Econ Final v2

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The phrase__describes a firm so central to that financial system that policymakers will not allow it to enter bankruptcy

"too big to fail"

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$0.75 billion; more than $0.75 billion

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

$1 billion; more than $1 billion

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals

$150 billion

The home that would have the highest mortgage payment on a 30-year fixed-rate mortgage would be a home with a mortgage of

$200000 at 12 percent

According to the macroeconometric model developed by Data Resources Incorporated, if taxes are increased by $100 billion, but the money supply is held constant, then GDP will fall by about:

$25 billion.

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the money supply equals

$600 billion

If the monetary base equals $400 billion and the money multiplier equals 2, then the money supply equals

$800 billion

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of an increase in household saving?

(A) i.e. the image where S-I moves right

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies at home?

(A) i.e. the image where S-I moves right

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of contractionary fiscal policies abroad?

(B) i.e. the image where S-I(r) moves left

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of an increase in investment demand?

(Exhibit: Policies Influence Real Exchange Rate) Which of the panels illustrates the impact on the real exchange rate of protectionist trade policies?

(D) i.e. image where NX moves right/up

A to G

(Exhibit: AD-AS Shifts) Starting from long-run equilibrium at A with output equal to and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the short-run nonneutrality of money is represented by the movement from

r3, Y2

(Exhibit: IS-LM Fiscal Policy) 3IS, 1LM. Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

increase; LM2

(Exhibit: Policy Interaction) 3LMs, 2 IS. 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 _____.

a lower rate of inflation for any level of unemployment

(Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to C to D, policymakers face:

If the monetary base is denoted by B, rr is the ratio of reserves to deposits, and cr is the ratio of currency to deposits, then the money supply is equal to ______ divided by ______ multiplied by B.

(cr + 1) ; (cr + rr)

A bank balance sheet consists of only the following items: Deposits $1,000 Reserves $100 Securities $400 Debt $500 Loans $2,000 What is the value of bank capital?

+$1,000

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals

-$10 billion

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.

-2

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, public saving is

-200

If the nominal rate is 1 percent and the inflation rate is 5 percent, the real interest rate is

-4 percent

If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is:

.0.005

Assume that the production function is Cobb-Douglas with parameter α = 0.3. If factors are paid their marginal products, capital and labor, respectively, receive the shares of income

.3 and .7

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then C increases by

.85 units

The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately

Assume that an economy has the Phillips curve π = π¿1 ¿ 0.5(u ¿ 0.06). Then the natural rate of unemployment is:

0.06

If the steady-state rate of unemployment equals 0.125 and the fraction of unemployed workers who find jobs each month (the rate of job findings) is 0.56, then the fraction of employed workers who lose their jobs each month (the rate of job separations) must be:

0.08

If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be:

0.18

Economists who have studied minimum-wage laws in the United States find that a 10 percent increase in the minimum wage increases teenage unemployment by about:

1 to 3 percent.

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. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1,600

If the quantity of real money balances is kY, where k is a constant, then velocity is:

1/k

Assume that an economy has the Phillips curve π = π¿1 ¿ 0.5(u ¿ 0.06). How many percentage-point-years of cyclical unemployment are needed to reduce inflation by 5 percentage points?

Bank Balance sheet Assets / Liabilities reserves / deposits 10000 / 100000 loans / debt 100000 / 20000 Securities /Equity 40,000 / $30000 What is the reserve ratio at the bank?

10 percent

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:

100

During the American Revolution, the price of gold measured in continental dollars increased to more than ______ times its previous level

100

Assume that a firm wants to build a factory that will cost $5 million. It believes that it can get a return of $600,000 in one year and then can sell the used factory for its original cost. The rate of return on this investment would be

12 percent

If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall

12 percent

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is

13 percent

Total investment in the United States averages about ______ percent of GDP

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6(Y - T). Taxes (T) are equal to 1,000. Government spending is 600. In this case, equilibrium investment is

1500

Assume that equilibrium GDP (Y) is 5,000. Consumption (C). is given by the equation C = 500 + 0.6Y. No government exists. In this case, equilibrium investment is

1500

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + t1Y, and Y = 50K0.5L0.5, where K = 100 and L = 100. If t1 increases from 0.2 to 0.25, then consumption decreases by

175

during the period between 1900 and 2000, the unemployment rate in the US was highest in the

1930s

If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss good(s) per U.S. good

2.5

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals:

2.5

Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:

2.5 percent in the short run but will return to its natural rate in the long run.

The estimate of the sacrifice ratio from the Volcker disinflation is approximately:

2.5-3

Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year's GDP.

Bank Balance sheet Assets / Liabilities reserves / deposits 10000 / 100000 loans / debt 100000 / 20000 Securities / Equity 40,000 / $30000 Owners equity will fall to zero if loan defaults reduce the value of total assets by __________ percent

If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1 dollar, then a Big Mac in Cancun, Mexico, should cost

20 pesos

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, then real balances in the economy equal

20,000

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(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:

260

If the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by T = 200 + 0.2Y, then C equals

2800

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ______ percent

According to the quantity theory and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase

3 percent

creditors; partial owners

3. Purchasers of bonds issued by companies are _____ of the company, while purchasers of shares of stock issued by a company are _____ of the company.

If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

300

If disposable income is 4,000, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, national saving is equal to:

300

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals

3000

If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:

400

Assume that the consumption function is given by C = 150 + 0.85(Y - T), the tax function is given by T = t0 + t1Y, and Y is 5,000. If t1 decreases from 0.3 to 0.2, then consumption increases by

425

Consider the money demand function that takes the form (M/P)d = Y/4i, where M is the quantity of money, P is the price level, Y is real output, and i is the nominal interest rate. What is the average velocity of money in this economy?

Bank Balance Sheet Assets / Liabilities & Net Worth Reserves / Deposits 10,000 $ / $100000 Loans / Debt 100,000 / $20000 Securities / Equity 40,000 / $30000 Based on the table, what is the leverage ratio at the bank?

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transactions velocity is ______ times per year

According to the quantity theory a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation a 5 percent increase in the rate of inflation increases the nominal interest rate by _____

5 ; 5

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is

5 percent

systematic; idiosyncratic

5. Risk that affects many businesses at the same time is called _____ risk, while risk associated with individual businesses is called _____ risk.

If Y=AK^.5L^.5 and A,K, and L are all 100, the marginal product of capital is

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

50 and the interest rate falls by 0.5 percent.

If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes minus transfers are 800, private saving is

500

Assume that the consumption function is given by C = 200 + 0.7(Y - T), the tax function is given by T = 100 + 0.2Y, and Y = 50K0.5L0.5, where K = 100. If L increases from 100 to 144, then consumption increases by

560

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.

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is: Answer Multiple Choice Question

600

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent.

Consider the money demand function that takes the form (M/P)d = kY, where M is the quantity of money, P is the price level, k is a constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation rate in this economy?

7 percent

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be

760

(Exhibit: Supply Shock) 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:

(Exhibit: Supply Shock) Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point:

Exhibit: IS*-LM*

reducing consumption and investment spending

A credit crunch reduces aggregate demand by

reducing consumption and investment spending.

A credit crunch reduces aggregate demand by:

increase; not change

A debt-financed tax cut will ______ current consumption in the traditional view and ______ current consumption in the view of Ricardian equivalence

increase; not change

A debt-financed tax cut will ______ current consumption in the traditional view and ______ current consumption in the view of Ricardian equivalence.

real

A deficit adjusted for inflation should include only government spending used to make _____ interest payments

real

A deficit adjusted for inflation should include only government spending used to make _____ interest payments.

sells assets at fire-sale prices to meet liquidity demands

A liquid bank can become insolvent when it

asymmetric information

A situation in which one party to an economic transaction has more knowledge about the transaction than the other is called:

asymmetric information.

A situation in which one party to an economic transaction has more knowledge about the transaction than the other is called:

restrain political incompetence and opportunism

A strict balanced-budget rule would

restrain political incompetence and opportunism.

A strict balanced-budget rule would:

Exhibit: AD-AS Shifts

A to B

Exhibit: AD-AS Shifts

A to G

Each of the following conditions will tend to reduce the sacrifice ratio except when:

the concept of hysteresis accurately describes the impact of history on the natural rate of unemployment.

The Phillips curve depends on all of the following forces except:

the current exchange rate.

If the nominal interest increases, then:

the demand for money decreases

Along an IS curve all of the following are always true except:

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

Two interpretations of the IS-LM model are that the model explains:

the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.

Two ways for the banks to borrow through the Federal Reserve are through

the discount window and the Team Auction Facility

monetarists

the doctrine according to which changes in the money supply are primary cause of economic fluctuations, implying that a stable money supply would lead to a stable economy

the value of net exports is also the value of

the excess of national saving over domestic investment

In a small open economy with a floating exchange rate, if the government adopts an expansionary fiscal policy, in the new short-run equilibrium:

the exchange rate will rise, but income will remain unchanged.

In a short-run model of a large open economy with a floating exchange rate, a monetary expansion causes a decrease in the interest rate and:

the exchange rate, and increases in income, net capital outflow, and net exports.

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in ______, and the aggregate demand curve shifts upward because of increases in .______

the expected price level; the money supply

A depreciation of the real exchange rate in a small open economy could be the result of:

the expiration of an investment tax-credit provision

political business cycle

the fluctuations in output and employment resulting from the manipulation of the economy for electoral gain

the inflation rate is a measure of how fast

the general level of prices in an economy is rising

The phrase "inflation is repudiation" applies only if:

the government is a debtor

All of the following are requirements for reducing inflation without causing a recession except:

the government's budget must be balanced.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

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

pigou effect

the increase in consumer spending that results when a fall in the price level raises real money balances and thereby, consumers wealth

In the case of demand-pull inflation, other things being equal:

the inflation rate rises but the unemployment rate falls

In the 1960s, in the United States:

the inflation rate rose but the unemployment rate fell.

In the classical model with fixed output, the supply and demand for goods and services are balanced by

the interest rate

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?

the interest rate

The factor that makes national saving equal investment, in equilibrium, is

the interest rate

the equation Y=(C-T)+I(r)+G may be solved for the equilibrium level of

the interest rate

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services.

the interest rate and the level of income

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances.

the interest rate and the level of income

The interaction of the IS curve and the LM curve together determine:

the interest rate and the level of output.

In a short-run model of a large open economy with a floating exchange rate:

the interest rate is determined in the IS-LM framework, and this value determines net capital outflow; then the exchange rate adjusts to make net exports equal net capital outflow.

In the Mundell-Fleming model on a Y - e graph, the curves labeled IS* and LM* are labeled that way as a reminder that:

the interest rate is held constant at the world interest rate r*.

If saving exceeds investment demand, and consumption is not a function of the interest rate

the interest rate will fall

In the classical model with fixed income, if households want to save more than firms want to invest, then:

the interest rate will fall

The IS curve shifts when any of the following economic variables change except:

the interest rate.

The slope of the IS curve depends on:

the interest sensitivity of investment and the marginal propensity to consume.

Which of the following is an example of a demand shock?

the introduction and greater availability of credit cards

In a short-run model of a large open economy, after net capital outflow is substituted for net exports in the IS curve:

the larger the absolute value of the responsiveness of net capital outflow with respect to the interest rate, the flatter the IS curve.

The natural level of output is:

the level of output at which the unemployment rate is at its natural level.

hysteresis

the long-lasting influence of history, such as on the natural rate of unemployment

What determines the distribution of national income between labor and capital in a competitive, profit maximizing economy with constant returns to scale?

the marginal productivity of labor relative to the marginal productivity of capital

all of the following are important macroeconomic variables except

the marginal rate of substitution

imperfect information model

the model of aggregate supply emphasizing that individuals do not always know the overall price level because they cannot observe the prices of all goods and services in the economy

High powered money is another name for

the monetary base

the ratio of the money supply to the monetary base is called

the money multiplier

If you hear in the news that the Federal Reserve conducted open-market purchases, then you should expect ______ to increase

the money supply

Along an aggregate demand curve, which of the following are held constant?

the money supply and velocity

If the ratio of currency to deposits (cr) increases, while the ratio of reserves to deposits (rr) is constant and the monetary base (B) is constant, then

the money supply decreases

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then

the money supply decreases

When the Fed decreases the interest rate paid on reserves, if the ratio of currency to deposits decreases also while the monetary base is constant, then

the money supply increases

In a small open economy with a floating exchange rate, the exchange rate will appreciate if:

the money supply is decreased.

If the monetary base fell and the currency-deposit ratio rose but the reserve-deposit ratio remained the same, then:

the money supply would fall, but not by as much as it would have fallen if the reserve-deposit ratio had risen

If the Fed announced it would fix the exchange rate at 100 yen per dollar, but with the current money supply the equilibrium exchange rate was 150 yen per dollar, then:

the money supply would rise until the market exchange rate was 100 yen per dollar.

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on

the money supply.

The hypothesis that hysteresis may play an important role in macroeconomics implies, among other things, that:

the natural rate of unemployment may increase if unemployment is high for a long period of time.

If there is a fixed-exchange-rate system, then in the long run:

the nominal exchange rate is fixed, but the real exchange rate is free to vary.

