Exam 3 EC

In the Keynesian-cross model, actual expenditures equal:

GDP

When is our final?

Hewson 2008 (12/9) 10:30 - 12:30

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.

higher; greater

According to the quantity theory of money, when velocity is constant, if output is higher, _____ real balances are required, and for fixed M this means _____ P.

higher; lower

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.

higher; lower

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.

increase; decrease

Holding output, Y, fixed, a reduction in the demand for money is the equivalent of a(n) _____ in velocity and will shift the aggregate demand curve to the _____.

increase; right

The IS curve plots the relationship between the interest rate and _____ that arises in the market for _____.

national income; goods and services

Okun's law is the _____ relationship between real gross domestic product (GDP) and the _____.

negative; unemployment rate

The theory of liquidity preference states that the quantity of real money balances demanded is:

negatively related to the interest rate and positively related to the income

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

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 Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy:

changes income, which changes consumption, which further changes income

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 _____.

increase; decrease

Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) _____ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _____.

increase; left

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production

If the interest rate is above the equilibrium value, the:

supply for real balances exceeds the demand

When gross domestic product (GDP) growth declines, investment spending typically _____ and consumption spending typically _____.

decreases; decreases

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.

decreases; downward

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:

decreasing the money supply.

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

If a change in government regulations allows banks to start paying interest on checking accounts, this will:

increase the demand for money.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures _____ for any given level of income.

increase, but by less than 100

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____.

prices; output

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.

real

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does NOT depend on:

the money supply

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

unplanned inventory investment