Macroeconomics Part Six

In the multiplier model, if the mpe is 0.2, then the multiplier is:

1.25

Suppose that to cool down an overheating economy the U.S. government decides to decrease income by 2,000. If the mpe is 0.8, the government should decrease its spending by:

400

What would NOT destabilize the economy?

A decline in asset prices leads people to begin to buy more stocks.

Annual inflation in Zimbabwe was 32 percent in 1998, 383 percent in 2003, and increased to more than 100,000 percent in 2009. What would a classical economist who sees great merit in the quantity theory of money look for in trying to explain this rise in inflation?

A rapid increase in the quantity of money in circulation.

In the early 2000s, Europeans saw the U.S. as a big half-off sale. European visitors to the U.S. were enjoying shopping for many items that were much more expensive in Europe. Which of the following could have led to this shopping spree?

A rise in the dollar price of the euro.

Which of the following would most likely cause an increase in the supply of dollars?

An expansionary fiscal policy that raised U.S. income and increased U.S. imports.

What are trade adjustment assistance programs?

Attempts to compensate those who suffer losses when trade restrictions are reduced.

Housing prices fell sharply in 2008 and 2009, contributing to a severe recession as the AD curve shifted leftward. The ordinary AS/AD model would predict that falling short-run aggregate supply would bring deflation and move the economy back to potential output. Which of the following describes the impact of dynamic feedback effects on this return to potential output?

Expectations that prices might fall further could cause people to reduce spending, shifting the AD curve further to the left.

Even as the U.S. government ran large budget deficits in the early 2000s, the interest rate did not rise substantially. Which of the following is among the reasons that crowding out did not raise interest rates at that time?

Foreigners were willing to finance the U.S. deficit with their abundant supply of savings.

If the U.S. dollar appreciates against the Japanese yen, then:

Japanese goods will be cheaper in the United States.

Which of the following best describes most economists' approach to economic stabilization until the 1930s?

Maintain a balanced budget at all times, under the principle of sound finance.

Which of the following is an international financial institution concerned primarily with monetary issues and international financial arrangements?

The International Monetary Fund.

Which of the following organizations works with developing countries to secure low-interest loans that foster economic growth?

The World Bank.

Which of the following is most representative of the functional finance view of the macroeconomy?

The government should decide on tax and spending plans based on their effects on the economy.

Suppose that the U.S. dollar buys 100 Japanese yen, gold costs $500 per ounce in New York, and gold costs 20,000 yen per ounce in Tokyo. What does the law of one price predict would happen?

Traders would buy gold in Japan and sell it in the U.S.

World trade declined in the 1930s. What is one explanation of that decline?

World income shrank and trade restrictions increased.

The balance of payment account is made up of:

a current account and a financial and capital account.

Because reducing both unemployment and inflation simultaneously are conflicting goals:

aggregate demand policy will allow policymakers to achieve one of these objectives, but not both.

Technological changes in telecommunications have:

allowed increased foreign trade in many services.

In 2009, some Chinese policymakers called for a reserve currency in place of the U.S. dollar. Should the yuan rise to be the reserve currency of choice, this would lead to:

an appreciation of the yuan and a depreciation of the dollar.

The income tax is:

an automatic stabilizer because income tax revenues rise as income increases, slowing an economic expansion.

In 2009, output was beneath potential. At the same time, the budget deficit hit a record high of over $1 trillion. If President Obama were to pursue budget cuts, given the state of the economy, these spending cuts would:

be procyclical.

The U.S. balance of trade has

been in deficit since the 1980s.

When a country runs a trade deficit, it does so by:

borrowing from foreign countries or selling assets to them.

Infant industry protection can be justified in theory by:

both the "learning by doing" argument and the existence of economies of scale.

A primary goal of the World Bank is to:

channel low-interest loans to developing countries to foster economic growth.

In the early 2000s, car sales in China slowed because the government had been restricting credit growth. This action is consistent with the effects of:

contractionary monetary policy but not contractionary fiscal policy.

A country that wants to increase its exchange rate to a higher level than the market exchange rate would most likely adopt:

contractionary monetary policy.

In 2007, oil prices increased sharply, actual output was less than potential output, and inflation increased. Given these circumstances, the increase in inflation was most likely:

cost-push inflation.

If the price of country's currency is below the equilibrium price and it has fixed exchange rates, then the:

country will accumulate official reserves.

In the early 2000s Ireland experienced very rapid increases in its GDP that caused its actual GDP to exceed its potential GDP. If Ireland had wanted to avoid inflation at this time, it could have:

cut its government expenditures to eliminate the inflationary gap.

