ECON 252 Purdue exam 2 (ch 11-18)

In the open-economy macroeconomic model, if the supply of loanable funds increases, net capital outflow a. increases and the real exchange rate decreases. b. and the real exchange rate decrease. c. decreases and the real exchange rate increases. d. and the real exchange rate increase.

a. increases and the real exchange rate decreases.

When the money market is drawn with the value of money on the vertical axis, as the price level decreases the quantity of money a. demanded decreases. b. demanded increases. c. supplied decreases. d. supplied increases.

a. demand decreases

Friedman argued that the Fed could use monetary policy to peg a. the level of real GDP. b. the growth rate of real GDP. c. the rate of unemployment. d. None of the above is correct.

d. None of the above is correct.

The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in the United States costs $40, how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold? a. 60 florin b. 40 florin c. 80 florin d. 20 florin

c. 80 florin

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

a. 1/(1 - MPC).

Paul, a Canadian citizen, purchases oranges grown in Florida. This purchase is an example of a. a U.S. export and a Canadian import b. an import for both Canada and the U.S. c. a U.S. import and a Canadian export d. an export for both the U.S. and Canada

a. a U.S. export and a Canadian import

hen Mexico suffered from capital flight in 1994, U.S. demand for loanable funds a. and U.S. net capital outflow fell. b. rose and U.S. net capital outflow fell. c. fell and U.S. net capital outflow rose. d. and U.S. net capital outflow rose.

a. and U.S. net capital outflow fell.

A firm produces construction equipment, some of which it sells to domestic businesses and some of which it exports. Which of the following effects of capital flight in the country where it produces would likely increase the quantity of equipment it sells? a. both what happens to the interest rate and what happens to the exchange rate b. what happens to the interest rate but not what happens to the exchange rate c. what happens to the exchange rate but not what happens to the interest rate d. neither what happens to the interest rate nor what happens to the interest rate.

a. both what happens to the interest rate and what happens to the exchange rate

If the discount rate is raised then banks borrow a. less from the Fed so reserves decrease. b. more from the Fed so reserves decrease. c. more from the Fed so reserves increase. d. less from the Fed so reserves increase.

a. less from the FED so reserves decrease

Real GDP a. moves in the opposite direction as unemployment. b. increases as production falls. c. falls when households save a smaller fraction of their income. d. All of the above are correct.

a. moves in the opposite direction as unemployment.

According to the Phillips curve, unemployment and inflation are positively related in a. neither the long run nor the short run. b. the short run and in the long run. c. the long run, but not in the short run. d. the short run, but not in the long run.

a. neither the long run nor the short run.

Suppose the economy is in long-run equilibrium. If there is an increase in the supply of labor as well as an increase in the money supply, then we would expect that in the short-run, a. real GDP will rise and the price level might rise, fall, or stay the same. b. the price level will rise, and real GDP might rise, fall, or stay the same. c. the price level will fall, and real GDP might rise, fall, or stay the same. d. real GDP will fall and the price level might rise, fall, or stay the same.

a. real GDP will rise and the price level might rise, fall, or stay the same.

In the open-economy macroeconomic model, the key determinant of net capital outflow is the a. real interest rate. b. nominal exchange rate. c. nominal interest rate. d. real exchange rate.

a. real interest rate.

The theory of purchasing-power parity primarily explains a. the determination of the real exchange rate. b. why trade deficits tend to move to zero over time. c. how foreign prices affect domestic prices. d. why a change in the real exchange rate changes a country's net exports.

a. the determination of the real exchange rate.

If the public correctly perceives that the central bank will reduce inflation, then a. the short-run Phillips curve shifts left, and the sacrifice ratio will be lower. b. the short-run Phillips curve shifts right, and the sacrifice ratio will be lower. c. the short-run Phillips curve shifts left, and the sacrifice ratio will be higher. d. the short-run Phillips curve shifts right, and the sacrifice ratio will be higher.

a. the short-run Phillips curve shifts left, and the sacrifice ratio will be lower.