In the classical model, according to the quantity theory and the Fisher equation, an increase in money growth increases

the nominal interest rate

The imperfect-information model assumes that producers find it difficult to distinguish between changes in:

the overall level of prices and relative prices.

natural-rate hypothesis

the premise that fluctuations in aggregate demand influence output , employment, and unemployment only in the short run, and that in the long run these variables return to the levels implied by the classical model

According to the classical dichotomy, when the money supply decreases, _____ will decrease.

the price level

The IS-LM model takes ______ as exogenous.

the price level

According to the sticky-price model, output will be at the natural level if:

the price level equals the expected price level.

If velocity is constant, in addition, the factors of production and the production function determine real GDP, then

the price level is proportionate to the money supply

An economic change that does not shift the aggregate demand curve is a change in:

the price level.

what is the best example of sticky prices

the price of a soda in a vending machine

which of the following is the best example of flexible prices

the price of gasoline at a service station

in a simple model of the supply and demand for pizza, the endogenous variables are

the price of pizza and the quantity of pizza sold

monetary transmission mechanism

the process by which changes in the money supply influence the amount that households and firms wish to spend on goods and services

In the long run, according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then ______ determines real GDP and ______ determines nominal GDP

the productive capability of the economy ; the money supply

the real wage will increase if

the productivity of labor increases

In the sticky-price model, the relationship between output and the price level depends on:

the proportion of firms with flexible prices.

In a Cobb-Douglas production function the marginal product of labor will increase if

the quantity of capital increases

In a Cobb Douglas production function the marginal product of capital will increase if

the quantity of labor increase

The endogenous variables of the mother of all models in the Appendix to Chapter 14 include the level of output, the natural rate of output, the price level, and:

the real and nominal interest rates.

Which of the following is an example of a relative price?

the real interest rate

When the LM curve is drawn, the quantity that is held fixed is:

the real money supply.

In the classical model, what adjusts to eliminate any unemployment of labor in the economy?

the real wage

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise

If increased immigration raises the labor force, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise

According to the imperfect-information model, in countries in which there is a great deal of variability of prices:

the response of output to unexpected changes in prices will be relatively small.

all of the following statements about sticky prices are true except

the sticky price model describes the equilibrium toward which the economy slowly gravitates

Currency equals

the sums of coins and paper money

in a simple graphical model of the supply and demand for pizza with the price of pizza measured vertically and the quantity of pizza measured horizantally

the supply curve slopes upward and to the right

time inconsistency

the tendency of policy makers to announce policies in advance in order to influence the expectations of private decision makers, and then to follow different policies after those expectations have been formed and acted upon

outside leg

the time between a policy action and its influence on the economy

inside leg

the time between a shock hitting the economy and the policy action taken to respond

If net capital outflow is positive then

the trade balance must be positive

Gary Becker's criticism of government spending on infrastructure as part of President Obama's stimulus plan was that:

there is a conflict between where spending on infrastructure would benefit employment and where infrastructure is most needed.

Short-run Phillips Curve

there is a lower-expected rate of inflation at every level of unemployment.

Some economists argue that monetary union will not work as well in Europe as it does in the United States for all of the following reasons except:

there is no European central bank as there is in the United States.

All of the following are suggested by the results of Alan Blinder's survey of firms except:

there is only one theory of price stickiness.

An "open" economy is one in which

there is trade in goods and services with the rest of the world

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant:

this represents a movement down the aggregate demand curve.

Building an economic model based on the assumption of a small open economy is useful because:

this underlying assumption can assist our understanding and intuition of open economy macroeconomics

In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:

to fall while net exports are unchanged.

Two policies that are intended to make the financial system more stable by restricting the size of financial institutions are:

to restrict mergers among large banks and to require higher capital requirements for large banks.

According to Euler's theorem, if competitive firms pay each other its marginal product and the production function has constant returns to scale, the sum of all factor payments will be equal to

total output

Compared to a closed economy, an open economy is one that:

trades with other countries.

The quantity equation, viewed as an identity, is a definition of the:

transactions velocity of money

Financial intermediation is the process of

transferring funds from savers to borrowers

If a dollar bought 1,000 Chilean pesos ten years ago and 1,500 lire now, and inflation for that period was 25 percent in the United States and 100 percent in Chile, then

traveling in chile is more expensive now than it was ten years ago

Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.

two

Based on the Phillips curve, unexpected movements in inflation are related to ______, and based on the short-run aggregate supply curve, unexpected movements in the price level are related to ______.

unemployment; output

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

When a pizza maker lists the price of a pizza at $10, this is an example of using money as a

unit of account

the real rental price of capital is the price per unit of capital measured in

units of output

the real wage is the return to labor measured in

units of output

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

unplanned inventory investment is negative.

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

unplanned inventory investment.

using market clearing model to analyze the demand for haircuts is - because the price of a haircut usually changes -

unrealistic, infrequently

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left.

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

upward and to the right.

People use money as a unit of account when they

use money as a measure of economic transactions

People use money as a medium of exchange when they

use money to buy goods and services

A variable rate of inflation is undesirable because:

variable inflation leads to greater uncertainty and risk than under constant inflation

Leading economic indicators are:

variables that tend to fluctuate in advance of the overall economy.

In the United States, bank reserves consists of

vault cash and deposits at the Federal Reserve

The quantity theory of money assumes that

velocity is constant

For a closed economy, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a

vertical line at 0

If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output.

vertical; fiscal

If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output.

vertical; monetary

All of the following are considered major functions of money except as a

way to display wealth

As the U.S. budget deficit shrank in the 1990s, the increase in U.S. national saving was ______ than the expansionary shift in the U.S. investment function, resulting in a trade ______

weaker ; deficit

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.

weaker; stronger

Prices of items included in the CPI are:

weighted according to quantity of the item purchased by the typical household.

macroeconomics does not try to answer the question of

what is the rate of return on education

A policy that decreases the job separation rate _____ the natural rate of unemployment.

will decrease

Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate

will fall and its net exports will rise

Assume that some large foreign countries begin to subsidize investment by instituting an investment tax credit. Then, if world saving does not depend on the interest rate, world investment

will remain unchanged and small country investment will fall

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly

workers will experience high rates of real wage growth

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

world interest rate.

On two occasions in the 1970s:

world oil prices rose rapidly, inflation was high, and the unemployment rate was high.

If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the

yen will appreciate by 3 percent against the dollar

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:

zero

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount ∆G and the planned expenditure schedule by an equal amount, then equilibrium income rises by

∆G divided by the quantity one minus the marginal propensity to consume.

(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______.

C; B

(Exhibit: Short Run to Long Run) 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

The economic statistic used to measure the level of prices is:

CPI.

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 increase in the price of oil:

Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.

a passive policy rule

Conducting monetary policy so that the FF rate = 0.05, where the FF rate is the nominal federal funds interest rate, is an example of

a passive policy rule.

Conducting monetary policy so that the FF rate = 0.05, where the FF rate is the nominal federal funds interest rate, is an example of :

Which of the following statements most closely describes the variation in unemployment rates across countries in Europe?

Countries with higher rates of unionization tend to have higher unemployment rates, but this is partially mitigated if wage negotiations are coordinated among employers.

The money supply consists of

Currency plus demand deposits

(Exhibit: IS*-LM*) A small open economy with a floating exchange rate is initially at equilibrium A with IS1, LM1 equilibrium exchange rate e2, and equilibrium output Y1. If there is a monetary expansion to LM*2 the new equilibrium will be at ____, holding everything else constant.

decrease; decrease; increase

During the 2008-2009 period, the conventional monetary policy response was to _____ the target federal funds rate, while the conventional fiscal policy response was to _____ taxes and to _____ government spending

decrease; decrease; increase

(Exhibit: Supply Shock) In this graph, assume that the economy starts at point A and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium and point ______ represents long-run equilibrium.

E; A

strongly; not

Economic research finds that greater central-bank independence is ______ correlated with lower and more stable inflation as well as ______ correlated with the average growth and variability of real GDP.

fact that there is no simple and compelling case for any particular view of macroeconomic policy.

Economic science has provided convincing evidence in favor of the:

monetary and fiscal policies should not be used to "fine-tune" the economy

Economists who view the economy as naturally stable often argue that

monetary and fiscal policies should not be used to "fine-tune" the economy.

Economists who view the economy as naturally stable often argue that:

LM shocks

Endogenous changes in the demand for money

The central bank in the United States is the

Federal Reserve

The quantity of money in the United States is essentially controlled by the

Federal Reserve

Open market operations are

Federal Reserve purchases and sales of government bonds

markets; intermediaries

Funds flow directly between savers and investors in financial _____ and flow indirectly between savers and investors through financial _____.

In the Keynesian-cross model, actual expenditures equal:

GDP

The statistic used by economists to measure the value of economic output is:

GDP

A country's exports may be written as equal to

GDP minus consumption of domestic goods and services minus investment of domestic goods and services minus government purchases of domestic goods and services.

save; spend

Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would ______ the extra take-home pay, while those facing binding borrowing constraints would ______ the extra-take home pay

save; spend

sum of past budget deficits and surpluses

Government debt equals the

sum of past budget deficits and surpluses.

Government debt equals the:

incentives to work and invest

Government tax policy can affect aggregate supply as well as aggregate demand, because changes in taxes change the

incentives to work and invest.

Government tax policy can affect aggregate supply as well as aggregate demand, because changes in taxes change the:

prosecuting fraud and malfeasance

Governments can reduce the problem of moral hazard by

prosecuting fraud and malfeasance.

Governments can reduce the problem of moral hazard by:

decreases in tax revenues

Holding other factors constant, the ratio of government debt to GDP can decrease as a result of any of the following changes except:

decreases in tax revenues.

Holding other factors constant, the ratio of government debt to GDP can decrease as a result of any of the following changes except:

Suppose that GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.5(Y - T). Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. Government spending (G) is 1,000 and taxes (T) is also 1,000. When a technological innovation changes the investment function to I = 3,000 - 100r:

I is unchanged and r rises by 10 percentage points

An increase in consumer saving for any given level of income will shift the:

IS curve downward and to the left.

In the IS-LM model, starting with no expected inflation, if expected inflation becomes negative, then the:

IS curve shifts leftward.

Changes in fiscal policy shift the:

IS curve.

Planned expenditure increase

IS curves to the right, raises income

Decrease in investment

IS shifts left, reducing income and employment

If the short-run aggregate supply curve is assumed to be horizontal and there are no international capital flows, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

IS-LM model

Taxes-decrease

IS-curve shifts to right, increases planned expenditures. Raises both income and interest rate. higher interest rate depresses investment.

Government purchases-increase

IS-curve shifts to right, increasing income and interest rate. Planned expenditures rise, stimulate production. Interest rate cause firms to cut back from investment plans.

(Exhibit: Shifting IS* and LM*) A small open economy with a floating exchange rate is initially in equilibrium at A with Holding all else constant, if the government imposes a tariff on imports in order to protect domestic jobs, then the _____ curve will shift to _____.

IS; IS*2

Exhibit: Shifting IS* and LM*

IS; IS*3

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 ______.

IS; left

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

IS; right

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

IS; shifts to the right

If investment does not depend on the interest rate, then the ______ curve is ______.

IS; vertical

prevent bank failures from multiplying

Ideally, the purpose of providing funds to insolvent banks beyond required insurance payouts is to

prevent bank failures from multiplying.

Ideally, the purpose of providing funds to insolvent banks beyond required insurance payouts is to:

Y = 1,600 - 3T - 100r + 4G

If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is:

the government's budget must be balanced

If government debt is not changing, then

the government's budget must be balanced.

If government debt is not changing, then:

policy by discretion

If policymakers are free to analyze events as they occur and choose whatever policy seems appropriate at the time, then this is:

policy by discretion.

If policymakers are free to analyze events as they occur and choose whatever policy seems appropriate at the time, then this is:

both the LM and the IS curves.

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:

$35,000

If the debt of the U.S. federal government in 2008 was divided equally among the people in the United States, then the debt per person would equal approximately

$35,000.

If the debt of the U.S. federal government in 2008 was divided equally among the people in the United States, then the debt per person would equal approximately:

0.005

If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is:

there will be no change in overall consumption

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly, and both generations follow the life-cycle consumption pattern and are altruistically linked

there will be no change in overall consumption.

If the government levies a one-time temporary tax on the young and gives the proceeds to the elderly, and both generations follow the life-cycle consumption pattern and are altruistically linked:

Which of the following statements correctly describes European labor markets?

In recent years, the average unemployment rate in Europe has been higher than the unemployment rate in the United States.

falls; rises

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

falls, falls

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ____

falls; falls

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.

IS curve shifts left

In the IS-LM model, starting with no expected inflation, if expected inflation becomes negative, then the:

the inflation rate rises but the unemployment rate falls

In the case of demand-pull inflation, other things being equal:

the inflation rate rises but the unemployment rate falls.

In the case of demand-pull inflation, other things being equal:

be horizontal

In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will

be horizontal.

In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will:

aggregate demand and short-run aggregate supply curves

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the

aggregate demand and short-run aggregate supply curves.

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the:

eliminating inflation

Inflation-indexed government bonds have all of the following benefits except

eliminating inflation.

Inflation-indexed government bonds have all of the following benefits except:

Equity financing is obtaining funds for a business by:

Issuing ownership shares

Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.

Keynesian; the short run, whereas the classical assumptions are most appropriate in the long run.

Increase in demand for money

LM curve shifts upward, which tends to raise interest rate and depress income

Changes in monetary policy shift the:

LM curve.

