchase of a:

2001 Jeep Cherokee

If real GDP grew by 6 percent and population grew by 2 percent, then real GDP per person grew by approximately ______ percent.

If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:

400.

Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If decreases from 0.3 to 0.2, then consumption increases by:

425

Consider the money demand function that takes the form (M/P)^d = Y/4i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

Assets Liabilities & Net Worth Reserves $10,000 Deposits $100,000 Loans 100,000 Debt 20,000 Securities 40,000 Equity 30,000 Based on the tale, what is the leverage ratio at the bank?

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will be:

5 percent.

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

50 and the interest rate falls by 0.5 percent.

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is:

500

Assume that the money demand function is (M/P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent.

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals ______ percent.

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

600.

According to the Quantity Theory of Money, if M is growing at 10% and real output grows at 3%, inflation must be:

Assume that the investment function is given by I = 1000 - 30r, where r is the real rate of interest in percent. Assume further that the nominal rate of interest is 10% and the inflation rate is 2%. According to this investment function, total investment will be:

760

What is a market-clearing model? When is it appropriate to assume that markets clear?

A market-clearing model is one in which prices adjust to equilibrate supply and demand. Market-clearing models are useful in situations where prices are flexible. Yet in many situations, flexible prices may not be a realistic assumption. For example, labor contracts often set wages for up to three years. Or, firms such as magazine publishers change their prices only every three to four years. Most macroeconomists believe that price flexibility is a reasonable assumption for studying long-run issues. Over the long run, prices respond to changes in demand or supply, even though in the short run they may be slow to adjust.

Starting from long-run equilibrium at A with output equal to Y and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the short-run nonneutrality of money is represented by the movement from:

A to G

A small open economy with a floating exchange rate is initially at equilibrium A with IS*1 ,LM*1 , equilibrium exchange rate e2 , and equilibrium output Y1 . If there is an increase in government spending to IS*2 , the new equilibrium will be at ____, holding everything else constant.

During the crisis 2007-2011, the monetary base increased by 300% but M1 increased by only 40%. The reason behind might be:

Banks decided to hold higher reserves due to increased risk

Why do economists build models?

Economists build models as a means of summarizing the relationships among economic variables. Models are useful because they abstract from the many details in the economy and allow one to focus on the most important economic connections.

Describe the two ways the BLS measures total employment.

Every month, the Bureau of Labor Statistics undertakes two surveys to measure employment. First, the BLS surveys about 60,000 households and thereby obtains an estimate of the share of people who say they are working. The BLS multiplies this share by an estimate of the population to estimate the number of people working. Second, the BLS surveys about 160,000 business establishments and asks how many people they employ. Each survey is imperfect; so the two measures of employment are not identical.

List the two things that GDP measures. How can GDP measure two things at once?

GDP measures the total income earned from the production of the new final goods and services in the economy, and it measures the total expenditures on the new final goods and services produced in the economy. GDP can measure two things at once because the total expenditures on the new final goods and services by the buyers must be equal to the income earned by the sellers of the new final goods and services. As the circular flow diagram in the text illustrates, these are alternative, equivalent ways of measuring the flow of dollars in the economy.

In the Keynesian cross, actual expenditures equal:

GDP.

An increase in consumer saving for any given level of income will shift the:

IS curve downward and to the left.

Changes in fiscal policy shift the:

IS curve.

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

IS; shifts to the right

Implicit price deflator, CPI: Index types

Implicit price deflator = Paasche Index; CPI = Laspeyres Index

How will the expansionary fiscal policy "abroad" will affect a small open economy?

Increase net exports because the interest rate r increases

Which of the following FED actions would decrease the money multiplier:

Increase the interest rate paid over banking reserves ratio

Changes in monetary policy shift the:

LM curve.

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

LM; right

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

LM; shifts to the right

Implicit Price Deflator

Nominal GDP / Real GDP (current price of all goods and services produced compared to the price of the same goods and services in a base year); if value is 1.50, this means the price of goods and services increased by 50% compared to the goods and services sold in the base year

The statistical relationship between changes in real GDP and changes in the unemployment rate is called:

Okun's law.

