Chapter 20 & 21: ECON study questions
c
According to classical macroeconomic theory, nominal variables, but not real variables, are affected by changes in the a.aggregate supply. b.labor supply. c.money supply. d.supply schedule.
c
A candidate for political office announces the following policies which, she says, economics clearly demonstrates will lead to higher output in the long run: 1. decrease immigration from abroad 2. make trade more open between the U.S. and other countries. a.1 and 2 both shift long-run aggregate-supply curve to the left. b.1 and 2 both shift long-run aggregate-supply curve to the right. c.1 shifts long-run aggregate-supply curve to the left, 2 shifts long-run aggregate-supply curve to the right. d.1 shifts long-run aggregate-supply curve to the right, 2 shifts long-run aggregate-supply curve to the left.
b
A decrease in the price level makes consumers feel wealthier, so they purchase more. This logic helps explain why the aggregate-demand curve a.is vertical. b.slopes upward. c.is horizontal. d.slopes downward.
b
A period of declining GDP is known as a. business cycle b. recession c expansion
f
A tax increase has a multiplier effect but not a crowding-out effect. True False
b
According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes a.the interest rate to fall, so aggregate demand shifts left. b.the interest rate to rise, so aggregate demand shifts left. c.the interest rate to rise, so aggregate demand shifts right. d.the interest rate to fall, so aggregate demand shifts right.
a
According to liquidity preference theory, which of the following is NOT true? a.A decrease in the price level shifts money demand to the right. b.A decrease in the interest rate increases the quantity of money demanded. c.A decrease in the interest rate is shown as a movement along the money-demand curve. d.A decrease in the interest rate does not affect the money-supply curve.
b
According to the theory of liquidity preference, which of the following is NOT true? a.The demand for money is represented by a downward-sloping line on a supply-and-demand graph. b.The supply of money depends on the interest rate. c.If the interest rate is below the equilibrium level, then the quantity of money people want to hold is greater than the quantity of money the Fed has created. d.If the interest rate is above the equilibrium level, then the quantity of money people want to hold is less than the quantity of money the Fed has created.
T
Aggregate-demand curve shifts to the left if the money supply decreases. True False
d
An increase in the capital stock shifts a.long-run aggregate-supply curve to the right but does not shift short-run aggregate-supply curve. b.short-run aggregate-supply curve to the left and long-run aggregate-supply curve to the right. c.short-run aggregate-supply curve to the right but does not shift long-run aggregate-supply curve. d.both short-run and long-run aggregate-supply curve to the right.
a
An increase in the marginal propensity to consume (MPC) a. raises the value of the multiplier. b. rarely occurs because the MPC is set by congressional legislation. c. lowers the value of the multiplier. d. has no impact on the value of the multiplier.
b
As the price level falls, the cost of borrowing money will fall , causing the quantity of output demanded to rise . This phenomenon is known as the a. wealth b. interest rate c. exchange rate
fall, rise, fall, rise, rise, exchange rate
As the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to (fall, rise) in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (fall/rise) , and the number of foreign products purchased by domestic consumers and firms (imports) will (rise/fall) . Net exports will therefore (fall/rise) , causing the quantity of domestic output demanded to (rise/fall) . This phenomenon is known as the ?
d
Assume the MPC is 0.6. Assume there is a multiplier effect and that the crowding-out effect is $10 billion. An increase in government purchases of $20 billion will shift aggregate demand to the a.left by $30 billion b.right by $50 billion c.left by $10 billion d.right by $40 billion
d
Below are pairs of GDP growth rates and unemployment rates. Economists would not be shocked to see most of these pairs in the U.S. Which pair of GDP growth rates and unemployment rates is not realistic? a.-1 percent; 8 percent b.3 percent; 6 percent c.10 percent; 5 percent d.-2 percent; 2 percent
a
Change Needed to Decrease AS Burdensome regulations a. increase b. decrease
b
Change Needed to Decrease AS Inflation expectations a. lower b. higher
a
Change Needed to Decrease AS Tax rates a. increase b. decrease
a
Change Needed to Increase AD Consumer expectation about future profitability a. improve b. worsen
b
Change Needed to Increase AD Government Spending a. decrease b. increase
a
Change Needed to Increase AD Interest rates a. decrease b. increase
a
Change Needed to Increase AD The value of the domestic currency relative to the foreign currency a. depreciate b appreciate
a
Direction of LRAS Curve Shift A government-sponsored training program increases the skill level of the workforce. a. right b. left
a
Direction of LRAS Curve Shift Many workers leave to pursue more lucrative careers in foreign economies. a. left b. right
b
Direction of LRAS Curve Shift This economy's primary source of foreign oil decides to cease exports for political reasons. a. right b. left
d
During a recession, unemployment typically a.does not change. b.falls substantially. c.falls slightly. d.rises.