Exhibit: Risk Premium

LM*2; IS*3

A small open economy with a floating exchange rate is initially in equilibrium at A with IS*1, LM*1, If the establishment of a new government in the country decreases the risk premium, then LM*1 will shift to _____ and IS*1 will shift to

LM*3; IS*2

Exhibit: IS*-LM* and AD

LM: LM*2

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

LM: shifts to the right

Exhibit: IS*-LM* and AD

LM; LM*3

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

LM; does not shift

If money demand does not depend on income, then the ______ curve is ______.

LM; horizontal

If money demand is extremely sensitive to the interest rate, then the ______ curve is ______.

LM; horizontal

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.

LM; right

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

LM; right

Percent change in P is approximately equal to the percent change in

M minus percentage change in Y plus percent change in velocity

Money market mutual fund shares are included in

M2 only

failure of the Office of Management and Budget to disclose figures on capital expenditures and credit programs

Measuring the size of government debt is complicated by all of the following factors except

failure of the Office of Management and Budget to disclose figures on capital expenditures and credit programs.

Measuring the size of government debt is complicated by all of the following factors except:

unemployment rate.

Monetary policy rules that target nominal variables would target any of the following except the

unemployment rate.

Monetary policy rules that target nominal variables would target any of the following except the:

If the short-run aggregate supply curve is assumed to be horizontal, international capital flows are infinitely elastic, and the nominal exchange rate is fixed, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

Mundell-Fleming model with fixed exchange rate

If the short-run aggregate supply curve is assumed to be horizontal and international capital flows are infinitely elastic, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

Mundell-Fleming model with floating exchange rate

The statistical relationship between changes in real GDP and changes in the unemployment rate is called:

Okun's law.

Treasury bills

One item that is considered part of the federal debt is

Treasury bills.

One item that is considered part of the federal debt is:

stocks

Ownership claims by shareholders in a firm are called

stocks

Ownership claims by shareholders in a firm are called:

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, which is the correct ordering of the price levels and money supplies?

P1 >P2 andM1 <M2

(Exhibit: Saving, Investment, and the Interest Rate 1) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if the government cuts taxes, holding other factors constant?

Point A

(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a tax law change that makes investment projects less profitable and decreases the demand for investment goods (but does not change the amount of taxes collected in the economy)?

Point A

Point B

(Exhibit: Saving, Investment, and the Interest Rate 2) The economy begins in equilibrium at Point E, representing the real interest rate, r1, at which saving, S1, equals desired investment, I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?

Point B

make the financial system more stable; lead to higher costs

Proponents of restricting the size of financial institutions believe this policy will _____, while opponents believe this policy will _____

make the financial system more stable; lead to higher costs

Proponents of restricting the size of financial institutions believe this policy will _____, while opponents believe this policy will _____.

creditors; partial owners

Purchasers of bonds issued by companies are _____ of the company, while purchasers of shares of stock issued by a company are _____ of the company

An economy must sacrifice 12 percent of GDP to reduce inflation. Which of the following plans represents the "cold turkey" solution to inflation?

Reduce output by 12 percent for 1 year.

whether by debt or taxes

Ricardian equivalence refers to the same impact of financing government

whether by debt or taxes.

Ricardian equivalence refers to the same impact of financing government:

systematic; idiosyncratic

Risk that affects many businesses at the same time is called _____ risk, while risk associated with individual businesses is called _____ risk

by governments

Sovereign debt refers to debt issued

by governments

Sovereign debt refers to debt issued:

output will decrease, but the price level will increase

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

with risky credit profiles

Subprime borrowers are borrowers:

with risky credit profiles.

Subprime borrowers are borrowers:

According to the quantity theory of money, ultimate control over the rate of inflation in the United States is exercised by:

The Fed

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.

doubt that the correct policy will be implemented at the correct time

The concerns of economists who favor passive over active policy are most closely associated with their

doubt that the correct policy will be implemented at the correct time.

The concerns of economists who favor passive over active policy are most closely associated with their:

either active or passive macroeconomic policy.

The differing interpretations of the historical record of the Great Depression provide support for using:

public believes that policymakers are committed to reducing inflation

The government can lower inflation with a low sacrifice ratio if the

public believes that policymakers are committed to reducing inflation.

The government can lower inflation with a low sacrifice ratio if the:

a capital injection

The government purchasing ownership stakes in a faltering financial institution in order to prop up the financial system is an example of

a capital injection.

The government purchasing ownership stakes in a faltering financial institution in order to prop up the financial system is an example of:

investment

The monetary transmission mechanism works through the effects of changes in the money supply on:

major investment banks. government-sponsored enterprises involved in the mortgage market. a large insurance company (AIG)

The mortgage defaults during the 2008-2009 financial crisis severely reduced the capital positions of:

major investment banks. government-sponsored enterprises involved in the mortgage market. a large insurance company (AIG all of the above

The mortgage defaults during the 2008-2009 financial crisis severely reduced the capital positions of:

demand-pull deflation.

The most prominent feature of the U.S. economy in the 1980s was:

between a policy action and its influence on the economy

The outside lag is the time

between a policy action and its influence on the economy.

The outside lag is the time:

sacrifice ratio

The percentage of a year's real GDP that must be foregone to reduce inflation by 1 percentage point is called the

sacrifice ratio.

The percentage of a year's real GDP that must be foregone to reduce inflation by 1 percentage point is called the:

take over and close shadow banks that could create systemic risk for the economy

The resolution authority over shadow banks given to the FDIC as part of the Dodd-Frank Act, gives the FDIC authority to

take over and close shadow banks that could create systemic risk for the economy.

The resolution authority over shadow banks given to the FDIC as part of the Dodd-Frank Act, gives the FDIC authority to:

expected price level

The short-run aggregate supply curve is drawn for a given

expected price level.

The short-run aggregate supply curve is drawn for a given:

Which of the following is an example of adverse selection?

The sickest people buy health insurance

leftward shift in the IS curve.

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

use the threat of disinheritance to control their children's behavior

The strategic bequest motive hypothesizes that parents

use the threat of disinheritance to control their children's behavior.

The strategic bequest motive hypothesizes that parents:

outside lag of fiscal policy

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

outside lag of fiscal policy.

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

policymaker has and is known to have an extremely strong preference for very low inflation

The time-inconsistency problem in discretionary policymaking about unemployment and inflation can be effectively avoided when the

policymaker has and is known to have an extremely strong preference for very low inflation.

The time-inconsistency problem in discretionary policymaking about unemployment and inflation can be effectively avoided when the:

equals the inflation rate

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation

equals the inflation rate.

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:

macroeconomics cannot conduct controlled experiments such as testing various tax and expenditure policies, because

They must make use of the data history gives them

a balanced-budget rule for fiscal policy

To force politicians to judge whether government spending is worth the costs, some economists have argued for

a balanced-budget rule for fiscal policy.

To force politicians to judge whether government spending is worth the costs, some economists have argued for:

investment banks

To the extent that risky mortgage-backed securities that were sold to buyers who were not fully aware of the risks contributed to the financial crisis of 2008-2009, blame for this action lies with:

investment banks.

To the extent that risky mortgage-backed securities that were sold to buyers who were not fully aware of the risks contributed to the financial crisis of 2008-2009, blame for this action lies with:

smaller than the multiplier

Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.

leading indicators and computer models

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

leading indicators and computer models

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

buy; LM

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

smaller the sensitivity of investment spending to the interest rate.

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

increases; does not change

When the federal government incurs additional debt to acquire an asset, under current budgeting procedures the deficit ______, while under capital budgeting procedures the deficit ______.

an ongoing unemployment insurance program

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

The person with health insurance rides a motorcycle without wearing a helmet

Which of the following is an example of moral hazard

The person with health insurance rides a motorcycle without wearing a helmet.

Which of the following is an example of moral hazard?

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

Y = 1,100, r = 6 percent.

If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is:

Y = 1,600 - 3T - 100r + 4G.

In a closed economy, private saving equals

Y-T-C

(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are:

Y2 and PE2.

When banks borrow through the Team Auction Facility, the price of borrowing is determined by

a competitive bidding process

Other things equal, an increase in the interest rate leads to

a decrease in quantity of investment goods demanded

An important factor in the evolution of commodity money to fiat money is

a desire to reduce transaction costs

To make a trade in a barter economy requires

a double coincidence of wants

the property of diminishing marginal product means that, after a point, when additional quantities of

a factor are added when another factor remains fixed, the marginal product of the first factor is fixed

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 fixed exchange rates, lead to:

a fall in consumption and income.

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.

The short-run aggregate supply curve is horizontal at:

a fixed price level.

Banks create money in

a fractional-reserve banking system but not in a 100-percent-reserve banking system

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:

a higher interest rate.

Assume that an economy has the usual type of Phillips curve except that the natural rate of unemployment in an economy is given by an average of the unemployment rates in the last two years. Then, there is:

a long-run tradeoff between inflation and unemployment.

Short-run Phillips Curve

a lower rate of inflation for any level of unemployment.

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the labor market were always in equilibrium, this would lead to:

a lower real wage and no change in unemployment.

inflation targeting

a monetary policy under which the central bank announces a specific target, or target range, for inflation rate

philips curve

a negative relationship between inflation and unemployment; in its modern form, a relationship among inflation, cyclical unemployment, expected inflation, and supply shocks, derived from short-run aggregate supply curve

automatic stabilizers

a policy that reduces the amplitude of economic fluctuations without regular and deliberate changes in economic policy . ex an income tax system that automatically reduces taxes when income falls

Which of the following would decrease the real exchange rate in a small open economy in the long run?

a reduction in government spending

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

a rise in both income and net exports.

If consumption depends positively on the level of real balances, and real balances depend negatively on the nominal interest rate in a neoclassical model, then:

a rise in money growth leads to a fall in consumption and a rise in investment

The quantitative easing policy conducted by the Federal Reserve between 2007 and 2011 resulted in a large increase in the monetary base that was partially offset by

a significant increase in the reserve-deposit ratio

liquidity trap

a situation in which the nominal interest rate has fallen to its lower bound of zero, calling into question the efficacy of monetary policy to further stimulate the economy

A change in investors' perceptions that make a fixed exchange rate untenable is known as:

a speculative attack.

According to Golden and Katz, the increasing income equality of recent decades is a result of

a steady pace of technological advance and a slowdown of educational advance

debt-inflation theory

a theory according to an unexpected fall in the price level redistributes real wealth from debtors to creditors and, therefore, reduces total spending in the economy

(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r3, then the economy has

a trade deficit

In an open economy:

a trade deficit may be good or bad

(Exhibit: Saving and Investment in a Small Open Economy) In a small open economy, if the world interest rate is r1, then the economy has:

a trade surplus

If the equation for a country's Phillips curve is π = 0.02 - 0.8(u - 0.05), where π is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (0.04)?

above 2 percent (0.02)

Excess reserves are reserves that the bank keep

above the legally required amount

If the price level depends on both the current money supply and future expected money supplies, in order to stop a hyperinflation, a central bank may try to establish credibility by

achieving increased political independence from the government

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

actual expenditure equals planned expenditure.

The ex post real interest rate will be greater than the ex ante real interest rate when the:

actual rate of inflation is less than expected rate of inflation

the marginal product of capitol is

additional output produced when one additional unit of capital is added

the marginal product of labor is

additional output produced when one additional unit of labor is added

If the government wants to raise investment but keep output constant, it should:

adopt a loose monetary policy and a tight fiscal policy.

Cost-push inflation is the result of:

adverse supply shocks.

If the short-run aggregate supply curve is assumed to be horizontal and money demand is proportional to income, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

aggregate demand and aggregate supply

Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the:

aggregate demand and short-run aggregate supply curves.

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run aggregate supply.

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run and long-run aggregate supply.

According to the natural-rate hypothesis, the levels of output and unemployment depend on:

aggregate demand in the short run, but not in the long run.

The relationship between the quantity of output demanded and the aggregate price level is called:

aggregate demand.

The relationship between the quantity of goods and services supplied and the price level is called:

aggregate supply.

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.

aggregate supply; aggregate demand

Tax cuts stimulate ______ by improving workers' incentive and expand ______ by raising households' disposable income.

aggregate supply; aggregate demand

in a system with fractional reserve banking

all banks must hold reserves equal to a fraction of their deposits

If the purchasing-power parity theory is true, then:

all changes in nominal exchange rate result from changes in the price level

economic profit is zero if

all factors are paid their marginal products and there are constant returns to scale

Unlike the real world, the classical model with fixed output assumes that

all factors of production are fully utilized

Net exports equal GDP minus domestic spending on

all goods and services

To the extent that mortgage defaults contributed to the financial crisis of 2008-2009, blame for these actions lies with:

all of the above

Which of the following policies are intended to reduce the likelihood of future financial crises?

all of the above

Under a fixed-exchange-rate system, the central bank of a small open economy must:

allow the money supply to adjust to whatever level will ensure that the equilibrium exchange rate equals the announced exchange rate.

One argument favoring a floating-exchange-rate system is that it:

allows monetary policy to be used for other purposes.

If bread is produced by using constant returns to scale production function, then if the

amount of equipment and workers are doubled, twice as much bread will be produced

In a country of gold standard, the quantity of money is determined by the

amount of gold

Real money balances equal the

amount of money expressed in terms of the quantity of goods and services it can purchase.