Assume that a competitive economy can be described by a constant returns to scale (Cobb Douglas) production function and all factors of production are fully employed. Holding other factors constant, including the quantity of capital and technology, explain how a one-time, 10-percent increase in the quantity of labor (perhaps the result of a special immigration policy) will change each of the following: The level of output produced;

Output increases by less than 10 percent because of diminishing returns to labor.

The economy begins in equilibrium at Point E, representing the real interest rate, , at which saving, , equals desired investment, . What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?

Point B

Assume that the equation for demand for bread at a small bakery is Qd = 60 - 10Pb + 3Y, where Qd is the quantity of bread demanded in loaves and Y is the average income in the town in thousands of dollars. If the average income in the town is 10, state the equation for Qd in terms of Pb

Qd = 60 - 10Pb + 3(10) Qd = 90 - 10Pb

List the three categories used by the Bureau of Labor Statistics to classify everyone in the economy. How does the BLS compute the unemployment rate?

The Bureau of Labor Statistics (BLS) classifies each person into one of the following three categories: employed, unemployed, or not in the labor force. The unemployment rate, which is the percentage of the labor force that is unemployed, is computed as follows: (see image) Note that the labor force is the number of people employed plus the number of people unemployed.

How are the CPI and the PCE deflator similar, and how are they different?

The CPI measures the price of a fixed basket of goods relative to the price of the same basket in the base year. The PCE deflator is the ratio of nominal consumer spending to real consumer spending. The CPI and the PCE deflator are similar in that they both only include the prices of goods purchased by consumers, and they both include the price of imported goods as well as domestically produced goods. The two measures differ because the CPI measures the change in the price of a fixed basket whereas the goods measured by the PCE deflator change from year to year depending on what consumers are purchasing in that particular year.

If the nominal interest rate increases, you would expect:

The demand for money to decrease

What are the four components of GDP? Give an example of each.

The four components of GDP are consumption, investment, government purchases, and net exports. The consumption category of GDP consists of household expenditures on new final goods and services, such as the purchase of a new television. The investment category of GDP consists of business fixed investment, residential fixed investment, and inventory investment. When a business buys new equipment this counts as investment. Government purchases consists of purchases of new final goods and services by federal, state, and local governments, such as payments for new military equipment. Net exports measures the value of goods and services sold to other countries minus the value of goods and services foreigners sell us. When the U.S. sells corn to foreign countries, it counts in the net export category of GDP.

How often does the price you pay for a haircut change? What does your answer imply about the usefulness of market-clearing models for analyzing the market for haircuts?

The price of haircuts changes rather infrequently. From casual observation, hairstylists tend to charge the same price over a one- or two-year period irrespective of the demand for haircuts or the supply of cutters. A market-clearing model for analyzing the market for haircuts has the unrealistic assumption of flexible prices. Such an assumption is unrealistic in the short run when we observe that prices are inflexible. Over the long run, however, the price of haircuts does tend to adjust; a market-clearing model is therefore appropriate.

When there is unexpected deflation (pi < Epi ) and contracts are not indexed

There is arbitrary redistribution of purchasing power from borrowers to lenders

A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6. The engineer eats the bread. What is the value added by each person? What is the bread's contribution to GDP?

Value added by each person is equal to the value of the good produced minus the amount the person paid for the materials needed to make the good. Therefore, the value added by the farmer is $1.00 ($1 - 0 = $1). The value added by the miller is $2: she sells the flour to the baker for $3 but paid $1 for the flour. The value added by the baker is $3: she sells the bread to the engineer for $6 but paid the miller $3 for the flour. GDP is the total value added, or $1 + $2 + $3 = $6. Note that GDP equals the value of the final good (the bread).

Use the model of supply and demand to explain how a fall in the price of frozen yogurt would affect the price of ice cream and the quantity of ice cream sold. In your explanation, identify the exogenous and endogenous variables.

