Econ 2H03 Final

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If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______. 1) positive; positive 2) positive; negative 3) negative; negative 4) negative; positive

If domestic spending exceeds output, we ______ the difference—net exports are ______. 1) import; negative 2) export; positive 3) import; positive 4) export; negative

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal? 1) increasing taxes 2) increasing government spending 3) increasing investment tax credits 4) imposing protectionist trade policies

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by: 1) borrowing from abroad. 2) borrowing from domestic banks. 3) the domestic government. 4) the World Bank.

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies in which: 1) capital is relatively scarce. 2) capital is relatively abundant. 3) technological production capabilities are inferior. 4) labor is relatively scarce.

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

-$10 billion

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.

-2

If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is:

.0.005

A small open economy with perfect capital mobility is characterized by all of the following except that: 1) its domestic interest rate always exceeds the world interest rate. 2) it engages in international trade. 3) its net capital outflows always equal the trade balance. 4) its government does not impede international borrowing or lending.

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 ______. 1) increase; increase 2) increase; decrease 3) decrease; increase 4) decrease; decrease

34. When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______. A) greater; inward B) greater; outward C) lower; inward D) lower; outward

B) greater; outward

In a closed economy, an increase in government spending raises income: A) and the interest rate in the short run, but leaves both unchanged in the long run. B) in the short run, but leaves it unchanged in the long run, while lowering investment. C) in the short run, but leaves it unchanged in the long run, while lowering consumption. D) and the interest rate in both the short and long runs.

B) in the short run, but leaves i unchanged in the long run, while lowering investment

The production function feature called "constant returns to scale" means that if we: A) multiply capital by z1 and labor by z2, we multiply output by z3. B) increase capital and labor by 10 percent each, we increase output by 10 percent. C) increase capital and labor by 5 percent each, we increase output by 10 percent. D) increase capital by 10 percent and increase labor by 5 percent, we increase output by 7.5 percent.

B) increase capital and labor by 10 percent each, we increase output by 10 percent

Assume that the production function is Cobb-Douglas with parameter α = 0.3. In the neoclassical model, if the labor force increases by 10 percent, then output: A) increases by about 10 percent. B) increases by about 7 percent. C) increases by about 3 percent. D) does not increase since the new workers are unemployed.

B) increases by about 7 percent

Crowding out occurs when an increase in government spending ______ the interest rate and investment ______. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

B) increases; decreases

Inflation ______ the variability of relative prices and ______ allocative efficiency. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

B) increases; decreases

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______. A) increases; appreciates B) increases; depreciates C) decreases; appreciates D) decreases; depreciates

B) increases; depreciates

In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______. A) increases; increases. B) increases; does not change C) decreases; increases D) decreases; does not change

B) increases; does not change

Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate. A) does not change; increases B) increases; increases C) increases; decreases D) decreases; increases

B) increases; increases

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis. A) larger than the multiplier B) the same as the multiplier C) smaller than the multiplier D) sometimes larger and sometimes smaller than the multiplier

Between 1880 and 1896, the price level in the United States fell 23 percent. This movement was ______ for bankers of the Northeast and ______ for farmers of the South and West. A) bad; bad B) good; good C) good; bad D) bad; good

C) good; bad

In the circular flow diagram, firms receive revenue from the _____ market, which is used to purchase inputs in the _____ market. A) goods; financial B) factor; financial C) goods; factor D) factor; goods

C) goods; factor

The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the _____ the monetary base and the _____ the money supply. A) smaller; smaller B) smaller; greater C) greater; greater D) greater; smaller

C) greater; greater

In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:

attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending

If the real exchange rate is high, foreign goods: A) and domestic goods are both relatively expensive. B) and domestic goods are both relatively cheap. C) are relatively expensive and domestic goods are relatively cheap. D) are relatively cheap and domestic goods are relatively expensive.

D) are relatively cheap and domestic goods are relatively expensive

1. Macroeconomics does not try to answer the question of: a. why do some countries experience rapid growth. b. what is the rate of return on education. c. why do some countries have high rates of inflation. d. what causes recessions and depressions.

1. The economic statistic used to measure the level of prices is: a. GDP. b. CPI. c. GNP. d. real GDP.

14. The amount of capital in an economy is a ______ and the amount of investment is a ______. a. flow; stock b. stock; flow c. final good; intermediate good d. intermediate good; final good

If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1 dollar, then a Big Mac in Cancun, Mexico, should cost: A) 2 pesos. B) 5 pesos. C) 10 pesos. D) 20 pesos.

D) 20 pesos

According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____. A) 1; 5 B) 5; 1 C) 1; 1 D) 5; 5

D) 5; 5

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent. A) 1 B) 3 C) 4 D) 7

D) 7

77. (Exhibit: Supply Shock) In this graph, assume that the economy starts at point A and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium and point ______ represents long-run equilibrium. A) B; C B) B; A C) E; D D) E; A

D) E; A

The central bank in the United States is the: A) Bank of America. B) U.S. Treasury. C) U.S. National Bank. D) Federal Reserve.

D) Federal Reserve

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______. A) LM; right B) LM; left C) IS; right D) IS; left

D) IS; left

Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______. A) classical; both the short and long runs. B) Keynesian; both the short and long runs. C) classical; the short run, whereas the Keynesian assumptions are most appropriate in the long run. D) Keynesian; the short run, whereas the classical assumptions are most appropriate in the long run.

D) Keynesian; the short run, whereas the classical assumptions are most appropriate in the long run

7. The statistical relationship between changes in real GDP and changes in the unemployment rate is called: A) the Phillips curve. B) the Solow residual. C) the Fisher effect. D) Okun's law.

D) Okun's law.

To make a trade in a barter economy requires: A) currency. B) a check. C) scrip. D) a double coincidence of wants.

D) a double coincidence of wants

The property of diminishing marginal product means that, after a point, when additional quantities of: A) a factor are added, output diminishes. B) both labor and capital are added, output diminishes. C) both labor and capital are added, the marginal product of labor diminishes. D) a factor is added when another factor remains fixed, the marginal product of that factor diminishes.

D) a factor is added when another factor remains fixed, the marginal product of that factor diminishes

50. The short-run aggregate supply curve is horizontal at: A) a level of output determined by aggregate demand. B) the natural level of output. C) the level of output at which the economy's resources are fully employed. D) a fixed price level.

D) a fixed price level.

Excess reserves are reserves that banks keep: A) in their vaults. B) at the central bank. C) to meet legal reserve requirements. D) above the legally required amount.

D) above the legally required amount

In a system with fractional-reserve banking: A) all banks must hold reserves equal to a fraction of their loans. B) no banks can make loans. C) the banking system completely controls the size of the money supply. D) all banks must hold reserves equal to a fraction of their deposits.

D) all banks must hold reserves equal to a fraction of their deposits

74. A favorable supply shock occurs when: A) environmental protection laws raise costs of production. B) the Fed increases the money supply. C) unions push wages up. D) an oil cartel breaks up and oil prices fall.

D) an oil cartel breaks up and oil prices fall.

The law of one price is enforced by: A) governments. B) producers. C) consumers. D) arbitrageurs.

D) arbitrageurs

15. The market value of all final goods and services produced within an economy in a given period of time is called: a. industrial production. b. gross domestic product. c. the GDP deflator. d. general durable purchases.

18. Assume that total output consists of 4 apples and 6 oranges and that apples cost $1 each and oranges cost $0.50 each. In this case, the value of GDP is: a. 10 pieces of fruit. b. $7. c. $8. d. $10.

19. All of the following transactions that took place in 2009 would be included in GDP for 2009 except the purchase of a: a. book printed in 2009, entitled The Year 3000. b. 2001 Jeep Cherokee. c. year 2010 calendar printed in 2009. d. ticket to see the movie 2001.

20. Since GDP includes only the additions to income, not transfers of assets, ______ are not included in the computation of GDP. a. final goods b. used goods c. consumption goods d. goods produced for inventory

22. When a firm sells a product out of inventory, investment expenditures ______ and consumption expenditures ______. a. increase; decrease b. decrease; increase c. decrease; remain unchanged d. remain unchanged; increase

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 ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls

In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income. A) buy; rises; increase B) sell; falls; decrease C) sell; rises; decrease D) buy; rises; decrease

When the real exchange rate rises: A) exports will decrease but imports will be unaffected. B) imports will decrease but exports will be unaffected. C) exports will increase and imports will decrease. D) exports will decrease and imports will increase.

D) exports will decrease and imports will increase

According to the neoclassical theory of distribution, total output is divided between payments to capital and payments to labor depending on their: A) supply. B) equilibrium growth rates. C) relative political power. D) marginal productivities.

D) marginal productivities

The real return on holding money is: A) the real interest rate. B) minus the real interest rate. C) the inflation rate. D) minus the inflation rate.

D) minus the inflation rate

The characteristic of the classical model that the money supply does not affect real variables is called: A) the monetary basis. B) monetary policy. C) the quantity theory of money. D) monetary neutrality

D) monetary neutrality

Money's liquidity refers to the ease with which: A) coins can be melted down. B) illegally obtained money can be laundered. C) loans can be floated. D) money can be converted into goods and services.

D) money can be converted into goods and services

All of the following assets are included in M1 except: A) currency. B) demand deposits. C) traveler's checks. D) money market deposit accounts.

D) money market deposit accounts

23. The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______. A) positive; money supply B) negative; money supply C) positive; price level D) negative; price level

D) negative; price level

Credit card balances are included in: A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M2.

D) neither M1 nor M2

35. Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy. A) the quantity of output and the price level B) the quantity of output C) the price level D) neither the quantity of output nor the price level

D) neither the quantity of output nor the price level

When economists speak of "the" interest rate, they mean: A) the rate on 90-day Treasury bills. B) the rate on 30-year government bonds. C) the "prime" rate on loans. D) no particular interest rate, since it is assumed that various interest rates tend to move up and down together.

D) no particular interest rate, since it is assumed that various interest rates tend to move up and down together

If income velocity is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M. A) prices B) income C) transactions D) nominal GDP

D) nominal GDP

The real interest rate is the: A) rate of interest actually paid by consumers. B) rate of interest actually paid by banks. C) rate of inflation minus the nominal interest rate. D) nominal interest rate minus the rate of inflation.

D) nominal intersect rate minus the rate of inflation

A statement that is generally true about capital in a large open economy is that it is: A) perfectly mobile, and the country does not influence world financial markets. B) perfectly mobile, and the country influences world financial markets. C) not perfectly mobile, but the country does not influence world financial markets. D) not perfectly mobile, but the country influences world financial markets.

D) not perfectly mobile, but the country influences world financial markets

An economy's factors of production and its production function determine the economy's: A) labor force participation rate. B) budget surplus or deficit. C) population growth rate. D) output of goods and services.

D) output of goods and services

65. Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government: A) prices will rise in both the short run and the long run. B) output will rise in both the short run and the long run. C) prices will rise in the short run and output will rise in the long run. D) output will rise in the short run and prices will rise in the long run.

D) output will rise in the short run and prices will rise in the long run.

37. Aggregate supply is the relationship between the quantity of goods and services supplied and the: A) money supply. B) unemployment rate. C) interest rate. D) price level.

D) price level.

If the transactions velocity of money remains constant while the quantity of money doubles, the: A) price of the average transaction must double. B) number of transactions must remain constant. C) price of the average transaction multiplied by the number of transactions must remain constant. D) price of the average transaction multiplied by the number of transactions must double.

D) price of the average transaction multiplied by the number of transactions must double

For borrowing from the discount window, the Fed sets the _____ of borrowing, compared to borrowing using the Term Auction Facility, where the Fed sets the _____ of borrowing. A) maximum quantity; minimum quantity B) minimum price; maximum price C) quantity; price D) price; quantity

D) price; quantity

42. If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect: A) neither prices nor level of output. B) both prices and level of output. C) level of output but not prices. D) prices but not level of output.

D) prices but not level of output.

The right of seigniorage is the right to: A) levy taxes on the public. B) borrow money from the public. C) draft citizens into the armed forces. D) print money.

D) print money

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium the money supply:

Increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income

If the short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM* curve:

Is vertical because the exchange rate does not enter into the LM* equation.

Changes in monetary policy shift the:

LM curve.

Exhibit: Risk Premium

LM*2; IS*3

A small open economy with a floating exchange rate is initially in equilibrium at A with IS*1, LM*1, If the establishment of a new government in the country decreases the risk premium, then LM*1 will shift to _____ and IS*1 will shift to

LM*3; IS*2

Exhibit: IS*-LM* and AD

LM; LM*3

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

LM; does not shift

If money demand does not depend on income, then the ______ curve is ______.

LM; horizontal

If money demand is extremely sensitive to the interest rate, then the ______ curve is ______.

LM; horizontal

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

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. 1) deficit; negative 2) surplus; positive 3) deficit; positive 4) surplus; negative

In a small, open economy if net exports are negative, then: 1) domestic spending is greater than output. 2) saving is greater than investment. 3) net capital outflows are positive. 4) imports are less than exports.

Net exports equal GDP minus domestic spending on: 1) all goods and services. 2) all goods and services plus foreign spending on domestic goods and services. 3) domestic goods and services. 4) domestic goods and services minus foreign spending on domestic goods and services.

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

260

A "small" economy is one in which the: 1) level of output is fixed. 2) price level is fixed. 3) domestic interest rate equals the world interest rate. 4) domestic saving is less than domestic investment.

An increase in the trade surplus of a small open economy could be the result of: 1) a domestic tax cut. 2) an increase in government spending. 3) an increase in the world interest rate. 4) the implementation of an investment tax-credit provision.

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 ______. 1) stronger; deficit 2) stronger; surplus 3) weaker; deficit 4) weaker; surplus

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 raised to 1,200, equilibrium income rises by:

50 and the interest rate falls by 0.5 percent.

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.

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to decrease the money supply:

Must be abandoned in order to maintain the fixed exchange rate

According to the Mundell-Fleming model, under floating exchange rates a fiscal expansion:

Or an import restriction raises the exchange rate, but a monetary expansion lowers it

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: Answer Multiple Choice Question

600

During the Great Depression, countries that devalued their currencies generally _____ whereas countries that maintained the old exchange rate ______.

Recovered relatively quickly; suffered longer

What is the difference between the strengthening and weakening of domestic currency? Explain.

Strengthening of currency is when domestic currency buys more of foreign currency. Weakening of currency is when domestic currency buys less of foreign currency

17. To compute the value of GDP: a. goods and services are valued at market prices. b. the sale of used goods is included. c. production for inventory is not included. d. goods and services are valued by weight.

(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 ______. a. sell; rise b. sell; fall c. buy; rise d. buy; fall

a. sell; rise

(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

(Exhibit: IS-LM*) A small open economy with a floating exchange rate e2 is initially at equilibrium A with IS, LM, and equilibrium output Y1. If there is a monetary expansion to LM2, the new equilibrium will be at__, holding everything else constant.

(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 ______. A) sell; rise B) sell; fall C) buy; rise D) buy; fall

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant the Federal Reserve should _____ the money supply shifting to _____. A) increase; LM2 B) decrease; LM2 C) increase; LM3 D) decrease; LM3

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except: A) high inflation. B) low interest rates. C) stock market volatility. D) falling house prices.

An increase in income raises money ______ and ______ the equilibrium interest rate. A) demand; raises B) demand; lowers C) supply; raises D) supply; lowers

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. A) less than B) greater than C) equal to D) sometimes less and sometimes greater than

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier. A) is larger than B) equals C) is smaller than D) is the inverse of the

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate

and net exports will both fall

In a small open economy, if the introduction of automatic-teller machines reduces the demand for money, then net exports

and the real exchange rate remain unchanged

The U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with high inflation rates relative to the United States has tended to ______, and the U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with low inflation rates relative to the United States has tended to ______

appreciate ; depreciate

The Mundell-Fleming model assumes that:

as in the IS-LM model, prices are fixed.

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will: A) lower the interest rate. B) raise the interest rate. C) have no effect on the interest rate. D) first lower and then raise the interest rate.

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, public saving is: A) -200. B) 200. C) 500. D) 1,800.

A) -200

Assume that equilibrium GDP (Y) is 5,000. Consumption (C). is given by the equation C = 500 + 0.6Y. No government exists. In this case, equilibrium investment is: A) 1,500. B) 2,000. C) 2,500. D) 3,000.

A) 1,500

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ______ percent. A) 3 B) 4 C) 9 D) 11

A) 3

If disposable income is 4,000, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, national saving is equal to: A) 300. B) 500. C) 700. D) 1,000.

A) 300

If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1000.

A) 50

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + 0.2Y, and Y = 50K0.5L0.5, where K = 100. If L increases from 100 to 144, then consumption increases by: A) 560. B) 840. C) 1,120. D) 2,120.

A) 560

78. (Exhibit: Supply Shock) Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point: A) A. B) B. C) C. D) D.

A) A.

79. (Exhibit: Supply Shock) 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) A. B) B. C) C. D) D.

A) A.

Evidence from the past 40 years in the United States supports the Fisher effect and shows that when the inflation rate is high, the ______ interest rate tends to be ______. A) nominal; high B) nominal; low C) real; high D) real; low

A) nominal; high

The marginal propensity to consume is: A) normally expected to be between zero and one. B) equal to consumption divided by disposable income. C) normally assumed to decrease as disposable income increases. D) normally assumed to increase as disposable income increases.

A) normally expected to be between zero and one

The most frequently used tool of monetary policy is: A) open-market operations. B) changes in the discount rate. C) changes in reserve requirements. D) changes in interest rate paid on reserves

A) open-market operations

57. If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then: A) output and employment will increase in the short run. B) output and employment will decrease in the short run. C) prices will increase in the short run. D) prices will decrease in the short run.

A) output and employment will increase in the short run.

72. Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run. A) output; prices B) prices; output C) short-run aggregate supply; long-run aggregate supply D) the money supply; the natural rate of output

A) output; prices

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y3, then inventories will ______ inducing firms to ______ production. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease

(Exhibit: Market for Real Money Balances) Based on the graph, the equilibrium levels of interest rates and real money balances are: A) r1 and M1/P1. B) r2 and M2/P2. C) r3 and M2/P2. D) r3 and M3/P3.

(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level. A) B; higher B) B; lower C) C; higher D) C; lower

2. (Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are: A) Y1 and PE1. B) Y2 and PE2. C) Y3 and PE3. D) Y3 and PE4.

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. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: A) drop by 4 percent. B) drop by 2 percent. C) drop by 1 percent. D) remain unchanged.

The inflation tax is paid: A) only by the central bank. B) by all holders of money. C) only by government bond holders. D) equally by every household.

B) by all holders of money

Government transfer payments: A) are included as part of government purchases, G. B) can be viewed as negative tax payments, T. C) are received as payment for inputs in the factor market. D) do not affect the level of public or private saving.

B) can be viewed as negative tax payments, T

The money supply will decrease if the: A) monetary base increases. B) currency-deposit ratio increases. C) discount rate decreases. D) reserve-deposit ratio decreases.

B) currency-deposit ratio increases

Net capital outflow in a large country: A) rises as the real domestic interest rate rises. B) declines as the domestic interest rate rises. C) depends on the foreign interest rate. D) depends only on domestic saving.

B) declines as the domestic interest rate rises

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. A) increase B) decrease C) first increase and then decrease D) first decrease and then increase

B) decrease

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease, depending on whether consumption is greater or less than investment.

B) decrease

An increase in the supply of capital will: A) increase the real rental price of capital. B) decrease the real rental price of capital. C) increase the productivity of capital. D) decrease the real interest rate.

B) decrease the real rental price of capital

91. If the demand for money increases, this will: A) increase velocity. B) decrease velocity. C) have no effect on velocity. D) cause the Fed to increase the money supply.

B) decrease velocity.

If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then savings: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.

B) decreases by 0.15 units

29. According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased: A) increases. B) decreases. C) does not change. D) may either increase or decrease.

B) decreases.

Private saving is: A) income minus consumption minus government spending. B) disposable income minus consumption. C) disposable income minus government spending. D) taxes minus government spending.

B) disposable income minus consumption

25. If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves farther to the right. A) downward; steeper B) downward; flatter C) upward; steeper D) upward; flatter

B) downward; flatter

51. The short run refers to a period: A) of several days. B) during which prices are sticky and unemployment may occur. C) during which capital and labor are fully employed. D) during which there are no fluctuations.

B) during which prices are sticky and unemployment may occur.

15. Most economists believe that prices are: A) flexible in the short run but many are sticky in the long run. B) flexible in the long run but many are sticky in the short run. C) sticky in both the short and long runs. D) flexible in both the short and long runs.

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

For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a

vertical line at 0

If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output.

vertical; monetary

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

The production of an economy is explained by a function: Y = 20 (L.5K.5) where L is labor and K is capital with L = 400 and K = 400. Does this economy support constant returns to scale?

when increase in percentage of output equals the increased percentage of all factors of production it is called constant returns to scale. Here output is 8000 units, so if we double the factors of production, L=800 and K=800, we see that the output becomes 16,000 units, double of 8000 units supporting the constant returns to scale

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate

will fall and its net exports will rise

Assume that some large foreign countries begin to subsidize investment by instituting an investment tax credit. Then, if world saving does not depend on the interest rate, world investment

will remain unchanged and small country investment will fall

What is the effect of an increase in interest rate on keeping government spending constant on consumption and investment?

with increase in interest rates, firms find taking loans for investments to be more costly, so this will decrease investments. and households start looking to saving as a better option than consuming, so consumption will decrease

Both Keynesians and supply-siders believe a tax cut will lead to growth:

but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS curve shifts to the right, raising the exchange rate

but not raising net exports or income

10. The total income of everyone in the economy adjusted for the level of prices is called: a. a recession. b. an inflation. c. real GDP. d. a business fluctuation.

20. Deflation occurs when: a. real GDP decreases. b. the unemployment rate decreases. c. prices fall. d. prices increase, but at a slower rate.

21. When a firm sells a product out of inventory, GDP: a. increases. b. decreases. c. is not changed. d. increases or decreases, depending on the year the product was produced.

23. Assume that a bakery hires more workers and pays them wages and that the workers produce more bread. GDP increases in all of the following cases except when the bread: a. is sold to households. b. is stored away for later sale. c. grows stale and is thrown away. d. is sold to other firms.

25. 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: a. $0.50. b. $1. c. $2. d. $3.

34. The underground economy: a. is included in the latest GDP accounts .b. includes only illegal activities. c. includes domestic workers for whom Social Security tax is not collected. d. excludes the illegal drug trade.

38. Real GDP means the value of goods and services is measured in ______ prices. a. current b. actual c. constant d. average

41. If nominal GDP in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator? a. 0.79 b. 1.03 c. 1.27 d. 1.30

47. Nominal GDP measures the value of goods and services in ______ prices, while real GDP measures the value of goods and services in ______ prices. a. foreign; domestic b. domestic; foreign c. current; constant d. constant; current

48. Real GDP is a better measure of economic well-being than nominal GDP, because real GDP: a. excludes the value of goods and services exported aboard. b. includes the value of government transfer payments. c. measures changes in the quantity of goods and services produced by holding prices constant. d. adjusts the value of goods and services produced for changes in the foreign exchange rate.

54. If real GDP grew by 6 percent and population grew by 2 percent, then real GDP per person grew by approximately ______ percent. a. 2 b. 3 c. 4 d. 8

55. In the national income accounts, consumption expenditures include all of the following except household purchases of: a. durable goods. b. nondurable goods. c. new residential housing. d. services.

63. If GDP (measured in billions of current dollars) is $5,465 and the sum of consumption, investment, and government purchases is $5,496, while exports equal $673, imports are: a. $673. b. -$673. c. $704. d. -$704.

