Intermediate Macroeconomics Analysis: Exam 2
Which of the following does not represent national saving? A. Y-C-I-G B. Y-T-C+T-G C. Y-C-G D. Private Saving + Government Saving
A
Why does the aggregate demand curve slope downward? A. A rise in inflation works through the increase in real interest rates to reduce the equilibrium quantity of aggregate output. B. A rise in inflation works through the decrease in real interest rates to reduce the equilibrium quantity of aggregate output. C. A decrease in inflation works through the increase in real interest rates to reduce the equilibrium quantity of aggregate output. D. A rise in inflation works through the increase in real interest rates to increase the equilibrium quantity of aggregate output.
A
If autonomous consumption rises A. the saving curve could shift to the left, to the right, or stay the same. B. the saving curve will shift to the right. C. the investment curve will shift to the left. D. the saving curve will shift to the left.
D
During this period (Great Inflation), the U.S. economy experienced A. slower growth. B. higher inflation. C. less severe cyclical behavior. D. all of the above. E. A and B only.
E
The "Great Moderation" period has been assigned to the time period:
running from 1984 to 2007
The period referred to as the "Great Inflation" corresponds approximately to the decade of the:
1970s
According to the consumption function, what variables determine aggregate spending on consumer goods and services? A. Consumer spending depends on disposable income, the real interest rate, and other variables such as consumers' optimism and wealth. B. Consumer spending depends only on disposable income and the real interest rate. C. Consumer spending depends on disposable income, the real interest rate, and the export-to-import ratio. D. None of the above are correct.
A
How and why do changes in the real interest rate affect net exports? A. When the real interest rate increases, the expected return on domestic assets rises relative to foreign assets. The domestic export becomes more expensive for foreigners and imported goods cheaper for domestic purchasers. The resulting decrease in exports and increase in imports will cause net exports to decline when the real interest rate rises. B. When the real interest rate increases, the expected return on domestic assets falls relative to foreign assets. The domestic export becomes more expensive for foreigners and imported goods more expensive for domestic purchasers. The resulting decrease in exports and increase in imports will cause net exports to decline when the real interest rate rises. C. When the real interest rate decreases, the expected return on domestic assets rises relative to foreign assets. The domestic export becomes more expensive for foreigners and imported goods cheaper for domestic purchasers. The resulting decrease in exports and increase in imports will cause net exports to decline when the real interest rate falls. D. None of the above are correct.
A
In Keynes's liquidity preference theory, what variables determine the demand for real money balances? A. The demand for real money balances depends on the nominal interest rate and real income. B. The demand for real money balances depends on the interest rate and net exports. C. The demand for real money balances depends on the inflation rate and real income. D. The demand for real money balances depends on the inflation rate and aggregate output.
A
The "Great Moderation" is perhaps best noted for A. a heightened degree of stability in most macroeconomic variables. B. the absence of both unemployment and inflation. C. economic policies that removed the harshness of markets. D. none of the above.
A
What condition is required for equilibrium in the goods market? A. Planned expenditure on goods and services must equal the actual amount of goods and services produced. B. Planned expenditure on goods and services must equal net exports. C. Planned expenditure on goods and services must equal the sum of net exports and planned investment spending. D. Consumption expenditure must equal planned investment spending.
A
What happens to aggregate output if unplanned inventory investment is either positive or negative? A. If unplanned inventory investment is positive, there is an excess supply of goods, and aggregate output will decline. If unplanned inventory investment is negative, there is an excess demand for goods, and aggregate output will rise. B. If unplanned inventory investment is positive, there is an excess supply of goods, and aggregate output will rise. If unplanned inventory investment is negative, there is an excess demand for goods, and aggregate output will decline. C. If unplanned inventory investment is positive, there is an excess demand for goods, and aggregate output will decline. If unplanned inventory investment is negative, there is an excess supply of goods, and aggregate output will rise. D. If unplanned inventory investment is positive, there is an excess demand for goods, and aggregate output will rise. If unplanned inventory investment is negative, there is an excess supply of goods, and aggregate output will decline.
