EC111 Final

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate a. demand rightward by more than $100 billion. b. demand rightward by less than $100 billion. c. supply leftward by more than $100 billion. d. supply leftward by less than $100 billion.

A

If policymakers decrease aggregate demand, then in the short run the price level a. falls and unemployment rises. b. and unemployment fall. c. and unemployment rise. d. rises and unemployment falls.

A

In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households a. increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve. b. decreases and as a result consumption spending increases. This effect contributes to the upward slope of the aggregate-supply curve. c. increases and as a result households increase their money holdings; in turn, interest rates increase and investment spending decreases. This effect contributes to the downward slope of the aggregate-demand curve. d. decreases and as a result households increase their money holdings; in turn, interest rates increase and investment spending decreases. This effect contributes to the upward slope of the aggregate-supply curve.

A

The initial impact of an increase in an investment tax credit is to shift a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. aggregate supply left.

A

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do? a. increase government expenditures or increase the money supply b. increase government expenditures or decrease the money supply c. decrease government expenditures or increase the money supply d. decrease government expenditures or decrease the money supply

A

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if a. the price level is higher than expected making production more profitable. b. the price level is higher than expected making production less profitable. c. the price level is lower than expected making production more profitable. d. the price level is higher than expected making production less profitable.

A

What, if anything, did policymakers do in response to the recession of 2001? a. tax cuts and expansionary monetary policy b. only tax cuts c. only expansionary monetary policy d. neither tax cuts nor expansionary monetary policy

A

When the actual change in the price level differs from its expected change, which of the following can explain why firms might change their production? a. both menu costs and mistaking a price level change for a change in relative prices b. menu costs but not mistaking a price level change for a change in relative prices c. mistaking a price level change for a change in relative price but not menu costs d. neither menu costs nor mistaking a price level change for a change in relative prices

A

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output? a. increase taxes b. increase the money supply c. increase government expenditures d. All of the above are correct.

A

If the central bank decreases the money supply, then in the short run prices a. rise and unemployment falls. b. fall and unemployment rises. c. and unemployment rise. d. and unemployment fall.

B

Liquidity preference theory is most relevant to the a. short run and supposes that the price level adjusts to bring money supply and money demand into balance. b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. c. long run and supposes that the price level adjusts to bring money supply and money demand into balance. d. long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

B

The aggregate quantity of goods and service demanded changes as the price level falls because a. real wealth rises, interest rates rise, and the dollar appreciates. b. real wealth rises, interest rates fall, and the dollar depreciates. c. real wealth falls, interest rates rise, and the dollar appreciates. d. real wealth falls, interest rates fall, and the dollar depreciates.

B

Which of the following statements is correct for the long run? a. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for money; the price level adjusts to balance the supply and demand for loanable funds. b. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money. c. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level is relatively slow to adjust. d. Output responds to the aggregate demand for goods and services; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

B

In the long run inflation a. and unemployment are primarily determined by labor market factors. b. and unemployment are primarily determined by the rate of money supply growth. c. is primarily determined by the rate of money supply growth while unemployment is primarily determined by labor market factors. d. is primarily determined by labor market factors while unemployment is primarily determined by the rate of money supply growth.

C

The misperceptions theory of the short-run aggregate supply curve says that the quantity of output supplied will increase if the price level a. increases by less than expected so that firms believe the relative price of their output has increased. b. increases by less than expected so that firms believe the relative price of their output has decreased. c. increases by more than expected so that firms believe the relative price of their output has increased. d. increases by more than expected so that firms believe the relative price of their output has decreased.

