ECO

If domestic residents of New Zealand purchase $60 million of foreign assets and foreigners purchase $50 million of New Zealand assets, then New Zealand's net capital outflow is

$10 million, so it must have a trade surplus.

Bertha purchased 10 shares of BestSnack, Inc. stock for $200 per share; in one year, she sold the 10 shares for $220 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much tax does Bertha pay on her gain?

$100

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level increased from 140 to 147. What is Bertha's before-tax real capital gain?

$19

If the exchange rate is 0.75 Swiss francs = $1, a chocolate bar that costs 2 Swiss francs costs

$2.67

In an open economy, consumption expenditure equals $420 billion, government expenditure equals $80 billion, investment equals $160 billion, and net exports equals $40 billion. What is national savings?

$200 billion

Bertha bought 10 shares of iSnack stock for $1 per share. In one year, she sold 5 shares for $5 a share. During this year, the price level decreased from 147 to 140. What is Bertha's before-tax real capital gain?

$21

In a certain economy, when income is $200, consumer spending is $160. The value of the multiplier for this economy is 4. It follows that, when income is $300, consumer spending is

$235

Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much did Bertha earn?

$242.5.

Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much tax does Bertha pay on her gain?

$250

During some year a country had $120 billion in domestic assets purchased by foreigners, had exports of $200 billion, and had imports of $70 billion. What was the value of foreign assets purchased by the country?

$250 billion.

The nominal exchange rate is 5 Swedish kroner per U.S. dollar and the real exchange rate is $0.75. Which of the following price for a particular good are consistent with those exchange rates?

$3 in the U.S. and 20 kroner in Sweden

If a country had a trade surplus of $15 billion and then its exports rose by $10 billion and its imports fell by $5, its net exports would now be

$30 billion.

Refer to the Figure. Suppose the multiplier is 4 and the government increases its purchases by $10 billion. Also, suppose the AD curves would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $35 billion. The extent of crowding out, for any particular level of the price level, is

$5 billion

If the marginal propensity to consume is 0.80, and there is no investment accelerator or crowding out, a $10 billion increase in government expenditures would shift the aggregate demand curve to the right by

$50 billion

scenario 34-1. 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. For this economy, an initial increase of $200 in net exports translates into a _________ increase in aggregate demand in the absence of the crowding-out effect.

$500

Last year a country saved $120 billion during the year, had exports of $90 billion and imports of $60 billion. What was its domestic investment during the year?

$90 billion

Bertha purchased 10 shares of BestSnack, Inc. stock for $200 per share; in one year, she sold the 10 shares for $220 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much does Bertha earn?

$97

If Ecuador purchases $20 billion in goods and $5 billion in services from abroad, while selling $10 billion in goods and $10 billion in services to foreign countries, Ecuador's net exports equal

-$5 billion.

scenario 34-1. 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

0.60

If the exchange rate is 0.60 British pounds per U.S. dollar, the price of a t-shirt in London is 12 British pounds and the price of the same t-shirt in the U.S. is $15, then what is the real exchange rate?

0.75

If a U.S. dollar purchases 30 Thai bhat, and a bouquet of flowers costs $12 in the U.S. and 480 bhat in Thailand, what is the real exchange rate?

0.75 Thai bouquets per U.S. bouquet

If a Starbucks Grande latte costs 3 Swiss francs in Switzerland and $4 in the United States, then purchasing-power parity implies the nominal exchange rate is how many Swiss francs per U.S. dollar?

0.75; if the exchange rate is less than this, it costs more U.S. dollars to buy a grande latte in Switzerland than in the U.S.

If the multiplier is 5, then the MPC is

0.8

A loaf of bread in the U.S. costs $2. The same loaf of bread in Sweden costs 10 kroner. If the exchange rate is 4 kroner per U.S. dollar, then the real exchange rate is

0.8, so the good is more expensive in Sweden.

Suppose the nominal interest rate is 8%, the inflation rate is 3% and the tax rate is 45%. What is after-tax real rate of interest?

1.4%.

Suppose the Consumer Price Index has increased from 105 to 107. What is the inflation rate?

1.9%

The multiplier for changes in government spending is calculated as

1/(1 - MPC).