A
What is the difference between a closed economy and an open economy? A. In an open economy, economies are open to trade with one another, while in a closed economy, there is no trading between the different economies. B. In an open economy, changes in the money supply affect the world interest rate, while in a closed economy, changes in the money supply affect only the domestic real interest rate. C. In an open economy, economies are open to exports and imports, while in a closed economy, the country is willing to export its goods only. D. An open economy can influence the world real interest rate, while a closed economy has no effect on the world interest rate.
A
What is the effect of an increase in domestic saving on the trade balance and net capital outflows? A. If domestic saving increases, net capital outflows will rise and net exports will increase. B. If domestic saving increases, net capital outflows will fall and net exports will increase. C. If domestic saving increases, net capital outflows will fall and net exports will decrease. D. If domestic saving increases, net capital outflows will rise and net exports will decrease.
A
Why did Keynesian analysis emphasize this concept? A. Keynes viewed the total amount of output demanded in the economy as being the same as planned expenditure. This is true when the planned expenditure on goods and services is equal to the actual amount of goods and services produced. B. Keynes believed that planned expenditure is the amount that households, businesses, the government, and foreigners actually do spend, which equals the total amount of output produced in the economy. C. Keynes viewed the total amount of output demanded in the economy as being the same as planned expenditure. This is true when the planned expenditure on goods and services is less than the actual amount of goods and services produced. D. Keynes viewed the total amount of output demanded in the economy as being the same as planned expenditure. This is true when the planned expenditure on goods and services is more than the actual amount of goods and services produced.
A
Autonomous consumption is the part of consumption that A. is dependent on the real interest rate. B. is independent from disposable income or the real interest rate. C. varies with disposable income. D. households are forced to spend above desired consumption.
B
How do changes in planned expenditures affect the aggregate demand curve? A. The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, government purchases, or taxes decrease. B. The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, or government purchases increase, or if taxes decrease. C. The aggregate demand curve shifts to the left if autonomous consumption, autonomous investment, autonomous net exports, or government purchases increase, or if taxes decrease. D. The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, government purchases, or taxes increase.
B
How do the conditions required for goods market equilibrium differ in the two types of economies? A. In an open economy, imports must equal exports, while in a closed economy, the goods market equilibrium is always zero. B. In a closed economy, goods market equilibrium occurs when saving equals investment; however, in an open economy, it can still be in equilibrium even when saving and investment are not equal. C. There are no real differences between the two types of economies. D. In an open economy, goods market equilibrium occurs when saving equals investment; however, in a closed economy, it can still be in equilibrium even when saving and investment are not equal.
B
If desired saving increases, what happens to the real interest rate and desired investment? A. The real interest rate increases, which causes desired investment to increase. B. The real interest rate decreases, which causes desired investment to increase. C. The real interest rate decreases, which causes desired investment to decrease. D. The real interest rate increases, which causes desired investment to decrease.
B
What causes the IS curve to shift? A. A shift in the IS curve occurs when equilibrium output changes at each given real interest rate. The factors of shifting are autonomous consumption, autonomous investment, and the real interest rate. B. A shift in the IS curve occurs when equilibrium output changes at each given real interest rate. The factors of shifting are autonomous consumption, autonomous investment, autonomous net exports, taxes, and government purchases. C. A shift in the IS curve occurs when the real interest rate changes at each given level of equilibrium output. D. None of the above are correct.
B
What does the IS curve show? A. It shows equilibrium points in the goods market — the combinations of planned investment spending and net exports. B. It shows equilibrium points in the goods market — the combinations of the real interest rate and equilibrium output. C. It shows equilibrium points in the goods market — the combinations of the real interest rate and net exports. D. It shows equilibrium points in the goods market — the combinations of planned expenditure and equilibrium output.
