Exam III

Suppose the economy is in long-run equilibrium. If there is an increase in the supply of labor as well as an increase in the money supply, then we would expect that in the short-run:

Real GDP will rise and the price level might rise, fall, or stay the same

If purchasing-power parity holds, then the value of the:

Real exchange rate is equal to one

Refer to Figure 9-1. From the figure it is apparent that:

Guatemala has a comparative advantage in producing coffee, relative to the rest of the world

If the stock market booms, then:

Aggregate demand increases, which the Fed could offset by decreasing the money supply

A decrease in government spending initially and primarily shifts:

Aggregate demand to the left

Consider the following sequence of events: price level ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ Τhis sequence explains why the:

Aggregate-demand curve slopes downward

According to the theory of liquidity preference:

The demand for money is represented by a downward-sloping line on a supply-and-demand graph

Which of the following decreases in response to the interest-rate effect from an increase in the price level:

Both investment and consumption

The principle of comparative advantage asserts that:

Countries can become better off by specializing in what they do best

Refer to Figure 34-6. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is:

$20 billion

Suppose the U.S. supply of loanable funds shifts left. This will:

Decrease U.S. net capital outflow and decrease the quantity of loanable funds demanded

Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would:

Decrease the money supply

If the multiplier is 6, then the MPC is:

0.83

The multiplier for changes in government spending is calculated as:

1/(1 - MPC)

According to purchasing-power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate:

1/2 pound per dollar

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

Decreased the money supply

According to the classical model, an increase in the money supply causes:

Prices to rise in the long run

Suppose the real exchange rate is 3/4 gallon of country A's gasoline per gallon of U.S. gasoline, a gallon of U.S. gasoline costs $3.00 U.S., and a gallon of gas in country A costs 6 units of their currency. What is the nominal exchange rate:

3/2 units of country A's currency per dollar

If the price of a sofa is $800 in the U.S. and 2400 pesos in Argentina, and the exchange rate is 4 pesos per dollar, what is the real exchange rate:

4/3

If the MPC = 4/5, then the government purchases multiplier is:

5

Which of the following is an example of U.S. foreign direct investment:

A U.S. based restaurant chain opens new restaurants in India.

Paul, a Canadian citizen, purchases oranges grown in Florida. This purchase is an example of:

A U.S. export and a Canadian import

Which of the following events would shift money demand to the left:

A decrease in the price level

The law of one price states that:

A good must sell at the same price at all locations

A quota is:

A limit on the quantity of imports

Refer to Figure 33-5. Starting from point B and assuming that aggregate demand is held constant, in the long run the economy is likely to experience:

A rising price level and a falling level of output, as the economy moves to point A

A tariff is a:

A tax on imported goods

Refer to Figure 34-2. A decrease in Y from Y1 to Y2 is explained as follows:

An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2 ; this shift of MD causes r to increase from r1 to r2 ; and this increase in r causes Y to decrease from Y1 to Y2

Which of the following policy actions shifts the aggregate-demand curve:

An increase in the money supply, an increase in taxes, an increase in government spending ALL OF THE ABOVE IS CORRECT

The equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents:

An upward-sloping short-run aggregate supply curve

Tax increases:

And increases in government expenditures shift aggregate demand right

Automatic stabilizers:

Are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession

Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium:

As people revise their price-level expectations downward, firms and workers strike bargains for lower nominal wages

The short-run effects on the interest rate are:

Best shown using liquidity preference theory

Refer to Figure 34-4. Suppose the money-demand curve is currently MD2. If the current interest rate is r2 ,then:

Bond issuers and banks will respond by lowering the interest rates they offer

In which of the following situations must national saving rise:

Both domestic investment and net capital outflow increase

Trade among nations is ultimately based on:

Comparative advantage

When making investment decisions, investors:

Compare the real interest rates offered on different bonds.

According to the misperceptions theory of the short-run aggregate supply curve, if a firm thought that inflation was going to be 4 percent and actual inflation was 2 percent, then the firm would believe that the relative price of what it produces had:

Decreased, so it would decrease production

When taxes increase, consumption:

Decreases as shown by a shift of the aggregate demand curve to the left

Refer to Figure 33-4. The economy would be moving to long-run equilibrium if it started at:

D and moved to C.