We can use a simple variant of the supply-and-demand model for pizza to answer this question. Assume that the quantity of ice cream demanded depends not only on the price of ice cream and income, but also on the price of frozen yogurt: Qd = D(PIC, PFY, Y). We expect that demand for ice cream rises when the price of frozen yogurt rises, because ice cream and frozen yogurt are substitutes. That is, when the price of frozen yogurt goes up, I consume less of it and, instead, fulfill more of my frozen dessert urges through the consumption of ice cream. The next part of the model is the supply function for ice cream, Qs = S(PIC). Finally, in equilibrium, supply must equal demand, so that Qs = Qd. Y and PFY are the exogenous variables, and Q and PIC are the endogenous variables. Figure 1-1 uses this model to show that a fall in the price of frozen yogurt results in an inward shift of the demand curve for ice cream. The new equilibrium has a lower price and quantity of ice cream.

If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is:

Y = 1,600 - 3T - 100r + 4G.

Suppose that the government increases taxes and government expenditure by equal amounts (ΔG = T) =$5 in an economy where the MPC = 0.7. What do you think will be the change to public savings:

Zero

All of the following are a stock except:

a consumer's wealth. the government budget deficit. the number of unemployed people. the amount of capital in the economy.

Banks create money in:

a fractional-reserve banking system but not in a 100-percent-reserve banking system.

In a small open economy, if the world interest rate is r1, then the economy has:

a trade surplus

Assume that GDP (Y) is 6,000. Consumption (C). is given by the equation C = 600 + 0.6(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real rate of interest in percent. Taxes (T) are 500 and government spending (G) is also 500. a. What are the equilibrium values of C, I, and r? b. What are the values of private saving, public saving, and national saving? c. If government spending rises to 1,000, what are the new equilibrium values of C, I, and r? d. What are the new equilibrium values of private saving, public saving, and national saving?

a. C = 600 + 0.6 (6,000 - 500) C = 3900 Y = C + I + G (I = 200 - 100r); G = 500; C = 3900; Y = 6000 6000 = 3900 + (200 - 100r) + 500 100r = 400 r = 4 = 4% Since r = 4 and I = 2000 - 100r I = 2000 - 100(4) I = 1600 b. Private saving = Y - T - C = 6000 - 500 - 3900 Public saving = 1600 Public Saving = T - G = 500 - 500 Public Saving = 0 National Saving = Y - C - G = 6000 - 3900 - 500 National Saving = 1600 c. If G rises to 1000 C = 600 + 0.6 (6000 - 500) = 3900 I = C + G - Y 2000 - 100r = 3900 + 1000 - 6000 -100r = -900 r = 9 = 9% I = 2000 - 100(9) I = 1100 d. Private saving = Y - T - C = 6000 - 500 - 3900 = 1600 (unchanged) Public Saving = 500 - 1000 = -500 (decreases) National Saving = 1600 - 500 = 1100 (decreases) a. 3,900; 1,600; 4 percent b. 1,600; 0; 1,600 c. 3,900; 1,100; 9 percent d. 1,600; -500; 1,100

Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed, and the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. The economy can be described by the following set of equations: (see image) How does an increase in government spending, holding other factors constant, affect the level of: a. public saving? b. private saving? c. national saving? d. the equilibrium interest rate? e. the equilibrium quantity of investment?

a. Public saving equals T - G. An increase in government spending, G, reduces public saving. b. Private saving equals Y - T - C. An increase in government spending does not affect private saving. c. National saving equals Y - C - G. An increase in government spending reduces national saving by an amount equal to the increase in government spending. d. The equilibrium interest rate increases to bring desired investment into equilibrium with the reduced quantity of national saving. e. The equilibrium quantity of investment is reduced via the increase in the interest rate by an amount equal to the increase in government spending.