The country of Robinya has a tax system identical to that of the United States. Suppose someone in Robinya bought a parcel of land for 10,000 deera (the local currency) in 1970 when the price index equaled 100. In 2010, the person sold the land for 100,000 deera, and the price index equaled 500. The tax rate on nominal capital gains was 20 percent. Compute the taxes the person paid on the nominal gain and the change in the real value of the land in terms of 2010 prices to find the after-tax real rate of capital gain. a. -20 percent b. 64 percent c. 42 percent d. 20 percent

b. 64 percent

The agency responsible for regulating the U.S. monetary system is the a. U.S. Treasury b. Federal Reserve c. Federal Trade Commission d. Department of Justice

b. Federal Reserve

Dave, a U.S. citizen buys a bicycle manufactured in China. Dave's purchase is a. both a U.S. and Chinese import. b. a U.S. import and a Chinese export. c. both a U.S. and Chinese export. d. a U.S. export and a Chinese import.

b. a U.S. import and a Chinese export.

Because the open-economy macroeconomic model focuses on the long run, it is assumed that a. GDP, but not the price level is given. b. both the price level and GDP are given. c. the price level and GDP are variables to be determined by the model. d. the price level, but not GDP is given.

b. both the price level and GDP are given.

Bank regulators impose capital requirements in order to a. increase the probability of a credit crunch. b. ensure banks can pay off depositors. c. provide an incentive for banks to hold risky assets. d. increase the amount of leverage in the economy.

b. ensure banks can pay off depositors

When there is inflation, the number of dollars needed to buy a representative basket of goods a. decreases, and so the value of money falls b. increases, and so the value of money falls. c. decreases, and so the value of money rises. d. increases, and so the value of money rises.

b. increases, and so the value of money falls.

In responding to the Phillips curve hypothesis, Friedman argued that the Fed can peg the a. unemployment rate. b. inflation rate. c. growth rate of real national income. d. All of the above are correct.

b. inflation rate.

Government purchases are said to have a a. liquidity-enhancing effect on aggregate supply. b. multiplier effect on aggregate demand. c. multiplier effect on aggregate supply. d. liquidity-enhancing effect on aggregate demand.

b. multiplier effect on aggregate demand.

According to classical macroeconomic theory, changes in the money supply affect a. real variables, but not nominal variables. b. nominal variables, but not real variables. c. nominal variables and real variables. d. neither nominal nor real variables.

b. nominal variables, but not real variables.

A 1977 amendment to the Federal Reserve Act of 1913 a. says the Federal Reserve should promote price stability and maximum employment, but specifies that it place more weight on promoting price stability. b. says the Federal Reserve should promote price stability and maximum employment, but does not specify how the Federal Reserve should weight these goals. c. says the Federal Reserve should only promote price stability d. says the Federal Reserve should only promote maximum employment

b. says the Federal Reserve should promote price stability and maximum employment, but does not specify how the Federal Reserve should weight these goals.

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by a. buying bonds. This buying would increase reserves. b. selling bonds. This selling would reduce reserves. c. selling bonds. This selling would increase reserves. d. buying bonds. This buying would reduce reserves.

b. selling bonds. This selling would reduce reserves.

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by a. selling bonds. This selling would increase the money supply. b. selling bonds. This selling would reduce the money supply. c. buying bonds. This buying would reduce the money supply. d. buying bonds. This buying would increase the money supply.

b. selling bonds. This selling would reduce the money supply.

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is a. sustainable, but the future burden on your children cannot be offset. b. sustainable, and the future burden on your children can be offset if you save for them. c. not sustainable, but the future burden on your children can be offset if you save for them. d. not sustainable, and the future burden on your children cannot be offset.

b. sustainable, and the future burden on your children can be offset if you save for them.

According to liquidity preference theory, a decrease in money demand for some reason other than a change in the price level causes a. the interest rate to rise, so aggregate demand shifts right. b. the interest rate to fall, so aggregate demand shifts right. c. the interest rate to rise, so aggregate demand shifts left. d. the interest rate to fall, so aggregate demand shifts left.

b. the interest rate to fall, so aggregate demand shifts right.