d
Fluctuations in real GDP are caused a.not at all by changes in aggregate demand nor changes in aggregate supply. b.only by changes in aggregate supply. c.only by changes in aggregate demand. d.by changes in aggregate demand and/or changes in aggregate supply.
d
For the United States, the most important source of the downward slope of the aggregate-demand curve is a. the exchange-rate effect. b. the wealth effect. c. the fiscal effect. d. the interest-rate effect. e. none of the above.
a
How does the aggregate-demand curve shift when increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending? a.The curve shifts to the left. b.The curve shifts to the right. c.The curve first shifts to the right and then shifts to the left. d.The curve does not shift at all.
T
If the Fed decreases the money supply, the interest rate increases. True False
a
If the government institutes an investment tax credit and decreases income taxes, a.real GDP and the price level rise. b.real GDP falls, and the price level could rise, fall, or stay the same. c.real GDP rises, and the price level could rise, fall, or stay the same. d.real GDP and the price level fall.
b
If the marginal propensity to consume (MPC) is 0.75, the value of the multiplier is a. 0.75. b. 4. c. 5. d. 7.5. e. none of the above.
b
If there is a natural disaster, the long-run aggregate-supply curve shifts a.right. b.left. c.not at all but instead remains constant. d.upward.
a
In the market for real output, the initial effect of an increase in the money supply is to a. shift aggregate demand to the right. b. shift aggregate supply to the left. c. shift aggregate supply to the right. d. shift aggregate demand to the left.
t
Keynes would agree with the statement that irrational waves of pessimism cause aggregate demand to be unstable. True False
d
Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by a. the supply and demand for labor. b. the supply and demand for loanable funds. c. aggregate supply and aggregate demand. d. the supply and demand for money.
d
Like real GDP, investment fluctuates, but it fluctuates ________ real GDP. a.slightly less than b.much less than c.in the same amount as d.much more than
a
Mark is having a policy debate with his cousin Gina. Gina points out that the political process is mostly responsible for the lag in implementing a.fiscal policy b.monetary policy c.both fiscal policy and monetary policy. d.neither fiscal policy nor monetary policy.
T
Monetary neutrality is the proposition of classical macroeconomic theory that changes in the money supply affect nominal variables but not real variables. T or F
d
Most economists believe that real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its persistent trend in a.the medium long run. b.neither the short run nor the long run. c.the very long run. d.the short run.
c
Other things the same, continued losses in technological ability and continued decreases in the money supply would unambiguously lead to a.declining prices only. b.neither declining prices nor declining real GDP. c.declining real GDP only. d.declining prices and declining real GDP.
d
Other things the same, if the money supply rises by 5% and people were expecting it to rise by 2%, then some firms have a.higher than desired prices, which depresses their sales. b.higher than desired prices, which increases their sales. c.lower than desired prices, which depresses their sales. d.lower than desired prices, which increases their sales.
d
Sometimes during times of heightened national security, government expenditures are larger than normal. What could the Fed do to reduce the effects this spending creates on interest rates? a.Decrease the money supply by buying bonds. b.Increase the money supply by selling bonds. c.Decrease the money supply by selling bonds. d.Increase the money supply by buying bonds.
T
Stagflation results from continued decreases in aggregate supply. True False
b
Suppose a wave of investor and consumer optimism has increased spending so that the current level of output exceeds the long-run natural rate. If policymakers choose to engage in activist stabilization policy, they should a. decrease government spending, which shifts aggregate demand to the right. b. decrease government spending, which shifts aggregate demand to the left. c. decrease taxes, which shifts aggregate demand to the right. d. decrease taxes, which shifts aggregate demand to the left.
a
Suppose a wave of investor and consumer pessimism causes a reduction in spending. If the Federal Reserve chooses to engage in activist stabilization policy, it should a. increase the money supply and decrease interest rates. b. decrease government spending and increase taxes. c. decrease the money supply and increase interest rates. d. increase government spending and decrease taxes.
b
Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? a. The level of technological knowledge and the size of the labor force b. The inflation rate and the Price level
a
Suppose the economy is in long-run equilibrium. Senator A succeeds in getting taxes lowered. At the same time, Senator B succeeds in getting major restrictions on logging enacted. In the short run a.the price level will rise, and real GDP might rise, fall, or stay the same. b.real GDP will fall and the price level might rise, fall, or stay the same. c.real GDP will rise and the price level might rise, fall, or stay the same. d.the price level will fall, and real GDP might rise, fall, or stay the same.