In the long run, the level of output is determined by the:

amounts of capital and labor and the available technology.

adaptive exceptions

an approach that assumes that people form their expectation of a variable based on recently observed values of the variable

rational expectations

an approach that assumes that people optimally use all available information including information about current and prospective policies to forecast future

An appreciation of the real exchange rate in a small open economy could be the result of:

an increase in government spending

An increase in the trade deficit of a small open economy could be the result of:

an increase in government spending

Which of the following will shift the aggregate supply curve up to the left?

an increase in the expected price level

An increase in the trade surplus of a small open economy could be the result of:

an increase in the world interest rate

A favorable supply shock occurs when:

an oil cartel breaks up and oil prices fall.

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:

and net exports both to rise.

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate

and net exports will both fall

After examining international data, the economist Robert Lucas found that aggregate demand has the biggest effect on output in countries where aggregate demand:

and prices are most stable.

In the United Kingdom between 1730 and 1920, during wartime, government spending tended to increase

and the interest rate also increased

In a small open economy, if the introduction of automatic-teller machines reduces the demand for money, then net exports

and the real exchange rate remain unchanged

The U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with high inflation rates relative to the United States has tended to ______, and the U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with low inflation rates relative to the United States has tended to ______

appreciate ; depreciate

If the number of dollars per yen rises, this is called a(n):

appreciation of the yen

The law of one price is enforced by:

arbitrageurs

If the real exchange rate is high, foreign goods:

are relatively cheap and domestic goods relatively expensive

The Mundell-Fleming model assumes that:

as in the IS-LM model, prices are fixed.

The theory of liquidity preference implies that:

as the interest rate rises, the demand for real balances will fall.

"inflation tax" means that

as the price level rises, the real value of money held by the public decreases

Economists use the term money to refer to

assets used for transactions

the assumption of continuous market clearing means that

at any given instant, buyers can buy all that they want and sellers can sell all that they want at the going price

The long-run aggregate supply curve is vertical at the level of output:

at which unemployment is at its natural rate.

In a small open economy with a floating exchange rate, a rise in government spending in the new short-run equilibrium:

attracts foreign capital, thus raising the exchange rate and reducing net exports by an amount just equal to the new government spending

Adverse selection concerns hidden knowledge about__, while moral hazard concerns hidden knowledge about__.

attributes; actions

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when:

average labor productivity is growing rapidly

If a neutral technological advance improves the production function, the neoclassical theory of distribution predicts:

both real wage and real rental price of capital will rise

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.

If the demand for money depends on the nominal interest rate, then via the quantity theory and the Fisher equation, the price level depends on

both the current and expected future money supply

In the case of cost-push inflation, other things being equal:

both the inflation rate and the unemployment rate rise at the same time.

If there is a fixed-exchange-rate system, then in the short run described by the Mundell-Fleming model:

both the nominal and real exchange rates are fixed.

If the Fed announces that it will raise the money supply in the future but does not change the money supply today,

both the nominal interest rate and the current price level will increase

Short-run fluctuations in output and employment are called:

business cycles.

investment goods as measured in GDP are purchased by

business firms and households

The reserve-deposit ratio is determined by

business policies of banks and the laws regulating banks

Both Keynesians and supply-siders believe a tax cut will lead to growth:

but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.

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.

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

buy; LM

(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______.

buy; fall

To increase the money supply, the federal reserve

buys government bonds

The inflation tax is paid

by all holders of money

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:

by lowering the interest rate so that investment spending increases.

government transfer payments

can be viewed as negative tax payments

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

In a 100-percent reserve banking system, banks

cannot affect the money supply

In a small open economy with a floating exchange rate, the supply of real money balances is fixed and a rise in government spending:

cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market.

the minimum value of of owners' equity in a bank mandated by regulators is called a _________ requirement

capital

the value of banks' owners' equity is called bank

capital

The two most important factors of production are

capital and labor

In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate.

capital inflow

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies in which:

capital is relatively scarce

if many banks fail, this is likely to

cause surviving banks to raise their ratios of reserves to deposits

All of the following are costs of fully expected inflation except that expected inflation:

causes lower real wages

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

changes income, which changes consumption, which further changes income.

Demand deposits are funds held in

checking accounts

In prisoner of war camps during WWII, the "currency" used was

cigarettes

If price expectations are assumed to be correct, money demand is proportional to income, and there are no international capital flows, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

classical closed economy

If price expectations are assumed to be correct, money demand is proportional to income, and net capital flow is infinitely elastic, then the mother of all models in the Appendix to Chapter 14 corresponds to which of the following special cases?

classical open economy

macroeconomists are like scientists because they both

collect data, develop hypotheses, and analyze the results

The aggregate demand curve tells us possible:

combinations of P and Y for a given value of M.

A country that is on a gold standard primarily uses

commodity money

Between 1995 and 2005, China chose to:

conduct an independent monetary policy, restrict international-capital flows, and maintain a fixed exchange rate.

To increase the monetary base, the Fed can

conduct open-market purchases

The economic response to the overnight reduction in the French money supply by 20 percent in 1724,

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

If an increase of equal percentage in all factors of production results in an increase in output of the same percentage, than a production function has the property

constant returns to scale

If output is described by the production function Y = AK^0.2L^0.8 then the production function has

constant returns to scale

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

consumer spending; IS

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

consumption

According to the model developed in Chapter 3, when government spending increases and taxes increase by an equal amount

consumption and investment both decrease

According to the model developed in Chapter 3, when taxes decrease without a change in government spending

consumption increases and investment decreases

In a closed economy, the components of GDP are

consumption, investment, and government purchases

the demand for output in a closed economy is the sum of

consumption, investment, and government spending

in examining the impact of fiscal policy, it is assumed that

consumption, investment, and the interest rate are endogenous variables

The circular flow model shows that households use income for

consumption, taxes, and savings

A shrinking U.S. budget deficit in the 1990s coincided with a ______ U.S. trade deficit.

continuing

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

If 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.

Alan Blinder's survey of firms found that the theory of price stickiness accepted by the most firms was:

coordination failure.

The most prominent feature of the U.S. economy in the 1970s was:

cost-push inflation.

During the era of the gold standard, the price of gold in England:

could be higher or lower than the price of gold in the United States, but not by more than the cost of transporting gold between the two countries.

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

country risk and expectations of future exchange-rate changes.

the difference between banks and other financial intermediaries is that only banks have the authority to

create assets that are apart of the money supply

Payment is differed by using _________, but immediate access to funds occurs when using ___________.

credit cards ; debit cards

In the case of an unanticipated inflation:

creditors with an unindexed contract are hurt because they get less than expected in real terms

In a neoclassical economy, if consumption increases as the interest rate decreases, then a $10 billion rise in government spending would

crowd out between zero and $10 billion of investment

The reduction in investment brought about by the increase in the interest rate caused by increased government spending is called

crowding out

If banks fear failure and become more conservative in making loans, then the sharp decline in bank lending is called a credit:

crunch

An arrangement by which a central bank holds enough foreign currency to back each unit of the domestic currency is called a:

currency board.

The monetary base consists of

currency held by the public, plus reserves held by the banks

The preferences of households determine the

currency-deposit ratio

The money supply will decrease if the

currency-deposit ratio 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.

decrease; LM

(Exhibit: Policy Interaction) 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 output constant, the Federal Reserve should _____ the money supply shifting to _____.

decrease; LM3

Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to ______ in the short run; and in the long run the expected price level will ______, causing the level of output to return to the natural level.

decrease; decrease

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease; decrease; decrease; decrease

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes net exports to ______, and expansionary monetary policy causes net exports to ______.

decrease; increase

If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will ______ and output will ______.

decrease; increase

A devaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

decreased

If inflation is 6 percent and a worker receives a 4 percent wage increase, then the worker's real wage:

decreased by 2 percent

In instances of hyperinflation, the delays involved in collecting taxes often result in:

decreased real government tax revenue

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

decreases

If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______

decreases ; appreciates

In a large open economy, an investment tax credit raises the real interest rate, ______ the trade balance, and ______ net capital outflow.

decreases ; decreases

The income velocity of money increases and the money demand parameter k ______ when people want to hold ______ money

decreases ; less

If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then savings

decreases by .15 units

Assume that the consumption function is given by C = 150 + 0.85(Y - T) and the tax function is given by T = t0 + t1Y. If t0 increases by 1 unit, then consumption

decreases by .85 units

In a small open economy, if the government adopts a policy that lowers imports, then the quantity of exports:

decreases by exactly the same amount as the quantity of imports decreases

recessions are periods when real GDP

decreases mildly

According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer:

decreases production.

When the Fed makes an open-market sale, it

decreases the monetary base (B)

When the Fed decreases the interest rate paid on reserves, it

decreases the reserve-deposit ratio (rr)

In the neoclassical model with fixed income, if there is a decrease in taxes with no change in government spending, then public saving ______ and private saving ______

decreases, increases

When GDP growth declines, investment spending typically ______ and consumption spending typically ______.

decreases; decreases

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.

decreases; downward

In a small open economy with a fixed exchange rate, if the country devalues its currency, then in the new short-run equilibrium the exchange rate ______, and the LM* curve shifts to the ______.

decreases; right

In a short-run model of a large open economy with a floating exchange rate, net capital outflow ______ as the domestic interest rate increases and is just equal to ______.

decreases; the decrease in net exports.

The simple investment function shows that investment ______ as ______ increases.

decreases; the interest rate

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by:

decreasing the money supply.

In a small open economy, if exports equal $5 billion and imports equal $7 billion, then there is a trade ______ and ______ net capital outflow

deficit ; negative

In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade ______ and ______ net capital outflow

deficit ; negative

In a large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is crowded out; the expansion also causes a trade

deficit and a rise in the real exchange rate

a period of falling prices is called

deflation

During hyperinflation real tax revenue of the government often drops substantially because of the:

delay between when a tax is levied and when it is collected

The price received by each factor of production for its services is determined by

demand and supply factors

A difference between the economic long run and the short run is that:

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

Liabilities of banks include

demand deposits

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

demand for real balances per unit of output.

In the IS-LM model, which two variables are influenced by the interest rate?

demand for real money balances and investment spending

The most prominent feature of the U.S. economy in the 1980s was:

demand-pull deflation.

An increase in income raises money ______ and ______ the equilibrium interest rate.

demand; raises

Bank reserves equal

deposits that banks have received but have not lent out

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

The goods produced in U.S. industries may be made more competitive in world markets by:

depreciating the U.S. currency.

One consequence of high inflation is a(n):

depreciation nominal exchange rate

a severe recession is called a

depression

endogenous variables are

determined within the model

Banks help mitigate the problem of adverse selection in lending by:

developing expertise in evaluating the business prospects of loan applicants

Financial markets allow households to__provide resources for investment, while financial intermediaries allow households__provide resources for investment.

directly; indirectly

The interest rate charged on loans by the Federal Reserves to banks is called the

discount rate

A consumption function shows the relationship between consumption and

disposable income

private saving is

disposable income minus consumption

In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on _____ , the amount of investment spending depends on _____, and the amount of government spending is determined _____

disposable income, the interest rate, exogenously

Consumption depends positively on ______ and investment depends negatively on ______

disposable income, the real interest rate

If a U.S. corporation sells a product in Canada and uses the proceeds to purchase a product manufactured in Canada, then U.S. net exports ______ and net capital outflows ______

do not change ; do not change

Illiquid financial institutions:

do not have immediately available funds to make promised payments

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

does not change production.

The earned income tax credit:

does not raise labor costs

When a country abandons its national currency and adopts the currency of the United States, this is known as:

dollarization.

A "small" economy is one in which the

domestic interest rate equals the world interest rate

Assuming there is perfect capital mobility, compared to a large open economy, a small open economy is one in which the:

domestic interest rate equals the world interest rate.

When exports exceed imports, all of the following are true except:

domestic investment exceeds domestic saving

In a large open economy, the interest rate adjusts so that domestic saving equals:

domestic investment plus net capital outflow

Net capital outflow is equal to the amount that

domestic investors lend abroad minus the amount that foreign investors lend here

In a small, open economy, if net exports are negative then

domestic spending is greater than output

An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

downward and to the left.

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

downward and to the left.

A decrease in the price level, holding nominal money supply constant, will shift the LM curve:

downward and to the right.

The investment function slopes ______ because there are ______ investment projects that are profitable as the interest rate decreases

downward, more

If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line representing saving minus investment

downward-sloping ; vertical

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves farther to the right.

downward; flatter

A key obstacle facing regulators who want to prevent financial institutions from taking excessive risks is the difficulty in:

drawing the line between excessive and appropriate risk taking

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. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

drop by 2 percent.

The long run refers to a period:

during which prices are flexible.

The short run refers to a period:

during which prices are sticky and unemployment may occur.

In a fractional-reserve banking system, banks create money because

each dollar of reserves generate many dollars of demand deposits

Devoting resources to avoiding the costs of expected inflation leads to:

economic inefficiency

Accounting profit is

economic profit plus return to capital

which of the following statements about economic models is true

economists use different models to address different economic phenomenon

macroeconomics is the study of the

economy as a whole

The public policy implication of Goldin and Katz's analysis of growing income inequality is that reversing this trend will require that more of society's resources be put into

education

in the us economy today, real GDP per person compared with its level in 1900 is about

eight times as high

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 result in higher income and:

either higher, lower, or unchanging interest rates.