66. In 2010, the GDP of the United States totaled about: a. $14.5 billion. b. $145 billion. c. $14.5 trillion. d. $145 trillion.

67. In 2010, GDP per person in the United States was approximately: a. $7,000. b. $27,000. c. $47,000. d. $74,000.

78. The CPI is determined by computing: a. an average of prices of all goods and services. b. the price of a basket of goods and services that changes every year, relative to the same basket in a base year. c. the price of a fixed basket of goods and services, relative to the price of the same basket in a base year. d. nominal GDP relative to real GDP.

79. Prices of items included in the CPI are: a. averaged with the price of every item weighted equally. b. weighted according to amount of the item produced in GDP. c. weighted according to quantity of the item purchased by the typical household. d. chained to the base year by the year-to-year growth rate of the item.

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 ______. a. rises, falls b. rises, rises c. falls, rises d. falls, falls

c. falls; rises

In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ______ and output .______ a. rises, falls b. rises, rises c. falls, rises d. falls, falls

c. falls; rises

The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases. a. the budget deficit b. consumption c. income d. real balances

c. income

61. In the national income accounts, government purchases are goods and services purchased by: a. the federal government. b. the federal and state governments. c. state and local governments. d. federal, state, and local governments.

64. All of the following actions are investments in the sense of the term used by macroeconomists except: a. IBM's building a new factory. b. corner candy store's buying a new computer. c. John Smith's buying a newly constructed home. d. Sandra Santiago's buying 100 shares of IBM stock.

72. Net national product equals GDP: a. plus net investment. b. minus net investment. c. plus depreciation. d. minus depreciation.

77. According to the usual seasonal pattern of the U.S. economy, GDP is highest in the quarter of the year that includes: a. January, February, and March. b. April, May, and June. c. July, August, and September. d. October, November, and December.

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 large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is crowded out; the expansion also causes a trade

deficit and a rise in the real exchange rate

In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate.

depreciate; increase

A "small" economy is one in which the

domestic interest rate equals the world interest rate

When exports exceed imports, all of the following are true except:

domestic investment exceeds domestic saving

Net capital outflow is equal to the amount that

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

In a small, open economy, if net exports are negative then

domestic spending is greater than output

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

downward and to the right.

If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line representing saving minus investment

downward-sloping ; vertical

drop by 2 percent.

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will result in higher income and:

either higher, lower, or unchanging interest rates.

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______ inducing firms to ______ production.

fall; increase

In a small open economy, if consumer confidence falls and consumers decide to save more, then the 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 rises

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

falls, while the real exchange rate rises and net exports rise

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

falls; rises

If investors in a large open economy become more willing to substitute foreign and domestic assets, then this will make the net capital outflow function:

flatter, and the slope of the IS curve flatter.

Under a floating system, the exchange rate:

fluctuates in response to changing economic conditions

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the

foreign inflation rate minus the domestic inflation rate

The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have:

free capital flows, a fixed exchange rate, and an independent monetary policy.

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

If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must:

give up the use of monetary policy for purposes of domestic stabilization.

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

In order to compensate for an expected future decline in the Japanese yen relative to the U.S. dollar, the interest rate in Japan must be ______ the interest rate in the United States.

higher than

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a

horizontal line at the world interest rate

If investment demand is infinite below some certain r (e.g., r**) and zero above r**, then the IS curve is ______ and ______ policy has no effect on output.

horizontal; fiscal

If money demand is infinite below some certain r (e.g., r*) and zero above r*, then the LM curve is ______ and ______ policy has no effect on output.

horizontal; monetary

In a small open economy a decrease in the exchange rate will _____ net exports and shift the _____ curve.

increase; IS

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

investment rises but consumption falls.

Suppose a new technology is developed that increases investment demand in both a closed economy and in a small open economy that are in other ways identical. Holding other factors constant, will the quantity of investment spending increase more in the closed economy or in the small open economy? Explain. Assume prices are flexible and that factors of production are fully employed in both economies. Assume there is perfect capital mobility for the small open economy.

investment spending will not change in the closed economy, but will increase in the small open economy. In the closed economy, there is no change in domestic saving, so the domestic interest rate must rise to keep the investment spending equal to the unchanged domestic saving. In the small open economy, the increase in investment demand is financed by net capital inflows at the unchanged world interest rate. The decrease in net capital outflows raises the real exchange rate and reduces net exports in the small open economy

A speculative attack on a currency occurs when:

investors' perceptions change, making a fixed exchange rate untenable.

According to the theory of liquidity preference, the supply of nominal money balances:

is chosen by the central bank.

the real exchange rate

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

According to the theory of liquidity preference, the supply of real money balances:

is fixed.

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

is larger than

the world interest rate

is the interest rate prevailing in world financial markets

If shirt-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM curve:

is vertical because the exchange rate does not enter into the LM equation

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM* curve:

is vertical because the exchange rate does not enter into the LM* equation.

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

large; small.

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:

lead to no change in saving.

"Crony capitalism" refers to situations in which banks make loans to those borrowers with the most:

political clout.

(Exhibit: Market for Real Money Balances) Based on the graph, the equilibrium levels of interest rates and real money balances are:

r2 and M2/P2

Based on the figure below, starting from equilibrium at interest rate r1 and income Y1, expansionary fiscal policy would generate the new equilibrium combination of interest rate and income:

r2, Y3

Based on the figure in question 2 above, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income:

r3, Y3

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances.

raises

For any given interest rate and price level, an increase in the money supply:

raises income.

In a large open economy with a floating exchange rate, such as in the United States, in the short run a monetary contraction:

raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers net exports.

In a small open economy, if the government adopts a policy that lowers imports, then that policy:

raises the real exchange rate and does not change net exports

Reducing the money supply ______ nominal interest rates in the short run, and ______ nominal interest rates in the long run.

raises; lowers

At the end of 1994 the Mexican government was unable to maintain a fixed exchange rate because it:

ran out of foreign-currency reserves.

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.

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

responsiveness of money demand to the interest rate is small.

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to__and expansionary monetary policy causes the exchange rate to__.

rise, fall

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to ______ and expansionary monetary policy causes the exchange rate to ______

rise; fall

According to the Mundell-Fleming model, under FIXED exchange rates expansionary fiscal policy causes income to ______, and under FLEXIBLE exchange rates expansionary monetary policy causes the exchange rate to _____.

rise; fall

In the Mundell-Fleming model, if the price level falls, then the equilibrium income

rises and the real exchange rate depreciates.

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

rises; rises

After the Kennedy tax cut in 1964, real GDP:

rose and unemployment fell.

If the exchange rate of currency A is fixed to a unit of currency B, then a potential problem for the central bank in charge of currency A is:

running out of currency B.

In the Mundell-Fleming model with fixed exchange rates, the imposition of trade restrictions results in an increase in net exports because:

saving increases.

The principal economic loss when a country dollarizes is the loss of:

seigniorage revenue.

According to purchasing-power parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will ___ oil in New York and _____ oil in London to drive _____ the price of oil in New York

sell ; buy ; down

28. Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000. In this case, the value added by the automobile company is: a. $10,000. b. $12,000. c. $20,000. d. $22,000.

30. Variables that a model takes as given are called: a. endogenous. b. exogenous. c. market clearing. d. macroeconomic.

33. In principle, the GDP accounts should—but do not—have an imputation for: a. housing services enjoyed by homeowners. b. rental services of automobiles driven by owners. c. meals cooked in restaurants. d. housing services enjoyed by renters.

39. Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real GDP (in 2002 prices) in 2009 was: a. $5. b. $6.50. c. $9.50. d. $11.

40. The best measure of the economic satisfaction of the members of a society is: a. nominal GDP. b. real GDP. c. the rate of inflation .d. the value of corporate profits.

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

between zero and one.

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to__the central bank, which causes the money supply to__.

sell domestic currency to; decrease

In the IS -LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.

sell; rises; decrease

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

surplus ; positive

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

taxes are decreased.

All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:

the 25-percent reduction in the money supply between 1929 and 1933.

Possible explanations put forth for the Great Depression do not include:

the Pigou effect.

Based on the figure below, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant:

the aggregate demand curve will shift to the left.

In the Mundell-Fleming model:

the behavior of the economy depends on whether the exchange rate system has a floating or fixed exchange rate.

In an economy with flexible prices, competitive factor markets, and fixed supplies of the factors of production, graphically illustrate the impact of an advance in technology that greatly improves the productivity of capital, ceteris paribus. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. Explain in words how the equilibrium values change.

the demand for capital increases, which increases the real rental price of capital, but the quantity of capital employed is unchanged at the level of the fixed supply

Along an IS curve all of the following are always true except:

the demand for real balances equals the supply of real balances.

the value of net exports is also the value of

the excess of national saving over domestic investment

In a short-run model of a large open economy with a floating exchange rate, a monetary expansion causes a decrease in the interest rate and:

the exchange rate, and increases in income, net capital outflow, and net exports.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

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

The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to ______ spending on goods and services.

unexpected; reduce

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

upward and to the right.

A country's exports may be written as equal to: 1) GDP minus consumption minus investment minus government spending. 2) GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services. 3) imports. 4) GDP minus imports.

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. 1) surplus; negative 2) deficit; positive 3) surplus; positive 4) deficit; negative

When exports exceed imports, all of the following are true except 1) net capital outflows are positive. 2) net exports are positive. 3) domestic investment exceeds domestic saving. 4) domestic output exceeds domestic spending.

A trade deficit can be financed in all of the following ways except by: 1) borrowing from foreigners. 2) selling domestic assets to foreigners. 3) selling foreign assets owned by domestic residents to foreigners. 4) borrowing from domestic lenders.

An "open" economy is one in which: 1) the level of output is fixed. 2) government spending exceeds revenues. 3) the national interest rate equals the world interest rate. 4) there is trade in goods and services with the rest of the world.

Holding other factors constant, legislation to cut taxes in an open economy will: 1) increase national saving and lead to a trade surplus. 2) increase national saving and lead to a trade deficit. 3) reduce national saving and lead to a trade surplus. 4) reduce national saving and lead to a trade deficit.

Unlike the real world, the classical model with fixed output assumes that: A) all factors of production are fully utilized. B) all capital is fully utilized but some labor is unemployed. C) all labor is fully employed but some capital lies idle. D) some capital lies idle and some labor is unemployed.

A) all factors of production are fully utilized

To increase the money supply, the Federal Reserve: A) buys government bonds. B) sells government bonds. C) buys corporate stocks. D) sells corporate stocks.

A) buys government bonds

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given income. This shift, in a neoclassical economy, will: A) lower investment and raise the interest rate. B) raise investment and lower the interest rate. C) lower both investment and the interest rate. D) raise both investment and the interest rate.

A) lower investment and raise the interest rate

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. A) lower; lower B) lower; higher C) no change in; lower D) no change in; higher

A) lower; lower

18. 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) real B) nominal C) real and nominal D) neither real nor nominal

A) real

In a small open economy, when the government reduces national saving, the equilibrium real exchange rate: A) rises and net exports fall. B) rises and net exports rise. C) falls and net exports fall. D) falls and net exports rise.

A) rises and net exports fall

In the small open economy in equilibrium: A) saving is fixed, and investment is determined by the investment function and the world interest rate. B) investment is fixed, and saving is determined by the saving function and the world interest rate. C) saving is fixed, and investment is determined by the trade balance. D) investment is fixed, and saving is determined by the trade balance.

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

The size of monetary base is determined by: A) the Federal Reserve. B) the Federal Reserve and banks. C) preferences of households about the form of money they wish to hold. D) business policies of banks and the laws regulating banks.

A) the Federal Reserve

If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then: A) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen. B) the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had fallen. C) the money supply would fall more than it would have fallen if the reserve-deposit ratio had risen. D) it is impossible to be certain whether the money supply would fall or rise in this case.

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

21. All of the following are suggested by the results of Alan Blinder's survey of firms except: A) there is only one theory of price stickiness. B) coordinating wage and price setting could improve welfare. C) reasons for price stickiness vary by industry. D) activist monetary policy can be used to cure recessions.

A) there is only one theory of price stickiness.

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.

In a small open economy with a floating exchange ratem a rise in government spending in the new short-run equilibrium:

Attract foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be _____. A) r1, Y2 B) r2, Y3 C) r3, Y3 D) r3, Y4

A decrease in the price level, holding nominal money supply constant, will shift the LM curve: A) upward and to the right. B) downward and to the right. C) downward and to the left. D) upward and to the left.

According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will: A) not change. B) be smaller. C) be bigger. D) be equal to 1.

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 ______. A) $1 billion; more than $1 billion B) $.75 billion; more than $.75 billion C) $.75 billion; $.75 billion D) $1 billion; $1 billion

The monetary transmission mechanism works through the effects of changes in the money supply on: A) the budget deficit. B) investment. C) government expenditures. D) taxation.

The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the: A) consumption function. B) interest rate. C) price level. D) nominal money supply.

If the quantity of real money balances is kY, where k is a constant, then velocity is: A) k. B) 1/k. C) kP. D) P/k.

B) 1/k

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be: A) 6 percent. B) 12 percent. C) 18 percent. D) 30 percent.

B) 12 percent

Total investment in the United States averages about ______ percent of GDP. A) 10 B) 15 C) 20 D) 25

B) 15

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal: A) 10. B) 20,000. C) 200,000. D) 2,000,000.

B) 20,000

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 t1 decreases from 0.3 to 0.2, then consumption increases by: A) 85. B) 425. C) 500. D) 525.

B) 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? A) i B) 4i C) 1/4i D) 0.25

B) 4i

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is: A) 2 percent. B) 5 percent. C) 10 percent. D) 20 percent.

B) 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: A) 300. B) 500. C) 1,000. D) 1,300.

B) 500

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is: A) 1 percent. B) 6 percent. C) -4 percent. D) -5 percent.

B) 6 percent

If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall: A) 0 percent. B) 8 percent. C) 10 percent. D) 12 percent.

B) 8 percent

80. (Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought and point ______ represents the eventual long-run equilibrium. A) B; C B) B; A C) E; D D) D; A

B) B; A

A country's exports may be written as equal to: A) GDP minus consumption minus investment minus government spending. B) GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services. C) imports. D) GDP minus imports.

B) GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services

Money market mutual fund shares are included in: A) M1 only. B) M2 only. C) both M1 and M2. D) neither M1 nor M2.

B) M2 only

In a closed economy, private saving equals: A) Y - C - G. B) Y - T - C. C) Y - I - C. D) Y - T.

B) Y - T - C

In a closed economy, 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: A) Y = 400 - 0.75T - 25r + G. B) Y = 1,600 - 3T - 100r + 4G. C) Y = 400 + 0.75T - 25r - G. D) Y = 1,600 + 3T - 100r - 4G.

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

If consumption depends positively on the level of real balances, and real balances depend negatively on the nominal interest rate in a neoclassical model, then: A) the classical dichotomy still holds. B) a rise in money growth leads to a fall in consumption and a rise in investment. C) a rise in money growth leads to a rise in consumption and a fall in investment. D) a rise in money growth leads to a rise in both consumption and investment.

B) a rise in money growth leads to a fall in consumption and a rise in investment

Economic profit is zero if: A) all factors are paid their marginal products and the law of diminishing returns is valid. B) all factors are paid their marginal products and there are constant returns to scale. C) all firms maximize profits and none are competitive. D) all firms maximize profits and all factors are paid their marginal products.

B) all factors are paid their marginal products and there are constant returns to scale

44. The long-run aggregate supply curve is vertical at the level of output: A) determined by aggregate demand. B) at which unemployment is at its natural rate. C) at which the inflation rate is zero. D) at a predetermined price level.

B) at which unemployment is at its natural rate.

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: A) directly. B) by lowering the interest rate so that investment spending increases. C) by raising the interest rate so that investment spending increases. D) by increasing government spending on goods and services.

B) by lowering the interest rate so that investment spending increases

If many banks fail, this is likely to: A) cause surviving banks to lower their ratios of reserves to deposits. B) cause surviving banks to raise their ratios of reserves to deposits. C) have no effect on the ratio of reserves to deposits in surviving banks. D) cause surviving banks to hold less currency.

B) cause surviving banks to raise their ratios of reserves to deposits

According to the model developed in Chapter 3, when government spending increases and taxes increase by an equal amount: A) consumption and investment both increase. B) consumption and investment both decrease. C) consumption increases and investment decreases. D) consumption decreases and investment increases.

B) consumption and investment both decrease

20. Alan Blinder's survey of firms found that the theory of price stickiness accepted by the most firms was: A) menu costs. B) coordination failure. C) nominal contracts. D) procyclical elasticity.

B) coordination failure.

In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would: A) still crowd out exactly $10 billion of investment. B) crowd out between zero and $10 billion of investment. C) not crowd out any investment. D) crowd out more than $10 billion of investment.

B) crowd out between zero and $10 billion of investment

The preferences of households determine the: A) reserve-deposit ratio. B) currency-deposit ratio. C) size of the monetary base. D) loan-deposit ratio.

B) currency-deposit ratio

When the Fed decreases the interest rate paid on reserves, it: A) increases the reserve-deposit ratio (rr). B) decreases the reserve-deposit ratio (rr). C) increases the monetary base (B). D) decreases the monetary base (B).

B) decreases the reserve-deposit ratio (rr)

In a large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is crowded out; the expansion also causes a trade: A) surplus and a fall in the real exchange rate. B) deficit and a rise in the real exchange rate. C) surplus and a rise in the real exchange rate. D) deficit and a fall in the real exchange rate.

B) deficit and a rise in the real exchange rate

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the: A) inflation rate. B) expected inflation rate. C) ex ante real interest rate. D) ex post real interest rate.

B) expected inflation rate

In the circular flow model, households receive income from the _____ market and save through the _____ market. A) goods; financial B) factor; financial C) goods; factor D) factor; goods

B) factor; financial

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a ______ interest rate and ______ in the quantity of investment. A) higher; no change B) higher; an increase C) lower; no change D) lower; an increase

B) higher; an increase

84. The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run. A) higher; higher B) higher; lower C) lower; lower D) lower; higher

B) higher; lower

16. Most economists believe that the classical dichotomy: A) holds approximately in both the short run and the long run. B) holds approximately in the long run but not at all in the short run. C) holds approximately in the short run but not at all in the long run. D) does not hold even approximately in either the long run or the short run.

B) holds approximately in the long run but not at all in the short run.

A rate of inflation that exceeds 50 percent per month is typically referred to as a(n): A) conflagration. B) hyperinflation. C) deflation. D) disinflation.

B) hyperinflation

If government purchases exceed taxes minus transfer payments, then the government budget is: A) balanced. B) in deficit. C) in surplus. D) endogenous.

B) in deficit

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must: A) increase by 2 percent. B) increase by 1 percent. C) remain constant. D) decrease by 1 percent.

B) increase by 1 percent

If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor: A) is 25 percent. B) is 75 percent. C) depends on the quantities of labor and capital. D) depends on the state of technology.

B) is 75 percent

The use of borrowed funds to supplement existing funds for purposes of investment is called: A) arbitrage. B) leverage. C) convergence. D) intermediation.

B) leverage

In a system with 100-percent-reserve banking: A) all banks must hold reserves equal to 100 percent of their loans. B) no banks can make loans. C) the banking system completely controls the size of the money supply. D) no banks can accept deposits.

B) no banks can make loans

Variables expressed in terms of money are called ______ variables. A) real B) nominal C) endogenous D) exogenous

B) nominal

66. If the short-run aggregate supply curve is horizontal, and, if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then: A) output and employment will increase in the short run. B) output and employment will decrease in the short run. C) prices will increase in the short run. D) prices will decrease in the short run.

B) output and employment will decrease in the short run.

82. In the short run an adverse supply shock causes: A) both prices and output to rise. B) prices to rise and output to fall. C) prices to fall and output to rise. D) both prices and output to fall.

B) prices to rise and output to fall.

A positive relationship between nominal interest rates and inflation in the United States is obvious in: A) both recent data and nineteenth-century data. B) recent data but not nineteenth-century data. C) nineteenth-century data but not recent data. D) neither nineteenth-century data nor recent data.

B) recent data but not nineteenth-century data

A firm's economic profit is: A) the price of output minus the wage minus the rental price of capital. B) revenue minus costs. C) revenue plus capital costs. D) the price of output minus labor costs.

B) revenue minus costs

The amount of capital that banks are required to hold depends on the: A) amount of deposits held at a bank. B) riskiness of the bank's assets. C) reserve requirements set by the Fed. D) level of deposit insurance coverage.

B) riskiness of the bank's assets

When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis, the factor: A) supply curve is horizontal. B) supply curve is vertical. C) supply curve slopes up to the right. D) demand curve slopes up to the right.

B) supply curve is vertical

64. Which of the following is an example of a demand shock? A) a large oil-price increase B) the introduction and greater availability of credit cards C) a drought that destroys agricultural crops D) unions obtain a substantial wage increase

B) the introduction and greater availability of credit cards

The real wage will increase if: A) the supply of labor increases. B) the productivity of labor increases. C) the price of output increases. D) the supply of capital decreases.

B) the productivity of labor increases

The real rental price of capital is the price per unit of capital measured in: A) dollars. B) units of output. C) units of labor. D) units of capital.

B) units of output

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: A) dollar will appreciate by 3 percent against the yen. B) yen will appreciate by 3 percent against the dollar. C) yen will appreciate by 6 percent against the dollar. D) yen will appreciate by 9 percent against the dollar.

B) yen will appreciate by 3 percent against the dollar

If there is a fixed-exchange-rate system, then in the short run described by the Mundell-Fleming model:

Both the nominal and real exchange rates are fixed

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

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. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: A) 2,000. B) 1,800. C) 1,600. D) 1,400.

Exhibit: IS*-LM*

If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400.

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: A) 350. B) 400. C) 600. D) 750.

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow. 1) deficit; negative 2) surplus; negative 3) deficit; positive 4) surplus; positive

In a small open economy, if the world interest rate is r1, then the economy has: 1) a trade surplus. 2) balanced trade. 3) a trade deficit. 4) negative capital outflows.

Endogenous variables are: a. fixed at the moment they enter the model. b. determined within the model. c. the inputs of the model. d. from outside the model.

Government policies directed at reducing frictional unemployment include: A) abolishing minimum-wage laws. B) making unemployment insurance 100 percent experience rated. C) increasing the earned income credit. D) making government part of the union杅irm wage bargaining process.

Macroeconomic models are used to explain how ______ variables influence ______ variables. a. endogenous; exogenous b. exogenous; endogenous c. microeconomic; macroeconomic d. macroeconomic; microeconomic

The macroeconomic problem that affects individuals most directly and severely is: A) inflation. B) unemployment. C) low savings. D) low investment.

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 ______. a. 1 billion; more than 1 billion b. 0.75 billion; more than 0.75 billion c. 0.75 billion; 0.75 billion d. 1 billion; 1 billion

b. $0.75 billion; more than $0.75 billion

The IS-LM model takes ______ as exogenous. a. the price level and national income b. the price level c. national income d. the interest rate

b. the price level

When the LM curve is drawn, the quantity that is held fixed is: a. the nominal money supply b. the real money supply c. government spending d. the tax rate

b. the real money supply.

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 ; $0

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift:

both the LM and the IS curves.

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS* curve shifts to the right, raising the exchange rate:

but not raising net exports or income

(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______.

buy; fall

7. It is a national income accounting rule that all expenditure on purchases of products is necessarily equal to: a. profits of firms. b. wages of employees. c. income of the producers of the products. d. income of employees.

70. In 2010, American net borrowings from abroad, per person, in current dollars, amounted to approximately: a. $100. b. $220. c. $1,675. d. $10,000.