Crowding out:

decreases the multiplier effect, so that an increase in government spending raises income by less.

If government has no debt initially but then annual revenues are $8 billion for 10 years while annual expenditures are $11 billion for 10 years, then the government has a:

deficit of $3 billion per year and a debt of $30 billion.

If Americans suddenly wanted European products because they were deemed more fashionable, the:

demand curve for the euro would shift right.

For the foreign exchange market, exports from the U.S. generate a:

demand for dollars and imports to the U.S. generate a supply of dollars.

A quota differs from a tariff in that quotas:

do not generate tax revenues, unlike tariffs.

If American interest rates fall relative to Japanese interest rates and Japanese inflation falls relative to American inflation, then the:

dollar will lose value in terms of yen.

When per unit output costs fall as output increases, this is called:

economies of scale.

When comparative advantage is based on transferable factors, the law of one price tends to:

erode the advantage away.

Suppose most economists agree that the target rate of unemployment is between 4 and 7 percent. If the actual unemployment rate is 11 percent, then most economists would agree that:

expansionary monetary and fiscal policies are appropriate.

As the economy contracts, tax revenues:

fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers.

The part of the balance of payments account that lists all long-term flows of payments is called the:

financial and capital account.

In the AE/AP model, if the U.S. exchange rate rises dramatically, most likely suppliers will:

find they cannot sell all they have produced; firms will layoff workers; income will decline; expenditures will decline further starting a cycle until expenditures equal production once again.

The government's running of a deficit or a surplus with the objective of affecting the level of output in the economy is called:

fiscal policy.

Countries are unlikely to maintain fixed exchange rates for long periods of time because:

fixed exchange rates impede a nation's ability to use monetary and fiscal policy to pursue domestic macroeconomic goals.

When the economy entered a serious recession in 2008, the response of the U.S. government was to institute a $700 billion bailout plan, pursue other heavy deficit spending, and take on unusually large liabilities through bond and money market fund guarantees. This is an example of:

functional finance and expansionary fiscal policy.

One of the reasons government debt is different from individual debt is:

government never really needs to pay back its debt.

If the price level in the United States falls relative to the price level in foreign nations, U.S. exports:

increase and U.S. imports decrease, causing the demand for dollars to rise and the supply of dollars to fall.

The quantity theory of money implies that an increase in the money supply will ultimately:

increase the price level and leave real GDP unchanged.

A country that was facing inflationary pressures decided to adopt a contractionary monetary policy. This policy raised the domestic interest rates, which:

increased the demand of domestic currency and appreciated the country's currency.

As the marginal propensity to expend rises, the multiplier:

increases

the type of comparative advantage that is not easily changed, such as climate,

inherent comparative advantage.

The most important difference between domestic governments and international organizations is that:

international organizations are less effective since they have no means of forcing members to comply.

If the money supply is 500 and velocity is 6, then nominal GDP:

is 3000.

When interest rates go up, it is:

more expensive for businesses to borrow, so investment falls.

Expansionary monetary policy generally:

pushes down the value of the U.S. dollar.

Contractionary monetary policy tends to:

raise the interest rate, raise capital inflows, and raise the value of the dollar.

When the economy is experiencing inflation, an economist who follows a functional finance principle is most likely to suggest that the government should:

run a surplus.

The concept of fiscal policy refers to the:

running of a deficit or surplus to affect the level of output in the economy.

Say consumers become more pessimistic about the future. The AE curve will likely:

shift down.

If a government finances an increase in its expenditures by selling bonds to the public, then the aggregate demand curve will:

shift out but not as much as it would if crowding out didn't occur.

The country of Cromania experienced a 5 percent increase in nominal wages while its productivity rate grew only 3 percent. The SAS curve of this economy will:

shift to the left, resulting in inflation.

Because automatic stabilizers lower transfer payments and raise tax receipts as an economy recovers from a recession, they:

slow down the pace of an economic recovery.

The view that the government budget should always be balanced except in wartime refers to:

sound finance.

The provisions in state constitutions requiring them to balance their budgets means that

state governments often behave procyclically because lower revenues during recessions mean lower state spending.

If the debt of the federal government decreases by $20 billion in one year the budget:

surplus in that year must be $20 billion.

Immediately following World War II, the U.S. ran trade:

surpluses and was an international lender.

If income increases, a budget deficit will:

tend to decrease.

Deficits and debt are often measured relative to GDP because:

the government's ability to repay the debt depends on GDP.

Monetary policy has an:

unambiguous effect on exchange rates because the income, price, and interest rate effects reinforce one another.

A primary goal of the International Monetary Fund (IMF) is to:

work out repayment plans for developing countries with large international debts.