ECON 1040 Exam #5

Paul Volcker, former chair of the Fed, implemented

d. contractionary policy, which decreased the popularity of the U.S. president who had appointed him.

Closely watched indicators such as the inflation rate and unemployment are released each month by the

a. Bureau of Labor Statistics

How would a decrease in the natural rate of unemployment affect the long-run Phillips curve?

a. It would shift the long-run Phillips curve left.

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

a. Jackie gets fewer job offers.

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

a. The interest-rate effect

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they

a. decreased the money supply.

A goal of monetary policy and fiscal policy is to

d. offset shifts in aggregate demand and thereby stabilize the economy.

In 2009, Congress and President Obama approved tax cuts and increased government spending. According to the short-run Phillips curve these policies should have

a. reduced unemployment and raised inflation.

Part of the argument against deficits is that they

b. increase interest rates and decrease investment.

Suppose that the money supply increases. In the short run, this increases prices according to

d. both the short-run Phillips curve and the aggregate demand and aggregate supply model.

In recent years, the Federal Reserve has conducted policy by setting a target for the

d. federal funds rate.

Scenario 34-1. 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. Refer to Scenario 34-1. For this economy, an initial increase of $200 in net exports translates into a(n)

b. $800 increase in aggregate demand in the absence of the crowding-out effect.

In the long run, a decrease in the money supply growth rate

d. decreases inflation and shifts the short-run Phillips curve left.

If the public correctly perceives that the central bank will reduce inflation, then the short-run Phillips curve shifts

d. left, and unemployment will rise by less than otherwise.

The Federal Open Market Committee is ​

d. ​the group at the Federal Reserve that sets monetary policy.

Policymakers following a "lean against the wind" policy would

a. increase government expenditures when output is low and decrease them when output is high

Some economists believe that there are positives from a little inflation and that it may "grease the wheels" in the

a. labor market.

By raising aggregate demand more than anticipated, policymakers

a. reduce unemployment temporarily.

When measured over a long span of time, a tax on interest income

a. reduces the benefits from saving by a large amount.

Double taxation means that both

a. the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States.

Scenario 34-1. 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. Refer to Scenario 34-1. The multiplier for this economy is

b. 4.00.

Which of the following shifts aggregate demand to the left?

b. A decrease in the money supply

If the stock market booms, then

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

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level

b. decreases the real value of households' money holdings.

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

b. downward pressures on prices and wages.

From 2008-2009 the Federal Reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have

b. raised inflation and reduced unemployment.

The theory by which people optimally use all available information when forecasting the future is known as

b. rational expectations.

Suppose that in 2018 and 2019, households and firms reduced desired expenditures. During the same period inflation fell and unemployment rose.

c. Both the change in inflation and the change in unemployment are consistent with what a given short-run Phillips curve implies.

Which of the following would transfer wealth from old to young?

c. More generous education subsidies

Suppose a tax cut affects aggregate demand and aggregate supply. Which of the shifts raise the price level?

c. The shift of aggregate demand, but not the shift of aggregate supply

A consumption tax that replaces an income tax

c. only taxes a household on the money it spends

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?

d. Interest-rate effect, exchange-rate effect, wealth effect

Figure 34-2 (a) The Money Market(b) The Aggregate Demand Curve Refer to Figure 34-2. A decrease in Y from Y 1 to Y 2 is explained as follows:

An increase in P from P1 to P2 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.

Time inconsistency will cause the

b. short-run Phillips curve to be higher than otherwise.

If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is

c. 0.8 and the multiplier is 5.

Scenario 35-1 Suppose that in the first half of June 2022, the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. Refer to Scenario 35-1. The effects of the housing and financial crises could be shown by shifting

c. aggregate demand to the left.

A politician blames the Federal Reserve for being "soft on unemployment" and claims that a permanently higher money supply growth rate will lead to a permanent reduction in the unemployment rate. The politician's argument is

c. inconsistent with the long-run Phillips curve. Further, the long-run Phillips curve implies that such a policy would increase inflation.

If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it should

c. increase the money supply growth rate, which raises the inflation rate.

An increase in government expenditures may lead people to expect that in the future taxes will rise and create greater distortions. By themselves these changes in expectations lead people to

c. reduce both consumption and investment.

An increase in the money supply will

c. reduce interest rates, increasing investment and aggregate demand.

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

c. the multiplier effect.

Assume the analysis of Friedman and Phelps is correct, so that the following equation is valid: ​ Unemployment rate = Natural rate of unemployment − a × (Αctual inflation − x). ​ In this equation,

c. x is the expected rate of inflation

If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year, the sacrifice ratio is

d. 5.

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?

d. With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.

Figure 34-1 Refer to Figure 34-1. If the current interest rate is 2 percent,

d. people will sell more bonds, which drives interest rates up.

Scenario 35-1 Suppose that in the first half of June 2022, the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. Refer to Scenario 35-1. In the short run the housing and financial crises

d. reduced both the price level and output.

If people in countries that have had persistently high inflation are skeptical about efforts to reduce inflation, the short-run Phillips curve will remain far to the

d. right, and the sacrifice ratio will be high.

Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year. The debt created by these continuing deficits is

d. sustainable, and the future burden on future generations can be offset if the current generation saves enough for them.

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

d. the equilibrium interest rate increases.

The short-run Phillips curve shows the combinations of

d. unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.