B
What is the monetary policy curve? A. It traces out the points at which the goods market is in equilibrium. B. It indicates the relationship between the inflation rate and the real interest rate. C. It indicates the relationship between consumption expenditure and the real interest rate. D. It indicates the relationship between net exports and the real interest rate.
B
Which of the following is not a similarity between the effects of changes in domestic saving and investment for large open economies to those for small open economies and closed economies? A. Changes in domestic saving and investment affect the domestic interest rate—like closed economies. B. Changes in domestic saving and investment will affect the world real interest rate—like small open economies. C. Changes in domestic saving and investment will affect the actual level of investment—like closed economies. D. Changes in domestic saving and investment affect the trade balance and net capital flows—like small open economies.
B
Why does the IS curve slope downward? A. As the real interest rate rises, consumption expenditure, planned investment spending, and net exports rise, which in turn increases planned expenditure. Aggregate output must be higher for it to equal planned expenditure and satisfy goods market equilibrium. Hence, the IS curve is downward-sloping. B. As the real interest rate rises, consumption expenditure, planned investment spending, and net exports fall, which in turn lowers planned expenditure. Aggregate output must be lower for it to equal planned expenditure and satisfy goods market equilibrium. Hence, the IS curve is downward-sloping. C. As the real interest rate falls, consumption expenditure, planned investment spending, and net exports rise, which in turn lowers planned expenditure. Aggregate output must be lower for it to equal planned expenditure and satisfy goods market equilibrium. Hence, the IS curve is downward-sloping. D. None of the above are correct.
B
Why does the money market move toward equilibrium? A. If the nominal interest rate is above its equilibrium value, people will purchase more bonds and bond prices will rise, which causes the nominal interest rate to rise. When the interest rate is below its equilibrium level, people will sell bonds and bond prices will fall, causing the interest rate to fall. B. If the nominal interest rate is above its equilibrium value, people will purchase more bonds and bond prices will rise, causing the nominal interest rate to fall toward the equilibrium value. When the interest rate is below its equilibrium level, people will sell bonds and bond prices will fall, causing the interest rate to rise toward the equilibrium value. C. If the nominal interest rate is above its equilibrium value, people will purchase more bonds and bond prices will fall, which causes the nominal interest rate to rise. When the interest rate is below its equilibrium level, people will sell bonds and bond prices will rise, causing the interest rate to fall. D. None of the above.
B
Why does the monetary policy curve slope upward? (Check all that apply.) A. Monetary policymakers will follow the Taylor principle and respond aggressively to a decrease in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises. B. When inflation increases, the supply of real money balances declines. This increases the equilibrium nominal interest rate in the money market, which also increases the real interest rate in the short run. C. When inflation increases, the supply of real money balances increases. This increases the equilibrium nominal interest rate in the money market, which also increases the real interest rate in the short run. D. Monetary policymakers will follow the Taylor principle and respond aggressively to an increase in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises.
B,D
How does a small open economy differ from a large open economy? A. A small open economy is only open to trade with similar economies. B. In a small open economy, equilibrium occurs when saving equals investment; however, in a large open economy equilibrium occurs when desired saving minus desired investment equals net exports. C. A small open economy has no effect on the world real interest rate. D. A small open economy is able to influence the world interest rate through its saving and investment decisions.
C
How does an autonomous tightening or easing of monetary policy by the Fed affect the MP curve? A. When the Fed decides to lower the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to raise the real interest rate at any given inflation rate, shifts the MP curve downward. B. When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts downward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve upward. C. When the Fed decides to raise the real interest rate at any given inflation rate, the MP curve shifts upward. Monetary policy easing, a decision to lower the real interest rate at any given inflation rate, shifts the MP curve downward. D. None of the above are correct.
C
What are the two types of planned investment spending? A. Planned investment and expected investment. B. Fixed investment and planned investment. C. Fixed investment and inventory investment. D. None of the above are correct.