Suppose the real exchange rate is 4/3 gallon of country A's milk per gallon of U.S. milk, a gallon of milk costs $4.00 in the U.S., and a gallon of milk in country A costs 10 units of their currency. What is the nominal exchange rate?

10/3 of a unit of country A's currency per U.S. dollar.

The real interest rate is 4%, inflation is 2%, and the marginal income tax rate is 25%. What is after-tax real rate of interest?

2.5%

scenario 34-1. 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

2.50

According to purchasing-power parity, if the same basket of goods costs $150 in the U.S. and 100 francs in Switzerland, then the nominal exchange rate is

2/3 francs per dollar.

If the exchange rate is 2 Swedish kroner per U.S. dollar, a shirt that costs 12 U.S. dollars costs

24 Swedish kroner.

Suppose the price of a new car is $25,000 in the United States, and the nominal exchange rate between South African and the United States is 10 South African rands per U.S. dollar. If purchasing-power parity holds, the price of the same car in South Africa will be

250,000 rands.

If the marginal propensity to consume is 2/3, then the government purchases multiplier is

3

Suppose P is the price level (the GDP deflator), Y the quantity of output (real GDP), V is velocity, and M the quantity of money if M = 600, V = 5, and Y = 1000, what is the price level?

3

The real interest rate is 5%, inflation is 3%, and the marginal income tax rate is 25%. What is after-tax real rate of interest?

3%

A latte costs $3 in the United States. If the nominal exchange rate were 800 Japanese yen per U.S. dollar and the real exchange rate were 0.75, what would the price of a latte be in Japan?

3,200 yen

The nominal interest rate is 10%, inflation is 4%, the marginal income tax rate is 25%. What is after-tax real rate of interest?

3.5%

Suppose the price level has increased from 103 to 107. Which of the following is the inflation rate?

3.88%

Suppose that a basket of goods costs $100 in the U.S. and that taking $100 and converting it into Thai bhat would allow you to buy 3/4 of the same basket of goods in Thailand. The real exchange rate would be computed as how many Thai goods per U.S. goods?

3/4

Suppose the nominal interest rate is 6% and the inflation rate is 2%. What is the real interest rate?

4%

The price of a basket of goods and services in the U.S. is $500. In Argentina, the same basket of goods and services costs 3,500 Argentine pesos. If the nominal exchange rate were 8 Argentinian pesos per U.S. dollar, what would the real exchange rate be?

4,000/3,500

Suppose the Consumer Price Index has increased from 100 to 105. What is the inflation rate?

5%

Consider an economy producing only widgets, which cost $2 each. If you have $100, what is the real value of the money you hold?

50 widgets. If the price of widgets increases, you will need more money.

If a good that costs $1 in the U.S. cost two-thirds of a Swiss franc in Switzerland, the real exchange rate would be computed as how many Swiss goods per U.S. goods?

50% more than the number of Swiss francs it takes to buy a U.S. dollar

Suppose P is the price level (the GDP deflator), Y the quantity of output (real GDP), and M the quantity of money. If M = 1,000, P = 2, and Y= 3,000, what is velocity (V)?

6

The nominal interest rate is 8%, inflation is 1%, the marginal income tax rate is 10%. What is after-tax real rate of interest?

6.2%

The nominal interest rate is 12%, inflation is 3%, the marginal income tax rate is 10%. What is after-tax real rate of interest?

7.8%

Which of the following is an example of U.S. foreign portfolio investment?

A U.S. citizen buys bonds issued by the Singapore government.

Which of the following is an example of crowding out?

A decrease in taxes increases interest rates, causing investment to fall.

Which of the following shifts aggregate demand to the left?

A decrease in the money supply.

According to liquidity preference theory, which of the following is NOT true?

A decrease in the price level shifts money demand to the right.

Suppose P denotes the price of goods and services measured in terms of money.

A decrease in the value of money is associated with an increase in P.

Which of the following illustrates how the investment accelerator works?

An increase in government expenditures increases aggregate spending so that Starshine Inc. finds it profitable to update its car-wash equipment.

Which of the following would increase the demand for Argentinian assets by people outside Argentina?

Argentinian interest rates rise, the default risk of Argentinian assets fall

Which of the following statements is correct?