If purchasing-power parity holds, the price level in the U.S. is 140, and the price level in Canada is 120, which of the following is true? a. the nominal exchange rate is 140/120 b. the nominal exchange rate is 120/140 c. the real exchange rate is 140/120. d. the real exchange rate is 120/140.

b. the nominal exchange rate is 120/140

Bank capital is a. the bank's total assets. b. the resources that owners have put into the bank. c. the reserves of the bank. d. the machinery, structures, and equipment of the bank.

b. the resources that owners have put into the bank

Which costs of inflation could the government take action to reduce without reducing inflation? a. shoeleather costs b. unintended changes in tax liabilities c. menu costs d. none of the above is correct.

b. unintended changes in tax liabilities

A limit on the quantity of a good produced abroad that can be purchased domestically is called a(n) a. Tariff b. Excise tax c. Import quota d. None of the above

c. Import quota

Which of the following is an example of U.S. foreign portfolio investment? a. Larry, a citizen of Ireland, opens a fish and chips restaurant in the United States. b. Albert, a German citizen, buys stock in a U.S. computer company. c. Nancy, a U.S. citizen, buys bonds issued by a Japanese bank. d. Dustin, a U.S. citizen, opens a country-western tavern in New Zealand.

c. Nancy, a U.S. citizen, buys bonds issued by a Japanese bank.

Consider four survivors on an island. Ron: has a cooking pot wants a machete Alice: has a machete wants a fishing spear Raymond: has a machete wants a cooking pot Lee: has a fishing spear wants a coconut Which of the following pairs of survivors has a double-coincidence of wants? a. Ron with Alice, and Ron with Lee b. Alice with Lee c. Ron with Raymond d. None of the above are correct.

c. Ron with Raymond

Which of the following is an example of the menu costs of inflation? a. Beto sells stocks and earns a real capital gain of $50, but is taxed for the nominal capital gain of $75 b. ​During Bolivia's hyperinflation, workers rushed to immediately convert their wages from pesos to black-market dollars c. ​Tito's Restaurant has to print new menus to update its prices compared to other prices in the economy d. The after-tax real interest rate is lower when inflation is higher

c. Tito's Restaurant has to print new menus to update its prices compared to other prices in the economy

Fluctuations in employment and output result from changes in a. aggregate demand only. b. aggregate supply only. c. aggregate demand and aggregate supply. d. neither aggregate demand nor aggregate supply.

c. aggregate demand and aggregate supply.

The curve that shows the quantity of goods and services that firms produce and sell a. as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-supply curve. b. as it relates to the overall price level is called the aggregate-demand curve. c. as it relates to the overall price level is called the aggregate-supply curve. d. as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-demand curve.

c. as it relates to the overall price level is called the aggregate-supply curve.

Suppose aggregate demand fell. In order to stabilize the economy, the government might a. decrease government expenditures. b. decrease the money supply. c. decrease taxes. d. do nothing.

c. decrease taxes.

Most economists believe that a cut in tax rates a. would generally increase government tax revenue. b. would have no effect on aggregate demand. c. has a relatively small effect on the aggregate-supply curve. d. All of the above are correct.

c. has a relatively small effect on the aggregate-supply curve.

A reduction in inflation would lead to a. less frequent price changes and increased variability of relative prices. b. more frequent price changes and increased variability of relative prices. c. less frequent price changes and decreased variability of relative prices. d. more frequent price changes and decreased variability of relative prices.

c. less frequent price changes and decreased variability of relative prices.

Which of the following does the U.S. currently have? a. tax laws that tax some capital income twice, but not means-tested government benefits b. tax laws that tax capital income only once, but not means-tested government benefits c. means-tested government benefits and tax laws that tax some capital income twice d. means-tested government benefits and tax laws that tax capital income only once

c. means-tested government benefits and tax laws that tax some capital income twice

When the Consumer Price Index increases from 100 to 120 a. more money is needed to buy the same amount of goods, so the value of money rises. b. less money is needed to buy the same amount of goods, so the value of money rises. c. more money is needed to buy the same amount of goods, so the value of money falls. d. less money is needed to buy the same amount of goods, so the value of money falls.

c. more money is needed to buy the same amount of goods, so the value of money falls.