C
What condition is required for equilibrium in the money market? A. Equilibrium occurs when the quantity of real money equals the quantity of demanded money. B. Equilibrium occurs when the total quantity of output produced in the economy equals the total amount of planned expenditures. C. Equilibrium occurs when the quantity of real money balances demanded equals the quantity of real money balances supplied. D. None of the above.
C
What is the aggregate demand curve? A. It is the relationship between the inflation rate and net exports. B. It traces out the points at which the goods market is in equilibrium. C. It is the relationship between the inflation rate and aggregate output when the goods market is in equilibrium. D. It is the relationship between the inflation rate and the real interest rate.
C
What relation between desired saving and desired investment is required for goods market equilibrium? A. Saving must be less than investment B. Saving must be greater than investment C. Saving must be equal to investment D. Goods market equilibrium cannot be reached in a closed economy
C
Which of the following causes an increase in desired saving? A. A decrease in taxes. B. An increase in government purchases. C. A decrease in autonomous consumption. D. All of the above.
C
Which of the following is not a determinant of national saving and investment in a closed economy? A. Income B. Consumption C. Net exports D. The real interest rate
C
Which of the following variables changes in order to bring saving and investment into equilibrium? A. Productivity B. The money supply C. The real interest rate D. The nominal interest rate
C
Business cycles are best defined as fluctuations in aggregate economic activity in which A. industrial activities expand and contract in a recurring — but not periodic — manner. B. all economic activities expand and contract in unison in a recurring and periodic fashion. C. the decisions of businesses are the governing force behind the aggregate fluctuations — hence the term "business cycle." D. many economic activities expand and contract together in a recurring — but not periodic — fashion.
D
Discuss the following statement: "Real GDP has decreased for two quarters in a row; we definitively are living through a contraction." A. The statement is correct since two consecutive quarters is more than enough time to determine an economy's trend. B. The statement is correct because changes in real GDP precisely mirror changes in other variables that reflect overall economic activity. C. The statement is correct since this measurement standard has been mandated by the U.S. Congress. D. The statement is incorrect since the official arbiter of business cycle dates (the NBER) looks at multiple indicators of economic activity before declaring the onset of a contraction.
D
How does the demand for real money balances respond to changes in each of these variables? A. The demand for money is positively related to the nominal interest rate and real income. B. The demand for money is positively related to the nominal interest rate and inversely related to real income. C. The demand for money is inversely related to the nominal interest rate and real income. D. The demand for money is inversely related to the nominal interest rate and positively related to real income.
D
What are the four components of planned expenditure? A. Consumption expenditure, fixed investment spending, inventory investment spending, and taxes. B. Consumption expenditure, planned investment spending, government purchases, and imports. C. Consumption expenditure, planned investment spending, government purchases, and exports. D. Consumption expenditure, planned investment spending, government purchases, and net exports.
D
Suppose a sharp increase in housing prices leads the Federal Reserve to raise the interest rate despite the fact that current inflation is close to the target of 2%. This action would be best described as:
an autonomous tightening of monetary policy
Given their market structure views, classical macroeconomists see prices and wages as being mostly ___________
flexible
According to modern Phillips curve analysis, a price shock - like a significant increase in the price of oil - would:
increase the inflation rate by shifting the Phillips Curve upward
The Taylor principle states that an increase in inflation should lead to a(n) ________________ in the real interest rate and a(n) ____________ in the nominal interest rate.
increase; increase
This view of classical macroeconomists regarding the responsiveness of prices and wages to changing conditions suggests (to them) that the economy adjusts to long-run equilibrium rather ____________
quickly
In macroeconomic analysis, the long run is distinguished from the short run on the basis of:
the degree of price flexibility
The aggregate demand curve slopes downward because a rise in inflation leads:
the monetary policy authority to raise the real interest rate
Compared to Keynesian macroeconomists, classical macroeconomists view the typical market as being _______________________ by monopolistic forces.
unconstrained
For classical macroeconomists, the economy's rapid adjustment to long-run equilibrium makes government intervention _______________
unnecessary