As a percentage of GDP, U.S. exports have tripled and U.S. imports have tripled since 1950.

Which of the following is NOT correct?

As the interest rate falls, the quantity of money demanded falls.

Which of the following describes the relationship between the value of money and the price level?

As the price level falls, the value of money rises.

Which of the following describes the relationship between the value of money and the price level?

As the price level rises, the value of money falls.

Refer to the Figure. If the economy starts at C and 1, then in the short run, a decrease in taxes moves the economy to

B and 2.

Refer to the Figure. If the economy starts at C and 1, then in the short run, an increase in aggregate demand moves the economy to

B and 2.

Which of the following Fed actions would increase the money supply?

Buying bonds

Which of the following describes monetary neutrality?

Changes in the supply of money affect nominal variables but not real ones.

Bertha lends $1,000 to Danko for 2 years and charges an annual interest rate of 6%. Bertha had anticipated the inflation rate of 2%, but it actually turned to be 2.5%. In two years, as a result of the higher-than-expected inflation,

Danko is better off at the expense of Bertha.

Suppose Jason believes that the government should follow an active stabilization policy when the economy is experiencing severe unemployment. Which of the following policies would he recommend in this case?

Decrease taxes.

A reduction in personal income taxes increases aggregate demand through an increase in private savings.

False

A tax increase has a multiplier effect but not a crowding-out effect.

False

According to liquidity preference theory, the opportunity cost of holding money is the inflation rate.

False

As the price level increases, the value of money increases. True

False

During periods of expansion, automatic stabilizers cause government expenditures to rise and taxes to fall.

False

If the Fed conducts open-market purchases, the money supply decreases and aggregate demand shifts right.

False

If the real exchange rate between India and Thailand is 1 and purchasing-power parity holds, then 1 Indian rupee buys 1 Thai bhat.

False

In the U.S., people are required to pay taxes on real capital gains irrespective of their nominal capital gains.

False

Long-run outcomes in the economy can be expressed in terms of output and the price level, or in terms of unemployment and inflation.

False

Purchasing-power parity theory does not hold at all times because the same goods produced in different countries are perfect substitutes for each other.

False

Refer to the Figure. You can explain a decrease in Y from Y1 to Y2 in the following way: A decrease in P in P2 to P1 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

False

The Federal Funds Rate is the interest rate the Fed charges depository institutions for short-term loans.

False

The immediate effect of a monetary injection increases the economy's ability to supply goods and services.

False

The interest-rate effect stems from the idea that a higher price level decreases the real value of households' money holdings.

False

The multiplier effect states that there are additional shifts in aggregate supply from fiscal policy because it increases income and thereby increases consumer spending.

False

The theory of liquidity preference only attempts to explain the nominal interest rate.

False

There are no costs of deflation.

False

When inflation was expected to be high and it turns out to be low, wealth is redistributed from creditors to debtors.

False

When the interest rate increases, the opportunity cost of holding money decreases, so the quantity of money demanded decreases.

False

Which of the following is NOT true according to classical macroeconomics theory?

For any given level of output, the interest rate adjusts to balance the supply of, and demand for, money.

Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 3% but it actually turned to be only 2%.

Her real interest rate was higher than expected, and the real value of the loan is higher than expected.

Bertha took out a 5-year fixed-interest-rate loan. She has anticipated the inflation rate of 2% but it actually turned to be 4%.

Her real interest rate was lower than expected, and the real value of the loan is lower than expected.

Which of the following is true about inflation and relative prices?

Higher inflation increases the relative-price variability distorting the resource allocation.

Refer to the Figure. Which of the following is true?

If the current interest rate is 2 percent, people will sell more bonds, which drives interest rates up.

Refer to the Figure. Which of the following is correct?

If the economy is at point b, a policy to restore full employment would be an increase in the money supply.

Refer to the Figure. Suppose the economy is at point A. Which of the following statements is true?

If the economy is left alone, then as it corrects itself and moves to the natural level of output, the price level will rise above P1.

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?

Increase the money supply by buying bonds.

Which of the following reforms would allow for the taxation of only real interest earnings?

Indexing the tax system to take into account the effects of inflation.

Which of the following is true about the inflation tax in the United States?

