ECO 119

The country of Leverett is a small open economy. Use the information provided below to answer the following questions about national saving (S), domestic investment (I), net exports (NX), the domestic interest rate (r), and the exchange rate (ε). Assume that a sudden change in world fashions makes Leverett exports unpopular. 1. The impact of this sudden change (increases I, leaves S unchanged, and lowers NX/leaves both S and I unchanged, which leaves NX unchanged) 2. These changes will then (decrease E and leave r unchanged/ increase E and leave r unchanged). Now assume that the fiscal policymakers of Leverett want to adjust taxes to maintain the exchange rate at its previous level. 3. Leverett policymakers should (decrease taxes/ increase taxes) . 4. This change will (leave I unchanged, increase S, and increase E/ decrease S, leave I unchanged, and increase E).

1. leaves both S and I unchanged, which leaves NX unchanged 2. decrease E and leave r unchanged 3. decrease taxes 4. decrease S, leave I unchanged, and increase E

Use the model of the small open economy to predict what would happen to the trade balance, the real exchange rate, and the nominal exchange rate in response to an introduction of a stylish line of Toyotas that makes some consumers prefer foreign cars over domestic cars. 1.) The trade balance would (decrease/remain unchanged) 2.) The real exchange rate would (fall/rise) 3.) The nominal exchange rate would (rise/fall)

1.) remain unchanged 2.) fall 3.) fall

Oceania is a small open economy. Suppose that a large number of foreign countries begin to subsidize investment by instituting an investment tax credit (while adjusting other taxes to hold their tax revenue constant), but Oceania does not institute such an investment subsidy. On the basis of this information, answer all parts of the following two questions. a. World investment demand as a function of the world interest rate will (decrease/increase) I As a result, the world interest rate will (fall/rise). b. This will cause domestic investment in Oceania to (increase/decrease) and push the trade balance toward (surplus/deficit) . c. Ultimately, the real exchange rate for Oceania currency will (decrease/increase)

a. increase, rise b. decrease, surplus c. decrease

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals: a.) -$10 billion b.) $10 billion c.) $25 billion d.) -$25 billion

a.) -$10 billion

Which of the panels illustrates the impact of an increase in household saving on the real exchange rate? (picture not on flashcard) a.) A b.) B c.) C d.) D

a.) A

In this graph, initially the economy is at point E, with price P0 and output Ȳ aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______. a.) C; B b.) A; D c.) D; A d.) B; C

a.) C; B

Which of the following is the best example of structural unemployment? a.) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available. b.) Vickie lost her job as a graphic artist at a movie studio because she did not have training in computer-generated animation. c.) Fatima lost her job at a packing plant but has not looked very intensively for a new job because she still has two months of unemployment insurance benefits left. d.) Tim is looking for a job with flexible hours but has not been offered one yet.

a.) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.

If the information technology boom increases investment demand in a small open economy, then net exports ______, and the real exchange rate ______. a.) decrease; appreciates b.) increase; depreciates c.) decrease; depreciates d.) increase; appreciates

a.) decrease; appreciates

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income. a.) decreases; downward b.) increases; upward c.) decreases; upward d.) increases; downward

a.) decreases; downward

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow. a.) deficit; negative b.) surplus; positive c.) deficit; positive d.) surplus; negative

a.) deficit; negative

When exports exceed imports, all of the following are true except: a.) domestic investment exceeds domestic saving. b.) domestic output exceeds domestic spending. c.) net exports are positive. d.) net capital outflows are positive.

a.) domestic investment exceeds domestic saving

Paying efficiency wages helps firms reduce the problem of moral hazard by: a.) encouraging unsupervised workers to maintain a high level of productivity. b.) matching the wages each worker is paid to the number of units of output each worker produces. c.) providing an incentive for the best-qualified workers to remain with the firm. d.) generating additional profits that can be used to improve working conditions.

a.) encouraging unsupervised workers to maintain a high level of productivity.

