Macro Exam

Recessions occur a) regularly, about every 3 years. b) regularly, about every 7 years. c) regularly, about every 12 years. d) irregularly.

7 years

Which of the following shifts the long-run aggregate supply curve to the left?

An increase in the price of imported natural resources and an increase in trade restrictions

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 happen to the dollar?

It would appreciate in foreign exchange markets making U.S. goods more expensive compared to foreign goods.

From one year to the next, inflation falls from 5 to 4 percent, while unemployment rises from 6 to 7 percent. Which of the following events could be responsible for this change? a) The central bank increases the growth rate of the money supply. b) The government cuts spending and raises taxes to reduce the budget deficit. c) Newly discovered oil reserves cause world oil prices to plummet. d) The appointment of a new Fed chair increases expected inflation.

The government cuts spending and raises taxes to reduce the budget deficit.

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

The interest-rate effect

The classical dichotomy and monetary neutrality are represented graphically by

a vertical long-run aggregate-supply curve.

If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run

both the unemployment rate and the inflation rate would be lower.

If U.S. speculators gained greater confidence in foreign economies so that they wanted to move more of their wealth into foreign countries, the dollar would

depreciate which would cause aggregate demand to shift right.

When the Federal Reserve increases the money supply and expands aggregate demand, it moves the economy along the Phillips curve to a point with ......... inflation and ........... unemployment. a) higher; higher b) higher; lower c) lower; higher d) lower; lower

higher; lower

An increase in the aggregate demand for goods and services has a larger impact on output ........... and a larger impact on the price level ...... a) in the short run; in the long run b) in the long run; in the short run c) in the short run; also in the short run d) in the long run; also in the long run

in the short run; in the long run

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

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

If the Federal Reserve reduces the rate of money growth and maintains it at the new lower rate, eventually expected inflation will ..... and the short-run Phillips curve will shift ........ a) decrease; downward b) decrease; upward c) increase; downward d) increase; upward

increase; upward

If the unemployment rate is below the natural rate, then

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

The Fed's target for the federal funds rate a) is an extra policy tool for the central bank, in addition to and independent of the money supply. b) commits the Fed to set a particular money supply so that it hits the announced target. c) is a goal that is rarely achieved because the Fed can determine only the money supply. d) matters to banks that borrow and lend federal funds but does not influence aggregate demand.

is an extra policy tool for the central bank, in addition to and independent of the money supply.

Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is temporarily

low and so supply a smaller quantity of labor.

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied.

All else equal, country A has a higher money supply growth rate and a long-run Phillips curve that is farther to the left than country B's. In the long run as compared to country B, country A will have

lower unemployment and higher inflation.

One determinant of the long-run average unemployment rate is the

minimum wage, while the inflation rate depends primarily upon the money supply growth rate.

If an increase in inflation permanently reduced unemployment, then

money would not be neutral and the long-run Phillips curve would slope downward.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, production is

more profitable and employment and output rises.

When an adverse supply shock shifts the short-run aggregate-supply curve to the left, it also a) moves the economy along the short-run Phillips curve to a point with higher inflation and lower unemployment. b) moves the economy along the short-run Phillips curve to a point with lower inflation and higher unemployment. c) shifts the short-run Phillips curve to the right. d) shifts the short-run Phillips curve to the left.

moves the economy along the short-run Phillips curve to a point with higher inflation and lower unemployment.

When the Federal Reserve decreases the federal funds target rate, the lower rate is achieved through

purchases of government bonds, which reduces interest rates and causes people to hold more money.

One reason the short-run aggregate-supply curve slopes upward is that a higher price level a) raises nominal wages if real wages are sticky. b) reduces nominal wages if real wages are sticky. c) raises real wages if nominal wages are sticky. d) reduces real wages if nominal wages are sticky.

raises nominal wages if real wages are sticky

Changes in the interest rate

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

The Phillips curve started as an observed ..... correlation between the inflation rate and the ...... a) positive; nominal interest rate b) positive; unemployment rate c) negative; nominal interest rate d) negative; unemployment rate

negative; unemployment rate

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy.

From 2008-2009 the Federal Reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have

raised inflation and reduced unemployment.

If the government wants to expand aggregate demand, it can .... government purchases or ...... taxes. a) increase; increase b) increase; decrease c) decrease; increase d) decrease; decrease

decrease; increase

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases.

Other things the same, if the U.S. price level falls, then U.S. residents want to buy

more foreign bonds. The real exchange rate falls.

According to the long-run Phillips curve, in the long run monetary policy influences

the inflation rate but not the unemployment rate.

According to liquidity preference theory, if the price level decreases, then

the interest rate falls because money demand shifts left.

An improved functioning of the labor markets will shift

the long-run Phillips curve to the left and the long-run aggregate supply curve to the right.