It falls most heavily on those who hold a lot of currency but accounts for a small share of U.S. government revenue.

Which of the following is true about the interest-rate effect?

It is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.

Which of the following is NOT true about the Employment Act of 1946?

It states that the government should not promote full employment and production.

In the short run, which of the following statements is true about the effects of an increase in the money supply?

It will lower the cost of borrowing.

A country has positive net exports in one year, and the next year it still has positive net exports but imports have risen more than exports. Which of the following has occurred?

Its trade surplus fell.

Which of the following would we not expect if government policy moved the economy down along a given short-run Phillips curve?

Jackie gets more job offers.

If Mexican exports are $50 billion and Mexican imports are $10 billion, which of the following is correct?

Mexico has a trade surplus of $40 billion.

A basket of goods costs $500 in the U.S., 2,000 Swedish kroner in Sweden, and 3,500 Argentinean pesos in Argentina. The exchange rates are 5 Swedish kroner per U.S. dollar and 8 Argentinean pesos per U.S. dollar. Which country has purchasing-power parity with the U.S?

Neither Argentina nor Sweden

A French company uses Canadian dollars it already owned to purchase bonds issued by a company in Canada. Which of these countries has an increase in net capital outflow?

Neither Canada nor France

An Australian firm buys pineapples from Indonesia with Indonesian rupiah it got in exchange for Australian dollars. Indonesian residents then use these dollars to purchase wool from Australia. Which of the following increases?

Neither Indonesia's net exports nor Indonesia's net capital outflow.

Sadie buys stock in a company in Italy. Mike opens an espresso bar in Italy. Both Sadie and Mike are American residents. Whose purchase, by itself, increases Italy's net capital outflow?

Neither Mike's nor Sadie's

Refer to the Figure. Which of the following is NOT correct?

Only monetary policy could be used to move the economy from point b to point a.

Why do people believe in the inflation fallacy?

People tend to forget that inflation in prices goes hand in hand with inflation in incomes.

Which of the following explains why the demand curve for money is downward sloping?

People want to hold a larger quantity of money when each dollar buys less.

Which of the following describes how inflation can be measured?

Percentage change in the GDP deflator.

Which of the following describes how inflation is usually measured?

Percentage change in the consumer price index.

Which of the following Fed actions would decrease the money supply?

Raising the reserve requirement

Which of the following is always correct in an open economy?

S = I + NCO

When higher inflation reduces the value of money,

Shoeleather costs of inflation increase.

Sophie buys a coffee shop in Vancouver, Canada and reopens it as a branch of her Seattle coffee chain. Marlowe imports a Peruvian milling stone for her bakery in Los Angeles. Sophie and Marlowe are both U.S. residents. Whose action is an example of U.S. foreign direct investment?

Sophie's but not Marlowe's

The nominal exchange rate is 12 South African rand, 600 Chilean pesos, 7 Croatian kuna, or 60 Indian rupees per U.S. dollar. A fast food breakfast costs $5 in the U.S., 36 rand in South Africa, 3,000 pesos in Chile, 28 kuna in Croatia, or 240 rupees in India. According to these numbers, where is the real exchange rate between American and foreign goods the highest?

South Africa

Which of the following is an example of menu costs?

Stores advertising new prices.

A Swedish mutual fund buys stock issued by a Norwegian company. This purchase is an example of

Swedish foreign portfolio investment. It decreases Norway's net capital outflow.

Which of the following statements about the multiplier effect is NOT true?

Tax reductions are said to have a multiplier effect on aggregate supply.

Refer to the Figure. Suppose the economy is currently at point A. Which of the following policies would policymakers NOT recommend to restore full employment?

The Fed increases the money supply.

Jason is a critic of stabilization policy. Which of the following statements would he NOT agree with?

The Fed should try to fine-tune the economy during times of economic fluctuations.

Which of the following statements is true about the Kennedy administration in the early 1960s?

The Kennedy administration made considerable use of fiscal policy to stimulate the economy.

According to purchasing-power parity, if the price level in the U.S. rises more than in New Zealand, then which of the following falls?

The U.S. nominal exchange rate, but not the U.S. real exchange rate

On the graph that depicts the theory of liquidity preference, which of the following is NOT true?

