Ch 20 M&B

Jack an Australian citizen buys a book printed in the US. Jack's purchase is a. a US export and included in U.S. aggregate demand. b. a US export but not included in U.S. aggregate demand. c. a US.import and included in U.S. aggregate demand. d. a US import but not included in U.S. aggregate demand.

A

Which of the following caused the IS curve to shift left during the 2008-2009 recession? a. a decrease in the price of houses and stocks and increased financial frictions b. a decrease in the price of houses and stocks but not increased financial frictions c. increased financial frictions, but not a decrease in the price of houses and stocks d. neither increased financial frictions nor a decrease in the price of house and stocks

A

Which of the following would raise autonomous consumption? a. consumer confidence concerning future economic conditions rise b. income rises c. taxes fall d. All of the above are correct.

A

In each of the cases below, determine whether the IS curve shifts to the right or left, does not shift, or is indeterminate in the direction of shift. A. The real interest rate rises. B. The marginal propensity to consume falls. C. Financial frictions increase. D. Autonomous consumption decreases. E. Both taxes and government spending decrease by the same amount. F. f. The sensitivity of net exports to changes in the real interest rate decreases. G. . The government provides tax incentives for research and development programs for firms.

A. An increase in the real interest rate reduces both investment spending and net exports. As output demanded decreases, output produced decreases. Since the interest rate is on the vertical axis, the change in output is shown as a movement along, rather than a shift of, the IS curve. B. Consumption falls at any interest rate and so the IS curve shifts left. C. An increase in financial frictions increases the cost of borrowing so planned investment spending falls and the IS curve shifts left. D. Consumption decreases and so the IS curve shifts left. E. The decrease in taxes increases consumption, but also increases saving, so consumption rises by less than the amount of the tax cut. The decrease in government purchases decreases output demanded by the same amount. Since the impact on output demand from the decrease in government purchases is larger, output demanded falls and the IS curve shifts left. F. If x decreases, this will increase net exports at any given real interest rate, holding all other factors constant. So, the IS curve shifts right. G. This increases autonomous investment, which increases planned investment so the IS curve shifts right.

Explain the logic by which an increase in the U.S. interest rate would make the exchange rate for the dollar rise.

An increase in the U.S. interest rate makes U.S. bonds more attractive. So, to buy the bonds foreigners will demand more dollars in the market for foreign exchange. The increase in the demand for dollars causes the exchange rate to rise.

When the U.S. exchange rate increases what happens to net exports? (see the answer below)

An increase in the exchange rate makes US. goods more expensive and so reduces US net exports. (Foreigners have to pay more of their currency to buy dollars. US residents get more foreign currency per dollar and so can buy more foreign goods per dollar.)

As the interest rate rises a. the exchange rate rises so net exports rise. b. the exchange rate rises so net exports fall. c. the exchange rate falls so net exports rise. d. the exchange rate falls so net exports fall.

B

Sheldon purchases a t-shirt made in China. This purchase a. is included in US consumption and US aggregate demand. b. is included in US consumption but not US aggregate demand. c. is not included in US consumption but is included in US aggregate demand. d. is not included in either U.S. consumption or US aggregate demand.

B

The IS curve shifts left if a. the interest rate rises. b. businesses become less confident in future economic conditions. c. consumer wealth rises. d. financial frictions decrease.

B

Which of the following is part of U.S. consumption? a. a foreigner buys a car made in the U.S. b. a student pays their tuition bill. c. a resident of Cedar Falls pays to have a new house built. d. All of the above are part of U.S. consumption.

B

18. Which of the following were part of what policymakers did to try to reduce the impact of the 2008-2009 recession? a. raised interest rates and government expenditures b. raised interest rates and reduced government expenditures c. reduced interest rates and raised government expenditures d. reduced interest rates and government expenditures

C

As the exchange rate falls, a. imports and exports rise. b. imports rise and exports fall. c. exports rise and imports fall. d. imports and exports fall.

C

If government expenditures rise, the IS curve shifts a. left. If the Fed wants to reduce the effect on output, it should raise the interest rate. b. left. If the Fed wants to reduce the effect on output, it should reduce the interest rate. c. right. If the Fed wants to reduce the effect on output, it should raise the interest rate. d. right. If the Fed wants to reduce the effect on output, it should reduce the interest rate.

C

If the interest rate falls, which (if any) firms will desire to increase investment spending? a. only firms with funds to make the expenditures on capital goods. b. only firms that need to borrow to finance their expenditures on new capital goods. c. both firms that have their own funds and firms that need to borrow. d. No firms will decrease their investment spending if the interest rate falls.

C

Suppose a business plans to spend $10 million dollars on business equipment and structures and decrease inventories by $1 million. How much does this firm's plan contribute to aggregate demand? a. $11 million. b. $10 million. c. $9 million. d. None of the above are correct.

C

The IS curve shifts right if a. the interest rate rises. b. taxes rise. c. government purchases rise. d. US residents do more travel to foreign countries.

C

Which of the following raises autonomous U.S. net exports? a. an increase in the interest rate b. a decrease in the exchange rate c. US movies become more popular in foreign markets d. All of the above.

C

Government purchases a. include purchase of both goods and services. b. are assumed to be autonomous c. include purchases by all levels of government. d. All of the above are correct.

D

If taxes increase, disposable income a. increases so consumption rises. b. increases so consumption falls. c. decreases so consumption rises. d. decreases so consumption falls.

D

Investment spending includes, purchases of a. only financial assets such as stocks and bonds. b. financial assets such as stocks and bonds and business equipment and business structures. c. only business equipment and business structures. d. business equipment, business structures, residential construction, and changes in inventory.

D

The slope of the IS curve is based on the logic that as the interest rate rises a. investment spending and net exports rise. b. investment spending rises and net exports fall. c. net exports rise and investment spending falls. d. investment spending and net exports fall.

D

"When the stock market rises, investment spending is increasing." Is this statement true, false, or uncertain? Explain your answer.

False. The sales of stocks and bonds represents transfers of assets, not the purchase of new capital goods, inventory, or residential construction. While "investment" is sometimes used to refer to saving, in the context of GDP "investment" refers to the purchases of new capital, inventory, and residential construction. To be clear we call expenditures on these items investment spending.

If households and firms believe the economy will be in a recession in the future, will this necessarily cause a recession, or have any impact on output at all?

Other things the same output will fall as expectations of lower future income and sales would reduce current consumption and investment spending. This decrease won't necessarily lead to a recession. First, output tend to rise over time as the population and capital stock rise. Second, all else may not be constant, for example the Fed may reduce interest rates which by itself would raise output. Third, recessions are periods of declining economic activity. While there's no set length of decline for a period to be considered a recession, a decline in output for say a single quarter wouldn't necessarily be considered a recession.

An increase in investment spending created by a decrease in the interest rate does not shift the IS curve, but an increase in investment spending created by an increase in business confidence shifts the IS curve to the right. Explain. (See the answer below.)

The effects of a change in the interest on expenditures is shown by moving along the IS curve which shows how expenditures change as the interest rate changes. The IS curve holds other variables that affect spending fixed. As other variables that affect spending change, the level of spending changes at each interest rate and so a new curve has to be drawn.

Why do companies cut production when they find that their unplanned inventory investment is greater than zero? If they didn't cut production, what effect would this have on their profits? Why?

When inventory is larger than planned, it means a firm's sales were lower than it planned, so it will cut back on production. Holding inventory is costly due to financing and storage.