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the: a.) foreign inflation rate minus the domestic inflation rate. b.) domestic inflation rate minus the foreign inflation rate. c.) domestic interest rate minus the foreign interest rate. d.) foreign exchange rate minus the domestic exchange rate.

a.) foreign inflation rate minus the domestic inflation rate.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income. a.) increase but by less than 100 b.) decrease by 100 c.) increase by more than 100 d.) increase by 100

a.) increase but by less than 100

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by: a.) increasing the money supply, but at the cost of permanently higher prices. b.) increasing the money supply, which would restore the original price level. c.) decreasing the money supply, but at the cost of permanently lower prices. d.) decreasing the money supply, which would restore the original price level.

a.) increasing the money supply, but at the cost of permanently higher prices.

The interest rate determines ______ in the goods market and money ______ in the money market. a.) investment spending; demand b.) investment spending; supply c.) government spending; supply d.) government spending; demand

a.) investment spending; demand

The president is considering placing a tariff on the import of Japanese luxury cars. Using the model presented in this chapter, consider the economics and politics of such a policy. Answer each of the following questions. a. How would this policy affect the U.S. trade deficit? This policy proposal would ultimately (decrease/not affect) the trade deficit. b. How would it affect the exchange rate? The exchange rate would (decrease/increase) c. Who would benefit and who would be hurt by such a policy? The foreign buyers of U.S. exports and the domestic buyers of automobiles would (benefit/be hurt) economically, while the domestic manufacturers of automobiles would (be hurt/benefit) .

a.) not affect b.) increase c.) be hurt, benefit

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect: a.) prices but not level of output. b.) neither prices nor level of output. c.) level of output but not prices. d.) both prices and level of output.

a.) prices but not level of output.

According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium wages because worker _____ increases. a.) productivity b.) turnover c.) unionization d.) shirking

a.) productivity

Economists call the changes in the composition of demand among industries and regions: a.) sectoral shifts. b.) insider-outsider conflicts. c.) moral hazard. d.) adverse selection.

a.) sectoral shifts

The unemployment resulting when real wages are held above equilibrium is called ______ unemployment, while the unemployment that occurs as workers search for a job that best suits their skills is called ______ unemployment. a.) structural; frictional b.) efficiency; structural c.) efficiency; inefficiency d.) frictional; efficiency

a.) structural; frictional

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply? a.) the interest rate b.) production c.) the price level d.) planned spending

a.) the interest rate

Along an aggregate demand curve, which of the following are held constant? a.) the money supply and velocity b.) the money supply and real output c.) real output and prices d.) nominal output and velocity

a.) the money supply and velocity

In the model of the steady-state unemployment rate with a fixed labor force, the rate of job finding equals the percentage of the ______ who find a job each month, while the rate of job separation equals the percentage of the ______ who lose their job each month. a.) unemployed; employed b.) labor force; unemployed c.) employed; labor force d.) labor force; labor force

a.) unemployed; employed

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate: a.) will fall, and its net exports will rise. b.) and net exports will both fall. c.) will rise, and its net exports will fall. d.) and net exports will both rise.

a.) will fall, and its net exports will rise.

Spells of unemployment end when the unemployed person finds a job or: a.) withdraws from the labor force. b.) runs out of unemployment insurance compensation. c.) enters the labor force. d.) refuses to answer unemployment survey questions.

a.) withdraws from the labor force.

Which of the panels illustrates the impact of contractionary fiscal policies abroad on the real exchange rate? (picture not included) a.) C b.) B c.) D d.) A

b.) B

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 increase in the price of oil: a.) both Central Bank A and Central Bank B should keep the quantity of money stable. b.) Central Bank A should decrease the quantity of money, whereas Central Bank B should increase it. c.) Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable. d.) both Central Bank A and Central Bank B should increase the quantity of money.

b.) Central Bank A should decrease the quantity of money, whereas Central Bank B should increase it.

In a small open economy, if the world interest rate is r3, then the economy has: ( image not included but r3 intersects investment curve to the right of the vertical S curve) a.) positive capital outflows. b.) a trade deficit. c.) balanced trade. d.) a trade surplus.

b.) a trade deficit.

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: a.) upward and to the left. b.) downward and to the left. c.) upward and to the right. d.) downward and to the right.

b.) downward and to the left.

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are ______, generating a ______ quantity of output demanded. a.) lower; greater b.) higher; greater c.) higher; smaller d.) lower; smaller

b.) higher; greater

An effective policy to reduce a trade deficit in a small open economy would be to: a.) increase tariffs on imports. b.) increase taxes. c.) increase government spending. d.) impose stricter quotas on imported goods.

b.) increase taxes.

