ECO 1002 Macro Midterm 2

An increase in the money supply shifts the _____ curve to the right, and the aggregate demand curve _____. IS; shifts to the right IS; does not shift LM: shifts to the right LM; does not shift

LM: shifts to the right

Based on the graph, which is the correct ordering of the price levels and money supplies? P1 > P2 and M1 > M2 P1 > P2 and M1 < M2 P1 < P2 and M1 > M2 P1 < P2 and M1 < M2

P1 > P2 and M1 < M2

A difference between the economic long run and the short run is that: the classical dichotomy holds in the short run but not in the long run. monetary and fiscal policy affect output only in the long run. demand can affect output and employment in the short run, whereas supply is the ruling force in the long run. prices and wages are sticky in the long run only.

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in _____ prices and _____ output in the short run. higher; lower lower; higher higher; higher lower; lower

higher; lower

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by: 200. 300. 400. 500.

500 (1/1-MPC)*G

The LM curve, in the usual case: is vertical. is horizontal. slopes down to the right. slopes up to the right.

slopes up to the right.

The debt-deflation theory of the Great Depression suggests that an _____ deflation redistributes wealth in such a way as to _____ spending on goods and services. unexpected; reduce unexpected; increase expected; reduce expected; increase

unexpected; reduce

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income: r2, Y2. r3, Y2. r2, Y3. r3, Y3.

r2, Y3.

1. If a computer glitch at credit card companies makes stores start accepting only cash payments, the demand for money will *blank*. 2. If the money supply is held constant, the aggregate demand curve will shift to the *blank*.

1. increase 2. left

Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point: A. B. C. D.

A. (Equilibrium where LRAS is)

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____. $2 billion; $8 billion $0.75 billion; $1 billion $0.75 billion; $0.75 billion $1 billion; $4 billion

$2 billion; $8 billion

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, a tax cut of $120 billion increases equilibrium income by _____ billion. $240 $160 $360 $180

$240

Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: 2,000. 1,800. 1,600. 1,400.

1,600.

1. An expansion in aggregate demand increases *blank* in the short run. 2. In the long run, however, it increases only the *blank*.

1. real GDP 2. price level

Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is _____ percent. 2 4 6 8

6

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: 70. 120. 170. 220.

70.

Assume that the economy starts at point A, and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point _____ represents the short-run equilibrium immediately following the drought, and point _____ represents the eventual long-run equilibrium. B; C B; A E; D D; A

B; A

Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at _____, with a _____ price level. B; higher B; lower C; higher C; lower

B; lower

In the Keynesian-cross model, actual expenditures equal: GDP. the money supply. the supply of real balances. unplanned inventory investment.

GDP

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the _____ curve to the _____. LM; right LM; left IS; right IS; left

IS; left

A tax cut shifts the _____ curve to the right, and the aggregate demand curve _____. IS; shifts to the right IS; does not shift LM; shifts to the right LM; does not shift

IS; shifts to the right

In this graph, the equilibrium levels of income and expenditure are: Y1 and PE1. Y2 and PE2. Y3 and PE3. Y3 and PE4.

Y2 and PE2. (PE and AE intersect)

Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely? a decline in the slope of the yield curve a decline in initial claims for unemployment insurance a rise in building permits a rise in stock prices

a decline in the slope of the yield curve

In the IS-LM model, which of the following causes income to decline and the interest rate to rise? an increase in the money supply a decrease in taxes an increase in taxes a decrease in the money supply

a decrease in the money supply

Stagflation—lower output and higher prices—is caused by an adverse shock to aggregate supply. an expansion in aggregate demand. a contraction in aggregate demand. a favorable shock to aggregate supply.

an adverse shock to aggregate supply.

In the IS-LM model, which of the following causes both the interest rate and income to decline? an increase in the money supply a decrease in the money supply a decrease in taxes an increase in taxes

an increase in taxes

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money: both Central Bank A and Central Bank B should increase the quantity of money. Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable. Central Bank A should keep the quantity of money stable, whereas Central Bank B should increase it. both Central Bank A and Central Bank B should keep the quantity of money stable.

both Central Bank A and Central Bank B should increase the quantity of money.