Paying efficiency wages helps firms reduce the problem of moral hazard by:

encouraging unsupervised workers to maintain a high level of productivity

variables that a model tries to explain are called

endogenous

In a small open economy with perfect capital mobility, the real interest rate will always be:

equal the world interest rate

The Keynesian cross shows:

equality of planned expenditure and income in the short run.

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:

equals the inflation rate.

Obtaining funds for a business by issuing ownership shares, such as through the stock market is called___finance.

equity

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then:

every point on the aggregate demand curve moves 5 percent to the left.

Equilibrium in the market for goods and services determines the ______ interest rate and the expected rate of inflation determines the ______ interest rate

ex ante real ; ex ante nominal

When a person purchases a 90-day Treasury bill, he or she cannot know the:

ex post real interest rate

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is higher than expected, then output ______ natural rate of output.

exceeds the

Protectionist policies in a small open economy do not alter the trade balance because the:

exchange rate appreciates to offset the increase in net exports

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.

According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:

exchange rate.

One justification for greater regulation of traditional commercial banks than of shadow banks is the:

existence of government insurance of bank deposits

variables that a model takes as given are

exogenous

IS shocks

exogenous changes in demand for goods and services

in an economic model

exogenous variables affect endogenous ones

macroeconomic models are used to explain how - variables influence - variables

exogenous, endogenous

Economist Robert Barro attributes the increase in the duration of unemployment to ______, while economist Paul Krugman attributes the increased duration to _____.

expanded unemployment-insurance coverage; insufficient consumer demand

Conventional monetary and fiscal policies during a financial crisis are aimed at__, while acting as a leader of last resort or injecting government funds into the financial system during a financial crisis is aimed at__.

expanding aggregate demand; fixing the financial system

The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____ inflation

expected ; actual

According to the Fisher effect, the nominal interest rate moves one-for-one with changes in the:

expected inflation rate

According to the Phillips curve, other things being equal, inflation depends positively on:

expected inflation.

Along any aggregate supply curve, there is only one:

expected price level.

The short-run aggregate supply curve is drawn for a given:

expected price level.

GDP is all of the following except the total:

expenditure of everyone in the economy.

The total income of everyone in the economy is exactly equal to the total:

expenditure on the economy's output of goods and services.

All of the following are measures of GDP except the total:

expenditures of all businesses in the economy.

Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase

exports by the small open economy

When the real exchange rate rises:

exports will decrease and imports will increase

In the circular flow model, households receive income from the ________ market and save through the _________ market

factor, financial

In the long run, the level of national income in an economy is determined by it's

factors of production and production function

A production function is a technological relationship between

factors of production and the quality of output produced

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will:

fall and in the long run prices will fall.

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______, inducing firms to ______ production.

fall; increase

In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate

falls and net exports rise

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate

falls and net exports rises

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is lower than expected, then output ______ natural rate of output.

falls below the

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:

falls by $40 billion

In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:

falls, while the real exchange rate rises and net exports rise

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.

falls; falls

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

falls; rises

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

falls; rises

All of the following actions increase government purchases of goods and services except the

federal governments sending a Social Security check to Betty Jones

The government spending component of GDP includes all of the following except

federal spending on transfer payments

In the mid-1980s, oil prices ______, inflation was ______, and the unemployment rate ______.

fell; low; declined

Money that has no value other than as money is called ________ money

fiat

A major disruption in the financial system that impedes the economy's ability to intermediate between those who want to save and those who want to borrow and invest is called a:

financial crisis

The set of institutions in the economy that facilitates the flow of funds between savers and investors is called the:

financial system

The precipitous fall in the price of assets that takes place hen financial institutions must sell their assets quickly in the midst of a crisis is called a(n):

fire sale

Each of the two models of short-run aggregate supply is based on some market imperfection. In the imperfect- information model, the imperfection is that:

firms confuse changes in the overall level of prices with changes in relative prices.

Most hyperinflations end with _____ reforms that eliminate the need for _____.

fiscal ; seigniorage

A monetary union with a common currency is an example of a:

fixed-exchange-rate system.

exogenous variables are

fixes at the moment they enter the model

Other things equal, a given change in money supply has a larger effect on demand the:

flatter the IS curve.

Other things equal, a given change in government spending has a larger effect on demand the:

flatter the LM curve.

If investors in a large open economy become more willing to substitute foreign and domestic assets, then this will make the net capital outflow function:

flatter, and the slope of the IS curve flatter.

Most economists believe that prices are:

flexible in the long run but many are sticky in the short run.

how does the distinction between flexible and sticky prices impact eh stay of macro

flexible prices are typically assumed in the study of the long run, while sticky prices are assumed for the short run

According to the Mundell-Fleming model, under:

floating exchange rates, a monetary expansion raises income whereas a fiscal expansion does not, but under fixed exchange rates, a fiscal expansion raises income whereas a monetary expansion does not.

Under a floating system, the exchange rate:

fluctuates in response to changing economic conditions.

When the French money supply was reduced by 45 percent over a period of seven months in 1724, the only values in the economy that adjusted fully and instantaneously were:

foreign exchange rates.

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the

foreign inflation rate minus the domestic inflation rate

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 ______ propensity to consume than debtors.

from debtors to creditors; a smaller

important characteristics of macroeconomic models include all of the following except

functional relationships based on controlled experiments

If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must:

give up the use of monetary policy for purposes of domestic stabilization.

Between 1880 and 1896, the price level in the United States fell 23 percent. This movement was ______ for bankers of the Northeast and ______ for farmers of the South and West

good ; bad

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.

goods and services; real money balances

In the circular flow diagram, firms receive revenue from the___________ market, which is used to purchase inputs in the ________ market

goods, factor

Exogenous variables

gov purchases, taxes, money supply

public saving is

government revenue minus government spending

The more funds that the Federal Reserve makes available for banks to borrow through the Term Auction Facility, the _____ the monetary base and the _____ the money supply

greater ; greater

The basic aggregate supply equation implies that output exceeds natural output when the price level is:

greater than the expected price level.

According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase.

greater; increase

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

greater; outward

real GDP - over time and the growth rate of real GDP -

grows; fluctuates

the unemployment rate

has never been 0 in the united states

Two reasons why capital may not flow to poor countries are that the poorer countries may:

have inferior production capabilities and not enforce property rights

Using decade-long data across countries from 2000-2010, countries with high money growth tend to have _____ inflation

high

Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have ______ rates of inflation and decades of low money growth tended to have ______ rates of inflation

high ; low

Demand-pull inflation is the result of:

high aggregate demand.

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except:

high inflation.

In the classical model with fixed income, if the interest rate is too low, then investment is too ______ and the demand for output ______ the supply

high, exceeds

When there is a fixed supply of loanable funds, an increase in investment demand results in a(n)

higher interest rate

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the short-run effects will be

higher output and lower unemployment.

Which of the following hypotheses is consistent with fewer hours worked per year in Europe than in the United States?

higher tax rates in Europe than in the United States

In order to compensate for an expected future decline in the Japanese yen relative to the U.S. dollar, the interest rate in Japan must be ______ the interest rate in the United States.

higher than

When saving (the supply of loanable funds) increases as the interest rate increases, an increase in investment demand results in a ______ interest rate and ______ in the quantity of investment

higher, an increase

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

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

higher; lower

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

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.

higher; lower

One argument in favor of tax cuts over spending-based fiscal stimulus is that:

historically tax cuts have been more successful than spending-based fiscal stimulus.

People use money as a store of value when they:

hold money to transfer purchasing power into the future

Most economists believe that the classical dichotomy:

holds approximately in the long run but not at all in the short run

For an open economy with perfect capital mobility, when net capital outflow is measured along the horizontal axis and the real interest rate is measured along the vertical axis, net capital outflow is drawn as a

horizontal line at the world interest rate

If investment demand is infinite below some certain r (e.g., r**) and zero above r**, then the IS curve is ______ and ______ policy has no effect on output.

horizontal; fiscal

If money demand is infinite below some certain r (e.g., r*) and zero above r*, then the LM curve is ______ and ______ policy has no effect on output.

horizontal; monetary

A rate of inflation that exceeds 50 percent per month is typically referred to as a(n):

hyperinflation

The idea that the natural rate of unemployment is increased following extended periods of unemployment is called:

hysteresis

If domestic spending exceeds output, we ______ the difference—net exports are ______.

import ; negative

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.

Economists are able to estimate the natural rate of unemployment in the United States:

in a 95 percent confidence interval of 2 to 3 percentage points.

If government purchases exceed taxes minus transfer payments, then the government budget is

in deficit

According to the classical theory of money, inflation does not make workers poorer because wages increase:

in proportion to the increase in overall price

falls, rises

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

the assumption of flexible prices is a more plausible assumption when applied to price changes that occur

in the long run

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

in the long run, but not in the short run.

According to the natural-rate hypothesis, output will be at the natural rate:

in the long run.

The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in:

in the short run only.

An increase in taxes lowers income:

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

An increase in government spending raises income:

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

Most economists believe:

in view of what economists now know about monetary and fiscal policy, and in view of institutional changes, a repeat of the Great Depression is unlikely.

The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases.

income

The tax multiplier indicates how much ______ change(s) in response to a $1 change in taxes.

income

the neoclassical theory of distribution explains the allocation of

income among factors of production

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 floating exchange rate, if the government decreases the money supply, then in the new short-run equilibrium:

income falls and the exchange rate rises.

national savings refers to

income minus consumption minus government spending

In a small open economy with a fixed exchange rate, if the central bank tries to increase the money supply, then in the new short-run equilibrium:

income remains constant.

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.

An explanation for the slope of the LM curve is that as:

income rises, money demand rises, and a higher interest rate is required.

In a short-run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in:

income, the interest rate, and the exchange rate, but a decrease in investment and net exports.

An economy's ______ equals its ______.

income; expenditure on goods and services

a typical trend during a recession is that

incomes fall

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must______ the money supply.

increase

According to the model developed in Chapter 3, when government spending increases but taxes are not raised, interest rates

increase

If the hypothesis of hysteresis is correct and output is lost even after a period of disinflation, the sacrifice ratio for an economy will:

increase

If the real exchange rate decreases, then net exports will _____.

increase

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will

increase

When government spending increases and taxes are increased by an equal amount, interest rates

increase

If the real exchange rate depreciates from 1 Japanese good per U.S. good to 0.5 Japanese good per U.S. good, then U.S. exports ______ and U.S. imports ______

increase ; decrease

In 1932, the U.S. government imposed a two-cent tax on checks written on deposits in bank accounts. This action would be expected to ______ the currency-deposit ratio and ______ the money supply

increase ; decrease

In a small open economy, if the world interest rate increases, then the supply of domestic currency on the foreign exchange market will _____ and the real exchange rate will _____, holding all else constant

increase ; decrease

Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____ and net exports will _____

increase ; decrease

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______

increase ; depreciates

If a U.S. corporation sells a product in Europe and uses the proceeds to purchase shares in a European corporation, then U.S. net exports ______ and net capital outflows ______

increase ; increase

In a small open economy, if the world interest rate falls, then domestic investment will _____ and the real exchange rate will _____, holding all else constant

increase ; increase

In a small open economy, if the government encourages investment, through, say, an investment tax credit, investment

increase and is financed through an inflow of foreign capital

The demand for real money balances is generally assumed to:

increase as real income increases

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate must

increase by 1 percent

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures ______ for any given level of income.

increase by 100

If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:

increase by 4 percent

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate fell by 1 percentage point over a year, Okun's law predicts that real GDP would:

increase by 5 percent.

If the reserve-deposit ratio is less than one, and the monetary base increases by $1 million, then the money supply will

increase by more than $1 million

The production function feature called "constant returns to scale" means that if we

increase capital and labor by 10 percent each, we increase output by 10 percent

money-supply increase

increase in M leads to increase in real money M/P because price level P is fixed in the short run

In the classical model with fixed income, an increase in the real interest rate could be the result of a(n)

increase in government spending

In the IS-LM model, a decrease in output would be the result of a(n):

increase in money demand.

In the classical model with fixed income a decrease in the real interest rate could be the result of a(n)

increase in taxes

In the IS-LM model, a decrease in the interest rate would be the result of a(n):

increase in the money supply.

An increase in income generated by an increase in the country risk premium will not occur if there is a(n) ______ sufficient to offset the decline in the demand for money caused by the higher risk premium.

increase in the price level caused by more expensive imports

An effective policy to reduce a trade deficit in a small open economy would be to:

increase taxes

If a change in government regulations allows banks to start paying interest on checking accounts, this will:

increase the demand for money.

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

increase the money supply.

if many banks fail, this is likely to

increase the ratio of currency to deposits

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

increase, but by less than 100

In the neoclassical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving ______

increase, does not change

In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports:

increase, the money supply increases, and income increases.