b
Suppose the government increases its purchases by $16 billion. If the multiplier effect exceeds the crowding-out effect, then a. the aggregate-supply curve shifts to the right by more than $16 billion. b. the aggregate-demand curve shifts to the right by more than $16 billion. c. the aggregate-demand curve shifts to the left by more than $16 billion. d. the aggregate-supply curve shifts to the left by more than $16 billion.
rise, c
Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to (fall/rise) , which will: a. Not affect the long-run aggregate supply curve b. Shift the long-run aggregate supply curve to the right c. Shift the long-run aggregate supply curve to the left
d
Take the following information as given for small, imaginary economy: When income is $10,000, consumption spending is $6,500.When income is $11,000, consumption spending is $7,100.Refer to the scenario. The marginal propensity to consume for this economy is a.1.50 b.5.00 c.0.60 d.2.50 The spending multiplier is calculated as 1/(1 - MPC). The marginal propensity to consume is the fraction of extra income that a household consumes rather than saves. In this case, an extra $1,000 of income increases spending by $600, so the MPC = 0.60. This means the multiplier is 1/(1 - 0.60) = 1/(0.40) = 2.5.
t
The Federal Funds Rate is the interest rate the Fed charges depository institutions for short-term loans. True False
supply
The aggregate (supply/demand) curve shows the quantity of goods and services that firms produce and sell at each price level
d
The best description of the economy in the long run comes from which macroeconomic theory? a.Aggregate supply b.Aggregate demand c.Keynesian d.Classical
b
The fraction of extra income that a household consumes rather than saves is called a.fiscal policy. b.the marginal propensity to consume. c.the multiplier. d.the savings rate.
d
The initial effect of an increase in the money supply is to a. increase the price level. b. increase the interest rate. c. decrease the price level. d. decrease the interest rate
b
The initial impact of an increase in government spending is to shift a. aggregate supply to the right. b. aggregate demand to the right. c. aggregate demand to the left. d. aggregate supply to the left.
c
The long-run aggregate-supply curve shifts left if a.important technology is outlawed, but not if emigration abroad increases. b.emigration abroad increases, but not if important technology is outlawed. c.either emigration abroad increases or important technology is outlawed. d.either emigration abroad decreases or technology improves.
c
The long-run effect of an increase in the money supply is to a. increase the interest rate. b. decrease the interest rate. c. increase the price level. d. decrease the price level.
t
The multiplier effect amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effect. True False
a
The quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level is shown on the a.aggregate-demand curve. b.market-demand curve. c.aggregate-supply curve. d.aggregate-goods curve.
d
The sticky-wage theory of the short-run aggregate-supply curve says that when the price level is higher than expected, a.relative to prices wages are higher and employment falls. b.relative to prices wages are higher and employment rises. c.relative to prices wages are lower and employment falls. d.relative to prices wages are lower and employment rises.
t
The tax system is the most important automatic stabilizer. True False
f
The theory of liquidity preference only attempts to explain the nominal interest rate. True False
c
The vertical axis of the aggregate demand and aggregate supply graph has the a.real GDP. b.output of services. c.price level. d.output of goods
d
The vertical axis of the aggregate demand and aggregate supply model measures the overall a. supply b. quantity of output c. demand d. Price level
b
We depart from the assumptions of classical economics when we focus on the relationship between the quantity of output and the ________ level. a.retail sales b.price c.real GDP d.unemployment
b
When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of a. the multiplier effect. b. the investment accelerator. c. the crowding-out effect. d. supply-side economics. e. none of the above.
a
When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of a. the multiplier effect. b. the investment accelerator. c. the crowding-out effect. d. supply-side economics. e. none of the above.
c
When an increase in government purchases raises incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have seen a demonstration of a. the investment accelerator. b. the liquidity trap. c. the crowding-out effect. d. supply-side economics. e. the multiplier effect.
c
When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate a. increases the quantity demanded of money. b. increases the demand for money. c. decreases the quantity demanded of money. d. decreases the demand for money. e. none of the above.
d
When the price level rises, a.the interest falls because people will want to hold less money and so they buy more bonds. b.the interest rate falls because people will want to hold more money and so they sell fewer bonds. c.firms will spend more on new business buildings and business equipment, and households will want to spend more on building new homes. d.firms will spend less on new business buildings and business equipment, and households will want to spend less on building new homes.
a
When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level a. shifts money demand to the right and increases the interest rate. b. shifts money demand to the left and increases the interest rate. c. shifts money demand to the right and decreases the interest rate. d. shifts money demand to the left and decreases the interest rate. e. none of the above.
