ECON 324 - Final Practice

Along any given IS curve: A) Both government spending and tax rates are fixed. B) Government spending is fixed, but tax rates vary. C) Both government spending and tax rates vary. D) Tax rates are fixed, but government spending varies.

A) Both government spending and tax rates are fixed.

The cyclically adjusted budget deficit: A) Estimates what the deficit would be if the economy were operating at the natural rate of output. B) Accounts for assets as well as liabilities. C) Measures the impact of fiscal policy on the lifetime incomes of individuals of different ages. D) Adjusts the deficit for inflation.

A) Estimates what the deficit would be if the economy were operating at the natural rate of output.

All of the following are endogenous variables in the dynamic model of aggregate demand and aggregate supply except: A) Pi, a central bank's inflation target. B) Yt, output. C) Rt, real interest rate. D) EtPit + 1, expected inflation.

A) Pi, a central bank's inflation target.

According to the traditional viewpoint of government debt, a tax cut without a cut in government spending: A) Raises consumption in the short run but lowers it in the long run. B) Raises consumption in both the short run and the long run. C) Lowers consumption in both the short run and the long run. D) Lowers consumption in the short run but raises it in the long run.

A) Raises consumption in the short run but lowers it in the long run.

In the short-run, if the price level is greater than the expected price level, then in the long run the aggregate: A) Supply curve will shift upward B) Demand curve will shift leftward C) Demand curve will shift rightward D) Supply curve will shift downward

A) Supply curve will shift upward

In the case of cost-push inflation, other things being equal: A) the inflation rate rises but the unemployment rate falls. B) Both the inflation rate and the unemployment rate fall. C) Both the inflation rate and the unemployment rate rise at the same time. D) The unemployment rate rises but the inflation rate falls.

A) The inflation rate rises but the unemployment rate falls

The IS curve shifts when any of the following economic variables change except: A) The interest rate B) Tax rates C) The marginal propensity to consume D) Government spending

A) The interest rate

If the debt of the U.S. federal government in 2008 was divided equally among the people in the United States, then the debt per person would equal approximately: A) $53,000 B) $35,000 C) $153,000 D) $3,500

B) $35,000

Given the monetary policy rule of the dynamic model of aggregate demand and aggregate supply, if the inflation rate increases by 1 percentage point, by how much does the nominal interest increase: A) 1 B) 1 + 0pi C) 1 + 0 (1-Pi) D) 1 + Sigma

B) 1 + 0pi

Financing a budget deficit by __________ leads to inflation, and inflation __________ the real value of government debt. A) Issuing debt; decreases. B) Printing money; decreases. C) Issuing debt; increases. D) Printing money; increases.

B) Printing money; decreases.

Which of the following would be represented by a negative value of the random demand shock, t? A) An aggressive increase in oil prices by a cartel. B) An irrational wave of optimism among investors. C) A decrease in government spending. D) A decrease in the central bank's inflation target.

C) A decrease in government spending.

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is lower than expected, then output __________ natural rate of output. A) Exceeds the B) Equals the C) Falls below the D) Moves to a different

C) Falls below the

An IS curve shows combinations of: A) Interest rates and income that bring equilibrium in the market for real balances. B) Taxes and government spending. C) Interest rates and income that bring equilibrium in the market for goods and services. D) Nominal money balances and price levels.

C) Interest rates and income that bring equilibrium in the market for goods and services.

All of the following are exogenous variables in the mother of all models in the Appendix to Chapter 14 expect the: A) World interest rate. B) Labor force. C) Price level. D) World real interest rate.

C) Price level

The Ricardian view on fiscal policy makes less sense if people are: A) Rational and practice foresight. B) Able to plan for the future. C) Shortsighted and not fully rational. D) Able to borrow without constraint.

C) Shortsighted and not fully rational.

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

C) Use money to buy goods and services.

Which of the following is the most likely explanation of the August 2011 decision by Standard and Poor's to reduce its credit rating on U.S. government bonds? A) Foreign governments were no longer willing to lend to the U.S. government. B) The U.S. government budget deficit was too large. C) Strategies to reduce predicted U.S. government future budget deficits did not appear likely, making default a possibility. D) A U.S. government debt was not likely outcome, but was a possibility to occur in the short term.

D) A U.S. government debt default was not a likely outcome, but was a possibility to occur in the short term.

When a government spends more than it collects in taxes, it runs a: A) Trade deficit. B) Budget surplus. C) Trade surplus. D) Budget deficit.

D) Budget deficit.

In the Keynesian Cross, if firms are producing at level Y1, then inventories will __________, inducing firms to __________ production. A) Rise; decrease. B) Fall; decrease. C) Rise; increase. D) Fall; increase.

D) Fall; increase

Hyperinflation typically occur when governments: A) Attempt to keep the unemployment rate below the natural rate. B) Use discretionary monetary policy to stabilize output. C) Set inflation targets too high. D) Finance spending with the inflation tax.

D) Finance spending with the inflation tax.

According to the Phillips curve, firms __________ prices when output is below the natural level of output, or equivalently, when the unemployment rate is __________ the natural rate of unemployment. A) Lower; below. B) Raise; above. C) Raise; below. D) Lower; above.

D) Lower; above.

Along a short-run aggregate supply curve, output is related to unexpected movements in the __________. Along a Phillips curve, unemployment is related to unexpected movements in the __________. A) Unemployment rate; price level B) Inflation rate; price level C) Price level; level of output D) Price level; inflation rate

D) Price level; inflation rate

According to the sticky-price model, output will be at the natural level if: A) Expectations are formed adaptively, but not if expectations are formed rationally. B) The proportion of firms with flexible prices equals the proportion of firms with sticky prices. C) Firms expect a high price level and the demand for goods is high. D) The price level equals the expected price level.

D) The price level equals the expected price level.

In the dynamic model, the demand for goods and services decreases as the natural rate of output (increases/decreases) or the real rate of interest (increases/decreases).

Decreases Increases

According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the (greater/smaller) the (increase/decrease) in output in response to an unexpected price increase.

Greater Increase

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will (increase/decrease) the demand for real money balances and will (increase/decrease) the interest rate.

Increase Increase

The LM curve, in the usual case, slopes (up/down) and to the (right/left).

Up Right