71. GNP equals GDP ______ income earned domestically by foreigners ______ income that nationals earn abroad. a. plus; plus b. minus; minus c. minus; plus d. plus; minus

74. National income differs from net national product by an amount called: a. depreciation. b. indirect business taxes .c. a statistical discrepancy. d. net foreign factor income payments.

81. The core inflation rate: a. measures the change in producer prices. b. is measured using a Paasche index. c. excludes food and energy prices. d. includes the price of exports and includes the price of imports.

Macroeconomic models: a. assume all wages and prices are sticky. b. assume all wages and prices are flexible. c. make different assumptions to explain different aspects of the macroeconomy. d. focus primarily on the optimizing behavior of households and firms.

Macroeconomics is the study of the: a. activities of individual units of the economy. b. decision making by households and firms. c. economy as a whole. d. interaction of firms and households in the marketplace.

The earned income tax credit: A) increases the government's tax revenue. B) reduces the incomes of poor working families. C) does not raise labor costs. D) is not an alternative to raising the minimum wage.

Transitions into and out of the labor force: A) rarely occur. B) do not affect unemployment statistics. C) make the interpretation of unemployment statistics complicated. D) reduce the amount of frictional unemployment.

Which statement below best illustrates the "art," rather than the "science" of macroeconomics? a. Macroeconomic data provides the motivation for new macroeconomic theory. b. Macroeconomic relationships can be expressed using symbols and equations. c. Macroeconomists must determine which simplifying assumptions give misleading results. d. Graphs and charts can be used to illustrate the history of macroeconomic variables.

c. 6

The equilibrium condition in the Keynesian-cross analysis in a closed economy is: a. income equals consumption plus investment plus government spending b. planned expenditure equals consumption plus planned investment plus government spending c. actual expenditure equals planned expenditure. d. actual saving equals actual investment

c. actual expenditure equals planned expenditure.

According to the Mundell-Fleming model, under flexible exchange rates expansionary monetary policy ______ increase income, and under fixed exchange rates expansionary monetary policy ______ increase income.

can; cannot

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

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

Between 1995 and 2005, China chose to:

conduct an independent monetary policy, restrict international-capital flows, and maintain a fixed exchange rate.

The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve.

consumer spending; IS

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

If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must:

control its citizens' access to world financial markets.

10. Which of the following is a flow variable? a. wealth b. the number unemployed c. government debt d. income

16. GDP is the market value of all ______ goods and services produced within an economy in a given period of time. a. used b. intermediate c. consumer d. final

85. Unlike the GDP deflator, the CPI includes the prices of: a. goods purchased by firms. b. goods purchased by governments. c. exported goods. d. imported goods.

Compared with a recession, real GDP during a depression: a. increases more rapidly. b. increases at approximately the same rate. c. decreases at approximately the same rate. d. decreases more severely.

In a simple model of the supply and demand for pizza, the endogenous variables are: a. the price of pizza and the price of cheese. b. aggregate income and the quantity of pizza sold. c. aggregate income and the price of cheese. d. the price of pizza and the quantity of pizza sold.

In a simple model of the supply and demand for pizza, when the price of cheese increases, the price of pizza ______ and the quantity purchased ______. a. increases; increases b. decreases; increases c. decreases; decreases d. increases; decreases

In an economic model: a. exogenous variables and endogenous variables are both fixed when they enter the model. b. endogenous variables and exogenous variables are both determined within the model. c. endogenous variables affect exogenous variables. d. exogenous variables affect endogenous variables.

In the U.S. economy today, real GDP per person, compared with its level in 1900, is about: a. 50 percent higher. b. twice as high. c. three times as high. d. eight times as high.

In the relationship expressed in functional form, Y = G(K, L), Y stands for real GDP, K stands for the amount of capital in the economy, and L stands for the amount of labor in the economy. In this case G( ): a. is the growth rate of real GDP when the amount of capital and labor in the economy is fixed. b. indicates that the variables inside the parentheses are endogenous variables in the model. c. is the symbol that stands for government input into the production process. d. is the function telling how the variables in the parentheses determine real GDP.

Sectoral shifts: A) lead to wage rigidity. B) explain the payment of efficiency wages. C) depend on the level of the minimum wage. D) make frictional unemployment inevitable.

The study of the economy as a whole is called: a. household economics. b. business economics. c. microeconomics. d. macroeconomics.

Which of the combinations listed is not a U.S. president and an important economic issue of his administration?a. President Carter, inflation b. President Reagan, budget deficits c. President G.H.W. Bush, budget deficits d. President Clinton, inflation

Which of the following statements about economic models is true? a. There is only one correct economic model. b. All economic models are based on the same assumptions. c. The purpose of economic models is to show how endogenous variables affect exogenous variables. d. Economists use different models to address different questions.

Tax cuts stimulate ______ by improving workers' incentive and expand ______ by raising households' disposable income. a. velocity; demand for loanable funds b. demand for loanable funds; velocity c. aggregate demand; aggregate supply d. aggregate supply; aggregate demand

d. aggregate supply; aggregate demand

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on: a. low levels of capital b. an untrained labor force c. inadequate tech d. low aggregate demand.

d. low aggregate demand.

In a small open economy with a fixed exchange rate, an effective policy to increase equilibrium output is to

decrease taxes

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes net exports to ______, and expansionary monetary policy causes net exports to ______.

decrease; increase

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

depreciating the U.S. currency.

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

do not change ; do not change

When a country abandons its national currency and adopts the currency of the United States, this is known as:

dollarization.

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

A monetary union with a common currency is an example of a:

fixed-exchange-rate system.

An increase in government spending raises income:

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

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, if the government encourages investment, through, say, an investment tax credit, investment

increase and is financed through an inflow of foreign capital

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

increase in money demand.

According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to __, an under flexible exchange rates expansionary fiscal policy causes income to___.

increase, remain unchanged

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

increases by more than 250.

An LM curve shows combinations of:

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

The interest rate determines ______ in the goods market and money ______ in the money market.

investment spending; demand

The intersection of the IS* and LM* curves shows the _____ and the ______ at which both the goods market and the money market are in equilibrium.

level of output; exchange rate

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

lower the interest rate.

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

planned spending.

The doctrine of purchasing-power parity:

provides a reason to expect that movements in the real exchange rate will typically be small or temporary

A change in income in the IS-LM model for a fixed price

represents a shift in the aggregate demand curve.

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a:

rise in the real interest rate and a fall in investment.

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to ______ the central bank, which causes the money supply to ______.

sell domestic currency to; decrease

The Mundell-Fleming Model is a___model for a___open economy

short-run; small

If net capital outflow is positive then

the trade balance must be positive

An "open" economy is one in which

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

If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output.

vertical; fiscal

Investment goods as measured in the GDP are purchased by: A) business firms alone. B) households alone. C) business firms and households. D) business firms, households, and governments.

C) business firms and household

Demand deposits are funds held in: A) currency. B) certificates of deposit. C) checking accounts. D) money markets.

C) checking accounts

The increase in income in response to a fiscal expansion in the IS-LM is: A) always less than in the Keynesian-cross model. B) less than in the Keynesian-cross model unless the LM curve is vertical. C) less than in the Keynesian-cross model unless the LM curve is horizontal. D) less than in the Keynesian-cross model unless the IS curve is vertical.

C) less than in the Keynesian-cross model unless the LM curve is horizontal

The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the ______ the demand is for net exports. A) more; greater B) more; smaller C) less; greater D) less; smaller

C) less; greater

Can; Cannot

(Exhibit: IS-LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS, LM, equilibrium exchange rate e2 and equilibrium output Y1. If there is a monetary expansion to LM2, the new equilibrium will be at ___, holding everything else constant.

(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______. A) sell; rise B) sell; fall C) buy; rise D) buy; fall

The interaction of the IS curve and the LM curve together determine: A) the price level and the inflation rate. B) the interest rate and the price level. C) investment and the money supply. D) the interest rate and the level of output.

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals: A) 0.6. B) 1.67. C) 2.0. D) 2.5.

D) 2.5

The demand for loanable funds is equivalent to: A) national saving. B) private saving. C) public saving. D) investment.

D) investment

Compared to typical open-market operations, when pursuing quantitative easing, Federal Reserve purchases tended to be _____ securities. A) safer and shorter-term B) tax-favored and foreign C) smaller-denomination and higher-grade D) riskier and longer-term

D) riskier and loner-term

In the classical model with fixed output, the supply and demand for goods and services are balanced by: A) government spending. B) taxes. C) fiscal policy. D) the interest rate.

D) the interest rate

The ratio of the money supply to the monetary base is called: A) the currency-deposit ratio. B) the reserve-deposit ratio. C) high-powered money. D) the money multiplier.

D) the money multiplier

In the IS-LM model, starting with no expected inflation, if expected inflation becomes negative, then the:

IS curve shifts leftward.

Changes in fiscal policy shift the:

IS curve.

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium:

Imports will decrease and exports will decrease by an equal amount

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

Income rises but the exchange rate does not rise

Under a fixed system, the exchange rate:

Is maintained at a predetermined level by the central bank

In the Mundell-Fleming model with fixed exchange rates attempts by the central bank to increase the money supply lead to exchange rate to fall, giving arbitrageurs the incentive to ________ the central bank, which causes the money supply to _______.

Sell domestic currency to; Decrease

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

The central bank's foreign-currency reserves are increasing.

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:

The exchange rate will rise, but income will remain unchanged

In the Mundell-Fleming model on a Y-e graph, the curves labeled IS* and LM* are labeled that way as a reminder that:

The interest rate is held constant at the world price level p*.

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

The money supply is decreased

If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current supply the equilibrium exchange rate was 150 yen per dollar, then:

The money supply would rise until the market exchange rate was 100 yen per dollar.

What is the difference between trade surplus and trade deficit? Explain.

When a country is a net exporter of goods and capital, it has a trade surplus. If it is a net importer of goods and borrower of capital it has a trade deficit.

In the Mundell-Fleming model, the domestic interest rate is determined by the:

World interest rate

The economy of Miniland has an income of $400, consumption is $200, government expenditure is $200, and the tax earnings of government is $150. a. Calculate private saving. b. Calculate public saving. c. Calculate national saving.

Y = $400 C = $200 T = $150 G = $200 a. Private saving= Y - C - T = 400-200-150=$50 b. Public saving = T-G= 150 - 200 = -$50 c. National saving = private saving + public saving= 50 + -50 = $0

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

Y = 1,100, r = 6 percent.

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.

The total output of the closed economy Moneyland is 10,000. Consumption is explained by the function C = 3,800 + 0.7T - 150r, where r is the real interest rate. Investment (I) is given by the equation, I = 1,500 + 50r. Taxes (T) are 1,000 and government spending (G) is 3,500. What are the values of consumption, investment, and real interest rate?

Y = 10,000 C = 3,800 + .7T - 150r I = 1,500 + 50r T = 1,000 G = 4,500 Y = C + I + G by plugging in values of Y, C, I, T and G we get r = 5 percent by plugging in the value of r in C and G we get: C = 3,750 and I= 1,750

The closed economy of Moneyland has total income of $5000, consumption function is C = 2000 - 30r, investment function I = 1500 - 20r, government spending is $2000, r is nominal interest rate. Inflation is 6 percent. Find the real rate of interest.

Y = C+I+G; 5000=2000-30r+1500-2r+2000; r=10 percent real interest rate = r-inflation=10-6=4 percent

30. To avoid double counting in the computation of GDP, only the value of ______ goods are included. a. final b. used c. intermediate d. investment

37. Nominal GDP means the value of goods and services is measured in ______ prices. a. current b. real c. constant d. average

45. If nominal GDP grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately ______ percent. a. 2 b. 3 c. 5 d. 8

56. In the national income accounts, the purchase of durables, nondurables, and services by households are classified as: a. consumption. b. investment. c. government purchases. d. net exports.

68. In 2010 in the United States, the approximate percentage of GDP that was spent on consumption was: a. 67 percent. b. 50 percent. c. 31 percent. d. 16 percent.

73. As a percentage of GNP, depreciation (also called the consumption of fixed capital) amounts to approximately: a. 10 percent. b. 25 percent. c. 50 percent. d. 0 percent.

76. Disposable personal income: a. is computed by subtracting personal tax and nontax payments from personal income. b. is generally greater than personal income. c. includes corporate profits but not dividends. d. does not include government transfers to individuals.

84. An increase in the price of imported goods will show up in: a. the CPI but not in the GDP deflator. b. the GDP deflator but not in the CPI. c. both the CPI and the GDP deflator. d. neither the CPI nor the GDP deflator.

9. 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 _____. a. as wages and profits; for goods and services b. for value added; as imputed values c. in current dollars; in constant dollars d. as interest and dividends; for depreciation and taxes

A period of falling prices is called: a. deflation. b. inflation. c. a depression. d. a recession.

A severe recession is called a(n): a. depression. b. deflation. c. exogenous event. d. market-clearing assumption.

All of the following are types of macroeconomics data except the: a. price of an IBM computer. b. growth rate of real GDP. c. inflation rate. d. unemployment rate.

Exogenous variables are: a. fixed at the moment they enter the model. b. determined within the model. c. the outputs of the model. d. explained by the model.

In a simple graphical model of the supply and demand for pizza with the price of pizza measured vertically and the quantity of pizza measured horizontally: a. the supply curve slopes upward and to the right. b. the demand curve slopes upward and to the right. c. the supply curve slopes downward and to the right. d. at the equilibrium price, the supply of pizza exceeds the demand for pizza.

Real GDP ______ over time and the growth rate of real GDP ______. a. grows; fluctuates b. is steady; is steady c. grows; is steady d. is steady; fluctuates

The ability of macroeconomists to predict the future course of economic events: a. is no better than the meteorologist's ability to predict the next month's weather. b. is much better than the meteorologist's ability to predict the next month's weather. c. has gotten worse over time. d. is less precise than it was in the 1920s.

The inflation rate in the United States averaged about: a. zero between 1900 and 1950. b. zero between 1950 and 2000. c. 10 percent between 1900 and 1950. d. 10 percent between 1950 and 2000.

The natural rate of unemployment is: A) the average rate of unemployment around which the economy fluctuates. B) about 10 percent of the labor force. C) a rate that never changes. D) the transition of individuals between employment and unemployment.

Two striking features of a graph of U.S. real GDP per capita over the twentieth century are the: a. overall upward trend interrupted by a large downturn in the 1930s. b. nearly constant level with a large downturn in the 1930s. c. downward trend in the first half of the century followed by the upward trend in the second half. d. constant level in the first half of the century followed by the upward trend in the second half.

Unions contribute to structural unemployment when collective bargaining results in wages: A) above the equilibrium level. B) below the minimum wage. C) below the equilibrium level. D) above the level of unemployment compensation.

Variables that a model tries to explain are called: a. endogenous. b. exogenous. c. market clearing. d. fixed.

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 greater than B) much less than C) almost equal to D) about one-half of

Which of the following is an example of frictional unemployment? A) Dave searches for a new job after voluntarily moving to San Diego. B) Elaine is willing to work for less than the minimum wage, but employers cannot hire her for less than the minimum wage. C) Bill is qualified and would like to be an airline pilot, but airlines do not find it profitable to hire him at the wage established by the airline pilots' union. D) Joan is willing to work for less than the going wage, but there are no jobs available.

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model, with fixed exchange rates, lead to:

a fall in consumption and income.

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:

a higher interest rate.

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 ______. a. $1 billion; more than $1 billion b. $0.75 billion; more than $0.75 billion c. $0.75 billion; $0.75 billion d. $1 billion; 1 billion

a. $1 billion; more than $1 billion

Assume that the production function is given by Y = AK0.5L0.5, where Y is GDP, K is capital stock, and L is labor. The parameter A is equal to 10. Assume also that capital is 100, labor is 400, and both capital and labor are paid for their marginal products. a. What is Y? b. What is the real wage of labor? c. What is the real rental price of capital (the amount of output paid per unit of capital)?

a. 2,000 b. 2.5 c. 10

Assume that in a small open economy where full employment always prevails, national saving is 300. a. If domestic investment is given by I = 400 - 20r, where r is the real interest rate in percent, what would the equilibrium interest rate be if the economy were closed? b. If the economy is open and the world interest rate is 10 percent, what will investment be? c. What will the current account surplus or deficit be? What will net capital outflow be?

a. 5 percent b. 200 c. the trade surplus will be 100

In the Keynesian-cross model, actual expenditures equal: a. GDP b. the money supply c. the supply of real balances d. unplanned inventory investment

a. GDP

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:

and net exports both to rise.

12. All of the following are a stock except: a. a consumer's wealth. b. the government budget deficit. c. the number of unemployed people. d. the amount of capital in the economy.

2. The statistic used by economists to measure the value of economic output is: a. the CPI. b. GDP. c. the GDP deflator. d. the unemployment rate.

31. Imputed values included in GDP are the: a. market prices of goods and services. b. estimated value of goods and services that are not sold in the marketplace .c. price of goods and services measured in constant prices. d. price of goods and services measured in current prices.

32. An example of an imputed value in the GDP is the: a. value-added of meals cooked at home. b. housing services enjoyed by homeowners. c. services of automobiles to their owners. d. value of illegal drugs sold.

36. Nominal GDP is measured in _____ dollars _____ time. a. current; at a point in b. current; per unit of c. constant; at a point in d. constant; per unit of

A policy that increases the job-finding rate _____ the natural rate of unemployment. A) will increase B) will decrease C) will not change D) could either increase or decrease

According to studies of individual unemployed workers, these workers are most likely to find a job: A) about three months before their unemployment insurance runs out. B) within a few weeks of their unemployment insurance running out. C) about three months after their unemployment insurance runs out. D) at a time not influenced by the remaining number of weeks of unemployment insurance.

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

All of the following statements about sticky prices are true except: a. in the short run, some wages and prices are sticky. b. the sticky-price model describes the equilibrium toward which the economy slowly gravitates. c. for studying year-to-year fluctuations, most macroeconomists believe that price stickiness is a better assumption than is price flexibility. d. magazine publishers tend to change their newsstand prices only every three or four years.

In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in government spending:

Cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market

In a small open economy with a floating exchange rate, an effective policy to decrease equilibrium output is to:

Decrease the money supply

Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:

Domestic interest rate equals the world interest rate

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

Exchange rate falls and net exports increases

In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to:

Increase the money supply

To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange-rate level, then the central bank must:

Sell foreign currency from reserves.

The Mundell-Fleming model is a _______ model for a ______ open economy.

Short-run; small

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS* curve:

Slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short run equilibrium income in the goods market.

According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium wages because worker _____ increases. A) productivity B) turnover C) unionization D) shirking

As the relative demand for unskilled workers falls, wages for unskilled workers ______, and unemployment compensation becomes a ______ attractive option. A) fall; more B) fall; less C) rise; more D) rise; less

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the real wage were rigid, this would lead to: A) no change in the real wage and a rise in unemployment. B) no change in the real wage and no change in unemployment. C) no change in the real wage and a fall in unemployment. D) a decrease in the real wage.

The Mundell-Fleming model assumes that....

as in the IS-LM model, prices are fixed

A policy that decreases the job separation rate _____ the natural rate of unemployment. A) will increase B) will decrease C) will not change D) could either increase or decrease

Across countries of Europe, greater spending on unemployment insurance tends to _____ unemployment, and more 揳ctive? labor- market policies tend to _____ unemployment. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

Data on unemployment in the United States show that: A) most spells of unemployment are long. B) most weeks of unemployment are attributable to the long-term unemployed. C) members of the labor force over age 55 have the highest unemployment rates. D) the duration of unemployment falls during recessions.

Differences in unemployment rates across demographic groups are most closely correlated with differences in: A) job-finding rates. B) job-separation rates. C) unionization rates. D) efficiency wage rates.

Discouraged workers are counted as: A) part of the labor force. B) out of the labor force. C) employed. D) unemployed.

Earlier retirement in Europe than in the United States contributes to: A) higher employment-to-population ratios in Europe than in the United States. B) lower employment-to-population ratios in Europe than in the United States. C) more hours worked per year by the average employed person in Europe than the average employed person in the United States. D) fewer hours worked per year by the average employed person in Europe than the average employed person in the United States.

Economists call the changes in the composition of demand among industries and regions: A) insider杘 utsider conflicts. B) sectoral shifts. C) moral hazard. D) adverse selection.

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) measured; actual B) actual; measured C) annual; monthly D) monthly; annual

Most spells of unemployment are ______ term, and most weeks of unemployment are attributable to ______-term unemployment. A) short; short B) short; long C) long; long D) long; short

When the unemployment rate is at a steady state: A) no hiring or firings are occurring. B) the number of people finding jobs equals the number of people losing jobs. C) the number of people finding jobs exceeds the number of people losing jobs. D) the number of people losing jobs exceeds the number of people finding jobs.

According to Olivier Blanchard, Europeans are more likely to use increases in real wages resulting from technological progress to increase ______, and Americans are more likely to use these increases in real wages to increase ______. A) hours of work; hours of leisure B) consumption of goods and services; hours of leisure C) hours of leisure; consumption of goods and services D) unemployment insurance benefits; efficiency wages

All of the following are causes of structural unemployment except: A) minimum-wage laws. B) the monopoly power of unions. C) unemployment insurance. D) efficiency wages.

Any policy aimed at lowering the natural rate of unemployment must either ______ the rate of job separation or ______ the rate of job finding. A) reduce; reduce B) increase; increase C) reduce; increase D) increase; reduce

Examples of 揳ctive? labor-market policies include all of the following except: A) job-search assistance B) subsidized employment C) unemployment insurance D) job-training programs

Frictional unemployment is unemployment caused by: A) wage rigidity. B) minimum-wage legislation. C) the time it takes workers to search for a job. D) clashes between the motives of insiders and outsiders.

If the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is: A) 1 percent. B) 9 percent. C) 10 percent. D) about 11 percent.

f s is the rate of job separation, f is the rate of job finding, and both rates are constant, then the steady state unemployment rate is approximately: A) f/(f+s). B) (f+s)/f. C) s/(s+f). D) (s+f)/s.

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

trades with other countries

In the Mundell-Fleming model: The behavior of the economy depends on.....

whether the exchange rate system has a floating or fixed exchange rate

One argument favoring a floating-exchange-rate system is that it:

allows monetary policy to be used for other purposes.

The simple investment function shows that investment ______ as ______ increases.

decreases; the interest rate

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about:

$25 billion.

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. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1,600

If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall

12 percent

A shrinking U.S. budget deficit in the 1990s coincided with a ______ U.S. trade deficit. 1) shrinking 2) continuing 3) nonexistent 4) stable

An increase in the trade deficit of a small open economy could be the result of: 1) an increase in taxes. 2) an increase in government spending. 3) an increase in the world interest rate. 4) the expiration of an investment tax-credit provision.

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 ______. 1) a trade deficit; $100 billion 2) balanced trade; $0 3) a trade surplus; $100 billion 4) balanced trade; $100 billion

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to: 1) make loans to the domestic government. 2) make loans to foreigners. 3) repay the national debt. 4) repay loans to the Federal Reserve.

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: 1) -$25 billion. 2) -$10 billion. 3) $10 billion. 4) $25 billion.

In a small open economy, policies that increase: 1) investment tend to cause a trade surplus. 2) investment tend to cause a trade deficit. 3) saving do not affect the trade balance. 4) saving tend to cause a trade deficit.

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. 1) deficit; negative 2) surplus; positive 3) deficit; positive 4) surplus; negative

Starting from a trade balance, 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 _____. 1) increase; increase 2) increase; decrease 3) increase, not change 4) decrease; increase

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss good(s) per U.S. good

2.5

If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1 dollar, then a Big Mac in Cancun, Mexico, should cost

20 pesos

Building an economic model based on the assumption of a small open economy is useful because: 1) it accurately describes the U.S. economy. 2) it is more complicated and realistic than a model based on the assumption of a large open economy. 3) this simplifying assumption can assist our understanding and intuition of open economy macroeconomics. 4) it is not possible to build models of large open economies.