a
Which of the following Fed actions would decrease the money supply? a.Raising the reserve requirement b.Buying bonds c.Lowering the reserve requirement d.Decreasing the discount rate
a
Which of the following Fed actions would decrease the money supply? a.Raising the reserve requirement b.Lowering the reserve requirement c.Decreasing the discount rate d.Buying bonds
c
Which of the following Fed actions would increase the money supply? a.Raising the reserve requirement b.Increasing the discount rate c.Buying bonds d.Selling bonds
d
Which of the following adjusts to bring aggregate demand and aggregate supply into balance? a.Variables other than the price level and the quantity of output b.The price level but not the quantity of output c.The quantity of output but not the price level d.Both the price level and the quantity of output
d
Which of the following best describes how an increase in the money supply shifts aggregate demand? a. The money supply shifts right, the interest rate rises, investment decreases, and aggregate demand shifts left. b. The money supply shifts right, prices rise, spending falls, and aggregate demand shifts left. c. The money supply shifts right, prices fall, spending increases, and aggregate demand shifts right. d. The money supply shifts right, the interest rate falls, investment increases, and aggregate demand shifts right.
d
Which of the following does fiscal policy not primarily affect in the long run? a.growth b.saving c.investment d.aggregate demand
b
Which of the following is NOT an automatic stabilizer? a.unemployment benefits b.an increase in money supply c.the welfare system d.the U.S. tax system
c
Which of the following is NOT correct? a.A lower interest rate increases the quantity of goods and services demanded. b.A lower price level shifts money demand leftward. c.When money demand shifts leftward, the interest rate falls. d.As the interest rate falls, the quantity of money demanded falls.
c
Which of the following is NOT true according to classical macroeconomics theory? a.Given output and the interest rate, the price level adjusts to balance the supply of, and demand for, money. b.For any given level of output, the interest rate adjusts to balance the supply of, and demand for, loanable funds. c.For any given level of output, the interest rate adjusts to balance the supply of, and demand for, money. d.Output is determined by the supplies of capital and labor and the available production technology.
c
Which of the following is an automatic stabilizer? a. military spending b. spending on public schools c. unemployment benefits d. spending on the space station e. All of the above are automatic stabilizers.
b
Which of the following is true about liquidity preference theory? a.It does not refer directly to Keynes' theory concerning the effects of changes in money demand and supply on interest rates. b.it is most relevant to the short run of interest rates. c.It supposes that the price level adjusts to bring money supply and money demand into balance. d.It is most helpful in understanding the wealth effect.
c
Which of the following is true about liquidity preference theory? a.It does not refer directly to Keynes' theory concerning the effects of changes in money demand and supply on interest rates. b.It is most helpful in understanding the wealth effect. c.it is most relevant to the short run of interest rates. d.It supposes that the price level adjusts to bring money supply and money demand into balance.
a
Which of the following policies would Keynes's followers support when a decrease in business optimism shifts the aggregate-demand curve away from long-run equilibrium? a.decrease taxes b.sell bonds to the public c.decrease the money supply d.decrease government expenditures
b
Which of the following policy actions does NOT shift the aggregate-demand curve? a.an increase in government spending b.a change in the price level c.open-market operations by the Fed d.a decrease in taxes
d
Which of the following statements about stabilization policy is true? a. In the short run, a decision by the Fed to increase the targeted money supply is essentially the same as a decision to increase the targeted interest rate. b. Congress has veto power over the monetary policy decisions of the Fed. c. Long lags enhance the ability of policymakers to "fine-tune" the economy. d. Many economists prefer automatic stabilizers because they affect the economy with a shorter lag than activist stabilization policy. e. All of the above are true.
b
Which of the following statements regarding taxes is correct? a. Most economists believe that, in the short run, the greatest impact of a change in taxes is on aggregate supply, not aggregate demand. b. A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes. c. An increase in taxes shifts the aggregate-demand curve to the right. d. A decrease in taxes shifts the aggregate-supply curve to the left.
c
Which of the following would be included in aggregate demand? a.The quantity of goods that firms produce b.The quantity of services that firms sell c.Firms' purchases of newly produced machinery d.Government's tax collections
a
Which of the following would cause prices and real GDP to fall in the short run? a.aggregate-demand curve shifts to the left b.short-run aggregate-supply curve shifts to the left c.short-run aggregate-supply curve shifts to the right d.aggregate-demand curve shifts to the right
c
Which of the following would not explain why the aggregate demand curve slopes downward? a.A higher price level lowers the real value of money and makes consumers poorer, which in turn encourages them to spend less. b.A lower price level causes U.S. interest rates to fall, the real value of the dollar to decline in foreign exchange markets, and U.S. net exports to rise. c.A higher price level increases real wealth, which stimulates spending on consumption. d.A lower price level reduces the interest rate, which encourages greater spending on investment goods