Economic statistics are not perfect. Explain at least one way in which each of the following statistics as currently calculated in the United States fails to completely or accurately measure the corresponding economic concept (in parentheses): a. real GDP per person (economic well-being); b. CPI (cost of living); c. unemployment rate (involuntary unemployment).

a. The official measure of GDP does not include measurements of leisure time available, nonmarket production, production in the underground economy, the distribution of income, or production externalities (e.g., pollution). b. The CPI does not allow substitution away from products with rising prices and has difficulty distinguishing between price changes and quality changes in products included in the index. c. The official unemployment rate does not take into account discouraged workers, part-time workers who desire full-time employment, and workers employed in jobs not matching their skill level, such as taxi drivers with PhDs in physics.

Suppose there is a technological breakthrough that increases the productivity of all capital and, consequently, increases the demand for investment. Using the long-run model of the economy developed in Chapter 3 with constant saving, state in words what happens to a. the real interest rate b. national saving c. investment d. consumption e. output.

a. real interest rate increases b. national saving is unchanged c. amount of investment is unchanged d. consumption is unchanged e. output is unchanged, fixed because it is determined by the factors of production

If the equation for a country's Phillips curve is p = 0.02 - 0.8(u - 0.05), where p is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?

above 2 percent (0.02)

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

actual expenditure equals planned expenditure.

Cost-push inflation is the result of:

adverse supply shocks

The relationship between the quantity of output demanded and the aggregate price level is called:

aggregate demand.

Under a fixed-exchange-rate system, the central bank of a small open economy must:

allow the money supply to adjust to whatever level will ensure that the equilibrium exchange rate equals the announced exchange rate.

Real money balances equal the:

amount of money expressed in terms of the quantity of goods and services it can purchase.

In the long run, the level of output is determined by the:

amounts of capital and labor and the available technology.

If bread is produced by using a constant returns to scale production function, then if the:

amounts of equipment and workers are both doubled, twice as much bread will be produced.

An appreciation of the real exchange rate in a small open economy could be the result of:

an increase in government spending.

Which of the following will shift the aggregate supply curve up to the left?

an increase in the expected price level

Which of the following will shift the aggregate supply curve up to the left?.

an increase in the expected price level

The theory of liquidity preference implies that:

as the interest rate rises, the demand for real balances will fall.

In the circular flow model, the flow of dollars from firms to households is paid _____ and the flow of dollars from households to firms is paid _____.

as wages and profits; for goods and services

The long-run aggregate supply curve is vertical at the level of output:

at which unemployment is at its natural rate.

In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then there is ______ and net capital outflow equals ______.

balanced trade; $0

In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will:

be horizontal.

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is ____ the natural rate of output in the short run

below

One possible benefit of moderate inflation is:

better functioning labor markets.

The Phillips curve expresses a short-run link:

between nominal and real variables.

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

both Central Bank A and Central Bank B should increase the quantity of money.

An estimate of total employment in the economy can be obtained from:

both the household and establishment surveys.

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

buy; LM

Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______.

buy; fall

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:

by lowering the interest rate so that investment spending increases.

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:

by lowering the interest rate so that investment spending increases.

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate.

capital inflow

If the purchasing-power parity theory is true, then:

changes in saving or investment influence only the real exchange rate.

The aggregate demand curve tells us possible:

combinations of P and Y for a given value of M.

Real GDP is measured in _____ prices ____ time.

constant; per unit of

The demand for output in a closed economy is the sum of:

consumption, investment, and government spending.

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n):

contractionary shift in the IS curve.

In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would:

crowd out between zero and $10 billion of investment.

The money supply will decrease if the.

currency deposit ratio increases.

Nominal GDP measures the value of goods and services in ______ prices, while real GDP measures the value of goods and services in ______ prices.

current; constant

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.

decrease

If wage rigidity holds the real wage above the equilibrium level, an increase in the demand for labor will ______ the number unemployed.

decrease

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:

decrease by 1 percent.

If the domestic government of a small open economy reduces government spending, the real exchange rate will __________ and net exports will ___________

decrease, increase

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level.

decrease; LM

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease; decrease; decrease; decrease

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level

decrease; increase

If inflation is 6 percent and a worker receives a 4 percent nominal wage increase, then the worker's real wage:

decreased 2 percent.