The demand-for-money curve is vertical.

If the price of a good in the U.S. is $20 and the unit of foreign currency is the rupee, in which case is the real exchange rate 5/6?

The exchange rate is 50 rupees per dollar and the foreign price is 1,200 rupees.

Which of the following is an example of an increase in government purchases?

The government builds new bridges.

Which of the following describes the effect of a decrease in the money supply?

The money supply curve shifts to the left, the price level decreases causing the value of money to increase.

Which of the following describes the effect of an increase in the money supply?

The money supply curve shifts to the right, the price level increases causing the value of money to decrease.

Which of the following is the immediate effect of a monetary injection?

The money supply increases, whereas the economy's ability to supply goods and services does not change.

Which of the following describes the Fisher effect?

The nominal interest rate adjusts to the inflation rate.

Refer to the Graphs. Which of the following statements is NOT true?

The nominal interest rate is held constant as we move from one point to another on either graph.

Which of the following explains why the supply curve for money is vertical?

The quantity of money supplied is fixed by the Federal Reserve.

Which of the following describes the money equilibrium in the long run?

The quantity of money that people want to hold equals the quantity of money supplied by the Fed.

Which of the following theories explains the long-run determinants of the price level and the inflation rate?

The quantity theory of money

Which of the following theories can explain both inflation and hyperinflation?

The quantity theory of money.

If purchasing-power parity did not hold, which of the following could NOT be true?

The real exchange rate equals 1.

In the U.S. a digital camera costs $250. The same camera in Paris sells for 200 euros. If the exchange rate were .70 euros per dollar, then which of the following would be correct?

The real exchange rate is less than 1. A person in Paris with $250 could exchange them for euros but then wouldn't have enough to buy the camera.

According to the theory of liquidity preference, which of the following is NOT true?

The supply of money depends on the interest rate.

According to liquidity preference theory, the money-supply curve would shift if the Fed engaged in open-market operations.

True

An increase in the value of money decreases the price of goods and services measured in terms of money. True

True

Fiscal policy can be used to move the economy along the short-run Phillips curve.

True

If the Fed decreases the money supply, the interest rate increases.

True

If the interest rate is below the Fed's target, the Fed should sell bonds to decrease the money supply.

True

In the U.S., the income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation.

True

Purchasing-power parity theory does not hold at all times because many goods are not easily transported.

True

The multiplier effect amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effect.

True

The tax system is the most important automatic stabilizer.

True

When deciding how much to save, people care most about before-tax nominal interest rates.

True

When inflation rises, the nominal interest rate rises, and people desire to hold less money

True

When inflation turns out to be higher than expected, wealth is redistributed from lenders to borrowers.

True

When inflation was expected to be high and it turns out to be low, wealth is redistributed from debtors to creditors.

True

If U.S. residents purchase $200 billion worth of foreign assets and foreigners purchase $400 billion worth of U.S. assets,

U.S. net capital outflow is -$200 billion; capital is flowing into the U.S.

Which of the following describes the meaning of the demand for money?

Wealth that people want to hold in liquid form.

If saving is less than domestic investment, then

Y < C + I + G and there is a trade deficit.

Juergen, a German resident, purchases some grapes grown in France. This purchase is an example of

a German import and a French export

Which of the following policy actions does NOT shift the aggregate-demand curve?

a change in the price level

A country buys more from foreign countries than it sells to them. It has

a trade deficit and negative net exports.

A country purchases $120 billion of foreign-produced goods and services and sells goods worth $130 billion. It has

a trade surplus of $10 billion and exports of $130 billion.

Which of the following does fiscal policy not primarily affect in the long run?

aggregate demand

If the stock market booms, then

aggregate demand increases, which the Fed could offset by selling government bonds.

Unemployment would increase and prices would decrease if

aggregate demand shifts left.

Which of the following is NOT an automatic stabilizer?

an increase in money supply

Which of the following events would cause the Fed to stabilize output through decreasing the money supply?

an increase in net exports

Which of the following events would cause the Fed to stabilize output through increasing the money supply?

an increase in taxes

The principle of monetary neutrality implies that

an increase in the money supply will increase the price level, but not real GDP.

