ECON204 Final

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows: Answers: a."Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. " b."Today the Fed took a step toward expanding aggregate demand, and this was done by raising the federal funds rate to 1.25 percent. " c."Today the Fed raised the discount rate by a quarter of a percentage point, and this action will force the federal funds rate to rise by the same amount. " d."Today the Fed took steps to increase the money supply by an amount that is sufficient to increase the federal funds rate to 1.25 percent. "

a. "Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. "

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would Answers: a.increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate. b. decrease the rate at which the money supply increases. This will also move inflation closer to its original rate. c. decrease the rate at which the money supply increases. However, this will make higher than its previous rate. d. increase the rate at which the money supply increases. This will also move inflation closer to its previous rate.

a. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate.

In which case can we be sure aggregate demand shifts left overall? Answers: a. People want to save more for retirement and the Fed decreases the money supply. b. People want to save less for retirement and the Fed decreases the money supply. c. People want to save less for retirement and the Fed increases the money supply. d. People want to save more for retirement and the Fed increases the money supply.

a. People want to save more for retirement and the Fed decreases the money supply.

Which of the following relationships is nicknamed the "twin deficits"? Answers: a. The relationship between budget deficit and trade deficit. b. The relationship between trade deficit and money supply deficit. c. The relationship between budget deficit and money supply deficit. d. The relationship between budget deficit and deficit of domestic investment.

a. The relationship between budget deficit and trade deficit.

During the financial crisis it was proposed that firms be provided with a tax credit for investment projects. Such a tax credit would shift Answers: a. the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left. b. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange right. c. the demand for loanable funds left and shift the supply of dollars in the market for foreign-currency exchange right. d. both the demand for loanable funds and the supply of dollars in the market for foreign-currency exchange left.

a. the demand for loanable funds right and shift the supply of dollars in the market for foreign-currency exchange left.

Which of the following describes the Volcker disinflation most accurately? Answers: a.Much of the public did not believe that the Fed would keep money growth low, so unemployment rose more than it would have otherwise. b.Almost all of the public believed that the Fed would keep money growth low, so unemployment rose less than it would have otherwise. c.Almost all of the public believed that the Fed would keep money growth low, so unemployment rose more than it would have otherwise. d.Much of the public did not believe that the Fed would keep money growth low, so unemployment rose less than it would have otherwise.

a.Much of the public did not believe that the Fed would keep money growth low, so unemployment rose more than it would have otherwise.

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift? Answers: a. By $60 billion b. By $30 billion c. By $20 billion d. By $90 billion

b. By $30 billion

Scenario 33-1 Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. Refer to Scenario 33-1. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand? Answers: a. Net exports would rise which by itself would increase U.S. aggregate demand. b. Net exports would fall which by itself would decrease U.S. aggregate demand. c. Net exports would rise which by itself would decrease U.S. aggregate demand. d. Net exports would fall which by itself would increase U.S. aggregate demand

b. Net exports would fall which by itself would decrease U.S. aggregate demand.

Scenario 33-2 Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Scenario 33-2. How is the new long-run equilibrium different from the original one? Answers: a. The price level and real GDP are higher. b. The price level is higher and real GDP is the same. c. The price level is the same and real GDP is higher. d. The price level and real GDP are lower.

b. The price level is higher and real GDP is the same.

Suppose that the United States imposes an import quota on lumber. The quota makes the real exchange rate of the U.S. dollar Answers: a. depreciate but does not change the real interest rate in the United States. b. appreciate but does not change the real interest rate in the United States. c. depreciate and the real interest rate in the United States decrease. d. appreciate and the real interest rate in the United States increase.

b. appreciate but does not change the real interest rate in the United States.

If people correctly anticipate that inflation will fall by 1%, then Answers: a. the short-run Phillips curve would shift left and unemployment falls. b. the short-run Phillips curve shifts left and unemployment is unchanged. c. the short-run Phillips curve shifts right and unemployment rises. d. the short-run Phillips curve shifts right and unemployment is unchanged.

b. the short-run Phillips curve shifts left and unemployment is unchanged.

