Intermediate Macro - Final Exam (Ch. 10,11,12)
leading economic indicators
variables that tend to fluctuate in advance of the overall economy are called:
lower, raise
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.
increasing, permanently higher prices
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 ____ the money supply, but at the cost of _____ ______ _____
money supply
The Fed can reduce the impact of demand shocks by controlling the ____ ____
the interest rate
The IS curve does not shift when ___ ____ ___ changes
actual expenditure, planned expenditure
The equilibrium condition in the Keynesian-cross analysis in a closed economy is: ____ ____ equals ____ ____
income (actual expenditure), planned expenditure
The equilibrium in the Keynesian cross is the point at which _____ (____ ____) equals ____ ____
unemployment, GDP
The negative relationship between _____ and ____ is called Okun's law
MPC
The slope of the planned expenditure function is the ____
interest rate
The variable that links the two halves of the IS-LM model is the:
actual expenditure
the amount households, firms, and the government spends on goods and services:
aggregate supply
the relationship between the quantity of goods and services supplied and the price level:
aggregate demand
the relationship between the quantity of output demanded and the aggregate price level
resulting from a change in the price level, at a given price level
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 ______.
level of output
A reduction in aggregate demand reduces the:
velocity
A reduction in money demand increases the ____ of money
right
A rise in the velocity of money causes the aggregate demand curve to shift to the ____
prices, output
A short-run aggregate supply curve shows fixed ____, and a long-run aggregate supply curve shows fixed ___
IS, shifts to the right
A tax cut shifts the ______ curve to the right, and the aggregate demand curve ______.
the price level
An economic change that does not shift the aggregate demand curve is a change in:
IS curve downward and to the left
An increase in consumer saving for any given level of income will shift the:
in the short run, in the long run, lowering investment
An increase in government spending raises income ____ ____ ____ ___ but leaves it unchanged ___ ___ ___ ___, while ____ ____
Keynesian, the short run
Analysis of the short run and long run indicates that the ______ assumptions are most appropriate in ______.
A
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:
increase, increase
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.
B, A
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
6
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.
P, Y, M
Assuming velocity is constant, the aggregate demand curve tells us possible combinations of __ and ___ for a given value of ___
B, lower
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.
buy, fall
Based on the graph, if the interest rate is r1, then people will ____ bonds, and the interest rate will ____
r2, Y2
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:
r2, Y3
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:
decrease, LM3
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 _____.
increase, LM2
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 _____.
labor force
Short-run movements in GDP are highly correlated with the utilization of the economy's ____ ____
reducing the severity
Stabilization policy refers to policy actions aimed at ____ ___ ____ of short-run economic fluctuations
rise, falls
Stagflation occurs when prices ____ and output ____
output will increase, but the price level will increase
Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:
goods and services
The IS curve represents whats going on in the market for:
only in the short run
The IS-LM model is generally used ______
the price level
The IS-LM model takes ___ ____ ____ as exogenous
smaller, greater
The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.
money
The LM curve represents whats happening to the supply and demand for ____
vertical
The LRAS curve is ____
full employment, natural
The LRAS vertical curve level of output, Y bar, is called ____ ___ or the _____ level of output
consumer spending, IS
The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve.
horizontal, fixed
The SRAS is _____ because all ____ are fixed
lower, raises, reduces
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.
time horizon
The aggregate supply relationship depends on the ____ ____
not neutral, output, prices
The economic response to the overnight reduction in the French money supply by 20 percent in 1724 confirmed that money is ___ ___ in the short run because both ____ and _____ dropped
money supply
The short-run impact of a change in the ____ _____ is not immediate
negatively, positively
The theory of liquidity preference states that the quantity of real money balances demanded is _____ related to the interest rate and ____ related to income
smaller than the multiplier
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.
fiscal policy
____ ____ has a multiplied effect on income
investment, consumption
_____ is far more volatile than _____ over the business cycle
the same amount
A decrease in taxes immediately raises disposable income by:
larger the marginal propensity to consume
A given increase in taxes shifts the IS curve more to the left the:
the money supply, velocity
Along an aggregate demand curve, _____ and ____ are held constant
upward and to the left
A decrease in the real money supply, other things being equal, will shift the LM curve ________
movement along the, shift in the
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.
interest rates, income, real money balances
AN LM curve shows combinations of ___ ____ and ____, which bring equilibrium in the market for ___ ____ ____
100
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:
GDP
Actual expenditure is equal to the ____
income
Planned expenditure is a function of ____
national income, planned investment, government spending, taxes
Planned expenditure is a function of: ____ ____, ____ ____, ____ ____, and ____
PE=C(Y-T)+I+G
Equation for planned expenditure:
higher, greater
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
employment, most needed
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 _____ and where infrastructure is ____ ____
consumption, income
Higher income causes higher ____, which further raises _____
decrease, increase
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: Central Bank A should _____ the quantity of money, whereas Central Bank B should ____ it
300
If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:
increase, decrease
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 _____
shifts upward by G
If government purchases rise by G, then the planned expenditure:
less, more
If the Fed accommodates an adverse supply shock, output falls _____, and prices rise ____
supply, demand
If the interest rate is above the equilibrium value, the ____ of real balances exceeds the ____
level of output but not prices
If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:
permanently higher prices
In response to an adverse supply shock, the Fed can increase aggregate demand to prevent a reduction in output, but this will lead to:
falls, rises
In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.
rises, falls
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 ______.
increase in the money supply
In the IS-LM model, a decrease in the interest rate would be the result of a(n):
consumption
In the IS-LM model, changes in taxes initially affect planned expenditures through:
be smaller
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:
1100
In the Keynesian-cross analysis, if the consumption function is given by C=20+0.7(Y-T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:
unplanned inventory investment
In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: ____ _____ _____
income, consumption, income
In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy ____ ____, which changes ____, which further changes ____
increase but by less than 100
In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ____ for any given level of income
2 billion, 4 billion
In the Keynesian-cross model, if the MPC=0.75, then a $2 billion increase in government spending increases planned expenditures by ____ and increases the equilibrium level of income by ____
flexible, supply or demand
In the long run, prices are ____ and can respond to changes in _____ __ _____
price level, level of output
In the long run, shifts in the aggregate demand curve affects the ___ ____ but not the ____
price level
In the long run, the level of output is NOT determined by the:
sticky
In the short run, prices are ____
output, employment
In the short run, real variables such as ____ and ____ must do the adjusting instead
rise, decrease
In this graph, if firms are producing at level Y3, then inventories will ____, inducing firms to ____ production.
2.5, natural rate
Making use of Okun's law, if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about ___ percent in the short run but will return to its ____ ____ in the long run
IS, right
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 ______.
LM, right
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 ______.
right
increases in the money supply shift the aggregate demand curve to the ____
left
reductions in the money supply shift the aggregate demand curve to the ____
real balances
the higher level of ____ ____ allows a greater volume of transactions, which means a greater quantity of output is demanded
goods and services demanded
the higher the price level P, the lower the level of real balances M/P, and therefore the lower the quantity of ____ ____ ____ ____