If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports ______ and net capital outflows ______. 1) increase; increase 2) decrease; decrease 3) do not change; do not change 4) do not change; increase

If domestic saving is less than domestic investment, then net exports are ______ and net capital outflows are ______. 1) positive; positive 2) positive; negative 3 negative; negative 4) negative; positive

If net capital outflow is positive, then: 1) exports must be positive. 2) exports must be negative. 3) the trade balance must be positive. 4) the trade balance must be negative.

In a small open economy with perfect capital mobility, the real interest rate will always be: 1) above the world real interest rate. 2) below the world real interest rate. 3) equal to the world real interest rate. 4) equal to the world nominal interest rate.

In a small open economy, if the world interest rate is r3, then the economy has: 1) a trade surplus. 2) balanced trade. 3) a trade deficit. 4) positive capital outflows.

In an open economy: 1) a trade deficit is always good. 2) a trade deficit is always bad. 3) a trade deficit may be good or bad. 4) a trade surplus is always bad.

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase: 1) investment in the small open economy. 2) saving in the small open economy. 3) exports by the small open economy. 4) imports by the small open economy.

If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports ______ and net capital outflows ______. 1) increase; increase 2) increase; decrease 3) decrease; increase 4) decrease; decrease

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and ______ net capital outflow. 1) deficit; negative 2) surplus; negative 3) deficit; positive 4) surplus; positive

Net capital outflow is equal to the amount that: 1) foreign investors lend here. 2) domestic investors lend abroad. 3) foreign investors lend here minus the amount domestic investors lend abroad. 4) domestic investors lend abroad minus the amount that foreign investors lend here.

Net capital outflow is equal to: 1) national saving minus the trade balance. 2) domestic investment plus the trade balance. 3) domestic investment minus national saving. 4) national saving minus domestic investment.

The adoption of an investment tax credit in a small open economy is likely to lead to: 1) no change in either domestic investment or domestic saving in the small open economy. 2) an increase in both domestic investment and domestic saving in the small open economy. 3) an increase in domestic saving but no change in domestic investment in the small open economy. 4) an increase in domestic investment but no change in domestic saving in the small open economy.

The value of net exports is also the value of: 1) net investment. 2) net saving. 3) national saving. 4) the excess of national saving over domestic investment.

The world interest rate: 1) is equal to the domestic interest rate. 2) makes domestic saving equal to domestic investment. 3) is the interest rate charged on loans by the World Bank. 4) is the interest rate prevailing in world financial markets.

Two reasons why capital may not flow to poor countries are that the poorer countries may: 1) have economies unlike those described by a Cobb-Douglas production function and not be subject to diminishing returns to capital. 2) have already accumulated high levels of capital relative to labor and may already have access to advanced technologies. 3) legally prevent the inflow of foreign capital and provide strong legal protection of private property. 4) have inferior production capabilities and not enforce property rights.

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

Increased

70. (Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with the price P0 and output Y. 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 AD2. The economy moves first to point ______ and then, in the long run, to point ______. A) A; D B) D; A C) A; B D) B; A

A) A; D

A tax cut shifts the ______ to the right, and the aggregate demand curve ______. A) IS; shifts to the right B) IS; does not shift C) LM: shifts to the right D) LM; does not shift

A) IS; shifts to the right

If investment does not depend on the interest rate, then the ______ curve is ______. A) IS; vertical B) IS; horizontal C) LM; vertical D) LM; horizontal

A) IS; vertical

Other things equal, an increase in the interest rate leads to: A) a decrease in the quantity of investment goods demanded. B) no change in the quantity of investment goods demanded. C) an increase in the quantity of investment goods demanded. D) sometimes an increase and sometimes a decrease in the quantity of investment goods demanded.

A) a decrease in the quantity of investment goods demanded

An important factor in the evolution of commodity money to fiat money is: A) a desire to reduce transaction costs. B) a desire to increase transaction costs. C) the fact that gold is no longer highly valued. D) a desire to use gold for jewelry.

A) a desire to reduce transaction costs

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by: A) a significant increase in the reserve-deposit ratio. B) a significant decrease in the reserve-deposit ratio. C) open-market purchases. D) open-market sales.

A) a significant increase in the reserve-deposit ratio

If the price level depends on both the current money supply and future expected money supplies, in order to stop a hyperinflation, a central bank may try to establish credibility by: A) achieving increased political independence from the government. B) increasing revenue from seigniorage. C) encouraging increased government spending and tax cuts. D) undertaking larger open-market purchases.

A) achieving increased political independence from the government

If nominal wages cannot be cut, then the only way to reduce real wages is by: A) adjustments via inflation. B) unions. C) legislation. D) productivity increases.

A) adjustments via inflation

24. The relationship between the quantity of output demanded and the aggregate price level is called: A) aggregate demand. B) aggregate supply. C) aggregate output. D) aggregate consumption.

A) aggregate demand.

An appreciation of the real exchange rate in a small open economy could be the result of: A) an increase in government spending. B) an increase in taxes. C) a decrease in the world interest rate. D) the expiration of an investment tax-credit provision.

A) an increase in government spending

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate: A) and net exports will both fall. B) will fall and net exports will rise. C) will rise and net exports will fall. D) and net exports will both rise.

A) and net exports will both fall

In recent U.S. experience, inflation has: A) been persistent from year to year, whereas in the nineteenth century inflation had little persistence. B) been persistent from year to year, and this was also true in the nineteenth century. C) not been persistent from year to year, although it was persistent in the nineteenth century. D) not been persistent from year to year, and the same was true in the nineteenth century.

A) been persistent from year to year, whereas in the nineteenth century inflation had little persistence

97. 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: A) both Central Bank A and Central Bank B should increase the quantity of money. B) Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable. C) Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it. D) both Central Bank A and Central Bank B should keep the quantity of money stable.

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

An example of decreasing returns to scale is when capital and labor inputs: A) both increase 10 percent and output increases 5 percent. B) both increase 10 percent and output increases 10 percent. C) both increase 5 percent and output increases 10 percent. D) do not change and output increases 5 percent.

A) both increase 10 percent and output increases by 5 percent

A country that is on a gold standard primarily uses: A) commodity money. B) fiat money. C) credit money. D) the barter system.

A) commodity money

To increase the monetary base, the Fed can: A) conduct open-market purchases. B) conduct open-market sales. C) raise the interest rate paid on reserves. D) lower the required reserve ratio.

A) conduct open-market purchases

If output is described by the production function Y = AK 0.2L0.8, then the production function has: A) constant returns to scale. B) diminishing returns to scale. C) increasing returns to scale. D) a degree of returns to scale that cannot be determined from the information given.

A) constant returns to scale

In the IS-LM model, changes in taxes initially affect planned expenditures through: A) consumption. B) investment. C) government spending. D) the interest rate.

A) consumption

In examining the impact of fiscal policy, it is assumed that: A) consumption, investment, and the interest rate are endogenous variables. B) consumption, investment, and the interest rate are exogenous variables. C) government purchases, taxes, and interest rates are endogenous variables. D) government purchases, taxes, and interest rates are exogenous variables.

A) consumption, investment, and the interest rate are endogenous variables

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies? A) P1 > P2 and M1 > M2 B) P1 > P2 and M1 < M2 C) P1 < P2 and M1 > M2 D) P1 < P2 and M1 < M2

In the case of an unanticipated inflation: A) creditors with an unindexed contract are hurt because they get less than they expected in real terms. B) creditors with an indexed contract gain because they get more than they contracted for in nominal terms. C) debtors with an unindexed contract do not gain because they pay exactly what they contracted for in nominal terms. D) debtors with an indexed contract are hurt because they pay more than they contracted for in nominal terms.

A) creditors with an unindexed contract are hurt because they get less than they expected in real terms

The monetary base consists of: A) currency held by the public, plus reserves held by banks. B) all outstanding currency, plus reserves held by banks. C) all outstanding currency, plus demand deposits. D) all bank reserves.

A) currency held by the public

8. 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: A) decrease by 1 percent. B) decrease by 2 percent. C) decrease by 3 percent. D) increase by 1 percent.

A) decrease by 1 percent.

If the Federal Reserve wishes to increase the money supply, it should: A) decrease the discount rate. B) increase interest paid on reserves. C) sell government bonds. D) decrease the monetary base.

A) decrease the discount rate

In instances of hyperinflation, the delays involved in collecting taxes often result in: A) decreased real government tax revenue. B) large capital gains for creditors. C) higher shoeleather costs of inflation. D) higher ex ante real interest rates.

A) decreased real government tax revenue

Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t0 + t1Y. If t0 increases by 1 unit, then consumption: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.

A) decreases by 0.85 units

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and ______ net capital outflow. A) decreases; decreases B) increases; increases C) decreases; increases D) increases; decreases

A) decreases; decreases

68. Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: A) decreasing the money supply. B) increasing the money supply. C) decreasing the price level. D) increasing the price level.

A) decreasing the money supply.

During hyperinflation real tax revenue of the government often drops substantially because of the: A) delay between when a tax is levied and when it is collected. B) significantly greater menu costs of printing tax forms. C) additional deductions taken for increased shoeleather costs. D) greater uncertainty associated with extreme rates of inflation.

A) delay between when a tax is levied and when it is collected

Consumption depends positively on ______ and investment depends negatively on ______. A) disposable income; the real interest rate B) the real interest rate; disposable income C) private saving; public saving D) public saving; private saving

A) disposable income; the real intersect rate

32. 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) downward and to the left. B) downward and to the right. C) upward and to the left. D) upward and to the right.

A) downward and to the left.

In a fractional-reserve banking system, banks create money because: A) each dollar of reserves generates many dollars of demand deposits. B) banks have the legal authority to issue new currency. C) funds are transferred from households wishing to save to firms wishing to borrow. D) the wealth of the economy expands when borrowers undertake new debt obligations.

A) each dollar of reserves generates many dollars of demand deposits

93. If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then: A) every point on the aggregate demand curve moves 5 percent to the left. B) every point on the aggregate demand curve moves up 5 percent. C) the aggregate demand curve moves down and to the left, but it is impossible to determine exactly by how much. D) the aggregate demand curve moves up and to the right, but it is impossible to determine exactly by how much.

A) every point on the aggregate demand curve moves 5 percent to the left.

Equilibrium in the market for goods and services determines the ______ interest rate and the expected rate of inflation determines the ______ interest rate. A) ex ante real; ex ante nominal B) ex post real; ex post nominal C) ex ante nominal; ex post real D) ex post nominal; ex post real

A) ex ante real; ex ante nominal

When a person purchases a 90-day Treasury bill, he or she cannot know the: A) ex post real interest rate. B) ex ante real interest rate. C) nominal interest rate. D) expected rate of inflation.

A) ex post real interest rate

The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____ inflation. A) expected; actual B) core; actual C) actual; expected D) expected; core

A) expected; actual

In the long run, the level of national income in an economy is determined by its: A) factors of production and production function. B) real and nominal interest rate. C) government budget surplus or deficit. D) rate of economic and accounting profit.

A) factors of production and production function

All of the following actions increase government purchases of goods and services except the: A) federal government's sending a Social Security check to Betty Jones. B) federal governments sending a paycheck to the president of the United States. C) federal government's buying a Patriot missile. D) city of Boston's buying a library book.

A) federal government's sending a Social Security check to Betty Jones

Money that has no value other than as money is called ______ money. A) fiat B) intrinsic C) commodity D) government

A) fiat

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right. A) buy; IS B) buy; LM C) sell; IS D) sell; LM

B) buy; LM

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) foreign exchange rate minus the domestic exchange rate. D) domestic interest rate minus the foreign interest rate.

A) foreign inflation rate minus the domestic inflation rate

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have _____ inflation. A) high B) low C) constant D) decreasing

A) high

In the classical model with fixed income, if the interest rate is too low, then investment is too ______ and the demand for output ______ the supply. A) high; exceeds B) high; falls short of C) low; exceeds D) low; falls short of

A) high; exceeds

When there is a fixed supply of loanable funds, an increase in investment demand results in a(n): A) higher interest rate. B) lower interest rate. C) increase in investment. D) decrease in investment.

A) higher interest rate

30. 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) higher; greater B) higher; smaller C) lower; greater D) lower; smaller

A) higher; greater

28. According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P. A) higher; lower B) lower; higher C) higher; higher D) lower; lower

A) higher; lower

76. If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ______ prices and ______ output in the short run. A) higher; lower B) lower; higher C) higher; higher D) lower; lower

A) higher; lower

People use money as a store of value when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem.

A) hold money to transfer purchasing power into the future

According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates: A) increase. B) are unchanged. C) decrease. D) can vary.

A) increase

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will: A) increase. B) decrease. C) remain unchanged. D) either increase or decrease, depending on whether consumption is greater or less than investment.

A) increase

When government spending increases and taxes are increased by an equal amount, interest rates: A) increase. B) remain the same. C) decrease. D) can vary wildly.

A) increase

In the classical model with fixed income, an increase in the real interest rate could be the result of a(n): A) increase in government spending. B) decrease in government spending. C) decrease in desired investment. D) increase in taxes.

A) increase in government spending

In the IS-LM model, a decrease in the interest rate would be the result of a(n): A) increase in the money supply. B) increase in government purchases. C) decrease in taxes. D) increase in money demand.

A) increase in the money supply

90. If a change in government regulations allows banks to start paying interest on checking accounts, this will: A) increase the demand for money. B) decrease the demand for money. C) have no effect on the demand for money. D) increase the demand for currency but decrease the demand for checking accounts.

A) increase the demand for money.

If many banks fail, this is likely to: A) increase the ratio of currency to deposits. B) decrease the ratio of currency to deposits. C) have no effect on the ratio of currency to deposits. D) decrease the amount of currency in circulation, if the Fed takes no action.

A) increase the ratio of currency to deposits

71. (Exhibit: Shift in Aggregate Demand) Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) ______ in the money supply or a(n) ______ in velocity. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

A) increase; increase

67. A reduction in the demand for money is the equivalent of a(n) _______ in velocity and will shift the aggregate demand curve to the _____. A) increase; right B) increase; left C) decrease; right D) decrease; left

A) increase; right

Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005. A) increased. B) decreased. C) did not change. D) were negative.

A) increased

When the Fed increases the interest rate paid on reserves, it: A) increases the reserve-deposit ratio (rr). B) decreases the reserve-deposit ratio (rr). C) increases the monetary base (B). D) decreases the monetary base (B).

A) increases the reserve-deposit ratio (rr)

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. A) increases; higher B) increases; lower C) decreases; higher D) decreases; lower

A) 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: A) increasing. B) decreasing. C) 7 percent. D) constant.

A) increasing

87. 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) decreasing the money supply, but at the cost of permanently lower prices. C) increasing the money supply, which would restore the original price level. 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.

Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand: A) investment increases and the interest rate rises. B) investment is unchanged and the interest rate rises. C) investment and the interest rate are both unchanged. D) investment decreases and the interest rate rises.

A) investment increases and the interest rate rises

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. B) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. C) investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. D) the price level is fixed whereas in the IS-LM model it is allowed to vary.

A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment

The income velocity of money: A) is defined in the identity MV = PY. B) is defined in the identity MV = PT. C) is the same thing as the transactions velocity of money. D) is the same as the number of times a dollar bill changes hands.

A) is defined in the identity MV=PY

At any particular point in time, the output of the economy: A) is fixed because the supplies of capital and labor and the technology are fixed. B) is fixed because the demand for goods and services is fixed. C) varies because the supplies of capital and labor vary. D) varies because the technology for turning capital and labor into goods and services varies.

A) is fixed because the supplies of capital and labor and the technology are fixed

45. If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: A) is horizontal. B) is vertical. C) slopes upward and to the right. D) slopes downward and to the right.

A) is horizontal.

A small country might want to use the money of a large country rather than print its own money if the small country: A) is likely to be unstable, whereas the large country is likely to be stable. B) is likely to be stable, whereas the large country is likely to be unstable. C) needs the revenue for seigniorage. D) wants to control its own inflation rate.

A) is likely to be unstable, whereas the large country is likely to be stable

A competitive firm: A) is small relative to the market in which it trades. B) has to charge a lower price when it wants to sell more goods. C) has several large competitors with whom it engages in fierce competition. D) can set the wage at which it hires workers.

A) is small relative to the market in which it trades

A given increase in taxes shifts the IS curve more to the left the: A) larger the marginal propensity to consume. B) smaller the marginal propensity to consume. C) larger the government spending. D) smaller the government spending.

A) larger the marginal propensity to consume

The spending hypothesis suggests that the Great Depression was caused by a: A) leftward shift in the IS curve. B) rightward shift in the IS curve. C) leftward shift in the LM curve. D) rightward shift in the LM curve.

A) leftward shift in the IS curve

85. If the Fed accommodates an adverse supply shock, output falls ______ and prices rise ______. A) less; more B) less; less C) more; less D) more; more

A) less; more

47. If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect: A) level of output but not prices. B) prices but not level of output. C) both prices and level of output. D) neither prices nor level of output.

A) level of output but not prices.

The banking system creates: A) liquidity. B) wealth. C) reserves. D) currency.

A) liquidity

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. A) lower; raises; reduces B) higher; lowers; increases C) lower; lowers; increases D) higher; raises; reduces

A) lower; raises; reduces

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines. A) lowers; raises B) raises; lowers C) raises; raises D) lowers; lowers

A) lowers; raises

The quantity equation for money, by itself: A) may be thought of as a definition for velocity of money. B) implies that the velocity of money is constant. C) implies that the price level is proportional to the money supply. D) implies that real gross domestic product (GDP) is proportional to the money supply.

A) may be thought of as a definition for the velocity of money

The costs of reprinting catalogs and price lists because of inflation are called: A) menu costs. B) shoeleather costs. C) variable yardstick costs. D) fixed costs.

A) menu costs

An example of a nominal variable is the: A) money supply. B) quantity of goods produced in a year. C) relative price of bread. D) real wage.

A) money supply

In a closed economy, Y - C - G equals: A) national saving. B) private saving. C) public saving. D) financial saving.

A) national saving

The supply of loanable funds is equivalent to: A) national saving. B) private saving. C) public saving. D) investment.

A) national saving

6. Okun's law is the ______ relationship between real GDP and the ______. A) negative; unemployment rate B) negative; inflation rate C) positive; unemployment rate D) positive; inflation rate

A) negative; unemployment rate

The opportunity cost of holding money is the: A) nominal interest rate. B) real interest rate. C) federal funds rate. D) prevailing Treasury bill rate.

A) nominal interest rate

Which of the following would most likely be called a hyperinflation? A) Price increases averaged 300 percent per year. B) The inflation rate was 10 percent per year. C) Real GDP grew at a rate of 12 percent over a year. D) A stock market index rose by 1,000 points over a year.

A) price increases averaged 300 percent per year

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. A) price level; increase B) interest rate; decrease C) money supply; increase D) consumption function; decrease

A) price level; increase

When the Federal Reserve conducts an open-market purchase, it buys bonds from the: A) public. B) U.S. Treasury. C) Internal Revenue Service. D) International Monetary Fund.

A) public

The nominal interest rate is the: A) rate of interest that investors pay to borrow money. B) same as the real interest rate. C) rate of inflation minus the real rate of interest. D) real rate of interest minus the rate of inflation.

A) rate of interest that investors pay to borrow money

Variables expressed in terms of physical units or quantities are called ______ variables. A) real B) nominal C) endogenous D) exogenous

A) real

63. Stabilization policy refers to policy actions aimed at: A) reducing the severity of short-run economic fluctuations. B) equalizing incomes of households in the economy. C) maintaining constant shares of output going to labor and capital. D) preventing increases in the poverty rate.

A) reducing the severity of short-run economic fluctuations.

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: A) reserves divided by rr. B) 1/rr. C) reserves times rr. D) reserves divided by (1 - rr).

A) reserves divided by rr

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, public saving: A) rises by $100 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $100 billion.

A) rises by $100 billion

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls

A) rises; falls

Disposable personal income is defined as income after the payment of all: A) taxes. B) interest. C) loans. D) social insurance contributions.

A) taxes

The theoretical separation of real and monetary variables is called: A) the classical dichotomy. B) monetary neutrality. C) the Fisher effect. D) the quantity theory of money.

A) the classical dichotomy

Two ways for banks to borrow reserves from the Federal Reserve are through: A) the discount window and the Term Auction Facility. B) open-market operations and excess reserve swaps. C) decreasing the reserve-deposit ratio and decreasing the currency-deposit ratio. D) fractional-reserve banking and financial intermediation.

A) the discount window and the Term Auction Facility

The factor that makes national saving equal investment, in equilibrium, is: A) the interest rate. B) private saving. C) public saving. D) fiscal policy.

A) the interest rate

If velocity is constant and, in addition, the factors of production and the production function determine real GDP, then: A) the price level is proportional to the money supply. B) real GDP is proportional to the money supply. C) the price level is fixed. D) nominal GDP is fixed.

A) the price level is proportional to the money supply

In the long run, according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP. A) the productive capability of the economy; the money supply B) the money supply; the productive capability of the economy C) velocity; the money supply D) the money supply; velocity

A) the productive capability of the economy; the money supply

In a Cobb-Douglas production function the marginal product of capital will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) labor's share of output increases. D) average capital productivity decreases.

A) the quantity of labor increases

Which of the following is an example of a relative price? A) the real interest rate B) the capital stock C) the dollar wage per hour D) the price level

A) the real interest rate

3. Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP. A) two B) four C) six D) eight

A) two

88. On two occasions in the 1970s: A) world oil prices rose rapidly, inflation was high, and the unemployment rate was high. B) world oil prices rose rapidly, inflation was moderate, and the unemployment rate was high. C) world oil prices rose rapidly, inflation was high, and the unemployment rate was moderate. D) world oil prices rose rapidly, but the Fed used monetary policy to curb inflation.

A) world oil prices rose rapidly, inflation was high, and the unemployment rate was high.

(Exhibit: IS-LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS, LM, equilibrium exchange rate e2 and equilibrium output Y1. If there is an increase in government spending to IS2, the new equilibrium will be at___, holding everything else constant.

If the money supply in Mexico is increasing much more rapidly than the money supply in the United States, holding other factors constant, what would you predict will happen to the nominal exchange rate between the Mexican peso and the United States dollar? Explain.

According to the quantity theory, the faster growth rate of money will result in a higher rate of inflation in Mexico than in the US. If there is purchasing-power parity, then the percentage change in nominal exchange rate equals the percentage change in the real exchange rate plus the difference in the inflation rates. The higher Mexican inflation will increase the nominal exchange rate, holding other factors constant

(Exhibit: IS*-LM*) 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.

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant: A) the aggregate demand curve will shift to the right. B) the aggregate demand curve will shift to the left. C) this represents a movement up the aggregate demand curve. D) this represents a movement down the aggregate demand curve.

During the financial crisis of 2008-09, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n): A) expansionary shift in the IS curve. B) contractionary shift in the IS curve. C) expansionary shift in the LM curve. D) contractionary shift in the LM curve.

If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals: A) 2,500. B) 2,800. C) 3,500. D) 4,200.

B) 2,800

Open-market operations are: A) Commerce Department efforts to open foreign markets to international trade. B) Federal Reserve purchases and sales of government bonds. C) Securities and Exchange Commission rules requiring open disclosure of market trades. D) Treasury Department purchases and sales of the U.S. gold stock.

B) Federal Reserve purchases and sales of government bonds

When banks borrow through the Term Auction Facility, the price of borrowing is determined by: A) the Federal Reserve. B) a competitive bidding process. C) the difference between the discount rate and the interest rate on three-month Treasury securities. D) open-market operations.

