Econ 3004 MC

Assume that the nominal interest rate is 11 percent, the inflation rate is 8 percent, and government debt at the beginning of the year equation $4 trillion. By how much is the government budget deficit overstated as a result of inflation.

$0.32 trillion

Assume the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ___ percent of one year's GDP

20

If the IS curve is given by Y = 1700 - 100r, the money demand function is given by (M/P)d = Y-100r, the money supply is 1000, and the price level is 2, then if the money supply is raised to 1200 equilibrium income rises by:

200 and the interest rate falls by 2 perecent

In a time of inflation when the real (i.e., deflated) value of the government debt is constant, then the conventionally:

reported government budget will show a deficit equal to the inflation rate times the outstanding degt

The reason that income response to a fiscal expansion is generally less in the IS-LM model than in the Keynesian -cross model is that the Keynesian - cross model assumes that

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

Lower; raises; reduces

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 generally lead to ____ income and a _____ interest rate

Lower;lower

According to the theory of Ricardian equivalence, if consumers are forward looking they will view a tax cut combined with no plan to reduce government spending as ____ , so their consumption will _____.

a rescheduling of taxes into the future; remain unchanged.

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

greater; increase

A time-inconsistency problem in macroeconomic policy can occur when the policymaker

has discretion to act as it seems best in each situation, based on his or her own knowledge and experience.

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the short run effects will be:

higher output and lower unemployment

Analysis of the short run Phillips curve suggests that policy makers who want to reduce unemployment in the short run should ____ aggregate demand at a cost of generating ____ inflation

increase;higher

Arguments in favor of passive economic policy include all of the following except

recession do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary.

If people's expectations of inflation are formed rationally rather than based on adaptive expectations and if policy makers make a credible policy move to reduce inflation, then the costs of reducing inflation will be _____ traditional estimates of the sacrifice ratio.

much lower than

Assume that there is a short run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank uses discretion in conducting monetary policy. Initially, household and firms expect high inflation. Following an announcement by the central bank of a low inflation policy households and firms will ____ the central bank's announcement and ____ their expectations of inflation.

not believe; not change

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

permanently reducing the money supply

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.

If the capital budgeting procedures were employed, the budget deficit would be measured as:

the change in government debt minus the change in government capital assets.