Ann, a U.S. citizen, uses some previously obtained euros to purchase a bond issued by a Spanish company. This transaction:

Does not change U.S. net capital outflow

When a country allows trade and becomes an exporter of a good:

Domestic producers become better off, and domestic consumers become worse off

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

Downward pressures on prices and wages

Which of the following is correct:

Economic fluctuations are easily predicted by competent economists, Recessions have never occurred very close together, Spending, income, and production do not fluctuate closely with real GDP. ANSWER = NONE OF THE ABOVE IS CORRECT

Which of the following both reduce net exports:

Exports fall, imports rise

Many macroeconomic variables:

Fluctuate together by the same amounts

The purchase of U.S. government bonds by Egyptians is an example of:

Foreign portfolio investment by Egyptians.

Which of the following sequences best represents the crowding-out effect:

Government purchases ↑ ⇒ GDP ↑ ⇒ demand for money ↑ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓

Fiscal policy refers to the idea that aggregate demand is affected by changes in:

Government spending and taxes

For any country, if the world price of copper is lower than the domestic price of copper without trade, that country should:

Import Copper

Foreign-produced goods and services that are purchased domestically are called:

Imports

The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change:

In the price level, but not output

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected:

Production is more profitable and employment rises

Which of the following statements is correct?

In the short run, unemployment and inflation are negatively related. In the long run they are largely unrelated problems

If the multiplier is 6 and if there is no crowding-out effect, then a $60 billion increase in government expenditures causes aggregate demand to:

Increase by $360 billion

Other things the same, if the price level falls, people:

Increase foreign bond purchases, so the dollar depreciates.

Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire:

Increased consumption, which shifts the aggregate-demand curve right

A U.S. firm sells diesel locomotives to a German railroad. Other things the same, this sale:

Increases U.S. net exports and decreases German net exports.

Which of the following shifts aggregate demand to the right:

Increases in the profitability of capital due perhaps to technological progress

The aggregate-demand curve shows that a decrease in the price level:

Increases the real value of goods and services demanded in the economy

When the money supply increases:

Interest rates fall and so aggregate demand shifts right.

If the Fed conducts open-market sales, which of the following quantities increase(s):

Interest rates, but not investment or prices

Which part of real GDP fluctuates most over the course of the business cycle:

Investment Expenditures

The infant-industry argument:

Is based on the belief that protecting industries when they are young will pay off later.

The model of aggregate demand and aggregate supply:

Is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution of resources between markets to explain aggregate relationships

A country's trade balance:

Is greater than zero only if exports are greater than imports

According to the theory of liquidity preference, money demand:

Is negatively related to the interest rate, while the money supply is independent of the interest rate.

A situation in which the Fed's target interest rate has fallen as far as it can fall is sometimes described as a:

Liquidity trap

Other things the same, a fall in an economy's overall level of prices tends to:

Raise the quantity demanded of goods and services, but lower the quantity supplied

Other things the same, an increase in the U.S. interest rate:

Lowers net capital outflow which decreases the quantity of loanable funds demanded

When, in our analysis of the gains and losses from international trade, we assume that a particular country is small, we are:

Making an assumption that is not necessary to analyze the gains and losses from international trade

If people decide to hold less money, then:

Money demand decreases, there is an excess supply of money, and interest rates fall

International Trade:

Raises the standard of living in all trading countries

The nominal exchange rate is the:

Rate at which a person can trade the currency of one country for another

The model of aggregate demand and aggregate supply explains the relationship between:

Real GDP and the price level.

Which of the following equations is always correct in an open economy:

NX = Y - C - G - I, NX = S - I, NX = NCO

In the open-economy macroeconomic model, the supply of dollars in the market for foreign-currency exchange comes from:

Net capital outflow

According to classical macroeconomic theory, changes in the money supply affect:

Nominal variables, but not real variables

If a country has a positive net capital outflow, then:

On net it is purchasing assets from abroad. This adds to its demand for domestically generated loanable funds

Refer to Figure 33-9. Suppose the economy starts where LRAS = AD1 = SRAS1. A decrease in short-run aggregate supply would be consistent with the movement to:

P2, Y1

Which of the following lists includes only changes that shift aggregate demand to the right:

Passing of an investment tax credit, an increase in the money supply

The real exchange rate measures the:

Price of domestic goods relative to the price of foreign goods.