In a small open economy, if the world interest rate falls, then domestic investment will _____, and the real exchange rate will _____, holding all else constant. a.) decrease; increase b.) increase; increase c.) decrease; decrease d.) increase; decrease

b.) increase, increase

In the Keynesian-cross model with a given MPC >0, the government-expenditure multiplier ______ the tax multiplier. a.) is the inverse of the b.) is larger than c.) equals d.) is smaller than

b.) is larger than

Sectoral shifts: a.) lead to wage rigidity. b.) make frictional unemployment inevitable. c.) explain the payment of efficiency wages. d.) depend on the level of the minimum wage.

b.) make frictional unemployment inevitable.

When insiders have a much greater impact on the wage-bargaining process than do outsiders, the negotiated wage is likely to be ______ the equilibrium wage. a.) much less than b.) much greater than c.) about one-half of d.) almost equal to

b.) much greater than

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______. a.) national income; money b.) national income; goods and services c.) the price level; money d.) the price level; goods and services

b.) national income; goods and services

The theory of liquidity preference states that the quantity of real money balances demanded is: a.) negatively related to both the interest rate and income. b.) negatively related to the interest rate and positively related to income. c.) positively related to the interest rate and negatively related to income. d.) positively related to both the interest rate and income.

b.) negatively related to the interest rate and positively related to income.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run, and ______ increase(s) in the long run. a.) prices; prices b.) output; prices c.) output; output d.) prices; output

b.) output; prices

In a small open economy, if the government adopts a policy that lowers imports, then that policy: a.) raises the real exchange rate and decreases net exports. b.) raises the real exchange rate and does not change net exports. c.) raises the real exchange rate and increases net exports. d.) lowers the real exchange rate.

b.) raises the real exchange rate and does not change net exports.

Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run. a.) nominal b.) real c.) neither real nor nominal d.) real and nominal

b.) real

Based on the graph, if the interest rate is r3, then people will ______ bonds, and the interest rate will ______. a.) buy; fall b.) sell; rise c.) sell; fall d.) buy; rise

b.) sell; rise

Unemployment insurance increases the amount of frictional unemployment by: a.) inducing workers to accept the first job offer that they receive. b.) softening the economic hardship of unemployment. c.) making workers more frantic in their search for new jobs. d.) making employers more reluctant to lay off workers.

b.) softening the economic hardship of unemployment

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade ______ and ______ net capital outflow. a.) deficit; positive b.) surplus; positive c.) deficit; negative d.) surplus; negative

b.) surplus; positive

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in: a.) both the short run and the long run. b.) the long run but not in the short run. c.) the short run but not in the long run. d.) neither the short run nor the long run.

b.) the long run but not in the short run.

All of the following are reasons for frictional unemployment except: a.) the flow of information is imperfect. b.) unemployed workers accept the first job offer that they receive. c.) geographic mobility takes time. d.) workers have different preferences and abilities.

b.) unemployed workers accept the first job offer that they receive.

A decrease in the real money supply, other things being equal, will shift the LM curve: a.) upward and to the right. b.) upward and to the left. c.) downward and to the left. d.) downward and to the right.

b.) upward and to the left.

Which of the panels illustrates the impact of an increase in investment demand on the real exchange rate? (picture not on quizlet) a.) B b.) A c.) C d.) D

c.) C

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the labor market were always in equilibrium, this would lead to: a.) a lower real wage and a rise in unemployment. b.) no change in real wage or in unemployment. c.) a lower real wage and no change in unemployment. d.) a lower real wage and less unemployment.

c.) a lower real wage and no change in unemployment.

Which of the following events would cause a currency to depreciate? a.) a tax cut b.) an investment boom c.) an increase in the price level d.) a tax increase abroad

c.) an increase in the price level

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. a.) deficit; positive b.) surplus; negative c.) deficit; negative d.) surplus; positive

c.) deficit; negative

Most economists believe that prices are: a.) sticky in both the short and long runs. b.) flexible in the short run but many are sticky in the long run. c.) flexible in the long run but many are sticky in the short run. d.) flexible in both the short and long runs.

