Intermediate Macro Exam 2

If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output. A) horizontal; fiscal B) vertical; fiscal C) horizontal; monetary D) vertical; monetary

A

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. A) price level; increase B) interest rate; decrease C) money supply; increase D) consumption function; decrease

A

In the IS-LM model, a decrease in the interest rate would be the result of a(n): A) increase in the money supply. B) increase in government purchases. C) decrease in taxes. D) increase in money demand.

A

In the IS-LM model, changes in taxes initially affect planned expenditures through: A) consumption. B) investment. C) government spending. D) the interest rate.

A

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

A

The opportunity cost of holding money is the: A) nominal interest rate B) real interest rate C) federal funds rate D) prevailing Treasury bill rate

A

The income velocity of money increases and the money demand parameter k ______ when people want to hold ______ money A) increases; more B) increases; less C) decreases; more D) decreases; less

D

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. A) less than B) greater than C) equal to D) sometimes less and sometimes greater than

A

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. A) increase B) decrease C) first increase and then decrease D) first decrease and then increase

A

According to the quantity equation, if the velocity of money and the supply of money are fixed, tan the price level increases, then the quantity of goods and services purchased: A) decreases B) increases C) does not change D) may either increase or decrease

A

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P. A) higher; lower B) lower; higher C) higher; higher D) lower; lower

A

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. A) the productive capability of the economy; the money supply B) the money supply; the productive capability of the economy C) velocity; the money supply D) the money supply; velocity

A

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 ______. A) right; decumulation B) right; accumulation C) left; decumulation D) left; accumulation

B

The income velocity of money: A) is defined in the identity MV=PY B) is defined in the identity MV=PT C) is the same thing as the transactions velocity of money D) is the same as the number of times a dollar bill changes hands

A

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______. A) IS; shifts to the right B) IS; does not shift C) LM: shifts to the right D) LM; does not shift

C

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: A) 2,000 B) 1,800. C) 1,600. D) 1,400.

C

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. A) 2 B) 4 C) 6 D) 8

C

If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when Tdecreases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400.

C

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then: A) both consumption and investment remain unchanged. B) consumption rises but investment falls. C) investment rises but consumption falls. D) both consumption and investment fall.

C

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect: A) neither prices nor level of output B) both prices and level of output C) prices but not level of output D) level of output but not prices

C

The transactions velocity of money indicates the _____ in a given period, while the income velocity of money indicates the _____ in a given period. A) number of transactions; amount of income earned B) quantity of money used for transactions; quantity of money paid as income C) number of times a dollar bill changes hands; number of times a dollar bill enters someone's income D) volume of transactions; flow of income

C

When the demand for money parameter, k, is large, the velocity of money is ____ and money is changing hands _____

small; infrequently

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

-4

.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: A) Y = 1,100, r = 6 percent. B) Y = 1,200, r = 5 percent. C) Y = 1,000, r = 5 percent. D) Y = 1,100, r = 5 percent.

A

A change in income in the IS-LM model for a fixed price A) represents a shift in the aggregate demand curve. B) represents a movement along the aggregate demand curve. C) has the same effect on the aggregate demand curve as a change in income in the IS- LM model resulting from a change in the price level. D) does not represent a change in the aggregate demand curve.

A

A tax cut shifts the ______ to the right, and the aggregate demand curve ______. A) IS; shifts to the right B) IS; does not shift C) LM: shifts to the right D) LM; does not shift

A

The reason that the income response to a fiscal expansion is generally less in the IS-LMmodel than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that: A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment. B) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment. C) investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate. D) the price level is fixed whereas in the IS-LM model it is allowed to vary.

A

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will: A) lower the interest rate. B) raise the interest rate C) have no effect on the interest rate. D) first lower and then raise the interest rate.

A

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: A) decrease by 1 percent. B) decrease by 2 percent C) decrease by 3 percent D) increase by 1 percent.

A

Which of the following is NOT an effect of expected inflation A) causes lower real wages B) leads to shoe-leather costs C) increases menu costs D) leads to taxing of nominal capital gains that are not real

A

if the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change is real GDP must by _____ percent. A) 3 B) 4 C) 9 D) 11

A

"inflation tax" means that: A) as the price level rises, taxpayers are pushed into higher tax brackets B) as the price level rises, the real value of money held by the public decreases C) as taxes increase, the rate of inflation also increases D) in a hyperinflation, the chief source of tax revenue is often the printing of money

B

A decrease in the price level, holding nominal money supply constant, will shift the LM curve: A) upward and to the right. B) downward and to the right. C) downward and to the left D) upward and to the left.

B

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply. A) increase B) decrease C) first increase and then decrease D) first decrease and then increase

B

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: A) 0. B) 100 C) 150 D) 250

B

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 A) prices; output B) output; prices C) output; output D) prices; prices

B

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: A) inflation of 1 percent and the nominal interest rate of less than 1 percent. B) inflation of 1 percent and the nominal interest rate of 1 percent. C) inflation of 1 percent and the nominal interest rate of more than 1 percent. D) both inflation and the nominal interest rate of less than 1 percent.