Recessions are periods when real GDP:

decreases mildly

In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving (T-G)______ and private saving (Y-T-C)______.

decreases; increases

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade ___________ and __________ net capital outflow.

deficit, negative?

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow.

deficit; negative

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade ______ and ______ net capital outflow.

deficit; negative

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

In the IS-LM model, which two variables are influenced by the interest rate?

demand for real money balances and investment spending

The goods produced in U.S. industries may be made more competitive in world markets by:

depreciating the U.S. currency.

Net capital outflow is equal to the amount that:

domestic investors lend abroad minus the amount that foreign investors lend here.

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

downward and to the left.

A decrease in the price level, holding nominal money supply constant, will shift the LM curve:

downward and to the right.

Assume that the money demand function is left parenthesis (M/P)^d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

drop by 2 percent.

The long run refers to a period:

during which prices are flexible.

The short run refers to a period:

during which prices are sticky and unemployment may occur.

Macroeconomics is the study of the:

economy as a whole.

In a small open economy with perfect capital mobility, the real interest rate will always be:

equal to the world real interest rate.

The Keynesian cross shows:

equality of planned expenditure and income in the short run.

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:

equals the inflation rate.

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is higher than expected, then output ______ natural rate of output.

exceeds the

Macroeconomic models are used to explain how ______ variables influence ______ variables.

exogenous; endogenous

Along any aggregate supply curve, there is only one:

expected price level.

The short-run aggregate supply curve is drawn for a given:

expected price level.

The total income of everyone in the economy is exactly equal to the total:

expenditure on the economy's output of goods and services.

All of the following are measures of GDP except the total:

expenditures of all businesses in the economy.

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase:

exports by the small open economy.

When the real exchange rate rises:

exports will decrease and imports will increase.

In the long run, the level of national income in an economy is determined by its:

factors of production and production function.

A production function is a technological relationship between:

factors of production and the quantity of output produced.

In a small open economy, when foreign governments reduce national saving in their countries the equilibrium real exchange rate:

falls and net exports rise

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate:

falls and net exports rise.

In the IS-LM model when M rises but P remains constant, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

falls; rises

In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ________ and output ________

falls; rises

GDP is the market value of all ______ goods and services produced within an economy in a given period of time.

final

Exogenous variables are:

fixed at the moment they enter the model.

Other things equal, a given change in money supply has a larger effect on demand the:

flatter the IS curve.

Most economists believe that prices are:

flexible in the long run but many are sticky in the short run.

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have ______ propensity to consume than debtors.

from debtors to creditors; a smaller

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for _____, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.

goods and services; real money balances

According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase.

greater; increase

Demand-pull inflation is the result of:

high aggregate demand.

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

higher; lower

The idea that the natural rate of unemployment is increased following extended periods of unemployment is called:

hysteresis.

If domestic spending exceeds output, we ______ the difference—net exports are ______.

import; negative

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in:

in the short run only.

An increase in government spending raises income:

in the short run, but leaves it unchanged in the long run, while lowering investment.

The equation Ybar = C(Ybar - T) + I(r) + Gbar may be solved for the equilibrium level of:

income

The tax multiplier indicates how much ______ change(s) in response to a $1 change in taxes.

income

Which of the following is a flow variable?

income

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

income and the interest rate rise, whereas consumption and investment fall.

In a small open economy with a floating exchange rate, if the government decreases the money supply, then in the new short-run equilibrium:

income falls and exchange rate rises.

In a small open economy with a fixed exchange rate, if the central bank tries to increase the money supply, then in the new short-run equilibrium:

income remains constant.

An explanation for the slope of the LM curve is that as:

income rises, money demand rises, and a higher interest rate is required.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

increase

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:

increase

If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:

increase by 4 percent.

In the IS-LM model, a decrease in output would be the result of a(n):

increase in money demand.

An effective policy to reduce a trade deficit in a small open economy would be to:

increase taxes.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

increase, but by less than 100

When government spending increases and taxes are increased by an equal amount, interest rates:

increase.