B) a competitive bidding process

Banks create money in: A) a 100-percent-reserve banking system but not in a fractional-reserve banking system. B) a fractional-reserve banking system but not in a 100-percent-reserve banking system. C) both a 100-percent-reserve banking system and a fractional-reserve banking system. D) neither a 100-percent-reserve banking system nor a fractional-reserve banking system.

B) a fractional-reserve banking system but not in a 100-percent-reserve banking system

Which of the following would decrease the real exchange rate in a small open economy in the long run? A) a personal income tax cut B) a reduction in government spending C) a tariff on imports D) an increase in investment

B) a reduction in government spending

The marginal product of capital is: A) output divided by capital input. B) additional output produced when one additional unit of capital is added. C) additional output produced when one additional unit of capital and one additional unit of labor are added. D) value of additional output when one dollar's worth of additional capital is added.

B) additional output produced when one additional unit of capital is added

The marginal product of labor is: A) output divided by labor input. B) additional output produced when one additional unit of labor is added. C) additional output produced when one additional unit of labor and one additional unit of capital are added. D) value of additional output when one dollar's worth of additional labor is added.

B) additional output produced when one additional unit of labor is added

48. In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where: A) aggregate demand equals long-run aggregate supply. B) aggregate demand equals short-run aggregate supply. C) aggregate demand equals short-run and long-run aggregate supply. D) short-run aggregate supply equals long-run aggregate supply.

B) aggregate demand equals short-run aggregate supply.

36. The relationship between the quantity of goods and services supplied and the price level is called: A) aggregate demand. B) aggregate supply. C) aggregate investment. D) aggregate production.

B) aggregate supply.

Real money balances equal the: A) sum of coin, currency, and balances in checking accounts. B) amount of money expressed in terms of the quantity of goods and services it can purchase. C) number of dollars used as a medium of exchange. D) quantity of money created by the Federal Reserve.

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

In the United Kingdom between 1730 and 1920, during wartime, government spending tended to increase: A) but the interest rate did not increase. B) and the interest rate also increased. C) but the interest rate decreased. D) and the interest rate remained constant.

B) and the interest rate also increased

If the number of dollars per yen rises, this is called a(n): A) appreciation of the dollar. B) appreciation of the yen. C) increase in the terms of trade. D) decrease in the terms of trade.

B) appreciation of the yen

"Inflation tax" means that: A) as the price level rises, taxpayers are pushed into higher tax brackets. B) as the price level rises, the real value of money held by the public decreases. C) as taxes increase, the rate of inflation also increases. D) in a hyperinflation, the chief source of tax revenue is often the printing of money.

B) as the price level rises, the real value of money held by the public decreases

Since 1960, the U.S. ratio of labor income to total income has: A) been about 2.5 to 1. B) been about 0.7. C) increased steadily. D) decreased steadily.

B) been about 0.7

46. 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. A) above B) below C) equal to D) either above or below

B) below

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wage(s) of: A) both barbers and farmers should have remained constant over time. B) both barbers and farmers should have risen over time. C) farmers should have risen while the real wage of barbers should have remained constant. D) barbers should have risen while the real wage of farmers should have remained constant.

B) both barbers and farmers should have rise over time

The reserve-deposit ratio is determined by: A) the Federal Reserve. B) business policies of banks and the laws regulating banks. C) preferences of households about the form of money they wish to hold. D) the Federal Deposit Insurance Corporation (FDIC).

B) business policies of banks and the laws regulating banks

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in: A) inflation of 1 percent and the nominal interest rate of less than 1 percent. B) inflation of 1 percent and the nominal interest rate of 1 percent. C) inflation of 1 percent and the nominal interest rate of more than 1 percent. D) both inflation and the nominal interest rate of less than 1 percent.

B) inflation of 1 percent and the nominal interest rate of 1 percent

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out: A) prices. B) investment. C) the money supply. D) taxes.

B) investment

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand: A) investment increases and the interest rate rises. B) investment is unchanged and the interest rate rises. C) investment and the interest rate are both unchanged. D) investment increases and the interest rate falls.

B) investment is unchanged and the interest rate rises

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so: A) investment falls and the interest rate rises. B) investment rises and the interest rate falls. C) investment and the interest rate both fall. D) investment and the interest rate both rise.

B) investment rises and the interest rate falls

The real exchange rate: A) measures how many Japanese yen one really gets for a U.S. dollar. B) is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level. C) is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level. D) is the price of a domestic car divided by the price of a foreign car.

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

4. Over the business cycle, investment spending ______ consumption spending. A) is inversely correlated with B) is more volatile than C) has about the same volatility as D) is less volatile than

B) is more volatile than

The classical dichotomy: A) cannot hold if money is "neutral." B) is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money. C) fully describes the world in which we live, especially in the short run. D) arises because money depends on the nominal interest rate.

B) is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money

The use of fei as money on the island of Yap illustrates the idea of money as a social convention because: A) only fei physically in the possession of the owner is accepted in transactions. B) legal claim to a fei never seen by current generations was accepted in transactions. C) the central bank of Yap accepts fei in exchange for paper certificates. D) the government of Yap verifies the authenticity of fei used for transactions.

B) legal claim to a fei never seen by current generations was accepted in transactions

Survey evidence indicates that economists worry ______ the general public does about prices increasing more rapidly than their incomes. A) more than B) less than C) about the same as D) more intensely than

B) less than

The percentage of government revenue raised by printing money has usually accounted for: A) more than 10 percent of government revenue in the United States. B) less than 3 percent of government revenue in the United States. C) less than 3 percent of government revenue in Italy. D) less than 3 percent of government revenue in Greece.

B) less than 3 percent of government revenue in the United States

In the classical model with fixed income, a reduction in the government budget deficit will lead to a: A) higher real interest rate. B) lower real interest rate. C) higher level of output. D) lower level of output.

B) lower real interest rate

In a fractional-reserve banking system, banks create money when they: A) accept deposits. B) make loans. C) hold reserves. D) exchange currency for deposits.

B) make loans

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels. A) monetary; high B) monetary; low C) fiscal; high D) fiscal; low

B) monetary; low

49. If the short-run aggregate supply curve is horizontal, then the: A) classical dichotomy is satisfied. B) money supply cannot affect prices in the short run. C) money supply cannot affect output in the short run. D) money supply is irrelevant in the short run.

B) money supply cannot affect prices in the short run.

If a country has a high rate of inflation relative to the United States, the dollar will buy: A) less of the foreign currency over time. B) more of the foreign currency over time. C) the same amount of the foreign currency over time. D) an amount of foreign currency determined by the real exchange rate.

B) more of the foreign currency over time

If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier. A) more; increase B) more; decrease C) fewer; increase D) fewer; decrease

B) more; decrease

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's: A) desire to increase prices throughout the economy. B) need to generate revenue to pay for spending. C) responsibility to increase nominal interest rates by increasing expected inflation. D) inability to conduct open-market operations.

B) need to generate revenue to pay for spending

The general demand function for real balances depends on the level of income and the: A) real interest rate. B) nominal interest rate. C) rate of inflation. D) price level.

B) nominal interest rate

13. The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance. A) one month B) six to nine months C) one to two years D) five to ten years

B) six to nine months

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should: A) not build because the rate of return on the factory is only 6 percent. B) not build because the rate of return on the factory is only 12 percent. C) build because the rate of return on the factory is 30 percent. D) build because the rate of return on the factory is 35 percent.

B) not build because the rate of return on the factory is only 6 percent

The nominal exchange rate between the U.S. dollar and the Japanese yen is the: A) number of yen you can get for lending one dollar in Japan for one year. B) number of yen you can get for one dollar. C) price of U.S. goods divided by the price of Japanese goods. D) price of Japanese goods divided by the price of U.S. goods.

B) number of yen you can get for one dollar

53. 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) only prices; only output B) only output; only prices C) both prices and output; only prices D) both prices and output; both prices and output

B) only output; only prices

Quantitative easing is most closely akin to: A) discount lending. B) open-market operations. C)fractional-reserve banking. D)capital requirements.

B) open-market operations

59. Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level. A) output decreases and prices are unchanged; rise B) output decreases and prices are unchanged; fall C) output and prices both decrease; rise D) output and prices both decrease; fall

B) output decreases and prices are unchanged; fall

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium: A) both output and the price level will increase. B) output will decrease, but the price level will increase. C) output will increase, but the price level will decrease. D) both output and the price level will decrease.

B) output will decrease, but the price level will increase

58. 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; output B) output; prices C) output; output D) prices; prices

B) output; prices

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively

B) positively; negatively

A competitive, profit-maximizing firm hires labor until the: A) marginal product of labor equals the wage. B) price of output multiplied by the marginal product of labor equals the wage. C) real wage equals the real rental price of capital. D) wage equals the rental price of capital.

B) price of output multiplied by the marginal product of labor equals the wage

An example of a real variable is the: A) dollar wage a person earns. B) quantity of goods produced in a year. C) price level. D) nominal interest rate.

B) quantity of goods produced in a year

To end a hyperinflation, a government trying to reduce its reliance on seigniorage would: A) print more money. B) raise taxes and cut spending. C) lower taxes and increase spending. D) lower interest rates.

B) raise taxes and cut spending

In practice, in order to stop a hyperinflation, in addition to stopping monetary growth, the government must: A) lower taxes and raise government spending. B) raise taxes and reduce government spending. C) change from one kind of currency to another. D) call for a new election.

B) raise taxes and reduce government spending

75. An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output. A) raises; but cannot affect B) raises; and may also lower C) lowers; but cannot affect D) lowers; and may also lower

B) raises; and may also lower

86. Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will: A) be permanently higher and output will be restored to the natural rate. B) return to the old level and output will be restored to the natural rate. C) be permanently higher and output will be permanently lower. D) return to the old level, but output will be permanently lower.

B) return to the old level and output will be restored to the natural rate.

96. If the Fed reduces the money supply by 5 percent, then the real interest rate will: A) rise in both the short run and the long run. B) rise in the short run but return to its original equilibrium level in the long run. C) rise in the short run but will fall below its original equilibrium level in the long run. D) be unaffected in both the short run and the long run.

B) rise in the short run but return to its original equilibrium level in the long run.

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, investment: A) rises by $100 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $100 billion.

B) rises by $60 billion

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving: A) rises by $100 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $100 billion.

B) rises by $60 billion

To reduce the money supply, the Federal Reserve: A) buys government bonds. B) sells government bonds. C) creates demand deposits. D) destroys demand deposits.

B) sells government bonds

The inconvenience associated with reducing money holdings to avoid the inflation tax is called: A) menu costs. B) shoeleather costs. C) variable yardstick costs. D) fixed costs.

B) shoeleather costs

11. Which of the following is a stock variable? a. wealth b. consumption c. investment d. income

10. Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______. A) variations in labor-market utilization; technological progress B) technological progress; variations in labor-market utilization C) money supply growth rates; changes in velocity D) changes in velocity; money supply growth rates

B) technological progress; variations in labor-market utilization

The costs of unexpected inflation, but not of expected inflation, are: A) menu costs. B) the arbitrary redistribution of wealth between debtors and creditors. C) unintended distortions of individual tax liabilities D) the costs of relative price variability.

B) the arbitrary redistribution of wealth between debtors and creditors

In the classical model with fixed income, if households want to save more than firms want to invest, then: A) the interest rate rises. B) the interest rate falls. C) output increases. D) output falls.

B) the interest rate falls

If saving exceeds investment demand, and consumption is not a function of the interest rate: A) the demand for loans exceeds the supply of loans. B) the interest rate will fall. C) the interest rate will rise. D) saving will fall.

B) the interest rate will fall

When the Fed decreases the interest rate paid on reserves, if the ratio of currency to deposits decreases also while the monetary base is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the two changes exactly offset each other.

B) the money supply increases

In a Cobb-Douglas production function the marginal product of labor will increase if: A) the quantity of labor increases. B) the quantity of capital increases. C) capital's share of output increases. D) average labor productivity decreases.

B) the quantity of capital increases

In the long run, what determines the level of total production of goods and services in an economy? A) the interest rate and the amount of national saving B) the quantity of capital, quantity of labor, and production technology C) consumption, investment, and government spending D) the marginal products of capital and labor, constant returns to scale, and competition

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

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a: A) store of value. B) unit of account. C) medium of exchange. D) flow of value.

B) unit of account

The real wage is the return to labor measured in: A) dollars. B) units of output. C) units of labor. D) units of capital.

B) units of output

People use money as a unit of account when they: A) hold money to transfer purchasing power into the future. B) use money as a measure of economic transactions. C) use money to buy goods and services. D) hold money to gain power and esteem.

B) use money as a measure of economic transactions

In the United States, bank reserves consist of: A) currency and demand deposits. B) vault cash and deposits at the Federal Reserve. C) gold deposits at the Federal Reserve. D) the money supply.

B) vault cash and deposits at the Federal Reserve

The quantity theory of money assumes that: A) income is constant. B) velocity is constant. C) prices are constant. D) the money supply is constant.

B) velocity is constant

All of the following are considered major functions of money except as a: A) medium of exchange. B) way to display wealth. C) unit of account. D) store of value.

B) way to display wealth

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

(Exhibit: IS-LM*) A small open economy with a floating exchange rate e2 is initially at equilibrium A with IS, LM, and equilibrium output Y1. If there is an increase in government spending to IS2, the new equilibrium will be at__, holding everything else constant.

(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____ with a _____ price level. A) B; higher B) B; lower C) C; higher D) C; lower

3. (Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______ inducing firms to ______ production. A) rise; increase B) rise; decrease C) fall; increase D) fall; decrease

An LM curve shows combinations of: A) taxes and government spending. B) nominal money balances and price levels. C) interest rates and income, which bring equilibrium in the market for real money balances. D) interest rates and income, which bring equilibrium in the market for goods and services.

An explanation for the slope of the LM curve is that as: A) the interest rate increases, income becomes higher. B) the interest rate increases, income becomes lower. C) income rises, money demand rises, and a higher interest rate is required. D) income rises, money demand rises, and a lower interest rate is required.

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals: A) $200 billion. B) $400 billion. C) $800 billion. D) $1,000 billion.

C) $800 billion

A bank balance sheet consists of only the following items: Deposits $1,000 Reserves $100 Securities $400 Debt $500 Loans $2,000 What is the value of bank capital? A) -$1,000 B) +$500 C) +$1,000 D) +$1,500

C) +$1,000

Assume that the production function is Cobb-Douglas with parameter α = 0.3. If factors are paid their marginal products, capital and labor, respectively, receive the shares of income: A) 0.3 and 0.3. B) 0.7 and 0.7. C) 0.3 and 0.7. D) 0.7 and 0.3.

C) 0.3 and 0.7

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by: A) 0.15 units. B) 0.5 units. C) 0.85 units. D) 1 unit.

C) 0.85 units

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: A) 600. B) 1,100. C) 1,500. D) 2,200.

C) 1,500

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by: A) 70. B) 140. C) 175. D) 250.

C) 175

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals: A) 1,000. B) 2,500. C) 3,000. D) 5,000.

C) 3,000

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ______ times per year. A) 0.2 B) 2 C) 5 D) 10

C) 5

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 increase: A) 2 percent. B) 3 percent. C) 5 percent. D 6 percent.

C) 5 percent

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be: A) 240. B) 700. C) 760. D) 970.

C) 760

69. (Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with price P0 and output Y. 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) A; D B) D; A C) C; B D) B; C

C) C; B

98. 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 increase the quantity of money. B) Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable. C) Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it. D) both Central Bank A and Central Bank B should keep the quantity of money stable.

C) Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.

The quantity of money in the United States is essentially controlled by the: A) President of the United States. B) Department of the Treasury. C) Federal Reserve. D) system of commercial banks.

C) Federal Reserve

Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. Government spending (G) is 1,000 and taxes (T) is also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r: A) I rises by 1,000 and r rises by 10 percentage points. B) I rises by 1,000 and r is unchanged. C) I is unchanged and r rises by 10 percentage points. D) I is unchanged and r rises by 15 percentage points.

C) I is unchanged and r rises by 10 percentage points

An increase in consumer saving for any given level of income will shift the: A) LM curve upward and to the left. B) LM curve downward and to the right. C) IS curve downward and to the left. D) IS curve upward and to the right.

C) IS curve downward and to the left

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______. A) LM; right B) LM; left C) IS; right D) IS; left

C) IS; right

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______. A) IS; shifts to the right B) IS; does not shift C) LM: shifts to the right D) LM; does not shift

C) LM: shifts to the right

Percentage change in P is approximately equal to the percentage change in: A) M. B) M minus percentage change in Y. C) M minus percentage change in Y plus percentage change in velocity. D) M minus percentage change in Y minus percentage change in velocity.

C) M minus percentage change in Y plus percentage change in velocity

In a closed economy, the components of GDP are: A) consumption, investment, government purchases, and exports. B) consumption, investment, government purchases, and net exports. C) consumption, investment, and government purchases. D) consumption and investment.

C) consumption, investment, and government purchases

According to Goldin and Katz, the increasing income inequality of recent decades is the result of: A) increases in the rates of technological advance and educational attainment. B) decreases in the rates of technological advance and educational attainment. C) a steady pace of technological advance and a slowdown in educational advance. D) a decrease in the rate of technological advance and an increase in the rate of educational advance.

C) a steady pace of technological advance and a slowdown in educational advance

54. In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where: A) aggregate demand is greater than long-run aggregate supply. B) aggregate demand equals short-run aggregate supply. C) aggregate demand equals short-run and long-run aggregate supply. D) short-run aggregate supply equals long-run aggregate supply.

C) aggregate demand equals short-run and long-run aggregate supply.

If the purchasing-power parity theory is true, then: A) the net exports schedule is very steep. B) all changes in the real exchange rate result from changes in price levels. C) all changes in the nominal exchange rate result from changes in price levels. D) changes in saving or investment influence only the real exchange rate.

C) all changes in

In a country on a gold standard, the quantity of money is determined by the: A) government. B) central bank. C) amount of gold. D) buying and selling of government securities.

C) amount of gold

.39. In the long run, the level of output is determined by the: A) interaction of supply and demand. B) money supply and the levels of government spending and taxation. C) amounts of capital and labor and the available technology. D) preferences of the public.

C) 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: A) number of workers is doubled, twice as much bread will be produced. B) amount of equipment is doubled, twice as much bread will be produced. C) amounts of equipment and workers are both doubled, twice as much bread will be produced. D) amounts of equipment and workers are both doubled, four times as much bread will be produced.

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

Economists use the term money to refer to: A) income. B) profits. C) assets used for transactions. D) earnings from labor.

C) assets used for transactions

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when: A) real interest rates are high. B) real interest rates are low. C) average labor productivity is growing rapidly. D) capital's share of income is growing rapidly.

C) average labor productivity is growing rapidly

One possible benefit of moderate inflation is: A) a reduction in boredom attributable to the changing prices. B) the elimination of menu costs. C) better functioning labor markets. D) increased certainty about the future.

C) better functioning labor markets

Checking account balances that are linked to debit cards are included in: A) M1. B) M2 only. C) both M1 and M2. D) neither M1 nor M2.

C) both M1 and M2

An example of increasing returns to scale is when capital and labor inputs: A) both increase 10 percent and output increases 5 percent. B) both increase 10 percent and output increases 10 percent. C) both increase 5 percent and output increases 10 percent. D) do not change and output decreases 5 percent.

C) both increase 5 percent and output increases 10 percent

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on: A) only the current money supply. B) only the expected future money supply. C) both the current and expected future money supply. D) neither the current nor the expected future money supply.

C) both the current and expected future money supply

If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts: A) the real wage will rise and the real rental price of capital will fall. B) both the real wage and the real rental price of capital will fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise.

C) both the real wage and the real rental price of capital will rise

2. Short-run fluctuations in output and employment are called: A) sectoral shifts. B) the classical dichotomy. C) business cycles. D) productivity slowdowns.

C) business cycles

The two most important factors of production are: A) goods and services. B) labor and energy. C) capital and labor. D) saving and investment.

C) capital and labor

31. The aggregate demand curve tells us possible: A) combinations of M and Y for a given value of P. B) combinations of M and P for a given value of Y. C) combinations of P and Y for a given value of M. D) results if the Federal Reserve reduces the money supply.

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

61. The economic response to the overnight reduction in the French money supply by 20 percent in 1724, A) confirmed the neutrality of money because no real variables were affected by this nominal change. B) confirmed the quantity theory by leading to an immediate 20 percent reduction in the price level. C) confirmed that money is not neutral in the short run because both output and prices dropped. D) contradicted Okun's law because decreases in output were not associated with increases in unemployment.

C) confirmed that money is not neutral in the short run because both output and prices dropped.

If an increase of an equal percentage in all factors of production results in an increase in output of the same percentage, then a production function has the property called: A) constant marginal product of labor. B) increasing marginal product of labor. C) constant returns to scale. D) increasing returns to scale.

C) constant returns to scale

According to the model developed in Chapter 3, when taxes decrease without a change in government spending: A) consumption and investment both increase. B) consumption and investment both decrease. C) consumption increases and investment decreases. D) consumption decreases and investment increases.

C) consumption increases and investment decreases

The demand for output in a closed economy is the sum of: A) public saving and private saving. B) the quantity of capital and labor and production technology. C) consumption, investment, and government spending. D) government purchases and transfer payments minus tax receipts.

C) consumption, investment, and government spending

An unexpected deflation can change demand by redistributing wealth from: A) creditors to debtors, thus raising consumption. B) creditors to debtors, thus lowering consumption. C) debtors to creditors, thus lowering consumption. D) debtors to creditors, thus raising consumption.

C) debtors to creditors, thus lowering consumption

According to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates: A) increase. B) are unchanged. C) decrease. D) can vary wildly.

C) decrease

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

C) decrease; appreciates

If inflation is 6 percent and a worker receives a 4 percent nominal wage increase, then the worker's real wage: A) increased 4 percent. B) increased 2 percent. C) decreased 2 percent. D) decreased 6 percent.

C) decreased 2 percent

5. When GDP growth declines, investment spending typically ______ and consumption spending typically ______. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

C) decreases; decreases

In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving ______ and private saving ______. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; does not change

C) decreases; increases

22. A difference between the economic long run and the short run is that: A) the classical dichotomy holds in the short run but not in the long run. B) monetary and fiscal policy affect output only in the long run. C) demand can affect output and employment in the short run, whereas supply is the ruling force in the long run. D) prices and wages are sticky in the long run only.

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

One consequence of high inflation is a(n): A) appreciating nominal exchange rate. B) decrease in the price of goods measured in terms of money. C) depreciating nominal exchange rate. D) decrease in the price of foreign currencies measured in terms of the domestic currency.

C) depreciating nominal exchange rate

The interest rate charged on loans by the Federal Reserve to banks is called the: A) federal funds rate. B) prime rate. C) discount rate. D) Treasury bill rate.

C) discount rate

A consumption function shows the relationship between consumption and: A) income. B) personal income. C) disposable income. D) taxes.

C) disposable income

52. The long run refers to a period: A) of decades. B) during which capital and labor are sometimes not fully employed. C) during which prices are flexible. D) during which output deviates from the full-employment level.

C) during which prices are flexible.

Devoting resources to avoiding the costs of expected inflation leads to: A) eliminating the costs of expected inflation. B) fewer relative price changes. C) economic inefficiency. D) a decrease in the transaction velocity of money.

C) economic inefficiency

Accounting profit is: A) economic profit minus the return to capital. B) equal to economic profit. C) economic profit plus the return to capital. D) equal to the economic return to capital.

C) economic profit plus the return to capital

The public policy implication of Goldin and Katz's analysis of growing income inequality is that reversing this trend will require that more of society's resources be put into: A) space exploration. B) capital expenditures. C) education. D) transfer payments.