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

the multiplier effect.

A sudden increase in business pessimism shifts the aggregate-_________ curve, leading to ___________ output. a) supply; lower b) supply; higher c) demand; lower d) demand; higher

demand; lower

In 1980, the combination of inflation and unemployment the U.S. was experiencing

followed two supply shocks that were triggered by the Organization of Petroleum Exporting Countries.

Monetary policy affects the economy with a lag mainly because it takes a long time a) for central banks to make policy changes. b) to change the money supply after a policy decision has been made. c) for a change in the money supply to affect interest rates. d) for a change in interest rates to affect investment spending.

for central banks to make policy changes

According to liquidity preference theory, the money-supply curve is

vertical.

A change in which of the following would shift the short-run aggregate-supply curve but not the long-run aggregate-supply curve? a) the labor force b) the capital stock c) the state of technology d) the expected price level

the expected price level

As the interest rate falls to equilibrium in the market for money,

the quantity of money demanded rises, which would reduce a surplus of money.

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

downward pressures on prices and wages.

If taxes

decrease, then consumption increases, and aggregate demand shifts rightward.

Suppose a wave of negative "animal spirits" overruns the economy, and people become pessimistic about the future. To stabilize aggregate demand, the Fed could ...... its target for the federal funds rate or Congress could ......... taxes. a) increase; increase b) increase; decrease c) decrease; increase d) decrease; decrease

decrease; decrease

From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel wealthier, then it would have shifted aggregate

demand right.

A movement to the left along a given short-run Phillips curve could be caused by

expansionary monetary policy, but not a reduction in the natural rate of unemployment.

A favorable supply shock causes the price level to

fall. To counter this a central bank could increase the money supply.

In recent years, the Federal Reserve has conducted policy by setting a target for the

federal funds rate.

When the interest rate increases, the opportunity cost of holding money

increases, so the quantity of money demanded decreases.

Stagflation is caused by a a) leftward shift in the aggregate-demand curve. b) rightward shift in the aggregate-demand curve. c) leftward shift in the aggregate-supply curve. d) rightward shift in the aggregate-supply curve.

leftward shift in the aggregate-supply curve

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

likely smaller than if the cut had been permanent.

When the economy goes into a recession, real GDP .......... and unemployment ........... . a) rises; rises b) rises; falls c) falls; rises d) falls; falls

falls; rises

Fiscal policy affects the economy

in both the short and long run.

Which of the following would shift the aggregate-demand curve to the left? a) A decline in the stock market. b) An increase in taxes. c) A decrease in government spending. d) All of the above.

An increase in taxes

People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this?

Both sticky price theory and sticky wage theory

In 2009, Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?

Both the increased funding for states and the tax cuts

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?

By $30 billion

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Increase taxes

In 2008, the United States was in recession. Which of the following things would you not expect to have happened?

Increased Real GDP

Which of the following is most commonly used to monitor short-run changes in economic activity?

Real GDP

If the stock market booms, then

aggregate demand increases, which the Fed could offset by selling bonds.

When taxes decrease, interest rates

increase, making the change in aggregate demand smaller.

Advocates of the theory of rational expectations believe that a) the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation. b) if disinflation catches people by surprise, it will have minimal impact on unemployment. c) wage and price setters never expect the central bank to follow through on its announcements. d) expected inflation depends on the rates of inflation that people have recently observed.

the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation.

A change in expected inflation shifts

the short-run Phillips curve, but not the long run Phillips curve.

From one year to the next, inflation falls from 5 to 4 percent, while unemployment falls from 7 to 6 percent. Which of the following events could be responsible for this change? a) The central bank increases the growth rate of the money supply. b) The government cuts spending and raises taxes to reduce the budget deficit. c) Newly discovered oil reserves cause world oil prices to plummet. d) The appointment of a new Fed chair increases expected inflation.

the central bank increases the growth rate of the money supply.

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

the equilibrium interest rate increases.

The natural rate of unemployment is a) the socially optimal level of joblessness. b) the level of joblessness the economy reaches in the short run. c) the amount of joblessness that cannot be reduced by public policies. d) the normal level of joblessness, regardless of inflation.

the normal level of joblessness, regardless of inflation

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

the slope of the aggregate-demand curve.

According to the theory of liquidity preference, an economy's interest rate adjusts a) to balance the supply and demand for loanable funds. b) to balance the supply and demand for money. c) one-for-one to changes in expected inflation. d) to equal the interest rate prevailing in world financial markets.

to balance the supply and demand for loanable funds

If there is an increase in the price of oil, then

unemployment rises. If the central bank tries to counter this increase, inflation rises.

Other things the same, as the price level decreases it induces greater spending on

both net exports and investment

If the Federal Reserve decided to raise interest rates, it could

sell bonds to lower the money supply.