The economic response to the overnight reduction in the French money supply by 20 percent in 1724: confirmed the neutrality of money because no real variables were affected by this nominal change. confirmed the quantity theory by leading to an immediate 20 percent reduction in the price level. confirmed that money is not neutral in the short run because both output and prices dropped. contradicted Okun's law because decreases in output were not associated with increases in unemployment.

confirmed that money is not neutral in the short run because both output and prices dropped.

The version of Okun's law studied in Chapter 11 assumes that with no change in unemployment, real gross domestic product (GDP) normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would: decrease by 1 percent. decrease by 2 percent. decrease by 3 percent. increase by 1 percent.

decrease by 1 percent.

In a typical recession, consumption ____________. Investment moves in the same direction but proportionately ____________. rises, more falls, more falls, less rises, less

falls, more

In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate _____ and output _____. rises; falls rises; rises falls; rises falls; falls

falls; rises

Other things equal, a given change in government spending has a larger effect on demand the: flatter the LM curve. steeper the LM curve. smaller the interest sensitivity of money demand. larger the income sensitivity of money demand.

flatter the LM curve.

The LM curve slopes upward because *blank* income increases money *blank* and, in turn, the interest rate.

higher, demand

Suppose that a heightened risk of terrorist attack reduces consumer confidence, inducing people to save more. To stabilize aggregate demand, the Fed should increase the money supply to raise the interest rate. decrease the money supply to lower the interest rate. decrease the money supply to raise the interest rate. increase the money supply to lower the interest rate.

increase the money supply to lower the interest rate.

Assume the Fed holds the interest rate constant in response to an increase in government purchases. The money supply will *blank*, and the impact on income will be *blank* than if the money supply were held constant.

increase, larger

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply, shifting to _____. increase; LM2 decrease; LM2 increase; LM3 decrease; LM3

increase; LM2

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run. increase; increase increase; decrease decrease; decrease decrease; increase

increase; decrease

Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) _____ in the money supply or a(n) _____ in velocity. increase; increase increase; decrease decrease; increase decrease; decrease

increase; increase

If the Fed responds to an adverse supply shock by expanding the money supply, it will make the resulting recession deeper than it otherwise would be. allow the price level to return to the level that prevailed before the shock. keep the economy closer to its natural levels of output and employment. stabilize aggregate demand at its previous level.

keep the economy closer to its natural levels of output and employment.

A given increase in taxes shifts the IS curve more to the left the: larger the marginal propensity to consume. smaller the marginal propensity to consume. larger the government spending. smaller the government spending.

larger the marginal propensity to consume.

If the Fed accommodates an adverse supply shock, output falls _____, and prices rise _____. less; more less; less more; less more; more

less; more

A change in income in the IS-LM model resulting from a change in the price level is represented by a _____ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a _____ aggregate demand curve. movement along the; shift in the shift in the; movement along the vertical; horizontal horizontal; vertical

movement along the; shift in the

The IS-LM model is generally used: only in the short run. only in the long run. both in the short run and in the long run. in determining the price level.

only in the short run.

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then: output and employment will increase in the short run. output and employment will decrease in the short run. prices will increase in the short run. prices will decrease in the short run.

output and employment will increase in the short run.

Economists who believe that monetary policy is more potent than fiscal policy argue that the: responsiveness of money demand to the interest rate is large. responsiveness of money demand to the interest rate is small. IS curve is nearly vertical. LM curve is nearly horizontal.

responsiveness of money demand to the interest rate is small.

If the Fed reduces the money supply by 5 percent, then the real interest rate will: rise in both the short run and the long run. rise in the short run but return to its original equilibrium level in the long run. rise in the short run but fall below its original equilibrium level in the long run. be unaffected in both the short run and the long run.

rise in the short run but return to its original equilibrium level in the long run.

If output is above its natural level, over time the price level will *blank*, shifting the *blank* curve and moving the economy toward its long‐run equilibrium.

rise, LM

Along an IS curve all of these are always true EXCEPT: planned expenditures equal actual expenditures. planned expenditures equal income. the demand for real balances equals the supply of real balances. there are no unplanned changes in inventories.

the demand for real balances equals the supply of real balances.