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

Over the business cycle, investment spending ______ consumption spending. a.) is inversely correlated with b.) is less volatile than c.) is more volatile than d.) has about the same volatility as

c.) is more volatile than

If the Fed accommodates an adverse supply shock, output falls ______, and prices rise ______. a.) more; less b.) less; less c.) less; more d.) more; more

c.) less; more

Discouraged workers are counted as: a.) unemployed. b.) part of the labor force. c.) out of the labor force. d.) employed.

c.) out of the labor force.

Any policy aimed at lowering the natural rate of unemployment must either ______ the rate of job separation or ______ the rate of job finding. a.) increase; reduce b.) reduce; reduce c.) reduce; increase d.) increase; increase

c.) reduce; increase

In a small open economy, if consumers shift their preference toward Japanese cars, then net exports: a.) fall, and the real exchange rate falls. b.) increase, and the real exchange rate remains unchanged. c.) remain unchanged, but the real exchange rate falls. d.) fall, but the real exchange rate remains unchanged.

c.) remain unchanged, but the real exchange rate falls.

In this graph, if firms are producing at level Y3, then inventories will ______, inducing firms to ______ production. a.) rise; increase b.) fall; decrease c.) rise; decrease d.) fall; increase

c.) rise; decrease

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that: a.) increases in government spending increase planned spending, but tax cuts reduce planned spending. b.) government spending increases the MPC more than tax cuts. c.) the government-spending multiplier is larger than the tax multiplier. d.) government-spending increases do not lead to unplanned changes in inventories, but tax cuts do.

c.) the government-spending multiplier is larger than the tax multiplier.

Although not a goal of the unemployment insurance system, one effect is that the system reduces a.) workers' uncertainty about their incomes. b.) the rate of job separation. c.) the rate of job finding. d.) frictional unemployment.

c.) the rate of job finding.

Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point: a.) B. b.) C. c.) D. d.) A.

d.) A.

If the underground economy is larger in Europe than in the United States, then the difference in the _____ number of hours worked between Europe and the United States may be smaller than the difference in the _____ numbers of hours worked. a.) annual; monthly b.) monthly; annual c.) measured; actual d.) actual; measured

d.) actual; measured

When GDP growth declines, investment spending typically ______ and consumption spending typically ______. a.) decreases; increases b.) increases; decreases c.) increases; increases d.) decreases; decreases

d.) decreases; decreases

An increase in taxes shifts the IS curve: a.) upward and to the left. b.) upward and to the right. c.) downward and to the right. d.) downward and to the left.

d.) downward and to the left.

The short run refers to a period: a.) during which there are no fluctuations. b.)of several days. c.) during which capital and labor are fully employed. d.) during which prices are sticky and cyclical unemployment may occur.

d.) during which prices are sticky and cyclical unemployment may occur.

As the relative demand for unskilled workers falls, wages for unskilled workers ______, and unemployment compensation becomes a ______ attractive option. a.) fall; less b.) rise; less c.) rise; more d.) fall; more

d.) fall; more

In a small open economy, if the introduction of automatic teller machines reduces the demand for money, then net exports: a.) remain unchanged, but the real exchange rate falls. b.) fall, but the real exchange rate remains unchanged. c.) fall, and the real exchange rate falls. d.) increase, and the real exchange rate remains unchanged.

d.) increase, and the real exchange rate remains unchanged.

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports ______, and U.S. imports ______. a.) increase; increase b.) decrease; decrease c.) decrease; increase d.) increase; decrease

d.) increase; decrease

By paying efficiency wages, firms contribute to higher unemployment because they: a.) increase the wage bill. b.) keep the wage below the equilibrium level. c.) make workers more productive. d.) keep the wage above the equilibrium level.

d.) keep the wage above the equilibrium level

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run. a.) both prices and output; both prices and output b.) only prices; only output c.) both prices and output; only prices d.) only output; only prices

d.) only output; only prices

If the interest rate is above the equilibrium value, the: a.) market for real balances clears. b.) demand for real balances increases. c.) demand for real balances exceeds the supply. d.) supply of real balances exceeds the demand.

d.) supply of real balances exceeds the demand.

If an economy has a large number of discouraged workers, the unempoyment rate will (be high/remain unaffected), and the employment-population ratio will (remain unaffected/be low)

remain unaffected, be low