The theory of purchasing-power parity implies that the demand curve for foreign-currency exchange is Answers: a. upward sloping. b. downward sloping. c. horizontal. d. vertical.

c. horizontal.

In 1998, the Russian government defaulted on its bonds. According to the open-economy macroeconomic model, this should have Answers: a. increased Russian interest rates and reduced Russian net exports. b. reduced Russian interest rates and increased Russian net exports. c. increased Russian interest rates and net exports. d. reduced Russian interest rates and net exports.

c. increased Russian interest rates and net exports.

If the central bank keeps the money supply growth rate constant, but people raise their inflation expectations by 1 percentage point, then the short-run Phillips curve shifts Answers: a. left and the unemployment rate rises. b. right and the unemployment rate falls. c. right and the unemployment rate rises. d. left and the unemployment rate falls.

c. right and the unemployment rate rises.

If inflation expectations rise, the short-run Phillips curve shifts Answers: a. right, so that at any inflation rate output is higher in the short run than before. b. left, so that at any inflation rate output is lower in the short run than before. c. right, so that at any inflation rate output is lower in the short run than before. d. left, so that at any inflation rate output is higher in the short run than before.

c. right, so that at any inflation rate output is lower in the short run than before.

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would Answers: a. fall which by itself would increase aggregate demand. b. rise which by itself would decrease aggregate demand. c. rise which by itself would increase aggregate demand. d. fall which by itself would decrease aggregate demand.

c. rise which by itself would increase aggregate demand.

If at a given real interest rate desired national saving is $140 billion, domestic investment is $90 billion, and net capital outflow is $60 billion, then at that real interest rate in the loanable funds market there is a Answers: a. surplus. The real interest rate will fall. b. surplus. The real interest rate will rise. c. shortage. The real interest rate will rise. d. shortage. The real interest rate will fall.

c. shortage. The real interest rate will rise.

A tax cut shifts the aggregate demand curve the farthest if Answers: a. the MPC is small and if the tax cut is temporary. b. the MPC is small and if the tax cut is permanent. c. the MPC is large and if the tax cut is permanent. d. the MPC is large and if the tax cut is temporary.

c. the MPC is large and if the tax cut is permanent.

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more, Answers: a. the larger the MPC and the stronger the influence of income on money demand. b. the smaller the MPC and the stronger the influence of income on money demand. c. the larger the MPC and the weaker the influence of income on money demand. d. the smaller the MPC and the weaker the influence of income on money demand.

c. the larger the MPC and the weaker the influence of income on money demand.

Scenario 35-2 ​ In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. Refer to Scenario 35-2. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then Answers: a. unemployment rises, but it would have risen more if people had been expecting 22% inflation. b. unemployment rises, but it would have risen more if people had been expecting 12.5% inflation. c. unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation. d. unemployment falls, but it would have fallen more if people had been expecting 22% inflation.

c. unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation.

A policy that raised the natural rate of unemployment would shift Answers: a. the short-run Phillips curve right but leave the long-run Phillips curve unchanged. b. the long-run Phillips curve right but leave the short-run Phillips curve unchanged. c. neither the long-run Phillips curve nor the short-run Phillips curve right. d. both the short-run and the long-run Phillips curves to the right.

d. both the short-run and the long-run Phillips curves to the right.

If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result? Answers: a. Both the price level and output b. The price level but not output c. Neither output nor the price level d. Output but not the price level

d. Output but not the price level

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to Answers: a. fall. This fall in price expectations shifts the short-run aggregate supply curve to the left. b. rise. This rise in price expectations shifts the short-run aggregate supply curve to the right. c. fall. This fall in price expectations shifts the short-run aggregate supply curve to the right. d. rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.

d. rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.

If the unemployment rate is below the natural rate, then Answers: a. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift right. b. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right. c. inflation is less than expected. As inflation expectations are revised the short-run Phillips curve will shift left. d. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift left.

b. inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is Answers: a. $60.75. b. $61.33. c. $60.25. d. $64.00.

a. $60.75.