C) education

Protectionist policies in a small open economy do not alter the trade balance because the: A) quantity of imports and exports is fixed. B) interest rate adjusts to offset any reductions in imports. C) exchange rate appreciates to offset the increase in net exports. D) level of net capital outflow is fixed by the world interest rate.

C) exchange rate appreciates to offset the increase in net exports

A production function is a technological relationship between: A) factor prices and the marginal product of factors. B) factors of production and factor prices. C) factors of production and the quantity of output produced. D) factor prices and the quantity of output produced.

C) factors of production and the quantity of output produced

In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate: A) rises and net exports fall. B) and net exports both rise. C) falls and net exports rise. D) and net exports both fall.

C) falls and net exports rise

In the IS-LM model when M/P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls

C) falls; rises

The government spending component of GDP includes all of the following except: A) federal spending on goods. B) state and local spending on goods. C) federal spending on transfer payments. D) federal spending on services.

C) federal spending on transfer payments

89. In the mid-1980s, oil prices ______, inflation was ______, and the unemployment rate ______. A) rose rapidly; high; rose B) rose slowly; moderate; high C) fell; low; declined D) fell; low; rose

C) fell; low; declined

Most hyperinflations end with _____ reforms that eliminate the need for _____. A) monetary; taxes B) monetary; currency C) fiscal; seigniorage D) fiscal; currency

C) fiscal; seigniorage

62. When the French money supply was reduced by 45 percent over a period of seven months in 1724, the only values in the economy that adjusted fully and instantaneously were: A) prices in grain markets. B) real wages. C) foreign exchange rates. D) interest rates.

C) foreign exchange rates.

According to the classical theory of money, inflation does not make workers poorer because wages increase: A) faster than the overall price level. B) more slowly than the overall price level. C) in proportion to the increase in the overall price level. D) in real terms during periods of inflation.

C) in proportion to the increase in the overall price level

The neoclassical theory of distribution explains the allocation of: A) output between goods and services. B) output among consumption, investment, and government spending. C) income among factors of production. D) income between saving and investment.

C) income among factors of production

National saving refers to: A) disposable income minus consumption. B) taxes minus government spending. C) income minus consumption minus government spending. D) income minus investment.

C) income minus consumption minus government spending

If the real exchange rate decreases, then net exports will _____. A) be positive. B) be negative. C) increase. D) decrease.

C) increase

The demand for real money balances is generally assumed to: A) be exogenous. B) be constant. C) increase as real income increases. D) decrease as real income increases.

C) increase as real income increases

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: A) decrease by 8 percent. B) decrease by 4 percent. C) increase by 4 percent. D) increase by 5 percent.

C) increase by 4 percent

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will: A) increase by $1 million. B) decrease by $1 million. C) increase by more than $1 million. D) decrease by more than $1 million.

C) increase by more $1 million

In the classical model with fixed income a decrease in the real interest rate could be the result of a(n): A) increase in government spending. B) increase in desired investment. C) increase in taxes. D) decrease in taxes.

C) increase in taxes

55. If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______ and output will ______. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase

C) increase; decrease

In a small open economy, if the world interest rate increases, then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____, holding all else constant. A) decrease; decrease B) decrease; increase C) increase; decrease D) increase; increase

C) increase; decrease

In a small open economy, if the government encourages investment, through, say, an investment tax credit, investment: A) increases and is financed through an increase in national saving. B) increases and is financed through an increase in exports. C) increases and is financed through an inflow of foreign capital. D) does not increase; the interest rate rises instead.

C) increases and is financed through an inflow of foreign capital

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings: A) decreases by 0.85 units. B) decreases by 0.15 units. C) increases by 0.15 units. D) increases by 0.85 units.

C) increases by 0.15 units

A liquidity trap occurs when: A) banks have too much currency and close their doors to new customers. B) the central bank mistakenly prints too much money, generating hyperinflation. C) interest rates fall so low that monetary policy is no longer effective. D) dams and locks are built to prevent flooding.

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

The demand for the economy's output: A) is always equal to the supply, regardless of the interest rate. B) may be computed provided that we know disposable income. C) is equal to consumption, investment, and government purchases. D) is determined by government purchases and taxes.

C) is equal to consumption, investment, and government purchases

In the United States, the money supply is determined: A) only by the Fed. B) only by the behavior of individuals who hold money and of banks in which money is held. C) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held. D) according to a constant-growth-rate rule.

C) jointly by the Fed and by the behavior of individuals who hold money and of banks in which money is held

The quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in _____ increases in the monetary base and _____ increases in money supply. A) no; no B) large; larger C) large; smaller D) small; smaller

C) large; smaller

The money hypothesis suggests that the Great Depression was caused by a: A) leftward shift in the IS curve. B) rightward shift in the IS curve. C) leftward shift in the LM curve. D) rightward shift in the LM curve.

C) leftward shift in the LM curve

When the demand for loanable funds exceeds the supply of loanable funds, households want to save ______ than firms want to invest and the interest rate ______. A) more; rises B) more; falls C) less; rises D) less; falls

C) less; rises

Assets of banks include: A) money market mutual funds. B) currency in the hands of the public. C) loans to customers. D) demand deposits.

C) loans to customers

33. 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 ______. A) greater; inward B) greater; outward C) lower; inward D) lower; outward

C) lower; inward

The ex ante real interest rate is equal to the nominal interest rate: A) minus the inflation rate. B) plus the inflation rate. C) minus the expected inflation rate. D) plus the expected inflation rate.

C) minus the expected inflation rate

The money supply will increase if the: A) currency-deposit ratio increases. B) reserve-deposit ratio increases. C) monetary base increases. D) discount rate increases.

C) monetary base increases

Open-market operations change the ______; changes in interest rate paid on reserves change the ______; and changes in the discount rate change the ______. A) monetary base; monetary base; monetary base B) money multiplier; money multiplier; money multiplier C) monetary base; money multiplier; monetary base D) money multiplier; monetary base; money multiplier

C) monetary base; money multiplier; monetary base

Macroeconomists call assets used to make transactions: A) real income. B) nominal income. C) money. D) consumption.

C) money

Variable inflation hurts both debtors and creditors because: A) inflation makes the money-fixed assets of creditors worth less. B) inflation makes the money-fixed liabilities of debtors worth less. C) most debtors and creditors are risk averse. D) most debtors and creditors are risk neutral.

C) most debtors and creditors are risk averse

In equilibrium, total investment equals: A) private saving. B) public saving. C) national saving. D) household saving.

C) national saving

In a large open economy, the exchange rate adjusts so that net exports equal: A) domestic saving. B) domestic investment. C) net capital outflow. D) domestic investment plus net capital outflow.

C) net capital outflow

The real exchange rate is determined by the equality of: A) saving and the demand for net exports. B) investment and the demand for net exports. C) net capital outflow and the demand for net exports. D) the negative value of net capital outflow and the demand for net exports.

C) net capital outflow and demand for net exports

The concept of monetary neutrality in the classical model means that an increase in the money supply will increase: A) real GDP. B) real interest rates. C) nominal interest rates. D) both saving and investment by the same amount.

C) nominal interest rates

If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate. A) increase B) decrease C) not change D) either increase or decrease

C) not change

The transactions velocity of money indicates the _____ in a given period, while the income velocity of money indicates the _____ in a given period. A) number of transactions; amount of income earned B) quantity of money used for transactions; quantity of money paid as income C) number of times a dollar bill changes hands; number of times a dollar bill enters someone's income D) volume of transactions; flow of income

C) number of times a dollar bill changes hands; number of times a dollar bill enters someone's income

In Zimbabwe in the 1990s the government resorted to printing money to pay the salaries of government employees because: A) it was a means to avoid price controls. B) of high rates of inflation. C) of declining tax revenues. D) of a need to stimulate the economy.

C) of declining tax revenues

19. Alan Blinder's survey of firms found that the typical firm adjusts its prices: A) more than once a week. B) about once a month. C) once or twice a year. D) less than once a year.

C) once or twice a year.

The rate of inflation is the: A) median level of prices. B) average level of prices. C) percentage change in the level of prices. D) measure of the overall level of prices.

C) percentage change in the level of prices

The currency-deposit ratio is determined by: A) the Federal Reserve. B) business policies of banks and the laws regulating banks. C) preferences of households about the form of money they wish to hold. D) the Federal Deposit Insurance Corporation (FDIC).

C) preferences of households about the form of money they wish to hold

81. In the short run, a favorable supply shock causes: A) both prices and output to rise. B) prices to rise and output to fall. C) prices to fall and output to rise. D) both prices and output to fall.

C) prices to fall and output to rise.

94. If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and: A) prices will remain unchanged in the long run. B) output will fall 5 percent in the long run. C) prices will fall 5 percent in the long run. D) output will remain unchanged in the long run.

C) prices will fall 5 percent in the long run.

38. A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______. A) output; output B) prices; prices C) prices; output D) output; prices

C) prices; output

The hyperinflation experienced by interwar Germany illustrates how fiscal policy can be connected to monetary policy when government expenditures are financed by: A) new taxes. B) borrowing in the open market. C) printing large quantities of money. D) selling gold.

C) printing large quantities of money

National saving is: A) private saving. B) public saving. C) private saving plus public saving. D) private saving minus public saving.

C) private saving plus public saving

In a closed economy with fixed output, when government spending increases: A) private saving decreases. B) private saving increases. C) public saving decreases. D) public saving increases.

C) public saving decreases

A competitive firm chooses the: A) price at which to sell the product produced. B) wage to pay labor. C) quantity of labor and capital to employ. D) rental price to pay capital.

C) quantity of labor and capital to employ

Other things equal, an expected deflation can change demand by: A) lowering the demand for money, thus shifting the LM curve. B) increasing the demand for money, thus shifting the LM curve. C) raising the real interest rate for any given nominal interest rate, thus reducing desired investment. D) lowering the real interest rate for any given nominal interest rate, thus increasing desired investment.

C) raising the real interest rate for any given nominal interest rate, thus reducing desired investment

The supply and demand for loanable funds determines the: A) real wage. B) real rental price of capital. C) real interest rate. D) nominal interest rate.

C) real interest rate

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate. A) real; real B) nominal; nominal C) real; nominal D) nominal; real

C) real; nominal

Compared to periods of lower rates of inflation, during a hyperinflation all of the following occur except: A) shoeleather costs increase. B) menu costs become larger. C) relative prices do a better job of reflecting true scarcity. D) tax distortions increase.

C) relative pries do a better job of reflecting true scarcity

In a neoclassical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will: A) rise $100 billion. B) rise $60 billion. C) rise $40 billion. D) not change.

C) rise $40 billion

83. Stagflation occurs when prices ______ and output ______. A) fall; falls B) fall; increases C) rise; falls D) rise; increases

C) rise; falls

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. A) purchases; raise B) purchases; lower C) sales; raise D) sales; lower

C) sales; raise

The major source of government revenue in most countries that are experiencing hyperinflation is: A) customs duties. B) income taxes. C) seigniorage. D) borrowing.

C) seigniorage

73. A supply shock does not occur when: A) a drought destroys crops. B) unions push wages up. C) the Fed increases the money supply. D) an oil cartel increases world oil prices.

C) the Fed increases the money supply.

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by: A) the Organization of Petroleum Exporting Countries (OPEC). B) the U.S. Treasury. C) the Federal Reserve. D) private citizens.

C) the Federal Reserve

In the United States, monetary policy is controlled by: A) the President. B) the Congress. C) the Federal Reserve. D) the Treasury Department.

C) the Federal Reserve

43. The natural level of output is: A) affected by aggregate demand. B) the level of output at which the unemployment rate is zero. C) the level of output at which the unemployment rate is at its natural level. D) permanent and unchangeable.

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

High-powered money is another name for: A) currency. B) demand deposits. C) the monetary base. D) M2.

C) the monetary base

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change.

C) the money supply decreases

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then: A) it cannot be determined whether the money supply increases or decreases. B) the money supply increases. C) the money supply decreases. D) the money supply does not change.

C) the money supply decreases

41. The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on: A) the labor supply. B) the supply of capital. C) the money supply. D) technology.

C) the money supply.

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases: A) output. B) velocity C) the nominal interest rate. D) the real interest rate.

C) the nominal interest rate

According to the classical dichotomy, when the money supply decreases, _____ will decrease. A) real GDP B) consumption spending C) the price level D) investment spending

C) the price level

An economic change that does not shift the aggregate demand curve is a change in: A) the money supply. B) the investment function. C) the price level. D) taxes.

C) the price level

Financial intermediation is the process of: A) settling disputes between borrowers and lenders. B) advising corporations on whether to expand using debt or equity. C) transferring funds from savers to borrowers. D) converting from a barter economy to a money economy.

C) transferring funds from savers to borrowers

11. Leading economic indicators are: A) the most popular economic statistics. B) data that are used to construct the consumer price index and the unemployment rate. C) variables that tend to fluctuate in advance of the overall economy. D) standardized statistics compiled by the National Bureau of Economic Research.

C) variables that tend to fluctuate in advance of the overall economy.

14. Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity. A) stronger; stronger B) stronger; weaker C) weaker; stronger D) weaker; weaker

C) weaker; stronger

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly: A) labor's share of total income will be increasing. B) labor's share of income will be decreasing. C) workers will experience high rates of real wage growth. D) economic profits will be positive.

C) workers will experience high rates of real wage growth

(Exhibit: IS and LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS, LM, Holding all else constant, if the government imposes a tariff on imports in order to protect domestic jobs, then the___curve will shift to__.

C. IS*1, IS2

(Exhibit: IS*-LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS1, LM1 equilibrium exchange rate e2, and equilibrium output Y1. If there is a monetary expansion to LM*2 the new equilibrium will be at ____, holding everything else constant.

(Exhibit: IS-LM Monetary Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y3

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant: A) the aggregate demand curve will shift to the right. B) the aggregate demand curve will shift to the left. C) this represents a movement up the aggregate demand curve. D) this represents a movement down the aggregate demand curve.

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant the Federal Reserve should _____ the money supply shifting to _____. A) increase; LM2 B) decrease; LM2 C) increase; LM3 D) decrease; LM3

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: A) 100. B) 200. C) 300. D) 400.

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: A) left by 100. B) left by 200. C) right by 100. D) right by 200.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

The home that would have the highest mortgage payment on a 30-year fixed-rate mortgage would be a home with a mortgage of: A) $200,000 at 8 percent. B) $100,000 at 12 percent. C) $100,000 at 8 percent. D) $200,000 at 12 percent.

D) $200,000 at 12 percent

During the American Revolution, the price of gold measured in continental dollars increased to more than ______ times its previous level. A) 2 B) 10 C) 50 D) 100

D) 100

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: A) 5 percent. B) 8 percent. C) 10 percent. D) 13 percent.

D) 13 percent

95. Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about: A) 5 percent in both the short run and the long run. B) 2.5 percent in both the short run and the long run. C) 5 percent in the short run but will return to its natural rate in the long run. D) 2.5 percent in the short run but will return to its natural rate in the long run.

D) 2.5 percent in the short run but will return to its natural rate in the long run.

An increase in income raises money ______ and ______ the equilibrium interest rate. a. demand; raises b. demand; lowers c. supply; raises d. supply; lowers

a. demand; raises

According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed: A) only to the labor used in production. B) partly between labor and capital used in production, with the surplus going to the owners of the firm as profits. C) equally between the labor and capital used in production. D) between the labor and capital used in production, according to their marginal productivities.

D) between the labor and capital used in production, according to their marginal productivities

If the Fed announces that it will raise the money supply in the future but does not change the money supply today, A) both the nominal interest rate and the current price level will decrease. B) the nominal interest rate will increase and the current price level will decrease. C) the nominal interest rate will decrease and the current price level will increase. D) both the nominal interest rate and the current price level will increase.

D) both the nominal interest rate and the current price level will increase

In a 100-percent-reserve banking system, banks: A) can increase the money supply. B) can decrease the money supply. C) can either increase or decrease the money supply. D) cannot affect the money supply.

D) cannot affect the money supply

The minimum amount of owners' equity in a bank mandated by regulators is called a _____ requirement. A) reserve B) margin C) liquidity D) capital

D) capital

The circular flow model shows that households use income for: A) consumption, saving, and factor payments. B) consumption, taxes, and factor payments. C) taxes, saving, and factor payments. D) consumption, taxes, and saving.

D) consumption, taxes, and saving

The difference between banks and other financial intermediaries is that only banks have the legal authority to: A) transfer funds from savers to borrowers. B) pay interest on debt obligations. C) manage portfolios of assets. D) create assets that are part of the money supply.

D) create assets that are part of the money supply

The reduction in investment brought about by the increase in the interest rate caused by increased government spending is called: A) a budget deficit. B) fiscal policy. C) the identification problem. D) crowding out.

D) crowding out

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. A) increase; IS B) decrease; IS C) increase; LM D) decrease; LM

D) decrease; LM

56. If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will ______ and output will ______. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase

D) decrease; increase

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when the government lowers taxes on business investment, thus increasing desired investment, but does not change government spending or change any taxes that affect disposable income, then the quantity of investment: A) increases and the interest rate rises. B) is unchanged and the interest rate rises. C) and the interest rate are both unchanged. D) decreases and the interest rate rises.

D) decreases and the interest rate rises

When the Fed makes an open-market sale, it: A) increases the money multiplier (m). B) increases the currency-deposit ratio (cr). C) increases the monetary base (B). D) decreases the monetary base (B).

D) decreases the monetary base (B)

The income velocity of money increases and the money demand parameter k ______ when people want to hold ______ money. A) increases; more B) increases; less C) decreases; more D) decreases; less

D) decreases; less

The price received by each factor of production for its services is determined by: A) demand for output and supply of factors. B) demand for factors and supply of output. C) demand and supply of output. D) demand and supply of factors.

D) demand and supply of factors

Liabilities of banks include: A) reserves. B) currency in the hands of the public. C) loans to customers. D) demand deposits.

D) demand deposits

26. The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant: A) short-run aggregate supply curve. B) long-run aggregate supply curve. C) price level in the short run. D) demand for real balances per unit of output.

D) demand for real balances per unit of output.

Bank reserves equal: A) gold kept in bank vaults. B) gold kept at the central bank. C) currency plus demand deposits. D) deposits that banks have received but have not lent out.

D) deposits that banks have received but have not lent out

In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on _____ , the amount of investment spending depends on _____, and the amount of government spending is determined _____. A) the interest rate; disposable income; by tax revenue B) the real wage; the real rental price of capital; by factor prices C) labor's share of output; capital's share of output; by the interest rate D) disposable income; the interest rate; exogenously

D) disposable income; the interest rate; exogenously

Credit cards: A) are part of the M1 money supply. B) are part of the M2 money supply. C) are part of both the M1 and M2 money supply. D) do not affect the money supply.

D) do not affect the money supply

In a large open economy, the interest rate adjusts so that domestic saving equals: A) domestic investment. B) net exports. C) net capital outflow. D) domestic investment plus net capital outflow.

D) domestic investment plus net capital outflow

The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases. A) upward; fewer B) upward; more C) downward; fewer D) downward; more

D) downward; more

Public saving is: A) always positive. B) always negative. C) always zero. D) either positive, negative, or zero.

D) either positive, negative, or zero

92. If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will: A) fall and in the long run prices will remain unchanged. B) remain unchanged and in the long run prices will fall. C) remain unchanged and in the long run prices will remain unchanged. D) fall and in the long run prices will fall.

D) fall and in the long run prices will fall.

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate: A) rises and net exports fall. B) rises and net exports rise. C) falls and net exports fall. D) falls and net exports rise.

D) falls and net exports rise

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving: A) rises by $40 billion. B) rises by $60 billion. C) falls by $60 billion. D) falls by $40 billion.

D) falls by $40 billion

Public saving is: A) income minus consumption minus government spending. B) disposable income minus consumption. C) disposable income minus government spending. D) government revenue minus government spending.

D) government revenue minus government spending

17. A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent: A) in both the short and long runs. B) in neither the short nor long run. C) in the short run but lead to unemployment in the long run. D) in the long run but lead to unemployment in the short run.

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

60. Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in: A) both the short run and the long run. B) in neither the short run nor the long run. C) in the short run, but not in the long run. D) in the long run, but not in the short run.

D) in the long run, but not in the short run.

9. 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 fell by 1 percentage point over a year, Okun's law predicts that real GDP would: A) decrease by 1 percent. B) decrease by 2 percent. C) increase by 4 percent. D) increase by 5 percent.

D) increase by 5 percent.

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

D) 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; decrease B) decrease; increase C) increase; decrease D) increase; increase

D) increase; increase

According to the model developed in Chapter 3, when government spending increases without a change in taxes: A) consumption increases. B) consumption decreases. C) investment increases. D) investment decreases.

D) investment decreases

1. Business cycles are: A) regular and predictable. B) irregular but predictable. C) regular but unpredictable. D) irregular and unpredictable.

D) irregular and unpredictable.

The neoclassical theory of distribution: A) was developed by Karl Marx. B) is rejected by most economists today. C) shows that the national income of an economy is not equal to total output. D) is a theory of how national income is divided among the factors of production.

D) is a theory of how national income is divided among the factors of production

With a Cobb-Douglas production function, the share of output going to labor: A) decreases as the amount of labor increases. B) increases as the amount of labor increases. C) increases as the amount of capital increases. D) is independent of the amount of labor.

D) is independent of the amount of labor

When the Fed increases the discount rate, it: A) increases the reserve to deposit ratio (rr). B) decreases the reserve to deposit ratio (rr). C) is likely to increase the monetary base (B) D) is likely to decrease the monetary base (B).

D) is likely to decrease the monetary base (B)

If the demand for real money balances does not depend on the interest rate, then the LM curve: A) slopes up to the right. B) slopes down to the right. C) is horizontal. D) is vertical.

D) is vertical

40. When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: A) slopes upward and to the right. B) slopes downward and to the right. C) is horizontal. D) is vertical.

D) is vertical.

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers ______ raises. A) more; larger B) more; smaller C) less; larger D) less; smaller

D) less; smaller

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. A) high; exceeds B) high; falls short of C) low; exceeds D) low; falls short of

D) low; falls short of

To increase the money multiplier, the Fed can: A) conduct open-market purchases. B) conduct open-market sales. C) raise the interest rate paid on reserves. D) lower the interest rate paid on reserves.

D) lower the interest paid on reserves

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates. A) increase; lower B) increase; raise C) lower; lower. D) lower; raise

D) lower; raise

An increase in the money supply: A) increases income and lowers the interest rate in both the short and long runs. B) increases income in both the short and long runs, but leaves the interest rate unchanged in the long run. C) lowers the interest rate in both the short and long runs, but leaves income unchanged in the long run. D) lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run.

D) lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run

The idea that the amount of any currency that can buy a particular good in one country should be able to buy (after being exchanged for the local currency) the same quantity of the same good anywhere in the world is called: A) the theory of the real exchange rate. B) equal currency conversion. C) international monetary exchange. D) purchasing-power parity.

D) purchasing power parity

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the: A) money supply is constant. B) velocity is constant. C) inflation rate is constant. D) real interest rate is constant.

D) real interest rate is constant

If the demand for real money balances is proportional to real income, velocity will: A) increase as income increases. B) increase as income decreases. C) vary directly with the interest rate. D) remain constant.

D) remain constant

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply: A) increases by $100. B) decreases by $100. C) increases by more than $100. D) remains the same.

D) remains the same

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 ______. A) resulting from a change in monetary policy; resulting from a change in fiscal policy B) resulting from a change in fiscal policy; resulting from a change in monetary policy C) at a given price level; resulting from a change in the price level D) resulting from a change in the price level; at a given price level

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

If consumption depends positively on the level of real balances and real balances depend negatively on the nominal interest rate in a neoclassical model, then the nominal interest rate: A) declines when the money growth rate rises. B) is unchanged when the money growth rate rises. C) rises 1 percent for each 1 percent rise in the money growth rate. D) rises less than 1 percent for each 1 percent rise in the money growth rate.