Measures of average workweeks and building permits for new housing units are included in the index of leading indicators, because shorter workweeks tend to indicate _____ future economic activity and increased permits for new units tend to indicate _____ future economic activity. stronger; stronger stronger; weaker weaker; stronger weaker; weaker

weaker; stronger

In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by _____ and increases the equilibrium level of income by _____. $3 billion; $9 billion $2.25 billion; $9 billion $2.25 billion; $2.25 billion $3 billion; $3 billion

$2.25 billion; $9 billion

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, an increase in government purchases of $120 billion increases equilibrium income by _____ billion. $240 $160 $360 $180

$360

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by: 0. 100. 150. 250.

100

In the Keynesian-cross analysis, if the consumption function is given by C = 200 + 0.7 (Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is: 350. 600. 950. 1,100.

1100

If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by: 200 and the interest rate falls by 2 percent. 100 and the interest rate falls by 1 percent. 50 and the interest rate falls by 0.5 percent. 200 and the interest rate remains unchanged.

50 and the interest rate falls by 0.5 percent.

Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _____, with a _____ price level. B; higher B; lower C; higher C; lower

C; higher (because price level increases)

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _____, shifting the _____ curve to the right and returning output to the natural level. increase; IS decrease; IS increase; LM decrease; LM

decrease; LM

The IS and LM curves together generally determine: income only. the interest rate only. both income and the interest rate. income, the interest rate, and the price level.

both income and the interest rate.

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ΔT will: decrease equilibrium income by ΔT. decrease equilibrium income by ΔT / (1 - MPC). decrease equilibrium income by ΔT (MPC) / (1 - MPC). not affect equilibrium income at all.

decrease equilibrium income by ΔT (MPC) / (1 - MPC).

The fact that due to Covid-19 people stopped going out and spending money, most likely led to a(n)_____ in the velocity of money and a _____ shift in the aggregate demand (AD) curve. increase; rightward decrease; rightward increase; leftward decrease; leftward

decrease; leftward

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income. increases; downward increases; upward decreases; upward decreases; downward

decreases; downward

The severity of the Great Depression may be partly explained by an increase in expected deflation, which raised real interest rates above nominal interest rates. inflation, which raised nominal interest rates above real interest rates. inflation, which raised real interest rates above nominal interest rates. deflation, which raised nominal interest rates above real interest rates.

deflation, which raised real interest rates above nominal interest rates.

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant: short-run aggregate supply curve. long-run aggregate supply curve. price level in the short run. demand for real balances per unit of output.

demand for real balances per unit of output.

The IS curve slopes downward because a *blank* interest rate reduces *blank* and thus income.

higher, planned investment

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _____, generating a _____ quantity of output demanded. higher; greater higher; smaller lower; greater lower; smaller

higher; greater

An increase in taxes lowers income: and the interest rate in the short run but leaves both unchanged in the long run. in the short run but leaves it unchanged in the long run, while increasing consumption and lowering investment. in the short run but leaves it unchanged in the long run, while lowering consumption and increasing investment. and the interest rate in both the short run and in the long run.

in the short run but leaves it unchanged in the long run, while lowering consumption and increasing investment.

Holding output, Y, fixed, a reduction in the demand for money is the equivalent of a(n) _____ in velocity and will shift the aggregate demand curve to the _____. increase; right increase; left decrease; right decrease; left

increase; right

Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) _____ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _____. increase; left increase; right decrease; left decrease; right

increase; left

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by: increasing the money supply, but at the cost of permanently higher prices. decreasing the money supply, but at the cost of permanently lower prices. increasing the money supply, which would restore the original price level. decreasing the money supply, which would restore the original price level.

increasing the money supply, but at the cost of permanently higher prices.

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. investment is autonomous, whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. the price level is fixed, whereas in the IS-LM model it is allowed to vary.

investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

Business cycles are: regular and predictable. irregular but predictable. regular but unpredictable. irregular and unpredictable.

irregular and unpredictable.

Over the business cycle, investment spending _____ consumption spending. is inversely correlated with is more volatile than has about the same volatility as is less volatile than

is more volatile than

When firms experience unplanned inventory accumulation, they typically: build new plants. lay off workers and reduce production. hire more workers and increase production. call for more government spending.

lay off workers and reduce production.

