ECN 211 Midterm Practice 3

Which of the following policy actions shifts the aggregate-demand curve?

- an increase in the money supply - an increase in government spending - an increase in taxes (all of the above)

The inflation tax

- is the revenue created when the government prints money - is an alternative to income taxes and government borrowing - is like a tax on everyone who holds money (all of the above)

Suppose the tax rate on nominal interest income is 20% and does not change over time. Also assume the real interest rate remains constant. In year 1, the inflation rate is 4% and the nominal interest rate is 10%. In year 2, the inflation rate is 14% The real interest rate in both years is : The nominal interest rate in year 2 is : The after tax nominal interst rate in year 1 is : The after tax nominal interest rate in year 2 is : The after tax real interest rate in year 1 is : The after tax real interest rate in year 2 is

6% 20% 8% 16% 4% 2%

Refer to the figure above. Suppose the the economy begins in recession. What is the short-run result of an open market purchase of securities by the Federal Reserve?

A movement from C to B (an increase of price level and GDP)

Refer to the figures above. Which graph best describes the effect of a decrease in price level, all else constant?

B (leftward shift of Md)

The unemployment rate was most likely greater than the natural rate at points

B and C

The short-run consequence of an increase in the personal income tax levied on households is best described by graph

C (Aggregete demand will decrease)

Refer to the figures above. Which graph best describes the short-run effect of a decrease in the quantity of discount loans made by the Federal Reserve?

D (leftward shift of Ms)

Which of the following would lead to a decrease in the multiplier effect of fiscal policy?

Households save a higher fraction of income

Refer to the figure below. If the relevant short-run aggregate supply curve is SAS2, what is the expected price level?

P2

Which of the following would be classified as fiscal policy?

The federal government cuts taxes to stimulate the economy

Refer to the figure above. Suppose the economy is producing at point A. Which of the following best describes the adjustment back to the natural level of output?

Wages and imput prices rise and the new equillibrium in point B.

In the short-run, an increase in aggregate supply leads to _____ price level and _____ in unemployment.

a decrease / a decrease

Which of the following would lead to a shift in the short-run aggregate supply curve but no change in the long-run aggregate supply curve?

a decrease in the excpected price level

Refer to the figure above. Which of the following would cause a movement from point B to C? (A decrease in Aggregate demand)

a fall in housing prices

An earthquake destroys capital stock in an economy. The result is

a leftward shift in the long-run aggregate supply curve

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

aggregate demand right

Money neutrality suggests that an increase in the money supply leads to _____ in price level and inflation and _____ in real GDP.

an increase / no change

Which of the following would not lead to a decrease in aggregate demand and a leftward shift in the AD curve?

an increase in domestic price level

In the long-run,

an increase in price level has no effect on the aggregate quantity of GDP supplied

Which of the following shifts both the short-run and long-run aggregate supply right?

an increase in the capital stock

If inflation is higher than what was expected,

creditors receive a lower real interest rate than they had anticipated

If the economy is producing below the natural rate of output in the short-run, wages and input prices will eventually ____ and ____ will increase, returning the economy to long-run equilibrium.

fall / short run aggregate supply

Other things the same, when the price level falls, interest rates

fall, so firms increase investment

Refer to the figure above. Suppose the economy begins in long-run equilibrium. The Federal Reserve has decided the inflation rate is too high and implements a contraction in the money supply. What best describes the path the economy takes as a result of the contraction in the money supply and the subsequent adjustment to a new long-run equilibrium?

from B to C to D (price level and GDP will decrease, then price level will decrease, GDP will increase)

Examples of automatic stabilizers include government expenditures that ____ when national income decreases and help explain why deficits are ____ during recessions.

increase / larger

In the long run, an economy's production of goods and services depends on its supply of

labor, natural resources, capital, and available technology

The Federal Reserve controls _____ and influences ______ with the intention of influencing ____ .

money supply / interest rates / investment

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 rises

Assume the MPC is 0.65. Assuming only the multiplier effect matters, an increase in government purchases of $20 billion will shift the aggregate demand curve to the

right by about $57.1 billion

Relative-price variability

rises with inflation, leading to a misallocation of resources

In order to understand how the economy works in the short run, we need to

study a model in which real and nominal variables interact

Monetary policy is determined by

the Federal Reserve and involves changing the money supply

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

the MPC is small and changes in the interest rate have a large effect on investment

Which of the following accounts for about two-thirds of the decline in output during a recession?

the decline in investment spending

Liquidity refers to

the ease with which an asset is converted to the medium of exchange

Suppose the expected inflation rate increases from 5% to 8%. According to the Fisher effect

the nomial interest rate increases by 3 percentage points

A favorable supply shock, like a decrease in the price of oil, would cause

the short-run Phillips curve to shift to the left and a more favorable trade-off between unemployment and inflation