The Federal Deposit Insurance Corporation a. is part of the Federal Reserve System. b. has become insolvent in recent years due to a large number of bank failures. c. protects depositors in the event of bank failures. d. in practice has seldom been of much use.

c. protects depositors in the event of bank failures.

During the financial crisis Congress and President Obama authorized tax cuts and increases in government spending. According to the Phillips curve, in the short run these policies should have a. reduced inflation and unemployment. b. raised inflation and unemployment. c. raised inflation and reduced unemployment. d. reduced inflation and raised unemployment.

c. raised inflation and reduced unemployment.

In 2001, Congress and President Bush instituted tax cuts. According to the short-run Phillips curve, in the short run this change should have a. raised inflation and unemployment. b. reduce inflation and raised unemployment. c. raised inflation and reduced unemployment. d. reduced inflation and unemployment.

c. raised inflation and reduced unemployment.

The nominal exchange rate is the a. the ratio of a foreign country's interest rate to the domestic interest rate. b. the real exchange rate minus the inflation rate. c. rate at which a person can trade the currency of one country for another. d. nominal interest rate in one country divided by the nominal interest rate in the other country.

c. rate at which a person can trade the currency of one country for another.

Which of the following is included in M2 but not in M1? a. Currency b.demand deposits c. savings deposits d. All of the above are included in both M1 and M2.

c. savings deposits

Tax increases a. shift aggregate demand right while increases in government expenditures shift aggregate demand left. b. and increases in government expenditures shift aggregate demand left. c. shift aggregate demand left while increases in government expenditures shift aggregate demand right. d. and increases in government expenditures shift aggregate demand right.

c. shift aggregate demand left while increases in government expenditures shift aggregate demand right.

The aggregate-demand curve a. has a slope that is explained in the same way as the slope of the demand curve for a particular product. b. is vertical in the long run. c. shows an inverse relation between the price level and the quantity of all goods and services demanded. d. All of the above are correct.

c. shows an inverse relation between the price level and the quantity of all goods and services demanded.

The average price level is measured by a. the rate of inflation. b. the nominal interest rate. c. the GDP deflator or the CPI. d. the price of oil.

c. the GDP deflator or the CPI.

If purchasing-power parity holds, the price level in the U.S. is 250, and the price level in Japan is 260, which of the following is true? a.the real exchange rate is 260/250 b. the nominal exchange rate is 250/260 c. the nominal exchange rate is 260/250 d. the real exchange rate is 250/260

c. the nominal exchange rate is 260/250

Goods that cost one dollar in the U.S. cost one euro in France, the real exchange rate would be computed as how many French goods per U.S. goods? a. one b. the price of the U.S. goods c. the number of euros that can be bought with one U.S. dollar d. None of the above is correct.

c. the number of euros that can be bought with one U.S. dollar

During a recession, unemployment ​ a. ​is equal to the natural rate of unemployment. b. ​is frictional unemployment minus structural unemployment. c. ​increases. d. ​decreases.

c. ​increases.

A good in the U.S. costs $20. The same good costs 150 pesos in Mexico. If the nominal exchange rate is 10 pesos per dollar, what is the real exchange rate? a. 3/4 so the good is more expensive in the U.S. b. 3/4 so the good is more expensive in Mexico c. 4/3 so the good is more expensive in Mexico d. 4/3 so the good is more expensive in the U.S.

d. 4/3 so the good is more expensive in the U.S.

The long-run aggregate supply curve shifts right if a. immigration from abroad increases. b. the capital stock increases. c. technology advances. d. All of the above are correct.

d. All of the above are correct.

Which of the following has been suggested as a cause of the Great Depression? a. a decline in the money supply b. a decrease in stock prices c. the collapse of the banking system d. All of the above are correct.

d. All of the above are correct.

Suppose there are both multiplier and crowding out effects but without any accelerator effects. An increase in government expenditures would a. shift aggregate demand right by a larger amount than the increase in government expenditures. b. shift aggregate demand right by the same amount as the increase in government expenditures. c. shift aggregate demand right by a smaller amount than the increase in government expenditures. d. Any of the above outcomes are possible.

d. Any of the above outcomes are possible.

