ECO119 Homework questions Ch. 13, 14, 17

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?

The central bank's foreign-currency reserves are increasing.

In the IS-LM analysis, the increase in income resulting from a tax cut is ______ the increase in income resulting from an equal rise in government spending.

Usually less than

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:

a fall in income and net exports.

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium, the money supply:

increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income.

The political business cycle refers to the:

manipulation of the economy to win elections.

The time between when government spending increases and when aggregate demand starts to increase is an example of an:

outside lag of fiscal policy.

If all past economic fluctuations resulted from inept economic policies, then the historical evidence would support using:

passive macroeconomic policy only.

In the LS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output _________

rises; falls

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to ______ the central bank, which causes the money supply to ______.

sell domestic currency to; decrease

In the Mundell-Fleming model, the domestic interest rate is determined by the:

world interest rate.

A small open economy with a floating exchange rate is initially at equilibrium A with IS*1, LM*1, equilibrium exchange rate e2, and equilibrium output Y1. If there is an increase in government spending to IS*2, the new equilibrium will be at ____, holding everything else constant.

B

A small open economy with a fixed exchange rate e2 is initially at equilibrium A with IS1 * , LM1* and equilibrium output Y1.. If there is an increase in government spending to IS2 * the new equilibrium will be at ____, holding everything else

C

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the federal reserve should _____ the money supply, shifting to ______

LM3

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.

LM; does not shift

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LMframework, ______ output and ______ interest rates.

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

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

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______.

Resulting from a change in the price level; at a given price level

A small open economy with a fixed exchange rate e2 is initially at equilibrium A with IS1 * , LM1* and equilibrium output Y1. If there is a monetary expansion to the new equilibrium will be at ____, holding everything else constant.

A

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.

C; Higher

In the IS-LM model, changes in taxes initially affect planned expenditures through:

Consumption

A small open economy with a floating exchange rate is initially in equilibrium at A with IS1*. Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____.

IS1* ; IS3*

One policy response to the us economic slow down of 2001 was to increase money growth. The policy response can be represented in the IS-LM model by shifting the ________ curve to the ______

LM, right

A small open economy with a floating exchange rate is initially in equilibrium at A with IS1* ; LM1*. If there is an increase in the risk premium, then LM1* will shift to _____ and IS1* will shift to _____.

LM2* ; IS3*

Increasing government spending when the economy is in a recession is an example of:

active fiscal policy.

Which of the following is an example of a fiscal policy that has no inside lag?

an ongoing unemployment insurance program

Policy is conducted by discretion if policymakers:

are free to size up the situation case by case and choose whatever policy seems appropriate at the time.

Policies that stimulate or depress the economy without any deliberate policy change are called:

automatic stabilizers.

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift:

both the LM and the IS curves.

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS* curve shifts to the right, raising the exchange rate:

but not raising net exports or income.

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy ______ increase income, and under fixed exchange rates, expansionary monetary policy ______ increase income.

can; cannot

The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve.

consumer spending; IS

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n):

contractionary shift in the IS curve.

vIf a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must:

control its citizens' access to world financial markets.

The risk premium included in the interest rate of small open economies incorporates:

country risk and expectations of future exchange-rate changes.

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.

In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate.

depreciate; increase

An argument in favor of allowing discretionary macroeconomic policy is that:

giving policymakers flexibility will allow them to respond to changing conditions.

All of the following could be considered automatic stabilizers except:

discretionary changes in taxes.

In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short-run equilibrium, the:

exchange rate falls and net exports increase.

The lag between the time that economic stimulus is needed and the time that a tax cut is passed by Congress is an example of a:

fiscal inside lag.

The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have:

free capital flows, a fixed exchange rate, and an independent monetary policy.

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have a ______ propensity to consume than debtors.

from debtors to creditors; smaller

Automatic stabilizers:

have no inside lag

According to the Lucas critique, when economists evaluate alternative policies they must take into consideration:

how the policies will affect expectations and behavior.

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium:

imports will decrease and exports will decrease by an equal amount.

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

income and the interest rate rise, whereas consumption and investment fall

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:

income rises, but the exchange rate does not rise.

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 lower the interest rate.

In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to:

increase the money supply.

In the Mundell-Fleming model with flexible exchange rates, an increase in the price level results in a(n) ______ in the real exchange rate and a(n) ______ in net exports

increase; decrease

According to the Mundell-Fleming model, under fixed exchange rates, expansionary fiscal policy causes income to ______, and under flexible exchange rates expansionary fiscal policy causes income to ______.

increase; remain unchanged

What are two types of tools that economists use to forecast future economic developments?

leading indicators and macroeconometric models

A given increase in taxes shifts the IS curve more to the left the:

larger the marginal propensity to consume

The money hypothesis suggests that the Great Depression was caused by a:

leftward shift in the LM curve.

The intersection of the IS* and LM* curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium.

level of output; exchange rate

The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a:

monetary outside lag.

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

no change in income but a rise in net exports.

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with fixed exchange rates, lead to:

no change in income or net exports.

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

output will decrease, but the price level will increase

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:

r2, Y3

According to tAccording to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to ______, and in an economy with fixed exchange rates, import restrictions cause net exports to ______.

remain unchanged; increase

Active economic policy seeks to do all of the following except:

take a hands-off approach to macroeconomic policy.

In the Mundell-Fleming model:

the behavior of the economy depends on whether the exchange-rate system has a floating or fixed exchange rate.

A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called a(n):

time-inconsistent policy.

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