In a small open economy a decrease in the exchange rate will _____ net exports and shift the _____ curve.

increase; IS

(Exhibit: Policy Interaction) 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

According to the Mundell-Fleming model with floating exchange rates, political uncertainty in Mexico in 1994 caused the risk premium on Mexican interest rates to ______ and the Mexican exchange rate to ______.

increase; decrease

According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run.

increase; decrease

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______ and output will ______

increase; decrease

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

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.

increase; demand

Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation.

increase; higher

(Exhibit: Shift in Aggregate Demand) 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

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate.

increase; increase

An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM framework, ______ output and ______ interest rates.

increase; raise

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

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

A revaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:

increased

Estimates by Goldin and Katz indicate that the financial returns of a year of college _____ between 1980 and 2005.

increased

Inflation ______ the variability of relative prices and ______ allocative efficiency.

increases ; decreases

Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate.

increases ; increases

If the consumption function is given by C = 150 + 0.85Y and Y increases by 1 unit, then savings

increases by .15 units

Assume that the production function is Cobb-Douglas with parameter α = 0.3. In the neoclassical model, if the labor force increases by 10 percent then output

increases by about 7 percent

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

increases by more than 250.

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:

increases by more than 250.

When the Fed increase the interest rate paid on reserves, it

increases the reserve-deposit ratio (rr)

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.

Crowding out occurs when an increase in government spending ______ the interest rate and investment ______.

increases, decrease

in a simple model of the s and d for pizza, when the price of cheese increases, the price of pizza - and the quantity purchased -

increases, decreases

Skill based technological change _______ the demand for high skilled workers, while the slowdown in the pace of educational advancement reduces the supply of high skilled workers, resulting in relatively _______ wages for skilled workers

increases, higher

in a simple model of the supply and demand for pizza, when aggregate income increases, the price of pizza - and the quantity purchased -

increases, increases

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

increases; increases

According to the quantity theory of money, if money is growing at a 10 percent rate and real output is growing at a 3 percent rate, but velocity is growing at increasingly faster rates over time as a result of financial innovation, the rate of inflation must be

increasing

Conventional monetary and fiscal policies used in a recession are aimed at:

increasing aggregate demand

If the government of a small open economy wishes to reduce a trade deficit, which policy action will be successful in achieving this goal?

increasing taxes

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.

If nominal wages cannot be cut, then the only way to cut real wages is by:

inflation

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in

inflation of 1 percent and nominal interest rate of 1 percent

a measure of how fast the general level of prices is rising is called

inflation rate

demand-pull inflation

inflation resulting from shocks to aggregate demand

cost-push inflation

inflation resulting from shocks to aggregate supply

The classical dichotomy breaks down for a Phillips curve, which shows the relationship between a nominal variable, ______, and a real variable, ______.

inflation; unemployment

endogenous variables

interest rate and national income

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

interest rate.

An IS curve shows combinations of:

interest rates and income that bring equilibrium in the market for goods and services.

An LM curve shows combinations of:

interest rates and income, which bring equilibrium in the market for real money balances.

A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective.

Each of the following phenomena hinders the precise estimation of the natural rate of unemployment except:

introduction of new products such as DVD players.

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out:

investment

The demand for loanable funds is equivalent to

investment

The monetary transmission mechanism works through the effects of changes in the money supply on:

investment

In a small open economy, policies that increase:

investment cause a trade deficit

According to the model developed in Chapter 3, when government spending increases without a change in taxes

investment decreases

Use the model developed in Chapter 3, but assume that consumption decreases, other things being equal, when the interest rate rises. If there is a technological advance that leads to an increase in investment demand

investment increase and the interest rate rises

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.

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is a technological advance that leads to an increase in investment demand

investment is unchanged and the interest rate rises

In a neoclassical economy, assume that the government lowers both government spending and taxes by the same amount. By doing so

investment rises and the interest rate falls

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

investment rises but consumption falls.

The interest rate determines ______ in the goods market and money ______ in the money market.

investment spending; demand

A speculative attack on a currency occurs when:

investors' perceptions change, making a fixed exchange rate untenable.

Business cycles are

irregular and unpredictable.

If a production function describing an economy is Y = 100 K^.25L^.75 then the share of output going to labor

is 75 percent

the neoclassical theory of distribution

is a theory of how national income is divided among the factors of production

According to the theory of liquidity preference, the supply of nominal money balances:

is chosen by the central bank.

The income velocity of money

is defined by the identity MV=PY

the demand for the economy's output

is equal to consumption, investment, and government purchases

the real exchange rate

is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level

The relationship between short-run aggregate supply curves and Phillips curves is that there:

is exactly one Phillips curve corresponding to each short-run aggregate supply curve.

At any particular point in time, the output of the economy

is fixed because the supplies of capital and labor and the technology are fixed

The Keynesian-cross analysis assumes planned investment:

is fixed, whereas the IS analysis assumes it depends on the interest rate.

According to the theory of liquidity preference, the supply of real money balances:

is fixed.

If all prices are stuck at a predetermined level, then when a short-run (Y) along the horizontal axis and the price level (P) along the vertical aggregate supply curve is drawn with real GDP axis, this curve:

is horizontal.

With a Cobb Douglas production function, the share of output going to labor

is independent of the amount of labor

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier.

is larger than

A small country might want to use the money of a large country rather than print its own money if the small country:

is likely to be unstable, whereas the large country is likely to be stable

When the Fed increases the discount rate, it

is likely to decrease the monetary base (B)

Under a fixed system, the exchange rate:

is maintained at a predetermined level by the central bank.

Over the business cycle, investment spending ______ consumption spending.

is more volatile than

the ability of macroeconomists to predict the future course of economic events

is no better than the meteorologists ability to predict next months weather

The classical dichotomy:

is said to hold when the values of real variables can be determined without any reference to nominal variables or the existence of money

a competitive firm

is small relative to the market which it trades

in the relationship expressed in functional form Y=G(K,l), y stands for real GDP, K stands for the amount of capital, and L stands for the amount of labor. In this case G():

is the function telling how the variables in the parentheses determine real GDP

the world interest rate

is the interest rate prevailing in world financial markets

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM* curve:

is vertical because the exchange rate does not enter into the LM* equation.

If the demand for real money balances does not depend on the interest rate, then the LM curve:

is vertical.

When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

is vertical.

A small open economy with perfect capital mobility is characterized by all of the following except that:

its domestic interest rate will always exceed the world interest rate

Which of the following rankings (from most severe to least severe) best captures the degree of hardship associated with various types of unemployment?

job losers, job leavers, marginally attached

Public policy to increase the job finding rate include _____ and public policy to decrease the job separation rate include _____.

job training programs; 100 percent experience rated unemployment insurance

In the United States, the money supply is determined

jointly by the Fed and by the behavior of individuals who hold money and the banks of which money is held

Inflation inertia refers to the idea that inflation:

keeps on going unless something acts to stop it.

Assume that a country experiences a reduction in productivity that lowers the marginal product of labor for any given level of labor. In this case, the:

labor demand curve shifts downward and to the left.

The quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in _____ increases in the monetary base and _____ increases in money supply.

large ; smaller

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then monetary policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

large; small.

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

larger the marginal propensity to consume.

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production.

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

lead to no change in saving.

Theory of Liquidity states real money increase

leads to lower interest rate and increase level of income, LM curve shifts to downward.

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

leftward shift in the IS curve.

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

leftward shift in the LM curve.

The use of fei as money on the island of Yap illustrates the idea of money as a social convention because

legal claim to a fei never seen by current generations was accepted in transactions

The lower the real exchange rate is, the ______ expensive domestic goods are relative to foreign goods, and the ______ the demand is for net exports

less ; greater

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers ______ raises

less ; smaller

Adverse selection may cause lenders to be offered opportunities to finance only:

less desirable business ventures

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

less than

Survey evidence indicates that economists worry ______ the general public does about prices increasing more rapidly than their incomes

less than

The percentage of government revenue raised by printing money has usually accounted for

less than 3 percent of government revenue in the United States

The increase in income in response to a fiscal expansion in the IS-LM is:

less than in the Keynesian-cross model unless the LM curve is horizontal.

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:

less than the expected price level.

When the demand for loanable funds exceeds the supply of loanable funds, households want to save ______ than firms want to invest and the interest rate ______

less, rises

Compared with an employed white teenage male, an employed middle-aged white male is ______ likely to become unemployed and, once unemployed, is ______ likely to find a job.

less; just as

If the Fed accommodates an adverse supply shock, output falls ______ and prices rise ______.

less; more

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

level of output but not prices.

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 use of borrowed funds to supplement existing funds for purposes of investment is called

leverage

The banking system creates

liquidity

If a country chooses to have free capital flows and to conduct an independent monetary policy, then it must:

live with exchange-rate volatility.

A bond (or debt instrument) is a(n):

loan to a firm

Assets of banks include

loans to customers

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:

low aggregate demand.

In the classical model with fixed income, if the interest rate is too high, then investment is too ______ and the demand for output ______ the supply

low, falls short of

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will ______ the sacrifice ratio

lower

Earlier retirement in Europe than in the United States contributes to:

lower employment-to-population ratios in Europe than in the United States.

lower equilibrium income by the decrease in the intercept multiplied by the multiplier.

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given income. This shift, in a neoclassical economy, will

lower investment and raise the interest rate

In the classical model with fixed income, a reduction in the government budget deficit will lead to a

lower real interest rate

To increase the money multiplier, the Fed can

lower the interest rate paid on reserves

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

lower the interest rate.

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

lower; inward

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

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.

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

An increase in the money supply:

lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run.

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation ______ the nominal interest rate and ______ the real interest rate, so that investment spending declines.

lowers; raises

macroeconomics is based on microeconomics for all the following reasons except

macro decision makers, when the make their choices, are required to maximize utility functions

The study of the economy as a whole is called

macroeconomics

which statement below best illustrates the art rather than the science of macro

macroeconomics must determine which simplifying assumptions clarify our thinking and which mislead us

The principal purpose of a central bank acting as a lender of last resort is to:

maintain the liquidity of the financial system

macroeconomic models

make different assumptions to explain different aspects of the macroeconomy

In a fraction-reserve banking system, banks create money when they

make loans

In a small open economy, if domestic saving exceeds domestic investment, then the extra saving will be used to:

make loans to foreigners

Using the sticky-price model, the higher the average rate of inflation, the more frequently firms must adjust their prices, which implies that a high rate of inflation:

makes the short-run aggregate supply curve steeper.

Government policies directed at reducing frictional unemployment include:

making unemployment insurance 100 percent experience rated.

The political business cycle refers to the

manipulation of the economy to win elections.

According to the neoclassical theory of distribution, total output is divided between payments to capitol and payments to labor depending on their

marginal productivities

Credit cards

may affect the demand for money

the quantity equation for money, by itself

may be thought of as a definition for velocity

Assume that a small open economy gets involved in a global war, in which its government purchases increase and the rest of the world's government purchases also increase. Then, for the small country, net exports

may increase or decrease

The costs of reprinting catalogs and price lists because of inflation are called:

menu costs

The ex ante real interest rate is equal to the nominal interest rate:

minus the expected inflation rate

the real return on holding money is

minus the inflation rate

Open-market operations change the ______; changes in interest rate paid on reserves change the ______; and changes in the discount rate change the ______

monetary base ; money multiplier ; monetary base

the money supply will increase if the

monetary base increases

The characteristic of the classical model that the money supply does not affect real variables is called:

monetary neutrality

If only unanticipated changes in the money supply affect real GDP, the public has rational expectations, and everyone has the same information about the state of the economy, then:

monetary policy cannot be used to systematically stabilize output.

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.

monetary; low

macroeconomists call assets used to make transactions

money

Moneys liquidity refers to the ease with which

money can be converted into goods and services

All of the following assets are included in M1 except

money market deposit accounts

An example of a nominal variable is the:

money supply

If the short-run aggregate supply curve is horizontal, then the:

money supply cannot affect prices in the short run.

When a borrower uses borrowed funds to engage in activities that are detrimental to the profitability of the business venture that was financed, there is a problem of:

moral hazard

Two types of problems that arise due to asymmetric information are:

moral hazard and adverse selection

If the Federal Reserve increases the interest rate paid on reserves, banks will tend to hold _____ excess reserves, which will _____ the money multiplier

more ; decrease

If a country has a high rate of inflation relative to the United States, the dollar will buy:

more of the foreign currency over time

According to the macroeconometric model developed by Data Resources Incorporated, the response of GDP four quarters after an increase in government spending, with the nominal interest rate held constant, will be ______ the response of GDP to a similar change with the money supply held constant.

more than three times as great as

Variable inflation hurts both debtors and creditors because:

most debtors and creditors are risk averse

Data on unemployment in the United States show that:

most weeks of unemployment are attributable to the long-term unemployed.

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

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to decrease the money supply:

must be abandoned in order to maintain the fixed exchange rate.

Planned expenditure is a function of:

national income and planned investment, government spending, and taxes.

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

national income; goods and services

In a closed economy, Y - C - G equals

national saving

in equilibrium, total investment equals

national saving

Net capital outflows is equal to

national saving minus domestic investment

In a large open economy, the real interest rate is determined by:

national saving, the net domestic investment function, and the net capital outflow function

the supply of loanable funds is equivalent to

national savings

the inflation rate in the US averaged about

nearly 0 between 1900 and 1950

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's

need to generate money to pay for spending

If domestic saving is less than domestic investment, then net exports are ______ and net capital outflows are ______.

negative ; negative

The Phillips curve shows a ______ relationship between inflation and unemployment, and the short-run aggregate supply curve shows a ______ relationship between the price level and output.

negative; positive

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.

negative; price level

Okun's law is the ______ relationship between real GDP and the ______.

negative; unemployment rate

The theory of liquidity preference implies that the quantity of real money balances demanded is:

negatively related to the interest rate and positively related to income.

