EC 111 Unit Four Test

a goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

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

the slope of the aggregate demand curve

take the following information as given for a small economy - when income is 10,000 consumption spending is 6,500 - when income is 11,000 consumption spending is 7,250

.75 (chang in C/change in I)

there is an excess demand for money at an interest rate of

3.25 percent (when the point is further than MS)

in a certain economy when income is 100 consumer spending is 60, the value of the multiplier for this economy is 4, it follows that when income is 101 consumer spending is 60.75

60.75 change AD1 = 100x4 = 400, multiplier (k) = 1/1(MPC) 4=1/1-MPC, MPC = .75, change in C = .75/101-100, .75/1=.75, 60+.75=60.75

suppose the economy starts at R stagflation would be consistent with the move to

P3 and Y1

if the economy is in long-run equilibrium then an adverse shift in short run aggregate supply would move the economy from

Q to R

natural level of output occurs at

Y2 (LRAS)

if the stock market crashes, then

aggregate demand decreases which the fed could offset by purchasing bonds

imagine that in the current year the economy is in long run equilibrium then the federal government reduces its purchases of goods by 50% which curve shifts and in which direction

aggregate demand shifts left

which of the following would cause stagflation

aggregate supply shifts left

which of the following is an example of crowding out

an increase in government spending increases interest rates, causing investment to fall

economic expansions (booms) in Canada would cause the US price level

and read GDP to rise

people have been expecting the price level to be 120 but it turns out to be 122 in response the tire company increases the number of workers it employs what could explain this?

both sticky price theory and sticky wage theory

the shift of the short run aggregate supply curve from SRAS 1 to SRAS 2

could be caused by a decrease in the expected price level

which of the following shifts aggregate demand to the left

decrease in the money supply

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

in recent years the federal reserve has conducted policy by setting a target for the

federal funds rate

the economic boom of the early 1940s resulted mostly from

increased government expenditures

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

increased real GDP

when the fed buys bonds the supply of money

increases and so aggregate demand shifts right

when the interest rate rises, the opportunity cost of holding money

increases, so the quantity of money demanded decreases

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 US assets, what would happen to the dollar

it would appreciate in foreign exchange markets making US goods more expensive compared to foreign goods

the sticky 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

other things the same, if technology increases then in the long run

output is higher and prices are lower

suppose the economy starts at point R if aggregate demand increases from AD2 to AD3 then in the short run the economy moves to

point O

which of the following is not a determinant of the long run level of real GDP

price level

in which of the following cases would the quantity of money demanded be smallest

r=.06 p=1.0 (bigger r smaller p)

assume the MPC is .8, assume there is a multiplier effect and that the total crowding out effect is 14 billion, an increase in government purchases of 90 billion will shift aggregate demand to the

right by 436 billion

suppose that foreigners had reduced confidence in US financial institutions and believed that privately issues US bonds were more likely to de defaulted on, US net exports would

rise which by itself would increase aggregate demand

if the federal reserve decided to raise interest rates, it could

sell bonds to lower the money supply

an increase in government purchases will

shift aggregate demand from AD2 to AD1

if the money supply curve MS on the left hand graph were to shift to the left this would

shift the AD curve to the left

using the liquidity preference model when the federal reserve decreases the money supply

the equilibrium interest rate increases

the federal open market committee is

the group at the federal reserve that sets monetary policy

of the fed increases the money supply

the interest rate decreases, which tends to increase investment and therefore the aggregate demand

for the US economy which of the following is the most important reason for the downward slope of the aggregate demand curve

the interest rate effect

if the economy starts at O a decrease in the money supply moves the economy

to Q in the long run

an example of an automatic stabilizer is

unemployment benefits

according to liquidity preference theory the money supply curve is

vertical