Other things the same, if the U.S. real exchange rate depreciates, U.S. net capital outflow

and U.S. net exports both increase.

Other things the same, if the exchange rate changes from 0.60 Swiss francs per dollar to 0.70 Swiss francs per dollar, the dollar has

appreciated and therefore each dollar buys more Swiss goods.

According to purchasing-power parity, if it took 5 Swedish kroner to buy a dollar today, but it took 4.75 kroner to buy it a year ago, then the dollar has

appreciated, indicating inflation was lower in the U.S. than in Sweden.

Changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into a recession are called

automatic stabilizers.

If the Federal Reserve decided to lower interest rates, it could

buy bonds to raise the money supply.

If the dollar buys more rice in Thailand than in the United States, then traders could make a profit by

buying rice in Thailand and selling it in the United States, which would tend to raise the price of rice in Thailand.

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?

decrease taxes

According to purchasing-power parity, if a country's central bank wanted the country's currency to appreciate relative to other currencies in the world, it would have to

decrease the money supply, which would also cause the country's price level to fall.

Which among the following assets is the most liquid?

deposits that can be withdrawn using ATMs

Other things the same, if the exchange rate changes from 6 Danish kroner per dollar to 5 Danish kroner per dollar, the dollar has

depreciated and so buys fewer Danish goods.

If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as

e(P/P*).

You are planning a trip to Europe. Other things the same, if the dollar depreciates relative to the euro, then dollar buys

fewer euros. Your train trips in Europe will require more dollars.

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

fiscal policy

If Vietnam has a trade surplus,

foreign countries purchase fewer Vietnamese assets than Vietnam purchases from them. This makes Vietnamese saving greater than Vietnamese domestic investment.

The purchase of U.S. government bonds by Saudi Arabian residents is an example of

foreign portfolio investment by Saudi Arabian residents.

Policymakers prefer both low inflation and low unemployment. The historical data summarized by the Phillips curve indicate that this combination of:

impossible.

Dmitri, a Canadian resident, buys $10,000 worth of olives from Cyprus. By itself this purchase

increases Canadian imports by $10,000 and decreases Canadian net exports by $10,000.

A Mexican company sells oil drilling equipment to a Colombian company, which pays with Colombian currency. This transaction

increases Mexican net capital outflow because Mexico acquires foreign assets.

If expected inflation is constant and the nominal interest increases by 3 percentage points, then the real interest rate

increases by 3 percentage points.

Other things the same, a decrease in the foreign price level

increases the real exchange rate. This increase could be offset by a decrease in the nominal exchange rate.

Arbitrage may not eliminate a price difference for a haircut in Paris versus a haircut in New York because ____

international travel would be too costly.

For an economy as a whole, net capital outflow

is always equal to net exports.

Which of the following is true about liquidity preference theory?

it is most relevant to the short run of interest rates.

From 1970 to 1998, the Italian lira

lost value compared to the U.S. dollar because inflation was higher in Italy.

One reason purchasing-power parity is not completely accurate is that ____

many goods are not easily tradable.

As inflation rises,

menu costs and shoeleather costs of inflation increase.

Steve is having a policy debate with his brother Brian. He points the fact that business firms make investment plans far in advance. This is a lag problem associated with

monetary policy.

The government builds a new recycling plant. The manager of the company hires workers and pays them an annual salary. These workers then increase their spending. The firms that sell the goods these workers buy also increase their output. This type of effect on spending illustrates the

multiplier effect.

If Canadian purchases of foreign assets are less than purchases of Canadian assets by foreigners, then Canada has a

negative net capital outflow and negative net exports.

If the value of the goods and services that the U.S. purchases from Canada are greater than the value of goods and services that Canada purchases from the U.S., the U.S. has

negative net exports with Canada and a trade deficit with Canada.

From 2000 to 2018, the U.S. had a large

net capital inflow and a trade deficit.

The inflation tax is not exactly like other taxes because ____

no one receives a bill from the government for the tax.

According to purchasing-power parity, if the price of a basket of goods in the U.S. rose from $1,200 to $1,260 and the price of the same basket of goods rose from 11,000 Mexican pesos to 11,440 Mexican pesos in Mexico, then the

nominal exchange rate would depreciate.