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

negatively; positively

Credit card balances are included in

neither M1 nor M2

The IS curve generally determines:

neither income nor the interest rate.

The LM curve generally determines:

neither income nor the interest rate.

Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy.

neither the quantity of output nor the price level

In a large open economy, the exchange rate adjusts so that net exports equal:

net capital outflow

The real exchange rate is determined by the equality of:

net capital outflow and the demand for net exports

In a large open economy, if an import quota is adopted, then:

net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises

In a system with 100-percent reserve banking

no banks can make loans

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.

how the policies will affect expectations and behavior.

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

expected inflation

According to the Phillips curve, other things being equal, inflation depends positively on

expected inflation.

According to the Phillips curve, other things being equal, inflation depends positively on:

does not change production

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

does not change production.

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

in the long run

According to the natural-rate hypothesis, output will be at the natural rate

in the long run.

According to the natural-rate hypothesis, output will be at the natural rate:

greater; increase

inflow; deficit

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the international effect initially will be a capital ______ and a trade ______.

raises consumption in the short run but lowers it in the long run

According to the traditional viewpoint of government debt, a tax cut without a cut in government spending

raises consumption in the short run but lowers it in the long run.

According to the traditional viewpoint of government debt, a tax cut without a cut in government spending:

lower

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will ______ the sacrifice ratio

lower

Advocates of the rational-expectations approach predict that a credible policy to lower inflation will ______ the sacrifice ratio.

stock exchanges

All of the following are examples of financial intermediaries except:

stock exchanges.

All of the following are examples of financial intermediaries except:

high inflation

All of the following may have contributed to the financial crisis and economic downturn of 2008-2009 except:

less than the expected price level

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is

less than the expected price level.

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:

if the Fed chose a target that was not natural output or the natural unemployment rate, the result would be accelerating inflation or deflation

Although real variables such as unemployment and real GDP are the best measures of economic performance, most economists do not advocate manipulating money supply directly to hit a real target because

if the Fed chose a target that was not natural output or the natural unemployment rate, the result would be accelerating inflation or deflation.

giving policymakers flexibility will allow them to respond to changing conditions

An argument in favor of allowing discretionary macroeconomic policy is that

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

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

a panic cycle of asset sales and falling asset prices.

An asset-price bubble bursts if there is

a panic cycle of asset sales and falling asset prices.

An asset-price bubble bursts if there is:

sells assets at fire-sale prices to meet liquidity demands.

An illiquid bank can become insolvent when it:

IS curve downward and to the left.

An increase in consumer saving for any given level of income will shift the:

The adoption of an investment tax credit in a small open economy is likely to lead to:

An increase in domestic investment but no change in domestic saving in a small open economy

lowers the interest rate and increases income in the short run, but leaves both unchanged in the long run.

An increase in the money supply:

recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary

Arguments in favor of passive economic policy include all of the following except

recessions do not reduce economic well-being, so using monetary and fiscal policy for stabilization is unnecessary.

Arguments in favor of passive economic policy include all of the following except:

be in deficit

Assume that a government has a balanced budget when the economy is at full employment. If the economy then enters a recession, with no change in tax or spending laws, then the budget of the government is most likely to

be in deficit.

a long-run tradeoff between inflation and unemployment

a long-run tradeoff between inflation and unemployment.

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 floating exchange rates, lead to:

no change in income or 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.

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the real wage were rigid, this would lead to:

no change in the real wage and a rise in unemployment.

When economists speak of "the" interest rate, they mean

no particular interest rate, since it assumed that various interest rates tend to move up and down

Variables expressed in terms of money are called ______ variables.

nominal

Evidence from the past 40 years in the United States supports the Fisher effect and shows that when the inflation rate is high, the ______ interest rate tends to be ______

nominal ; high

If income is assumed to be constant, but no other assumptions are made, the level of ______ is determined by M

nominal GDP

The general demand function for real balances depends on the level of income and the:

nominal interest rate

The opportunity cost of holding money is the

nominal interest rate

the real interest rate is equal to the

nominal interest rate minus the inflation rate

the real interest rate is the

nominal interest rate minus the rate of inflation

The concept of monetary neutrality in the classical model means that an increase in the money supply will increase:

nominal interest rates

When Paul Volcker tightened the money supply:

nominal interest rates fell in the long run.

When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the ______ rate of unemployment.

nonaccelerating inflation

The NAIRU is the:

nonaccelerating inflation rate of unemployment.

The model of aggregate demand and aggregate supply is consistent with short-run monetary ______ and long-run monetary ______.

nonneutrality; neutrality

the marginal propensity to consume is

normally expected to be between zero and one

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should

not build because the rate of return on the factory is only 12 percent

If purchasing-power parity holds, then changes in domestic saving will _____ the real exchange rate.

not change

Protectionist policies implemented in a small open economy with a trade deficit have the effect of ______ the trade deficit and ______ the quantity of imports and exports

not changing ; decreasing

A statement that is generally true about capital in a large open economy is that it is:

not perfectly mobile, but the country influences world financial markets

The transactions velocity of money indicates the _____ in a given period, while the income velocity of money indicates the _____ in a given period

number of times a dollar bill changes hands ; number of times a dollar bill enters someones income

The nominal exchange rate between the U.S. dollar and the Japanese yen is the:

number of yen you can get for one dollar

In Zimbabwe in the 1990s the government resorted to printing money to pay the salaries of government employees because

of declining tax revenues

Alan Blinder's survey of firms found that the typical firm adjusts its prices:

once or twice a year.

According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in:

only in the short run.

The IS-LM model is generally used:

only in the short run.

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 output; only prices

Quantitative easing is most closely akin to

open-market operations

The most frequently used tool of monetary policy is

open-market operations

The assumption of rational expectations for inflation means that people will form their expectations of inflation by:

optimally using all available information, including information about current policies, to forecast the future.

According to the Mundell-Fleming model, under floating exchange rates a fiscal expansion:

or an import restriction raises the exchange rate, but a monetary expansion lowers it.

If the short-run aggregate supply curve is horizontal, and, if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:

output and employment will decrease 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.

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.

output decreases and prices are unchanged; fall

An economy's factors of production and its production function determine the economy's

output of goods and services

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.

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government:

output will rise in the short run and prices will rise in the long run.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.

output; prices

Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run.

output; prices

two striking features of a graph of us real gdp per capita over the 20th century are the

overall upward trend interrupted by a large downturn due to the economic depression in the 30s

The rate of inflation is the

percentage change in the level of price

The sacrifice ratio measures the:

percentage of a year's real gross domestic product (GDP) that must be foregone to reduce inflation by 1 percentage point.

A recession may alter an economy's natural rate of unemployment in all of the following ways except by:

permanently reducing the money supply.

For the purposes of the Keynesian cross, planned expenditure consists of:

planned investment, government spending, and consumption expenditures.

In the Keynesian-cross model, the equilibrium level of income is determined by:

planned spending.

"Crony capitalism" refers to situations in which banks make loans to those borrowers with the most:

political clout.

If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______.

positive ; positive

public saving is either

positive, negative, or zero

According to the sticky-price model, deviations of output from the natural level are _____ deviations of the price level from the expected price leve

positively associated with

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate.

positively, negatively

Country risk included in the risk premium in interest rates refers to the:

possibility that loans in some countries may not be repaid because of political upheaval.

The currency-deposit ratio is determined by

preferences of households about the form of money they wish to hold

which of the combinations listed is not a us president and an important economic issue of his administration

president clinton, inflation

For borrowing from the discount window, the Fed sets the _____ of borrowing, compared to borrowing using the Term Auction Facility, where the Fed sets the _____ of borrowing

price ; quantity

Which of the following would most likely be called a hyperinflation?

price increases averaged 300 percent per year

In the Mundell-Fleming model, the exogenous variables are the:

price level, world interest rate, monetary policy, and fiscal policy.

Aggregate supply is the relationship between the quantity of goods and services supplied and the:

price level.

All of the following are exogenous variables in the mother of all models in the Appendix to Chapter 14 except the:

price level.

If the short-run IS-LM equilibrium occurs at a level of income above the natural level of output, in the long run the ______ will ______ in order to return output to the natural level.

price level; increase

Along a short-run aggregate supply curve, output is related to unexpected movements in the ______. Along a Phillips curve, unemployment is related to unexpected movements in the ______.

price level; inflation rate

all of the following are types of macroeconomic data except

price of an IBM computer

A competitive, profit maximizing firms hires labor until

price of output multiplied by the marginal product of labor equals the wage

If the transactions velocity of money remains constant while the quantity of money doubles, the:

price of the average transaction multiplied by the number of transactions must double.

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that ______.

prices are fixed; output is fixed

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

prices but not level of output.

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except:

prices do not adjust when there is perfect competition.

deflation occurs when

prices fall

The definition of transaction velocity of money is

prices multiple by transactions divided by money

The definition of the transactions velocity of money is

prices multiplied by transactions divided by money.

In the short run, a favorable supply shock causes:

prices to fall and output to rise.

In the short run an adverse supply shock causes:

prices to rise and output to fall.

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and:

prices will fall 5 percent in the long run.

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.

prices; output

The right of seigniorage is the right to:

print money

The hyperinflation experienced by interwar Germany illustrates how fiscal policy can be connected to monetary policy when government expenditures are financed by

printing large quantities of money

national saving is

private saving plus public saving

The Great Depression in the United States:

probably cannot be considered to have started because of a leftward shift in the LM curve because real balances did not fall between 1929 and 1931.

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

production

Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the greater the:

proportion of firms with flexible prices.

The doctrine of purchasing-power parity:

provides a reason to expect that movements in the real exchange rate will typically be small or temporary

Paying efficiency wages helps firms reduce the problem of adverse selection by:

providing an incentive for the best-qualified workers to remain with the firm.

When the Federal Reserve conducts an open-market purchase, it buys bonds from the

public

The government can lower inflation with a low sacrifice ratio if the:

public believes that policymakers are committed to reducing inflation.

In a closed economy with fixed output, when government spending increases

public saving decreases

According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will:

purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.

The idea that the amount of any currency that can buy a particular good in one country should be able to buy (after being exchanged for the local currency) the same quantity of the same good anywhere in the world is called

purchasing power parity

The recession produced by a financial crisis:

puts further pressure on asset prices and financial institutions

In the long run, what determines the level of total production function of goods and services in an economy?

quantity of capital, quantity of labor, and production technology

An example of a real variable is the:

quantity of goods produced in a year

a competitive firms chooses the

quantity of labor and capital to employ

The intersection of the IS and LM curve determines the values of:

r and Y, given G, T, M, and P.

(Exhibit: Market for Real Money Balances) Based on the graph, the equilibrium levels of interest rates and real money balances are:

r2 and M2/P2

(Exhibit: IS-LM Monetary Policy) 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

(Exhibit: IS-LM Fiscal Policy) 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

(Exhibit: IS-LM Fiscal Policy) 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, Y3

(Exhibit: Policy Interaction) 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 _____.

r2, Y3

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

r3, Y2

(Exhibit: IS-LM Monetary Policy) 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:

r3, Y3

To end a hyperinflation, a government trying to reduce its reliance on seigniorage would:

raise taxes and cut spending

In practice, in order to stop a hyperinflation, in addition to stopping monetary growth, the government must:

raise taxes and reduce government spending

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with equilibrium in the market for real balances.

raises

For any given interest rate and price level, an increase in the money supply:

raises income.

In a large open economy with a floating exchange rate, such as in the United States, in the short run a monetary contraction:

raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers net exports.

In a small open economy, if the government adopts a policy that lowers imports, then that policy:

raises the real exchange rate and does not change net exports

An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output.

raises; and may also lower

Reducing the money supply ______ nominal interest rates in the short run, and ______ nominal interest rates in the long run.

raises; lowers

Other things equal, an expected deflation can change demand by:

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

At the end of 1994 the Mexican government was unable to maintain a fixed exchange rate because it:

ran out of foreign-currency reserves.

the nominal interest rate is the

rate of interest the investors pay to borrow money

a graph of the us unemployment rate over the 20th century shows

rates of unemployment always greater than 0 with substantial variations from year to year

Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.

real

Variables expressed in terms of physical units or quantities are called ______ variables.

real

the total income of everyone in the economy adjusted for the level of base year prices is called

real GDP

The supply and demand for loanable funds determines the

real interest rate

The one-to-one relation between the inflation rate and the nominal interest rate, the Fisher effect, assumes that the:

real interest rate is constant

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.

real; nominal

A positive relationship between nominal interest rates and inflation in the United States is obvious in:

recent data but not nineteenth century data

During the Great Depression, countries that devalued their currencies generally ______ whereas countries that maintained the old exchange rate ______.

recovered relatively quickly; suffered longer

Holding other factors constant, legislation to cut taxes in an open economy will:

reduce national saving and lead to a trade deficit

One argument favoring a fixed-exchange-rate system is that it:

reduces exchange-rate uncertainty, thereby promoting more international trade.

An increase in the interest rate:

reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects.

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

Cyclically adjusted budgets are useful because they:

reflect policy changes, but not current economic conditions.