If the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _________ and net exports will ______________

increase; decrease

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate.

increase; increase

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______ and net capital outflows ______.

increase; increase

An increase in investment demand for any given level of income and interest rates due, for example, to more optimistic animal spirits will, within the IS LM framework, ______ output and ______ interest rates.

increase; raise

An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM framework, ______ output and ______ interest rates.

increase; raise

A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

increased.

Skill-biased technological change ______ the demand for high-skilled workers, while the slowdown in the pace of educational advancement reduces the supply of skilled workers, resulting in relatively _____ wages for skilled workers.

increases; higher

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be:

increasing

An LM curves shows combinations of:

interest rates and income, which bring equilibrium in the market for real money balances.

A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective.

In a small open economy, policies that increase:

investment tend to cause a trade deficit.

If the production function describing an economy is Y = 100 K^.25L^.75, then the share of output going to labor:

is 75 percent.

Rigidity of the labor market, e.g., wages are not adjusted flexibly:

is a reason why deflation is costly.

Disposable personal income

is computed by subtracting personal tax and nontax payments from personal income.

The real exchange rate:

is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.

At any particular point in time, the output of the economy:

is fixed because the supplies of capital and labor and the technology are fixed.

According to the definition used by the U.S. Bureau of Labor Statistics, a person is not in the labor force if that person:

is going to school full time.

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ____________ the tax multiplier.

is larger than

A positive inflation rate implies the following except:

is necessary if the FED wants to have room manipulating nominal interest rate.

When a firm sells a product out of inventory, GDP:

is not changed.

If the demand for real money balances does not depend on the interest rate, then the LM curve:

is vertical.

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production.

If the government increases taxes, the IS curve will shift ______________ and the aggregate demand curve will shift ____________

left; left

In the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending.

less than

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:

less than the expected price level.

The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the ______ the demand is for net exports.

less; greater

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

level of output but not prices.

Assets of banks include:

loans to customers

In the classical model with fixed income, if the interest rate is too high, then investment is too ______ and the demand for output ______ the supply.

low; falls short of

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

lower equilibrium income by the decrease in the intercept multiplied by the multiplier.

To increase the money multiplier, the Fed can

lower the interest rate paid on reserves

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

lower; inward

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is __________ and the aggregate demand curve shifts __________.

lower; inward

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

lower; raises; reduces

Funds flow directly between savers and investors in financial __________ and flow indirectly between savers and investors through financial ________

markets; intermediaries

The real return on holding money is:

minus the inflation rate.

GNP equals GDP ______ income earned domestically by foreigners ______ income that nationals earn abroad.

minus; plus

The money supply will increase if the:

monetary base increases.

If a country has a high rate of inflation relative to the United States, the dollar will buy:

more of the foreign currency over time.

Planned expenditure is a function of:

national income and planned investment, government spending, and taxes.

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

national income; goods and services

The Phillips curve shows a ______ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a ______ relationship between the price level and output.

negative; positive

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.

negative; price level

Okun's law is the ______ relationship between real GDP and the ______.

negative; unemployment rate

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

negatively; positively

The IS curve generally determines:

neither income nor the interest rate.

Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy.

neither the quantity of output nor the price level

The model of aggregate demand and aggregate supply is consistent with short-run monetary ______ and long-run monetary ______.

nonneutrality; neutrality

Protectionist policies implemented in a small open economy with a trade deficit have the effect of ______ the trade deficit and ______ the quantity of imports and exports.

not changing; decreasing

The nominal exchange rate between the U.S. dollar and the Japanese yen is the:

number of yen you can get for one dollar.

A worker with two jobs is counted:

once in the household survey, but twice in the establishment survey.

According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in:

only in the short run.

An economy's factors of production and its production function determine the economy's:

output of goods and services.

Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run.

output; prices

A recession may alter an economy's natural rate of unemployment in all of the following ways except by:

permanently reducing the money supply.

For the purposes of the Keynesian cross, planned expenditure consists of:

planned investment, government spending, and consumption expenditures.

In the Keynesian-cross model, the equilibrium level of income is determined by:

planned spending.