Using the aggregate demand-aggregate supply (AD-AS) model, the economic downturn caused by Covid-19 can be BEST described by a: rightward shift of long-run aggregate supply (LRAS) and leftward shift of AD. leftward shift of LRAS and leftward shift of AD. rightward shift of LRAS and upward shift of short-run aggregate supply (SRAS). leftward shift of AD and downward shift of SRAS.

leftward shift of LRAS and leftward shift of AD.

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, _____ output and _____ interest rates. increase; lower increase; raise lower; lower lower; raise

lower; raise

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a _____ real money supply M / P, which _____ the interest rate and _____ spending. lower; raises; reduces higher; lowers; increases lower; lowers; increases higher; raises; reduces

lower; raises; reduces

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change _____ in the short run and change _____ in the long run. only prices; only output only output; only prices both prices and output; only prices both prices and output; both prices and output

only output; only prices

In the short run, a favorable supply shock causes: both prices and output to rise. prices to rise and output to fall. prices to fall and output to rise. both prices and output to fall.

prices to fall and output to rise

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____. output; output prices; prices prices; output output; prices

prices; output

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income: r2, Y2. r3, Y2. r2, Y3. r3, Y3.

r2, Y2.

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be: r1, Y2. r2, Y3. r3, Y3. r3, Y4.

r2, Y3.

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income: r2, Y2. r3, Y2. r2, Y3. r3, Y3.

r3, Y3.

Other things equal, an expected deflation can change demand by: lowering the demand for money, thus shifting the LM curve. increasing the demand for money, thus shifting the LM curve. raising the real interest rate for any given nominal interest rate, thus reducing desired investment. lowering the real interest rate for any given nominal interest rate, thus increasing desired investment.

raising the real interest rate for any given nominal interest rate, thus reducing desired investment.

Stabilization policy refers to policy actions aimed at: reducing the severity of short-run economic fluctuations. equalizing incomes of households in the economy. maintaining constant shares of output going to labor and capital. preventing increases in the poverty rate.

reducing the severity of short-run economic fluctuations.

In this graph, if firms are producing at level Y3, then inventories will _____, inducing firms to _____ production. rise; increase rise; decrease fall; increase fall; decrease

rise; decrease

Based on the graph, if the interest rate is r3, then people will _____ bonds, and the interest rate will _____. sell; rise sell; fall buy; rise buy; fall

sell; rise

Based on the graph, if the interest rate is r3, then people will _____ bonds, and the interest rate will _____. sell; rise sell; fall buy; rise buy; fall

sell; rise (sell bonds when interest/demand is low, which raises interest/demand back to equilibrium levels)

If the interest rate is above the equilibrium value, the: demand for real balances exceeds the supply. supply of real balances exceeds the demand. market for real balances clears. demand for real balances increases.

supply of real balances exceeds the demand.

According to the theory of liquidity preference, the central bank can increase the *blank* of money and *blank* the interest rate.

supply, lower

At the intersection of the IS and LM curves: the economy is at full employment. the goods market disequilibrium offsets the money market disequilibrium. the economy has the right balance of inflation and unemployment. the goods market and money market are both in equilibrium.

the goods market and money market are both in equilibrium.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that: government spending increases the MPC more than tax cuts. the government-spending multiplier is larger than the tax multiplier. government-spending increases do not lead to unplanned changes in inventories, but tax cuts do. increases in government spending increase planned spending, but tax cuts reduce planned spending.

the government-spending multiplier is larger than the tax multiplier.

The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances. inflation and unemployment the price level and real output the interest rate and the level of income the interest rate and real money balances

the interest rate and the level of income

The IS curve shifts when any of the following economic variables change EXCEPT: the interest rate. government spending. taxes. the marginal propensity to consume.

the interest rate.

If an economy is in a liquidity trap, then an expansionary monetary policy ends up increasing: the interest rate. output. investment. the liquidity of household portfolio.

the liquidity of household portfolio.

A decrease in the nominal money supply, other things being equal, will shift the LM curve: upward and to the right. downward and to the right. downward and to the left. upward and to the left.

upward and to the left.