Compared to periods of lower rates of inflation, during a hyperinflation all of the following occur except:

relative prices do a better job of reflecting true scarcity

If the demand of real money balances is proportional to real income, velocity will

remain constant

In a small open economy, if consumers shift their preference toward Japanese cars, then net exports:

remain unchanged but the real exchange rate falls

According 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

In a 100-percent-reserve banking system, if a customer deposits $100 of currency into a bank, then the money supply

remains the same

A change in income in the IS-LM model for a fixed price

represents a shift in the aggregate demand curve.

If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve-deposit ratio, then the total money supply is

reserves divided by rr

The asset price that experienced a boom prior to the 2008-2009 recession was the price of;

residential real estate

Those economists who believe that fiscal policy is more potent than monetary policy argue that the:

responsiveness of investment to the interest rate is small.

Those economists who believe that monetary policy is more potent than fiscal policy argue that the:

responsiveness of money demand to the interest rate is small.

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

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:

return to the old level and output will be restored to the natural rate.

a firms economic profit is

revenue minus costs

If the demand function for money is M/P = 0.5Y - 100r and if M/P increases by 100, then the LM curve for any given interest rate shifts to the:

right by 200.

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:

right with a slope less than one.

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.

right; accumulation

In a neoclassical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will

rise $40 billion

Exhibit: IS*-LM*

A tax cut combined with tight money, as was the case in the United States in the early 1980s, should lead to a:

rise in the real interest rate and a fall in investment.

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

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

(Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y3, then inventories will ______, inducing firms to ______ production.

rise; decrease

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to ______ and expansionary monetary policy causes the exchange rate to ______

rise; fall

Stagflation occurs when prices ______ and output ______.

rise; falls

In a small open economy, when the government reduces national saving, the equilibrium real exchange rate:

rises and net exports fall

In the Mundell-Fleming model, if the price level falls, then the equilibrium income

rises and the real exchange rate depreciates.

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, investment:

rises by $60 billion

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving:

rises by $60 billion

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, public saving:

rises by$100 billion

If consumption depends positively on the level of real balances and real balances depend negatively on the nominal interest rate in a neoclassical model, then the nominal interest rate

rises less than 1 percent for each 1 percent rise in the money growth rate

In the IS-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 IS-LM model when government spending rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

rises; rises

A dislike of randomness in economic circumstances is called:

risk aversion

Compared to typical open-market operations, when pursuing quantitative easing, Federal Reserve purchases tended to be _____ securities

riskier and longer-term

The amount of capital that banks are required to hold is based on the

riskiness of the banks assets

Between August 1929 and March 1933, the money supply fell 28 percent. At that time the monetary base ______ and the currency-deposit and reserve-deposit ratios both ______

rose ; rose

After the Kennedy tax cut in 1964, real GDP:

rose and unemployment fell.

If the exchange rate of currency A is fixed to a unit of currency B, then a potential problem for the central bank in charge of currency A is:

running out of currency B.

If s is the rate of job separation, f is the rate of job finding, and both rates are constant, then the unemployment rate is approximately:

s/(s + f)

The percentage of a year's real GDP that must be foregone to reduce inflation by 1 percentage point is called the:

sacrifice ratio.

To prevent banks from using excess reserves to make loans that would increase the money supply, the Federal Reserve could conduct open-market ______ and _____ the interest rate paid on bank reserves

sales ; raise

In the Mundell-Fleming model with fixed exchange rates, the imposition of trade restrictions results in an increase in net exports because:

saving increases.

In the small open economy in equilibrium:

saving is fixed, and investment is determined by the investment function and the world interest rate

Economists call the changes in the composition of demand among industries and regions:

sectoral shifts.

The principal economic loss when a country dollarizes is the loss of:

seigniorage revenue.

The major source of government revenue in most countries that are experiencing hyperinflation is

seigniorage.

According to purchasing-power parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will ___ oil in New York and _____ oil in London to drive _____ the price of oil in New York

sell ; buy ; down

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

To maintain a fixed-exchange-rate system, if the exchange rate moves below the fixed-exchange-rate level, then the central bank must:

sell foreign currency from reserves.

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

sell interest-earning assets in order to obtain non-interest-bearing money.

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

sell; LM

(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r3, then people will ______ bonds and the interest rate will ______.

sell; rise

In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.

sell; rises; decrease

To reduce the money supply, the Federal Reserve

sells government bonds

Stocks are:

shares of ownership in a firm

tax increase, Fed hold interest rate constant

shifts IS curve to left. Fed must decrease money supply to keep interest rate at it's original level, shifts LM curve upward. Income falls and recession deepens with high interest rate.

tax increase, Fed hold money supply constant

shifts IS curve to left. income and interest rate fall. fall in income signals possible recession.

tax increase, holds income constant

shifts IS curve to left. raise money supply to shift LM curve downward enough to offset shift in IS. Recession is not likely but large fall in interest rate.

The short-run Phillips curve:

shifts upward if expected inflation increases.

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

shoeleather costs

The Mundell-Fleming model is a ______ model for a ______ open economy.

short-run; small

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance.

six to nine months

If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the IS* curve:

slopes downward and to the right because the higher the exchange rate, the lower the level of net exports and, therefore, of short-run equilibrium income in the goods market.

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally:

slopes downward and to the right.

The LM curve, in the usual case:

slopes up to the right.

A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production.

slowdown; slowdown

When the demand for money parameter, k, is large, the velocity of money is ______ and money is changing hands _____

small ; infrequently

If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______.

small; large

smaller than the multiplier

Other things equal, a given change in money supply has a larger effect on demand the:

smaller the income sensitivity of money demand.

When drawn with the interest rate on the vertical axis and income on the horizontal axis, the IS curve will be steeper the:

smaller the sensitivity of investment spending to the interest rate.

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

smaller; greater

According to the sticky-price model:

some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.

Each of the two models of short-run aggregate supply is based on some market imperfection. In the sticky-price model, the imperfection is that:

some firms do not adjust their prices instantly to changes in demand.

a graph of the rate of inflation is the US over the 20th century shoes

some periods of deflation in the first half of the century, but only positive rates of inflation in the second half

A rise in the price of an asset above its fundamental value is called a(n):

speculative bubble

If the short-run aggregate supply curve is steep, the Phillips curve will be:

steep

Other things equal, a given change in government spending has a larger effect on demand the:

steeper the IS curve.

an assumption of - is more plausible for studying the short-run behavior of the economy, while an assumption of - is more plausible for studying the long run equilibrium behavior of the economy

sticky prices, flexible prices

when studying the short run behavior of the economy, an assumption of - is more plausible, in contrast to studying the long run equilibrium behavior of an economy, when an assumption of - is more plausible

sticky prices, flexible prices

lower interest rate

stimulates planned expenditures, production and income

In fourteenth century Europe, the bubonic plague

substantially increased real wages in Europe

All of the following are ways that the modern Phillips curve differs from the relationship observed by A. W. Phillips in 1958 except that the modern Phillips curve:

substitutes the output gap for unemployment.

The Pigou effect:

suggests that as prices fall and real money balances rise, consumers should feel wealthier and spend more.

When factor supply is fixed and quantity of the factor is graphed on the horizontal axis while factor price is graphed on the vertical axis the factor

supply curve is vertical

In the short-run, if the price level is greater than the expected price level, then in the long run the aggregate:

supply curve will shift upward.

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

In a small open economy, if exports equal $15 billion and imports equal $8 billion, then there is a trade ______ and ______ net capital outflow

surplus ; positive

In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow

surplus ; positive

In a small open economy, starting from a position of balanced trade, if the government increases the income tax, this produces a tendency toward a trade ______ and ______ net capital outflow

surplus ; positive

The logic of Ricardian equivalence implies that:

tax cuts do not influence consumer spending but changes in government spending do.

Disposable personal income is defined as income after the payment of all

taxes

In a small open economy with a floating exchange rate, the exchange rate will depreciate if:

taxes are decreased.

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

technological progress; variations in labor-market utilization

The imperfect-information model bases the difference in the short-run and long-run aggregate supply curve on:

temporary misperceptions about prices.

All of the following events are consistent with the spending hypothesis as contributing to the Great Depression except:

the 25-percent reduction in the money supply between 1929 and 1933.

A supply shock does not occur when:

the Fed increases the money supply.

In the United States, monetary policy is controlled by

the Federal Reserve

The size of the monetary base is determined by

the Federal Reserve

Possible explanations put forth for the Great Depression do not include:

the Pigou effect.

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant:

the aggregate demand curve will shift to the left.

The costs of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors

lucas critique

the argument that traditional policy analysis does not adequately take into account the impact of policy changes on peoples exceptions

The natural rate of unemployment is:

the average rate of unemployment around which the economy fluctuates.

In the Mundell-Fleming model:

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

The theoretical separation of real and monetary variables is called:

the classical dichotomy

Exhibit: AD-AS Shifts

AS1 to AS2

how the policies will affect expectations and behavior

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

(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with the price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD2. The economy moves first to point ______ and then, in the long run, to point ______.

A; D

Exhibit: AD-AS Shifts

AD1 to AD2

believe; lower

Assume that there is a short-run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank follows a fixed rule in conducting monetary policy. Initially, households and firms expect high inflation. Following a credible announcement by the central bank of a low-inflation policy, households and firms will ______ the central bank's announcement and ______ their expectations of inflation.

not believe; not change

Assume that there is a short-run tradeoff between inflation and unemployment, that the central bank desires both low inflation and low unemployment, and that the central bank uses discretion in conducting monetary policy. Initially, households and firms expect high inflation. Following an announcement by the central bank of a low-inflation policy, households and firms will ______ the central bank's announcement and ______ their expectations of inflation

not believe; not change

have no inside lag

Automatic stabilizers

have no inside lag.

Automatic stabilizers:

(Exhibit: IS*-LM*) 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.

(Exhibit: Supply Shock) 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; A

(Exhibit: Short Run to Long Run) 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; lower

All of the following are examples of shadow banks except:

Bank of America

unemployment; output

Based on the Phillips curve, unexpected movements in inflation are related to ______, and based on the short-run aggregate supply curve, unexpected movements in the price level are related to ______.

compared with a recession, real GDP during a depression

Decreases more severely

All of the following U.S. federal agencies are directly concerned with macroeconomic policy except the:

Department of Health and Human Services.

In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then there is ______ and net capital outflow equals ______

balanced ; $0

macroeconomics is

based on microeconomic foundations

The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:

basing their opinions on recently observed inflation.

According to the imperfect-information model, when the price level is greater than the expected price level, output will _____ the natural level of output

be greater than

In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will:

be horizontal.

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:

be smaller.

Since 1960, the US ratio of labor income to total income has

been about .7

In recent U.S. experience, inflation has:

been persistent from year to year, whereas in the nineteenth century inflation has little persistence

The price level decreases and output increases in the transition from equilibrium is _____ the natural rate of output in the short run.

below

One possible benefit of moderate inflation is:

better functioning labor markets

according to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed

between labor and capital used in production, according to their productivities

The Phillips curve expresses a short-run link:

between nominal and real variables.

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

between zero and one.

In 2007 in the United States among labor-force members ages 16 to 19, the highest unemployment rate was for:

black males.

In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:

borrowing from abroad

A trade deficit can be financed in all of the following ways except by:

borrowing from domestic lenders

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.

Checking account balances that are linked to debit cards are included in

both M1 and M2

During the 2008-2009 financial crisis, the Federal Reserve served as a leader of last resort by providing liquidity to:

both banks and shadow banks with reliable collateral

If the productivity of farmers has risen substantially over time because of technological progress, and workers can move freely between being farmers and barbers, the neoclassical theory of distribution predicts that the real wage(s) of

both barbers and farmers should have risen over time

Along any given IS curve:

both government spending and tax rates are fixed.

The IS and LM curves together generally determine:

both income and the interest rate.

An example of decreasing returns to scale is when capital and labor inputs:

both increase 10 percent and output increase 5 percent

An example of increasing returns to scale is when capital and labor inputs:

both increase 5 percent and output increases 10 percent

Issuing bonds is called__financing, while issuing stocks is called__financing.

debt; equity

An unexpected deflation can change demand by redistributing wealth from:

debtors to creditors, thus lowering consumption.

Net capital outflow in a large country:

declines as the domestic interest rate rises

According to the IS-LM model, if Congress raises taxes but Fed must ______ the money supply. the Fed wants to hold the interest rate constant, then the

decrease

If wage rigidity holds the real wage above the equilibrium level, an increase in the demand for labor will ______ the number unemployed.

decrease

In the Mundell-Fleming model, if political turmoil raises the risk premium in a country's interest rate, then the exchange rate will ______.

decrease

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will

decrease

according to the model developed in Chapter 3, when taxes are increased but government spending is unchanged, interest rates

decrease

If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports ______ and net capital outflows ______

decrease ; decrease

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level

decrease ; increase

Use the model developed in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when the government lowers taxes on business investment, thus increasing desired investment, but does not change government spending or change any taxes that affect disposable income, then the quantity of investment

decrease and the interest rate rises

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real 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.

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will:

decrease equilibrium income by (∆T)(MPC)/(1 - MPC).

In the IS-LM model, a decrease in expected inflation (or an increase in expected deflation), leads to a(n):

decrease in both output and the nominal interest rate.

decrease in the money supply

In the Mundell-Fleming model, expectations that a currency will lose value in the future will cause the current exchange rate to:

decrease in the present.

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

decrease taxes.

If the Federal Reserve wishes to increase the money supply, it should

decrease the discount rate

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

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