Temporary tax cuts shift the aggregate-demand curve

not as far to the right as do permanent tax cuts.

Suppose that Thailand's saving exceeds its domestic investment. In this case, Thailand has

positive net capital outflows and positive net exports.

Other things the same, according to purchasing-power parity, if over the next few years Nigeria has a lower money supply growth rate than South Africa, then

prices in Nigeria will rise by a smaller percentage than in South Africa. So, the Nigerian naira will appreciate against the South African rand.

Other things the same, the real exchange rate between U.S. and Swiss goods would be lower if

prices in the U.S. were lower, or the number of Swiss francs the dollar purchased were lower.

Net capital outflow occurs when

purchases of foreign assets by domestic residents is greater than the purchase of domestic assets by foreign residents.

When consumers prefer goods produced in one country over another, ____

purchasing-power parity may not hold.

During the 1770s, the United States ____

relied heavily on the inflation tax.

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

right by $40 billion

An increase in U.S. net exports would shift U.S. aggregate demand

rightward. In an attempt to stabilize the economy, the government could decrease expenditures.

If the nominal exchange rate remains at 30 Thai bhat per U.S. dollar while prices in Thailand rise more slowly than in the United States, then the real exchange rate of Thai goods for U.S. goods

rises.

If money demand shifted to the left and the Federal Reserve desired to return the interest rate to its original value, it could

sell bonds to decrease the money supply.

To stabilize interest rates, the Federal Reserve will respond to a decrease in money demand by

selling government bonds, which decreases the supply of money.

Bertha owns a pastry shop and café in an economy that is prone to rapid inflation. If Bertha reprints her menu every month,

she bears a high menu cost and the relative price of her pastries is too low.

Refer to the Figure. A decrease in government purchases will

shift aggregate demand from AD1 to AD3.

Unemployment is higher and inflation is lower as the aggregate-demand curve ________ a given aggregate supply curve.

shifts leftward along

One reason purchasing-power parity is not completely accurate is that ____

some goods are not perfect substitutes when produced in different countries.

To calculate the value of a country's net exports,

subtract the value of goods and services imported from the value of goods and services exported.

Suppose that more Americans decide to vacation in France and that Americans purchase more French government bonds. Ignoring how payments are made for these purchases,

the first action by itself lowers U.S. net exports, the second action by itself raises U.S. net capital outflow.

The economy will move to a point on the short-run Phillips curve where unemployment is lower if

the inflation rate increases.

According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes

the interest rate to rise, so aggregate demand shifts left.

The fraction of extra income that a household consumes rather than saves is called

the marginal propensity to consume.

If purchasing-power parity holds, all of the following are true except

the nominal exchange rate is the ratio of U.S. prices to foreign prices.

If the exchange rate is 7 Argentinian pesos per U.S. dollar, a side of beef costs 6,000 Argentinian pesos in Argentina, and a side of beef costs $1,000 in the U.S., then

the real exchange rate is greater than one and arbitrageurs could profit by buying beef in Argentina and selling them in the U.S.

If a dollar buys less wheat in Russia than in the U.S., then

the real exchange rate is less than 1; a profit may be made by buying wheat in the U.S. and selling it in Russia.

One cost of deflation is ____

the redistribution of wealth toward creditors and away from debtors.

Refer to the Figure . Which curve offers policymakers a "menu" of combinations of inflation and unemployment?

the right-hand graph

Refer to the Figure. Which graph measures the inflation rate along its vertical axis?

the right-hand graph

Refer to the Figure. Which graph measures the unemployment rate along its horizontal axis?

the right-hand graph

Which of the following is an example of an automatic stabilizer?

the unemployment compensation system

Refer to the Figure. What is measured along the horizontal axis of the right-hand graph?

the unemployment rate

As the price level increases,

the value of money decreases.

As the price level decreases,

the value of money increases.

Suppose that the real rate of return from operating clothing stores in Brazil falls relative to the real rate of return in the United States. Other things the same,

this will decrease U.S. net capital outflow and increase Brazilian net capital outflow.

Keynes would agree with the statement that irrational waves of pessimism cause aggregate demand to be unstable.

true

According to the short-run Phillips curve, inflation

would rise and unemployment would fall if policymakers increased the money supply.