In the long run, an increase in the money supply growth rate a. shifts both the long-run and the short-run Phillips curves right. b. shifts the long-run Phillips curve left and the short-run Phillips curve right. c. shifts the long-run Phillips curve right and the short-run Phillips curve left. d. None of the above is correct.

d. None of the above is correct.

Which of the following contains a list only of things that increase when the budget deficit of the U.S. decreases? a. U.S. interest rates, the real exchange rate of the dollar, U.S. domestic investment b. U.S. supply of loanable funds, U.S. exports, the real exchange rate of the dollar c. the real exchange rate of the dollar, U.S. net capital outflow, U.S. net exports. d. U.S. supply of loanable funds, U.S. net capital outflow, U.S. domestic investment

d. U.S. supply of loanable funds, U.S. net capital outflow, U.S. domestic investment

Supply-side economists believe that changes in government purchases affect a. only aggregate demand. b. neither aggregate demand nor aggregate supply. c. only aggregate supply. d. both aggregate demand and aggregate supply.

d. both aggregate demand and aggregate supply.

"Money is a veil" best describes the a. Keynesian view. b. economy in the short run but not the long run. c. new-Keynesian view. d. classical view.

d. classical view.

The Fed's primary tool to change the money supply is a. changing the interest rate on reserves. b. changing the reserve requirement. c. redeeming Federal Reserve notes. d. conducting open market operations.

d. conducting open market operations

If Y and M are constant and V doubles, the quantity equation implies that the price level a. does not change. b. more than doubles. c. falls to half its original level. d. doubles.

d. doubles

If the demand for dollars in the market for foreign-currency exchange shifts left, then the exchange rate a. rises and the quantity of dollars exchanged does not change. b. rises and the quantity of dollars exchanged rises. c. falls and the quantity of dollars exchanged falls. d. falls and the quantity of dollars exchanged does not change.

d. falls and the quantity of dollars exchanged does not change.

The primary cause of inflation is a. reduced velocity of money. b. inter-bank lending. c. ​variability in relative prices. d. ​growth in the quantity of money.

d. growth in the quantity of money

In response to the sharp decline in stock prices in October 1987, the Federal Reserve a. increased the money supply and increased interest rates. b. decreased the money supply and increased interest rates. c. decreased the money supply and decreased interest rates. d. increased the money supply and decreased interest rates.

d. increased the money supply and decreased interest rates.

Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your a. nominal wage is higher. b. nominal wage is lower. c. real wage is higher. d. real wage is lower.

d. real wage is lower

Shoe-leather cost refers to a. the tendency to expend more effort searching for the lowest price when inflation is high. b. the distortion in resource allocation created by distortions in relative prices due to inflation. c. the cost of more frequent price changes induced by higher inflation. d. resources used to maintain lower money holdings when inflation is high.

d. resources used to maintain lower money holdings when inflation is high

An individual would suffer lower losses from an unexpectedly higher inflation rate if a. she held much currency and owned many bonds. b. she held much currency and owned few bonds. c. she held little currency and owned many bonds. d. she held little currency and owned few bonds.

d. she held little currency and owned few bonds.

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in a. the price level. b. the exchange rate. c. real wealth. d. the interest rate.

d. the interest rate.

If a central bank decreases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result? a. output but not the price level b. both the price level and output c. neither output nor the price level d. the price level but not output

d. the price level but not output

According to the Phillips curve, unemployment and inflation are negatively related in a. the short run and in the long run. b. neither the long run nor the short run. c. the long run, but not in the short run. d. the short run, but not in the long run.

d. the short run, but not in the long run.

The time inconsistency of policy implies that a. what policymakers say they will do is generally what they will do, but people don't believe them because of current policy. b. what policymakers say they will do is usually not what they do, but people believe them anyway. c. people will believe Fed policy will be less inflationary than the Fed claims. d. when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply.

d. when people expect that inflation will be low, it is easier for the Fed to increase output by increasing the money supply.