D) rises less than 1 percent for each 1 percent rise in the money growth rate

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left. A) buy; IS B) buy; LM C) sell; IS D) sell; LM

D) sell; LM

D) sell; buy; down

12. A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production. A) increase; slowdown B) increase; increase C) slowdown; increase D) slowdown; slowdown

D) slowdown; slowdown

When the demand for money parameter, k, is large, the velocity of money is ______ and money is changing hands ______ A) large; frequently B) large; infrequently C) small; frequently D) small; infrequently

D) small; frequently

In fourteenth-century Europe, the bubonic plague: A) reduced the population of Europe by about one-half. B) substantially increased economic output in Europe. C) substantially increased real rentals on land in Europe. D) substantially increased real wages in Europe.

D) substantially increased real wages in Europe

If the nominal interest increases, then: A) the money supply increases. B) the money supply decreases. C) the demand for money increases. D) the demand for money decreases.

D) the demand for money decreases

A depreciation of the real exchange rate in a small open economy could be the result of: A) a domestic tax cut. B) an increase in government spending. C) a decrease in the world interest rate. D) the expiration of an investment tax-credit provision.

D) the expiration of an investment tax-credit provision

The phrase "inflation is repudiation" applies only if: A) inflation is expected. B) the government has no debt. C) the government is a creditor. D) the government is a debtor.

D) the government is a debtor

What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale? A) the relative quantity of labor to capital B) the interest rate C) the ratio of public saving to private saving D) the marginal productivity of labor relative to the marginal productivity of capital

D) the marginal productivity of labor relative to the marginal productivity of capital

27. Along an aggregate demand curve, which of the following are held constant? A) real output and prices B) nominal output and velocity C) the money supply and real output D) the money supply and velocity

D) the money supply and velocity

In the classical model, what adjusts to eliminate any unemployment of labor in the economy? A) the average price level B) the interest rate C) the real rental price of capital D) the real wage

D) the real wage

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts: A) the real wage will rise and the real rental price of capital will fall. B) both the real wage and the real rental price of capital will fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise.

D) the real wage will fall and the real rental price of capital will rise

If increased immigration raises the labor force, the neoclassical theory of distribution predicts: A) the real wage will rise and the real rental price of capital will fall. B) both the real wage and the real rental price of capital will fall. C) both the real wage and the real rental price of capital will rise. D) the real wage will fall and the real rental price of capital will rise.

D) the real wage will fall and the real rental price of capital will rise

Currency equals: A) M1. B) the sum of funds in checking accounts. C) the sum of checking accounts and paper money. D) the sum of coins and paper money.

D) the sum of coins and paper money

1. An "open" economy is one in which: A) the level of output is fixed. B) government spending exceeds revenues. C) the national interest rate equals the world interest rate. D) there is trade in goods and services with the rest of the world.

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

According to Euler's theorem, if competitive firms pay each factor its marginal product and the production function has constant returns to scale, the sum of all factor payments will equal: A) total investment. B) total saving. C) total profits. D) total output.

D) total output

The quantity equation, viewed as an identity, is a definition of the: A) quantity of money. B) quantity of transactions. C) price level. D) transactions velocity of money.

D) transactions velocity of money

A variable rate of inflation is undesirable because: A) debtors and creditors cannot protect themselves by indexing contracts. B) shoeleather costs are greater under variable inflation than under constant inflation. C) menu costs are greater under variable inflation than under constant inflation. D) variable inflation leads to greater uncertainty and risk as compared to constant inflation.

D) variable inflation leads to greater uncertainty and risk as compared to constant inflation

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by: A) G/(1 - MPC). B) more than zero but less than G/(1 - MPC). C) G. D) zero.

D) zero

(Exhibit: IS and LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS, LM, Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the___curve will shit to___

D. IS*, IS3

Why is the domestic output not equal to domestic spending in an open economy? Explain.

In an open economy, domestic output could be exported while foreign output could be imported through international trade. This results in the difference between the domestic spending and domestic output

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes net exports to _______, and expansionary monetary policy causes net exports to ______.

Decrease; Increase

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

Decreased

In a small open economy with a fixed exchange rate, if the country devaules its currency, then in the new short-run equilibrium rate ______, and the LM* curve shifts to the _______.

Decreases; right

In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports:

Increase, the money supply increases, and income increases

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

Exchange Rate

According to the Mundell-Fleming model, under:

Floating exchange rates, a monetary expansion raises income whereas a fiscal expansion does not, but under fixed exchange rates, a fiscal expansion raises income whereas a monetary expansion does not

A country's exports may be written as equal to

GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services.

(Exhibit: Shifting IS* and LM*) A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if the government imposes a tariff on imports in order to protect domestic jobs, then the _____ curve will shift to _____.

IS; IS*2

Exhibit: Shifting IS* and LM*

IS; IS*3

Major improvements in computer information technology and communications in the late 1990s fueled an increase in investment demand in the United States, which is a large open economy. What is the predicted impact of this increased investment demand in the United States on the U.S. interest rate, the U.S. exchange rate, and U.S. net exports, holding other factors constant? Illustrate your answer graphically and explain in words.

The increase in domestic investment demand will increase the US interest rate. The higher domestic interest rate will reduce net capital outflows. The reduced supply of dollars in the foreign exchange market will increase the US exchange rate. The higher real exchange rate makes US exports less competitive and imports more attractive, reducing US net exports

In times of great economic uncertainty and potential job loss, many consumers may increase their saving as a precautionary measure. What is the predicted impact of an increase in national saving on the domestic interest rate and exchange rate in a large open economy, holding other factors constant? Illustrate your answer graphically and explain in words.

The increase in national saving will decrease the domestic interest rate. The lower interest rate will increase the amount of net capital outflows, which will decrease the domestic exchange rate as the supply of the domestic currency in the foreign exchange market increases

In the 2008 global financial crisis, many investors considered the U.S. economy a safe place to move their assets. What is the predicted impact of this inflow of financial capital to the United States, which is a large open economy, on the U.S. interest rate and the U.S. exchange rate, holding other factors constant? Illustrate your answer graphically and explain in words.

The reduction in net capital outflows reduces the demand for loanable funds, which reduces the domestic interest rate. The lower domestic interest rate partially offsets some of the initial decrease in net capital outflows from the US, but there is an overall decrease in the net capital outflows. The reduction in net capital inflows reduces the supply of dollars in the foreign exchange market and increases the real exchange rate

(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are:

Y2 and PE2.

26. 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: a. $20,000. b. $20,000 less the automobile company's profit on the car. c. $20,900. d. $20,900 less the profits of all three companies on the items that they sold.

3. GDP is all of the following except the total: a. expenditure of everyone in the economy. b. income of everyone in the economy. c. expenditure on the economy's output of goods and services. d. output of the economy.

4. The total income of everyone in the economy is exactly equal to the total: a. expenditure on the economy's output of goods and services. b. consumption expenditures of everyone in the economy. c. expenditures of all businesses in the economy. d. government expenditures.

42. If the GDP deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009? a. $12 trillion b. $12.5 trillion c. $15 trillion d. $18.75 trillion

43. The GDP deflator is equal to: a. the ratio of nominal GDP to real GDP. b. the ratio of real GDP to nominal GDP. c. real GDP minus national GDP. d. nominal GDP minus real GDP.

46. If nominal GDP increased by 5 percent and the GDP deflator increased by 3 percent, then real GDP ______ by ______ percent. a. increased; 2 b. decreased; 2 c. increased; 8 d. decreased; 8

50. The new chain-weighted measures of real GDP are an improvement over traditional measures because the prices used to compute real GDP are: a. never far out of date. b. always from the same base year. c. imputed. d. chained to the CPI.

53. If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and net exports are -$1,910, then government purchases are: a. $2,977. b. $1,910. c. -$843. d. $1,067.

6. All of the following are measures of GDP except the total: a. expenditures of all businesses in the economy .b. income from all production in the economy. c. expenditures on all final goods and services produced. d. value of all final production.

60. In the national income accounts, all of the following are classified as government purchases except: a. payments made to Social Security recipients. b. services provided by police officers. c. purchases of military hardware. d. services provided by U.S. senators.

65. The investment component of GDP includes all of the following except: a. purchases of corporate stock. b. spending on new plants and equipment. c. purchases of new housing by households. d. changes in business inventories.

If the steady-state rate of unemployment equals 0.125 and the fraction of unemployed workers who find jobs each month (the rate of job findings) is 0.56, then the fraction of employed workers who lose their jobs each month (the rate of job separations) must be: A) 0.08. B) 0.125. C) 0.22. D) 0.435.

If wage rigidity holds the real wage above the equilibrium level, an increase in the supply of labor will ______ the number unemployed. A) increase B) decrease C) not change D) possibly increase, decrease, or leave unchanged

One reason for unemployment is that: A) it takes time to match workers and jobs. B) all jobs are identical. C) the labor market is always in equilibrium. D) a laid-off worker can immediately find a new job at the market wage.

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

Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total spells of unemployment were attributable to the long-term unemployed? A) 9 percent B) 10 percent C) 43.5 percent D) 56.5 percent

The generosity of unemployment insurance benefits is measured by: A) the replacement rate and the duration of benefits. B) the median wage and the unemployment rate. C) the price level and duration of unemployment. D) the job-finding rate and the job-separation rate.

When the real wage is above the level that equilibrates supply and demand: A) the quantity of labor supplied exceeds the quantity demanded. B) the quantity of labor demanded exceeds the quantity supplied. C) there is no unemployment. D) the labor market clears.

Which of the following characteristics made the 2008? 009 recession differ most sharply from previous recessions? A) a large spike in the duration of unemployment B) a large increase in teenage unemployment C) higher rates of female unemployment than rates of male unemployment D) an increase in the rate of job separation and a decrease in the rate of job finding

Which of the following policies were not adopted by the government in an attempt to reduce the natural rate of unemployment? A) unemployment insurance B) government employment agencies C) public retraining programs D) the Illinois bonus program for unemployment insurance claimants who found jobs quickly

Which of the following statements about minimum-wage workers in the United States is not correct: A) minimum-wage workers are more likely to be male. B) minimum-wage workers are more likely to work part time. C) minimum-wage workers are more likely to be less educated. D) minimum-wage workers are more likely to be young.

Which of the following statements most closely describes the variation in unemployment rates across countries in Europe? A) Countries with higher rates of unionization tend to have higher unemployment rates, but this is partially mitigated if wage negotiations are coordinated among employers. B) Countries with higher rates of unionization tend to have higher unemployment rates, and this tendency is exacerbated if wage negotiations are coordinated among employers. C) Countries with more generous unemployment insurance benefits tend to have higher unemployment rates, but this is partially mitigated if the benefits are offered for a longer period of time. D) Countries with more generous unemployment insurance tend to have lower unemployment rates, but this effect is completely offset if benefits are offered for a longer period of time.

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:

a fall in income and net exports.

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell- Fleming model with floating exchange rates, lead to:

a rise in both income and net exports.

A change in investors' perceptions that make a fixed exchange rate untenable is known as:

a speculative attack.

(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r3, then the economy has

a trade deficit

(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r1, then the economy has:

a trade surplus

An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis: a. downward and to the left b. upward and to the right c. upward and to the left d. downward and to the right

a. downward and to the left.

Assume that GDP (Y) is 5,000. Consumption (C). is given by the equation C = 1,200 + 0.3(Y - T) - 50r, where r is the real interest rate. Investment (I) is given by the equation I = 1,500 - 50r. Taxes (T) are 1,000 and government spending (G) is 1,500. 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. Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 - 50r. What are the new equilibrium values of C, I, and r? d. What are the new values of private saving, public saving, and national saving?

a. 2,200; 1,300; 4 percent b. 1,800; -500; 1,300 c. 1,950; 1,550; 9 percent d. 2,050; -500; 1,550

Assume that GDP (Y) is 5,000. Consumption (C). is given by the equation C = 1,000 + 0.3(Y - T). Investment (I) is given by the equation I = 1,500 - 50r, where r is the real interest rate in percent. Taxes (T) are 1,000 and government spending (G) is 1,500. 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. Now assume there is a technological innovation that makes business want to invest more. It raises the investment equation to I = 2,000 - 50r. What are the new equilibrium values of C, I, and r? d. What are the new values of private saving, public saving, and national saving?

a. 2,200; 1,300; 4 percent b. 1,800; -500; 1,300 c. 2,200; 1,300; 14 percent d. 1,800; -500; 1,300

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. 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

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 labor and technology, carefully explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following: a. the level of output produced; b. the real wage of labor; c. the real rental price of capital; d. capital's share of total income.

a. Output decreases by less than 50 percent because of diminishing returns to capital. b. The real wage decreases because the average productivity of labor decreases (Y/L decreases, as Y decreases and L is constant), so the MPL, which equals (1 - α)Y/L, decreases. c. The real rental price of capital increases because the average productivity of capital increases (Y/K increases, as Y decreases proportionally less than K decreases), so the MPK, αY/K increases. d. capital's share of income is unchanged since it depends only on the parameter (α) from the production function, which does not change

The theory of liquidity preference implies that: a. as the interest rate rises, the demand for real balances will fall b. as the interest rate rises, the demand for real balances will rise c. the interest rate will have no effect on the demand for real balances d. as the interest rate rises, income will rise

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

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. a. decrease; decrease; decrease; decrease b. increase; increase; increase; increase c. decrease; decrease; increase; increase d. increase; increase; decrease; decrease

a. decrease; decrease; decrease; decrease

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. a. increase b. decrease c. first increase and then decrease d. first decrease and then increase

a. increase

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

a. increase by 100

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

a. national income; goods and services

Assume that in a small open economy with full employment, consumption depends only on disposable income. National saving is 300, investment is given by I = 400 - 20r, where r is the real interest rate in percent, and the world interest rate is 10 percent. a. If government spending rises by 100, does investment change? What is the level of investment after the change? b. Does the trade balance change if G rises by 100? If it changes, does it increase or decrease, and by how much? c. Does net capital outflow change if G rises by 100? If it changes, does it increase or decrease, and by how much? d. Will the real exchange rate rise, fall, or remain constant as a result of the change in G?

a. no. 200 b. yes. it decreases by 100 c. yes. it decreases by 100 d. it will rise

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, carefully 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: a. the level of output produced; b. the real wage of labor; c. the real rental price of capital; d. labor's share of total income.

a. output increases by less than 10 percent because diminishing returns to labor b. the real wage decreases because the average productivity of labor decreases (Y/L decreases as Y increases less in proportion than the increase in L), so the MPL, which equals (1 - α)Y/L, decreases c. the real rental price of capital increases because the average productivity of capital increases (Y/K increases, as Y decreases proportionally less than K decreases), so the MPK, αY/K increases d. labor's share of income is unchanged, since it depends only on the parameter (1 - α) from the production function, which does not change.

Consider two competitive economies that have the same quantities of labor (L = 400) and capital (K = 400), and the same technology (A = 100). The economies of the countries are described by the following Cobb-Douglas production functions: North Economy: Y = A L.3K.7 South Economy: Y = A L.7K.3 a. Which economy has the larger total production? Explain. b. In which economy is the marginal product of labor larger? Explain. c. In which economy is the real wage larger? Explain. d. In which economy is labor's share of income larger? Explain.

a. output is the same in both economies, given the symmetry of the parameters of the productions function and the equal quantities of labor and capital b. The MPL is larger in the South Economy. The MPL depends on the value of (1 - α) and the average productivity of labor (Y/L). Since the average productivity of labor is the same in both countries, differences in the MPL depend on the value of (1 - α), which is larger in South Economy (.7) than in North Economy (.3). c. Since factors are paid according to the values of their marginal products, the real wage is larger in South Economy, because the MPL is larger in South Economy than in North Economy (from part b). d. Labor's share of income equals (1 - α), which is larger in South Economy (.7) than in North Economy (.3).

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: a. right with a slope less than one. b. right with a slope greater than one. c. left with a slope less than one. d. left with a slope greater than one.

a. right with a slope less than one.

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will: a. sell interest-earning assets in order to obtain non-interest-bearing money. b. purchase interest-earning assets in order to reduce holdings of non-interest-bearing money. c. purchase fewer goods and services d. be content with their portfoliios

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

Two interpretations of the IS-LM model are that the model explains: a. the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve. b. the short-run quantity theory of income or the short-run fisher effect c. the determination of investment and saving, or what shifts the liquidity preference scheduled. d. changes in government spending and taxes, or the determination of the supply of real money balances

a. the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.

Price flexibility plays a key role in the classical model by ensuring that the markets reach equilibrium. a. Explain which price adjusts to bring equilibrium in the labor market. Describe how the price adjusts when demand exceeds supply in this market. b. Explain which price adjusts to bring equilibrium in the loanable funds market. Describe how the price adjusts when supply exceeds demand in this market.

a. the real wage adjusts to make labor demand equal to labor supply. If labor demand is greater than labor supply, the real wage rises, decreasing the quantity of labor demanded until the quantity of labor demanded equals the fixed supply of labor

After studying the circular flow of dollars in the economy, explain with an example how saving done by households goes back into the circular flow. In reality, does all saving go back as an investment?

according to the circular flow of dollars diagram, households save their money in financial markets and then financial markets lend this money to markets, some of the money is kept by people to themselves as cash, which does not get converted to investment

If the government wants to raise investment but keep output constant, it should:

adopt a loose monetary policy and a tight fiscal policy.

Net exports equal GDP minus domestic spending on

all goods and services

44. Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 5 in 2009, then the GDP deflator in 2009, using a base year of 2002, was approximately: a. 1.5. b. 1.7. c. 1.9. d. 2.0.

49. Chain-weighted measures of real GDP make use of prices from: a. an unchanging base year. b. a continuously changing base year. c. a base year that is changed approximately every 5 years. d. a base year that is changed approximately every 10 years.

51. The national income accounts identity, for an open economy, is: a. Y = C + I + G - NX. b. Y = C + I + G + NX. c. Y = C + I + G. d. Y = C + I - G.

58. In the national income accounts, goods bought for future use are classified as which type of expenditure?a. services b. investment c. government purchases d. net exports

59. If total investment (measured in billions of current dollars) equals $741, business fixed investment is $524, and residential fixed investment is $222, then inventory investment is: a. $5. b. -$5. c. $15. d. -$15.

62. In the national income accounts, net exports equal: a. exported goods minus imported goods. b. exported goods and services minus imported goods and services. c. exported goods minus imported services .d. exported goods and services plus imported goods and services.

69. In 2010 in the United States, total government purchases per person (in current dollars) amounted to approximately: a. $1,900. b. $9,700. c. $13,500. d. $25,600.

75. The largest component of national income is: a. corporate profits. b. compensation of employees. c. proprietors' income. d. net interest.

82. Measuring the rate of inflation using a market basket that excludes food and energy prices is preferred by some analysts because this measure, called core inflation, a. provides a real, rather than a nominal, rate of inflation. b. gives a better measure of ongoing, sustained price changes. c. is more consistent with measures of inflation used in other countries .d. fluctuates more than measures of inflation that include food and energy prices.

83. An increase in the price of goods bought by firms and the government will show up in: a. the CPI but not in the GDP deflator. b. the GDP deflator but not in the CPI. c. both the CPI and the GDP deflator. d. neither the CPI nor the GDP deflator.

A graph of the rate of inflation in the United States over the twentieth century shows: a. an overall upward trend interrupted by a large downturn in the 1930s. b. some periods of deflation in the first half of the century, but only positive rates of inflation in the second half of the century. c. a relatively steady, positive level throughout the century except for deflation in the 1930s. d. a constant rate of inflation in the first half of the century followed by an upward trend in the second half.

A measure of how fast prices are rising is called the: a. growth rate of real GDP. b. inflation rate. c. unemployment rate. d. market-clearing rate.

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) a lower real wage and no change in unemployment. C) a lower real wage and less unemployment. D) no change in real wage or in unemployment.

During the period between 1900 and 2000, the unemployment rate in the United States was highest in the: a. 1920s. b. 1930s. c. 1970s. d. 1980s.

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ______ percent (rounded to the nearest percent). A) 0 B) 9 C) 11 D) 20

Important characteristics of macroeconomic models include all of the following except: a. simplifying assumptions. b. functional relationships based on controlled experiments. c. endogenous and exogenous variables. d. implicit or explicit consistency with microeconomic foundations.

In a simple model of the supply and demand for pizza, when aggregate income increases, the price of pizza ______ and the quantity purchased ______. a. increases; decreases b. increases; increases c. decreases; increases d. decreases; decreases

In the case of unions, the conflict of interest between different groups of workers results in insiders wanting ______, while outsiders want ______. A) more hirings; high wages B) high wages; more hirings C) high wages; fewer hirings D) fewer hirings; high wages

Much of the difference in unemployment rates across Europe is attributable to differences in: A) short-term unemployment. B) long-term unemployment. C) frictional unemployment. D) the natural rate of unemployment.

Policies to substantially reduce the natural rate of unemployment should be targeted at: A) the short-term unemployed. B) the long-term unemployed. C) discouraged workers. D) insiders and outsiders.

Public policy to increase the job finding rate includes _____, and public policy to decrease the job separation rate includes _____. A) government employment agencies; higher unemployment insurance benefits B) government employment agencies; 100 percent experience-rated unemployment insurance C) higher minimum wage laws; payment of unemployment benefits for longer periods D) higher efficiency wages; partially experience-rated unemployment insurance

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

b. upward and to the left.

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6, and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by: a. 0 b. 100 c. 150 d. 250

b. 100

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______. a. LM, left b. LM, right c. IS, left d. IS, right

b. LM; right

(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are: a. Y1 and PE1 b. Y2 and PE2 c. Y3 and PE3 d. Y3 and PE4.

b. Y2 and PE2.

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income. a. aggregate demand; aggregate supply b. aggregate supply; aggregate demand c. monetary policy; fiscal policy d. fiscal policy; monetary policy

b. aggregate supply; aggregate demand

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will: a. not change b. be smaller c. be bigger d. be equal to 1

b. be smaller.

When planned expenditure is drawn on a graph as a function of income, the slope of the line is: a. zero b. between zero and one c. one d. greater than one

b. between zero and one.

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because of fiscal policy: a. increases the amount of money in the economy b. changes income, which changes consumption, which further changes income c. is government spending and, therefore, more powerful than private spending d. changes the interest rate

b. changes income, which changes consumption, which further changes income.

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. a. increase b. decrease c. first increase and then decrease d. first decrease and then increase

b. decrease

a. Suppose a government education program succeeds in getting households to save more (you may interpret this as a downward shift in the consumption function). Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of the higher saving rate by households. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium values. b. State in words what happens to: i. the real interest rate; ii. national saving; iii. investment; iv. consumption; and v. output.

b. i. real interest rate decreases ii. national saving increases iii. investment increases iv. consumption decreases v. output is unchanged, fixed because it is determined by the factors of production

a. Suppose a government moves to reduce a budget deficit. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of reducing a government's budget deficit by increasing (lump-sum) taxes on household income. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium values. b. State in words what happens to: i. the real interest rate; ii. national saving; iii. investment; iv. consumption; and v. output.

a. Suppose a government decides to reduce spending and (lump-sum) income taxes by the same amount. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of the equal reductions in spending and taxes. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium values. b. State in words what happens to: i. the real interest rate; ii. national saving; iii. investment; iv. consumption; and v. output.

b. i. real interest rate decreases ii. national saving increases iii. investment increases iv. consumption increases v. output is unchanged, fixed because it is determined by the factors of production

a. Suppose a government moves to reduce a budget deficit. Using the long-run model of the economy developed in Chapter 3, graphically illustrate the impact of reducing a government's budget deficit by reducing government purchases. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium values. b. State in words what happens to: i. the real interest rate; ii. national saving; iii. investment; iv. consumption; and v. output.

b. i. real interest rate decreases ii. national saving increases iii. investment increases iv. consumption is unchanged v. output is unchanged, fixed because it is determined by the factors of production

a. 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, graphically illustrate the impact of the increased investment demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the terminal equilibrium values. b. State in words what happens to: i. the real interest rate; ii. national saving; iii. investment; iv. consumption; and v. output.

b. i. real interest rate increases ii. national saving is unchanged iii. amount of investment is unchanged iv. consumption is unchanged v. output is unchanged, fixed because it is determined by the factors of production

According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase

b. increase; decrease

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______. a. increase, supply b. increase, demand c. decrease, supply d. decrease, demand

b. increase; demand

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income: a. increase by 250 b. increase by more than 250 c. decrease by 250 d. increase, but by less than 250

b. increases by more than 250.