Economic variables we are most interested in are:

Real variables, but we usually observe nominal variables

An increase in the money supply will:

Reduce interest rates, decreasing investment and increasing aggregate demand

Other things the same, an increase in the foreign price level:

Reduces the real exchange rate. This reduction could be offset by an increase in the domestic price level

Assume the multiplier is 5 and that the crowding-out effect is $30 billion. An increase in government purchases of $20 billion will shift the aggregate-demand curve to the:

Right by $70 billion

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level:

Rises, shifting aggregate supply left

In the open-economy macroeconomic model, the market for loanable funds identity can be written as:

S = I + NCO

If a country has Y > C + I + G, then:

S > I and it has a trade surplus.

Refer to Figure 34-8. An increase in government purchases will:

Shift aggregate demand from AD1 to AD2

Refer to Figure 34-8. An increase in taxes will:

Shift aggregate demand from AD1 to AD3

Refer to Figure 33-8. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P3 and Y3, then it must be the case that:

Short run aggregate supply has increased

If the world price of coffee is lower than Colombia's domestic price of coffee without trade, then Colombia:

Should import coffee

The aggregate demand curve shifts left if either:

Speculators lose confidence in U.S. assets or foreign countries enter into recession

Menu costs help explain:

Sticky price theory

In order to understand how the economy works in the short run, we need to:

Study a model in which real and nominal variables interact.

When the Mexican peso gets "stronger" relative to the dollar:

The U.S. trade deficit with Mexico falls

Eric, a resident of Sweden, purchases a book printed in the U.S. Which country's exports increase:

The U.S.'s

For any country that allows free trade:

The domestic price is equal to the world price

After a country goes from disallowing trade in coffee with other countries to allowing trade in coffee with other countries:

The domestic price of coffee will equal the world price of coffee

Liquidity refers to:

The ease with which an asset is converted to the medium of exchange

The dollar is said to depreciate against the euro if:

The exchange rate falls. Other things the same, it will cost fewer euros to buy U.S. goods

Which of the following would tend to shift the supply of dollars in the market for foreign-currency exchange in the open-economy macroeconomic model to the right:

The expected rate of return on U.S. assets falls

When a country allows international trade and becomes an importer of a good:

The gains of the winners exceed the losses of the losers

Refer to Figure 34-5. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events:

The government reduces government spending, resulting in a decrease in people's incomes

Refer to Figure 34-5. What is measured along the vertical axis of the graph:

The interest rate

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase:

The multiplier effect

Several arguments for restricting trade have been advanced. Those arguments do not include:

The no-deadweight-loss argument

The aggregate demand and aggregate supply graph has:

The price level on the vertical axis. The price level can be measured by the GDP deflator

Aggregate demand includes:

The quantity of goods and services households, firms, the government, and customer abroad want to buy

When a country's government budget deficit decreases:

The real exchange rate of its currency decreases and its net exports increase

The term crowding-out effect refers to:

The reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase.

The aggregate supply curve is upward sloping in:

The short run, but not the long run.

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for:

The slope of the aggregate-demand curve.

Refer to Figure 35-4. What is measured along the horizontal axis of the right-hand graph:

The unemployment rate

Net capital outflow equals:

The value of foreign assets purchased by domestic residents- the value of domestic assets purchased by foreigners

The long-run aggregate supply curve shifts left if:

There is a natural disaster

The logic of the multiplier effect applies:

To any change in spending on any component of GDP

Other things the same, which of the following would both make foreigners more willing to engage in U.S. portfolio investment:

U.S. interest rates rise, the default risk of U.S. assets fall

If the budget deficit increases, then:

U.S. residents will want to purchase fewer foreign assets and foreign residents will want to purchase more U.S. assets

Economist A.W. Phillips found a negative correlation between:

Wage inflation and unemployment

Suppose Brazil has a comparative advantage over other countries in producing almonds, but other countries have an absolute advantage over Brazil in producing almonds. If trade in almonds is allowed, Brazil:

Will export almonds

An open economy's GDP is always given by:

Y = C + I + G + NX

During a recession the economy experiences:

falling employment and income