C

The sticky-price theory of the short-run aggregate supply curve says that when the price level is higher than expected, some firms will have a. higher than desired prices which leads to an increase in the aggregate quantity of goods and services supplied. b. higher than desired prices which leads to a decrease in the aggregate quantity of goods and service supplied. c. lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied. d. lower than desired prices which leads to a decrease in the aggregate quantity of goods and services supplied

C

Which of the following statements is correct? a. Both liquidity preference theory and classical theory assume the interest rate adjusts to bring the money market into equilibrium. b. Both liquidity preference theory and classical theory assume the price level adjusts to bring the money market into equilibrium. c. Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium. d. Liquidity preference theory assumes the price level adjusts to bring the money market into equilibrium; classical theory assumes the interest rate adjusts to bring the money market into equilibrium.

C

According to liquidity preference theory, the slope of the money demand curve is explained as follows: a. Interest rates rise as the Fed reduces the quantity of money demanded. b. Interest rates fall as the Fed reduces the supply of money. c. People will want to hold less money as the cost of holding it falls. d. People will want to hold more money as the cost of holding it falls.

D

An increase in the expected price level shifts short-run aggregate supply to the a. right, and an increase in the actual price level shifts short-run aggregate supply to the right. b. right, and an increase in the actual price level does not shift short-run aggregate supply. c. left, and an increase in the actual price level shifts short-run aggregate supply to the left. d. left, and an increase in the actual price level does not shift short-run aggregate supply.

D

Critics of stabilization policy argue that a. there is a lag between the time policy is passed and the time policy has an impact on the economy. b. the impact of policy may last longer than the problem it was designed to offset. c. policy can be a source of, instead of a cure for, economic fluctuations. d. All of the above are correct.

D

During recessions a. workers are laid off. b. factories are idle. c. firms may find they are unable to sell all they produce. d. All of the above are correct.

D

Proponents of rational expectations argued that the sacrifice ratio a. could be high because it was rational for people not to immediately change their expectations. b. could be high because people might adjust their expectations quickly if they found anti-inflation policy credible. c. could be low because it was rational for people not to immediately change their expectations. d. could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

D

Shifts in the aggregate-demand curve can cause fluctuations in a. neither the level of output nor the level of prices. b. the level of output, but not in the level of prices. c. the level of prices, but not in the level of output. d. the level of output and in the level of prices.

D

The multiplier for changes in government spending is calculated as a. MPC. b. 1 - MPC. c. 1/MPC. d. 1/(1 - MPC).

D

When the money supply decreases a. interest rates fall and so aggregate demand shifts right. b. interest rates fall and so aggregate demand shifts left. c. interest rates rise and so aggregate demand shifts right. d. interest rates rise and so aggregate demand shifts left.

D

Which of the following effects helps to explain the downward slope of the aggregate-demand curve? a. the exchange-rate effect b. the wealth effect c. the interest-rate effect d. All of the above are correct.

D

Which of the following results in higher inflation and higher unemployment in the short run? a. a more expansionary monetary policy b. a more contractionary monetary policy c. a decrease in the minimum wage d. an adverse supply shock such as an increase in the price of oil

D

slope of the aggregate-demand curve? a. As the money supply increases, the interest rate falls, so spending rises. b. As the money supply increases, the interest rate rises, so spending falls. c. As the price level increases, the interest rate falls, so spending rises. d. As the price level increases, the interest rate rises, so spending falls.

D

An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected price level a. rises, shifting aggregate demand right. b. rises, shifting aggregate demand left. c. falls, shifting aggregate supply right. d. falls, shifting aggregate supply left.

C

Disinflation is defined as a a. zero rate of inflation. b. constant rate of inflation. c. reduction in the rate of inflation. d. negative rate of inflation.

C

If the stock market booms, then a. aggregate demand increases, which the Fed could offset by increasing the money supply. b. aggregate supply increases, which the Fed could offset by increasing the money supply. c. aggregate demand increases, which the Fed could offset by decreasing the money supply. d. aggregate supply increases, which the Fed could offset by decreasing the money supply.

C

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they a. decreased the money supply. b. increased government expenditures. c. decreased taxes. d. None of the above is correct.

A

The short-run relationship between inflation and unemployment is often called a. the Classical Dichotomy. b. Money Neutrality. c. the Phillips curve. d. None of the above is correct.

C