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income: a. increase by 250 b. increase by more than 250 c. decrease by 250 d. increase, but by less than 250

b. increases by more than 250.

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the: a. consumption function b. interest rate c. price level d. nominal money supply

b. interest rate.

When firms experience unplanned inventory accumulation, they typically: a. build new pants b. lay off workers and reduce production c. hire more workers and increase production d. call for more government spending

b. lay off workers and reduce production.

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 ______. a. right; decumulation b. right; accumulation c. left; decumulation d. left; accumulation

b. right; accumulation

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

b. rise; decrease

A graph of the U.S. unemployment rate over the twentieth century shows: a. an overall upward trend in the unemployment rate interrupted by a large upturn in the 1930s. b. an overall downward trend in the unemployment rate interrupted by a large upturn in the 1930s. c. rates of unemployment always greater than zero with substantial variations from year to year. d. alternating periods of positive and negative rates of unemployment.

A typical trend during a recession is that: a. the unemployment rate falls. b. the popularity of the incumbent president rises. c. incomes fall. d. the inflation rate rises.

All of the following are important macroeconomic variables except: a. real GDP. b. the unemployment rate. c. the marginal rate of substitution. d. the inflation rate.

If the rate of separation is 0.02 and the rate of job finding is 0.08 but the current unemployment rate is 0.10, then the current unemployment rate is ______ the equilibrium rate, and in the next period it will move ______ the equilibrium rate. A) above; toward B) above; away from C) below; toward D) below; away from

Macroeconomists cannot conduct controlled experiments, such as testing various tax and expenditure policies, because: a. it is against the law. b. they tried it once and it did not work. c. they must make use of the data history gives them. d. economists already know the answers that would come out of the experiments.

One efficiency-wage theory implies that firms pay high wages because: A) this practice increases the problem of moral hazard. B) in wealthy countries, it is important to pay workers high wages to improve their health. C) the more a firm pays its workers, the greater their incentive to stay with the firm. D) paying high wages promotes adverse selection.

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

Recessions are periods when real GDP: a. increases slowly. b. increases rapidly. c. decreases mildly. d. decreases severely.

The assumption of flexible prices is a more plausible assumption when applied to price changes that occur: a. from minute to minute. b. from year to year. c. in the long run. d. in the short run.

The inflation rate is a measure of how fast: a. the total income of the economy is growing. b. unemployment in the economy is increasing. c. prices in the economy are rising. d. the number of jobs in the economy is expanding.

The unemployment rate: a. was zero during the 1990s in the United States. b. was zero on average between 1900 and 1950 in the United States. c. has never been zero in the United States. d. is usually zero when the economy is not in a recession or depression.

Wage rigidity: A) forces labor demand to equal labor supply. B) is caused by sectoral shifts. C) prevents labor demand and labor supply from reaching the equilibrium level. D) increases the rate of job finding.

Which of the following hypotheses is consistent with fewer hours worked per year in Europe than in the United States? A) fewer mandated holidays in Europe than in the United States B) higher employment-to-population ratios in Europe than in the United States C) higher tax rates in Europe than in the United States D) a smaller underground economy in Europe than in the United States

Which of the following is the best example of structural unemployment? A) Tim is looking for a job with flexible hours but has not been offered one yet. B) Vickie lost her job as a graphic artist at a movie studio because she did not have training in computer-generated animation. C) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available. D) 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.

Workers unemployed as a result of wage rigidity are: A) actively searching for a job to match their skills. B) not eligible to receive unemployment insurance benefits. C) waiting for a job to become available. D) relocating to another part of the country as a result of sectoral shifts.

The IS and LM curves together generally determine: a. income only b. the interest rate only c. both income and the interest rate d. income, the interest rate, and the price level

c. both income and the interest rate.

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will: a. decrease equilibrium income by (∆T) b. decrease equilibrium income by (∆T)/(1 - MPC) c. decrease equilibrium income by (∆T)(MPC)/(1 - MPC) d. not affect equilibrium income at all

c. decrease equilibrium income by (∆T)(MPC)/(1 - MPC).

The Keynesian cross shows: a. determination of equilibrium income and the interest rate in the short run b. determination of equilibrium income and the interest rate in the long run c. equality of planned expenditure and income in the short run. d. equality of planned expenditure and income in the long run.

c. equality of planned expenditure and income in the short run.

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______, inducing firms to ______ production. a. rise, increase b. rise, decrease c. fall, increase d. fall, decrease

c. fall; increase

In a short-run model of a large open economy with a floating exchange rate, net capital outflow ______ as the domestic interest rate increases and is just equal to ______.

decreases; the decrease in net exports.

The Keynesian-cross analysis assumes planned investment: a. is fixed and so does the IS analysis b. depends on the interest rate and so does the IS analysis c. is fixed, whereas the IS analysis assumes it depends on the interest rate d. depends on expenditure and so does the IS analysis

c. is fixed, whereas the IS analysis assumes it depends on the interest rate.

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances. a. inflation and unemployment b. the price level and real output c. the interest rate and the level of income d. the interest rate and real money balances

c. the interest rate and the level of income

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income: a. income falls b. planned expenditure falls c. unplanned inventory investment is negative. d. prices rise

c. unplanned inventory investment is negative.

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: a. liquidity preference b. the government-purchases multiplier c. unplanned inventory investment d. real money balances

c. unplanned inventory investment.

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ∆G and the planned expenditure schedule by an equal amount, then equilibrium income rises by a. one unit b. ∆G c. ∆G divided by the quantity one minus the marginal propensity to consume. d. ∆G multiplied by the quantity one minus the marginal propensity to consume.

c. ∆G divided by the quantity one minus the marginal propensity to consume.

Assume that the following equations characterize a large open economy: (1) Y = 5,000 (2) Y = C + I + G + NX (3) C = 1/2(Y - T) (4) I = 2,000 - 100r (5) NX = 500 - 500ε (6) CF = -100r (7) CF = NX (8) G = 1,500 (9) T = 1,000. Where NX is net exports, CF is net capital outflow, and ∈ is the real exchange rate. Solve these equations for the equilibrium values of C, I, NX, CF, r, and ε. (Hint: Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into (2). Then substitute (5) and (6) into (7). Now you have two equations in r and ε. Check your work by seeing that all of these equations balance given your answers.)

c=2000; I=1,750; NX=-250; CF=-250; r=2.5 percent

According to the Mundell-Fleming model, under flexible exchange rates expansionary monetary policy___increase income, and under fixed exchange rates expansionary monetary policy___increase income.

can; cannot

In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in a government spending:

cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market

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

During the era of the gold standard, the price of gold in England:

could be higher or lower than the price of gold in the United States, but not by more than the cost of transporting gold between the two countries.

The risk premium included in the interest rate of small open economies incorporates:

country risk and expectations of future exchange-rate changes.

An arrangement by which a central bank holds enough foreign currency to back each unit of the domestic currency is called a:

currency board.

13. All of the following are a flow except: a. the number of new automobile purchases. b. the number of people losing their jobs. c. business expenditures on plant and equipment. d. the government debt.

24. When bread is baked but put away for later sale, this is called :a. waste. b. saving. c. fixed investment. d. investment in inventory.

27. The value added of an item produced refers to: a. a firm's profits on the item sold. b. the value of the labor inputs in the production of an item. c. the value of a firm's output less the value of its costs. d. the value of a firm's output less the value of the intermediate goods that the firm purchases.

29. In computing GDP, a. expenditures on used goods are included. b. production added to inventories is excluded. c. the amount of production in the underground economy is imputed. d. the value of intermediate goods is included in the market price of the final goods.

32. Permitting a lower minimum wage for teenagers would likely: A) raise teenage unemployment. B) raise teenage wages overall. C) prevent teenagers from getting job experience. D) raise unemployment among unskilled adults.

35. Real GDP is measured in _____ dollars ____ time. a. current; at a point in b. current; per unit of c. constant; at a point in d. constant; per unit of

41. The assumption of continuous market clearing means that: a. sellers can sell all that they want at the going price. b. buyers can buy all that they want at the going price. c. in any given month, buyers can buy all that they want and sellers can sell all that they want at the going price. d. at any given instant, buyers can buy all that they want and sellers can sell all that they want at the going price.

5. An economy's ______ equals its ______. a. consumption; income b. consumption; expenditure on goods and services c. expenditure on goods; expenditures on services d. income; expenditure on goods and services

52. If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and government purchases are $1,098, then net exports are: a. $131. b. -$131. c. $31. d. -$31.

57. 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: a. $1,674. b. $2,463. c. $2,083. d. $1,983.

8. Two equivalent ways to view GDP are as the: a. total payments made to all workers in the economy or the total profits of all firms and businesses in the economy. b. total expenditures on all goods produced in the economy or the total income earned from producing all services in the economy. c. total profits of all firms and businesses in the economy or the total consumption of goods and services by all households in the economy. d. total income of everyone in the economy or the total expenditure on the economy's output of goods and services.

80. 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: a. 0.75. b. 0.80. c. 1. d. 1.25.

Assume that a country experiences a reduction in productivity that lowers the marginal product of labor for any given level of labor. In this case, the: A) labor supply curve shifts to the right. B) labor supply curve shifts to the left. C) labor demand curve shifts upward and to the right. D) labor demand curve shifts downward and to the left.

By paying efficiency wages, firms contribute to higher unemployment because they: A) increase the wage bill. B) make workers more productive. C) keep the wage below the equilibrium level. D) keep the wage above the equilibrium level.

Centralized union wage bargaining with government intervention in Sweden gives relatively more influence to ______, while firm-level union wage bargaining in the United States gives relatively more influence to ______. A) efficiency wages; sectoral shifts B) sectoral shifts; efficiency wages C) insiders; outsiders D) outsiders; insiders

Discouraged workers are individuals who: A) have jobs that do not match their skills (e.g., a Ph.D. driving a taxi cab). B) have been unemployed for more than 26 weeks. C) call themselves unemployed but are not seriously looking for a job. D) want a job but have given up looking for one.

Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to: A) reduce labor turnover. B) improve the quality of the firm's labor force. C) increase worker effort. D) reduce the firm's wage bill.

Entry into and exit from the labor force are important to the determination of the unemployment rate because: A) more than one-half of the unemployed have only recently entered the labor force. B) most of the unemployed are young workers still looking for their first job. C) discouraged workers are counted as part of the labor force. D) almost one-half of all spells of unemployment end in the unemployed person's withdrawal from the labor market.

Frictional unemployment is inevitable because: A) different sectors do not shift. B) the economy needs to be lubricated. C) workers never quit their jobs to change careers. D) the demand for different goods always fluctuates.

If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be: A) 0.02. B) 0.08. C) 0.10. D) 0.18.

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) labor force; labor force B) labor force; unemployed C) employed; labor force D) unemployed; employed

More frequent holidays for workers in Europe than in the United States contribute to: A) higher employment-to-population ratios in Europe than in the United States. B) lower employment-to-population ratios in Europe than in the United States. C) more hours worked per year by the average employed person in Europe than the average employed person in the United States. D) fewer hours worked per year by the average employed person in Europe than the average employed person in the United States.

Paying efficiency wages helps firms reduce the problem of adverse selection by: A) generating additional profits that can be used to pay for more proficient hiring managers. B) keeping labor unions from organizing workers in the firm. C) encouraging unsupervised workers to maintain a high level of productivity. D) providing an incentive for the best-qualified workers to remain with the firm.

Short-term unemployment is most likely to be ______ unemployment, while long-term unemployment is mostly likely to be _____ unemployment. A) structural; frictional B) structural; the natural rate of C) the natural rate of; frictional D) frictional; structural

Suppose that over the course of a year 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total weeks of unemployment were attributable to the long-term unemployed? A) 9 percent B) 10 percent C) 43.5 percent D) 56.5 percent

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) efficiency; inefficiency B) efficiency; structural C) frictional; efficiency D) structural; frictional

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

Along any given IS curve: a. tax rates are fixed, but government spending varies b. government spending is fixed, but tax rates vary c. both government spending and tax rates vary d. both government spending and tax rates are fixed

d. both government spending and tax rates are fixed.

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. increases; downward b. increases; upward c. decreases; upward d. decreases; downward

d. decreases; downward

In the IS-LM model, which two variables are influenced by the interest rate? a. supply of nominal money balances and demand for real balances b. demand for real money balances and government purchases c. supply o of nominal money balances and investment spending d. demand for real money balances and investment spending

d. demand for real money balances and investment spending

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______. a. rises, falls b. rises, rises c. falls, rises d. falls, falls

d. falls; falls

One argument in favor of tax cuts over spending-based fiscal stimulus is that: a. tax cuts increase the MPC by a larger amount than government spending b. tax cuts temporarily increase planned spending, but government spending permanently increases private spending c. in theory the tax multiplier is larger than the government spending multiplier d. historically tax cuts have been more successful than spending-based fiscal stimulus

d. historically tax cuts have been more successful than spending-based fiscal stimulus.

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

d. increase, but by less than 100

An IS curve shows combinations of: a. taxes and government spending b. nominal money balances and price levels c. interest rates and income that bring equilibrium in the market for real balances d. interest rates and income that bring equilibrium in the market for goods and services

d. interest rates and income that bring equilibrium in the market for goods and services.

planned expenditure is a function of:

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

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

d. negatively related to the interest rate and positively related to income.

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. a. positively; positively b. positively; negatively c. negatively; negatively d. negatively; positively

d. negatively; positively

For the purposes of the Keynesian cross, planned expenditure consists of: a. planned investment b. planned government spending c. planned investment and government spending d. planned investment, government spending, and consumption expenditures.

d. planned investment, government spending, and consumption expenditures.

The LM curve, in the usual case: a. is vertical b. is horizontal c. slopes down to the right d. slopes up to the right

d. slopes up to the right.

The interaction of the IS curve and the LM curve together determine: a. the price level and the inflation rate b. the interest rate and the price level c. investment and the money supply d. the interest rate and the level of output.

d. the interest rate and the level of output.

In the Mundell-Fleming model, if political turmoil raises the risk premium in a country's interest rate, then the exchange rate will ______.

decrease

If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports ______ and net capital outflows ______

decrease ; decrease

In the IS-LM model, a decrease in expected inflation (or an increase in expected deflation), leads to a(n):

decrease in both output and the nominal interest rate.

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) ______ sufficient to offset the decline in the demand for money caused by the higher risk premium.

decrease in the money supply

In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange rate to:

decrease in the present.

In a small open economy with a fixed exchange rate, an effective policy to increase equilibrium output is to:

decrease taxes.

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Federal Reserve should _____ the money supply shifting to _____.

decrease; LM3

decrease; decrease; decrease; decrease

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to__and expansionary monetary policy causes net exports to___.

decrease; increase

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate__, and the LM* curve shifts to the__.

decrease; right

If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______

decreases ; appreciates

In a small open economy, if the government adopts a policy that lowers imports, then the quantity of exports: A) remains unchanged. B) decreases but not as much as the quantity of imports decreases. C) decreases by exactly the same amount as the quantity of imports decreases. D) decreases by more than the quantity of imports decreases.

decreases by exactly the same amount as the quantity of imports decreases.

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate ______, and the LM* curve shifts to the ______.

decreases; right

Suppose people in an economy reduce their saving. What will be the effect on real interest rate and investment?

if households develop a tendency of saving less, there will be less money to lend, so the support of loanable funds will be less. This will increase the real interest rates r, and due to the increase in r investors will find it more costly to take a loan, so investment will decrease

An increase in taxes lowers income:

in the short run, but leaves it unchanged in the long run, while lowering consumption and increasing investment. the money supply, the new equilibrium combination of interest and income will be _____. @r2, Y3

Most economists believe:

in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.

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

income

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 the exchange rate rises

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

income remains constant

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.

In a short-run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in:

income, the interest rate, and the exchange rate, but a decrease in investment and net exports.

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

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 ______

increase ; decrease

Starting from a trade balance, 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

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______

increase ; depreciates

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

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

increase ; increase

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply shifting to _____.

increase; LM2

According to the Mundell-Fleming model with floating exchange rates, political uncertainty in Mexico in 1994 caused the risk premium on Mexican interest rates to ______ and the Mexican exchange rate to ______.

increase; decrease

In the Mundell-Fleming model with flexible exchange rates, an increase in the price level results in a(n) ______ in the real exchange rate and a(n) ______ in net exports.

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

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

According to the Mundell-Fleming model, under fixed exchange rates expansionary fiscal policy causes income to ______, and under flexible exchange rates expansionary fiscal policy causes income to ______.

increase; remain unchanged

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

increases; increases

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

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

The intersection of the IS and LM curves shows the___and the ___at which both the goods market and the money market are in equilibrium.

level of output; exchange rate

The intersection of the IS* and LM* curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium.

level of output; exchange rate

If a country chooses to have free capital flows and to conduct an independent monetary policy, then it must:

live with exchange-rate volatility.

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

Assume that a small open economy gets involved in a global war, in which its government purchases increase and the rest of the world's government purchases also increase. Then, for the small country, net exports

may increase or decrease

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.

more than three times as great as

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve.

movement along the; shift in the

Net capital outflows is equal to

national saving minus domestic investment

In a large open economy, the real interest rate is determined by:

national saving, the net domestic investment function, and the net capital outflow function

The IS curve generally determines:

neither income nor the interest rate.

The LM curve generally determines:

neither income nor the interest rate.

In a large open economy, if an import quota is adopted, then:

net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

no change in income but a rise in net exports.

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

no change in income or net exports.

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell- Fleming model with fixed exchange rates, lead to:

no change in income or net exports.

When Paul Volcker tightened the money supply:

nominal interest rates fell in the long run.

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 IS-LM model is generally used:

only in the short run.

Country risk included in the risk premium in interest rates refers to the:

possibility that loans in some countries may not be repaid because of political upheaval.

In the Mundell-Fleming model, the exogenous variables are the:

price level, world interest rate, monetary policy, and fiscal policy

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that ______.

prices are fixed; output is fixed

The Great Depression in the United States:

probably cannot be considered to have started because of a leftward shift in the LM curve because real balances did not fall between 1929 and 1931.

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

production

What effect does advancement in technology have upon the equilibrium between real rental price and capital (assuming supply of capital is fixed)?

provided that the supply of capital is fixed, advancement in technology will increase the demand for capital. but as the supply is fixed, the real rental price will increase. So the new equilibrium will be in the same supply amount of capital with increased real rental price

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

purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.

purchasing power parity

Why is purchasing power parity called "the law of one price"? Explain.

purchasing power parity signifies that if there is any change in the price level of a good in different countries, then it will be leveled out through international arbitrage. Thus, the currency has the same purchasing power in different countries at the same time

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

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

During the Great Depression, countries that devalued their currencies generally ______ whereas countries that maintained the old exchange rate ______.

recovered relatively quickly; suffered longer

During the Great Depression, countries that devalued their currencies generally__whereas countries that maintained the old exchange rate__.

recovered relatively quickly; suffered longer

One argument favoring a fixed-exchange-rate system is that it:

reduces exchange-rate uncertainty, thereby promoting more international trade.

An increase in the interest rate:

reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects.

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

remain unchanged but the real exchange rate falls

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to ______ and in an economy with fixed exchange rates import restrictions cause net exports to ________.

remain unchanged; Increase

According to the Mundell-Fleming model, Import restriction in an economy with flexible exchange rates cause net exports to__and in an economy with fixed exchange rates import restrictions cause net exports to__.

remain unchanged; increase

The Mundell-Fleming model is a ______ model for a ______ open economy.

short-run; small

If shirt-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS curve:

slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally:

slopes downward and to the right.

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

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

smaller the sensitivity of investment spending to the interest rate.

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

smaller; greater

The Pigou effect:

suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more.

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and ______ net capital outflow

surplus ; positive

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

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?

the interest rate

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services.

the interest rate and the level of income

In a short-run model of a large open economy with a floating exchange rate:

the interest rate is determined in the IS-LM framework, and this value determines net capital outflow; then the exchange rate adjusts to make net exports equal net capital outflow.

In the Mundell-Fleming model on a Y-e graph, the curves labeled IS and LM are labeled that way as a reminder that:

the interest rate is held constant at the world interest rate r*

In the Mundell-Fleming model on a Y - e graph, the curves labeled IS* and LM* are labeled that way as a reminder that:

the interest rate is held constant at the world interest rate r*.

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

the interest rate.

The slope of the IS curve depends on:

the interest sensitivity of investment and the marginal propensity to consume.

In a short-run model of a large open economy, after net capital outflow is substituted for net exports in the IS curve:

the larger the absolute value of the responsiveness of net capital outflow with respect to the interest rate, the flatter the IS curve.

If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate was 150 yen per dollar, then:

the money supply would rise until the market exchange rate was 100 yen per dollar.

If there is a fixed-exchange-rate system, then in the long run:

the nominal exchange rate is fixed, but the real exchange rate is free to vary.

In an economy with flexible prices, competitive factor markets, and fixed supplies of the factors of production, graphically illustrate the impact of a deadly virus that kills a large part of the labor force, but leaves the other factors of production untouched, ceteris paribus. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. Explain in words how the equilibrium values change.

the supply of labor decreases, which increases the real wage. All of the reduced labor force is employed

In an economy with flexible prices, competitive factor markets and fixed supplies of the factors of production, graphically illustrate the impact of a change in immigration policy in a country that permits a huge influx of foreign workers into the labor market, ceteris paribus. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve's shift; and v. the terminal equilibrium values. Explain in words how the equilibrium values of labor, the real wage, saving, investment, and the real interest rate change

the supply of labor force increases, which forces the real wage lower and increases the quantity of labor employed, since there is no unemployment in this model. Output (Y) increases as labor increases, national saving (Y - C - G) increases, which makes the equilibrium of rate of interest fall to bring national saving and investment into equilibrium

Gary Becker's criticism of government spending on infrastructure as part of President Obama's stimulus plan was that:

there is a conflict between where spending on infrastructure would benefit employment and where infrastructure is most needed.

Some economists argue that monetary union will not work as well in Europe as it does in the United States for all of the following reasons except:

there is no European central bank as there is in the United States.

In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:

to fall while net exports are unchanged.

If a dollar bought 1,000 Chilean pesos ten years ago and 1,500 lire now, and inflation for that period was 25 percent in the United States and 100 percent in Chile, then

traveling in chile is more expensive now than it was ten years ago

The government of an economy has increased its spending and taxes by the same amount. What is the effect on investment?

with increased taxes, people will have less money to consume and save, so there will be reduction in private saving. With increased government spending, public saving will also be reduced. Reduction in both private saving and public saving will lead to a reduction in national saving, and as national saving is equal to investment, this implies a decrease in investment

In the Mundell-Fleming model, the domestic interest rate is determined by the

world interest rate

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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