According to the sticky-price model, deviations of output from the natural level are _____ deviations of the price level from the expected price level.

positively associated with

Aggregate supply is the relationship between the quantity of goods and services supplied and the:

price level.

If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the ______ will ______ in order to return output to the natural level.

price level; increase

A competitive, profit-maximizing firm hires labor until the:

price of output multiplied by the marginal product of labor equals the wage.

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

prices but not level of output.

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except:

prices do not adjust when there is perfect competition.

A competitive firm chooses the:

quantity of labor and capital to employ.

The intersection of the IS and LM curve determines the values of:

r and Y, given G, T, M, and P.

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.

real; nominal

Holding other factors constant, legislation to cut taxes in an open economy will:

reduce national saving and lead to a trade deficit.

In a small open economy, if consumers shift their preference toward Japanese cars, then net exports:

remain unchanged but the real exchange rate falls.

If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve deposit ratio, then the total money supply is:

reserves divided by rr.

Those economists who believe that fiscal policy is more potent than monetary policy argue that the:

responsiveness of investment to the interest rate is small.

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______.

resulting from a change in the price level; at a given price level

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the:

right by 200.

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:

right with a slope less than one.

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.

right; accumulation

In the IS-LM model when government spending rises, in the short-run equilibrium, in the usual case the interest rate __________ and output ___________

rises; rises

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market ______ and _____ the interest rate paid on bank reserves.

sales; raise

In the small open economy in equilibrium:

saving is fixed, and investment is determined by the investment function and the world interest rate.

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

sell interest-earning assets in order to obtain non-interest-bearing money.

Exhibit: Market for Real Money Balances Based on the graph, if the interest rate is r3, then people will ______ bonds and the interest rate will ______.

sell; rise

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr , then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

small; large

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

small; large

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

smaller; greater

If the short-run aggregate supply curve is steep, the Phillips curve will be:

steep.

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow.

surplus; positive

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

technological progress; variations in labor-market utilization

In the United States, monetary policy is controlled by:

the Federal Reserve.

The Phillips curve depends on all of the following forces except:

the current exchange rate.

The IS curve shifts when any of the following economic variables change except:

the interest rate.

The factor that makes national saving equal investment, in equilibrium, is:

the interest rate.

The natural level of output is:

the level of output at which the unemployment rate is at its natural level.

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect ______ to increase.

the money supply

If the monetary base fell and the currency deposit ratio rose but the reserve deposit ratio remained the same, then:

the money supply would fall, but not by as much as it would have fallen if the reserve deposit ratio had risen.

In a small open economy with a floating exchange rate, the exchange rate will appreciate if:

the money surplus is decreased.

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases:

the nominal interest rate.

The IS-LM model takes _________ as exogenous.

the price level

In a simple model of the supply and demand for pizza, the endogenous variables are:

the price of pizza and the quantity of pizza sold.

In the sticky-price model, the relationship between output and the price level depends on:

the proportion of firms with flexible prices.

In the long run, what determines the level of total production of goods and services in an economy?

the quantity of capital, quantity of labor, and production technology

When the LM curve is drawn, the quantity that is held fixed is:

the real money supply.

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise.

If net capital outflow is positive, then:

the trade balance must be positive.

As the short-run Phillips curve shifts from A to B to C to D:

there is a lower-expected rate of inflation at every level of unemployment.

An "open" economy is one in which:

there is trade in goods and services with the rest of the world.

Two equivalent ways to view GDP are as the

total income of everyone in the economy or the total expenditure on the economy's output of goods and services

Compared to a closed economy, an open economy is one that:

trades with other countries.

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

unplanned inventory investment is negative.

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

unplanned inventory investment.

Since GDP includes only the additions to income, not transfers of assets, ______ are not included in the computation of GDP.

used goods

A variable rate of inflation is undesirable because:

variable inflation leads to greater uncertainty and risk as compared to constant inflation.

The quantity theory of money assumes that:

velocity is constant.

As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was ______ than the expansionary shift in the U.S. investment function, resulting in a trade ______.

weaker; deficit

If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the:

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