B

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 A) only prices; only output B) only output; only prices C) both prices and output; only prices D) both prices and output; both prices and output

B

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______ A) variations in labor-market utilization; technological progress B) technological progress; variations in labor-market utilization C) money supply growth rates; changes in velocity D) changes in velocity; money supply growth rates

B

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will: A) be permanently higher and output will be restored to the natural rate. B) return to the old level and output will be restored to the natural rate. C) be permanently higher and output will be permanently lower D) return to the old level, but output will be permanently lower

B

The IS-LM model takes ______ as exogenous A) the price level and national income B) the price level C) national income D) the interest rate

B

The inflation tax is paid: A) only by the central bank B) by all holders of money C) only by government bond holders D) equally by every household

B

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that ______. A) output is fixed; prices are fixed B) prices are fixed; output is fixed C) the interest rate is fixed; the money supply is fixed D) prices are flexible; output varies

B

The short run refers to a period: A) of several days. B) during which prices are sticky and unemployment may occur. C) during which capital and labor are fully employed D) during which there are no fluctuations.

B

When firms experience unplanned in inventory decumulation, they typically: A) build new plants B) hire more workers and increase production C) call for more government spending D) lay off workers and reduce production

B

When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce production. C) hire more workers and increase production D) call for more government spending.

B

(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: A) r2, Y2 B) r3, Y2 C) r2, Y3 D) r3, Y

C

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a raise in taxes of (change in)T will: A) decrease in equilibrium income by (change in)T B) decrease in equilibrium income by (change in)T/1-mpc C) decrease in equilibrium income by MPC/1-MPC(change in)T D) not affect equilibrium income at all

C

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: A) one unit B) G. C) G divided by the quantity one minus the marginal propensity to consume. D) G multiplied by the quantity one plus the marginal propensity to consume.

C

According to the quantitiy theory of money, ultimate control over the rate of inflation in the United States is exercised by: A) the Organization of Petroleum Exporting Countries B) the US Treasury C) the Federal Reserve D) private citizens

C

An economic change that does not shift the aggregate demand curve is a change in: A) the money supply. B) the investment function. C) the price level. D) taxes.

C

An increase in consumer saving for any given level of income will shift the: A) LM curve upward and to the left. B) LM curve downward and to the right. C) IS curve downward and to the left. D) IS curve upward and to the right.

C

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 _____. A) 1; 5 B) 5; 1 C) 1; 1 D) 5;5

D

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. A) increase; lower B) increase; raise C) lower; lower. D) lower; raise

D

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______. A) LM; left B) LM; right C) IS; left D) IS; right

B

If the quantity of real money balances is kY, where k is constant, then velocity is: A) k B) 1/k C) kP D) P/k

B

If the demand for real money balances is proportional to real income, velocity will: A) increase as income increases B) increase as income decreases C) vary directly with the interest rate D) remain constant

D

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. A) increase; IS B) decrease; IS C) increase; LM D) decrease; LM

D

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. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase

A

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: A) is horizontal. B) is vertical C) slopes upward and to the right D) slopes downward and to the right.

A

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 ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls

A

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier. A) is larger than B) equals C) is smaller than D) is the inverse of the

A

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 ______. A) $1 billion; more than $1 billion B) $0.75 billion; more than $0.75 billion C) $0.75 billion; $0.75 billion D) $1 billion; $1 billion

A

The quantity equation for money, by itself: A) may be thought of as a definition for velocity of money. B) implies that the velocity of money is constant C) implies that the price level is proportional to the money supply D) implies that real gross domestic product (GDP) is proportional to the money supply.

A

Two interpretations of the IS-LM model are that the model explains: A) the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve. B) the short-run quantity theory of income, or the short-run Fisher effect C) the determination of investment and saving, or what shifts the liquidity preference schedule D) changes in government spending and taxes, or the determination of the supply of real money balances.

A

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: A) downward and to the left. B) downward and to the right C) upward and to the left D) upward and to the right.

A

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? A) 3% B) 7% C) 10% D) 13%

B

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? A) i B) 4i C) 1/4i D) 0.25

B

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: A) desire to increase prices throughout the economy B) need to generate revenue to pay for spending C) responsibility to increase nominal interest rates by increasing expected inflation D) inability to conduct open market operations

B

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. A) downward; steeper B) downward; flatter C) upward; steeper D) upward; flatter

B

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: A) Y = 400 - 0.75T - 25r + G. B) Y = 1,600 - 3T - 100r + 4G. C) Y = 400 + 0.75T - 25r - G. D) Y = 1,600 + 3T - 100r - 4G.

B

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: A) 10. B) 20,000. C) 200,000 D) 2,000,000.

B

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 supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by: A) 200 and the interest rate falls by 2 percent. B) 100 and the interest rate falls by 1 percent. C) 50 and the interest rate falls by 0.5 percent. D) 200 and the interest rate remains unchanged.

C

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: A) only the current money supply B) only the expected future money supply. C) both the current and expected future money supply. D) neither the current nor the expected future money supply.

C

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 A) 0.2 B) 2 C) 5 D) 10

C

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 ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls

C

In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______. A) rises; falls B) rises; rises C) falls; rises D) falls; falls

C

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: A) 350 B) 400 C) 600 D) 750

C

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 ______. A) LM; right B) LM; left C) IS; right D) IS; left

C

Percentage change in P is approximately equal to the percentage change in: A) M B) M minus percentage change in Y. C) M minus percentage change in Y plus percentage change in velocity. D) M minus percentage change in Y minus percentage change in velocity.

C

The IS curve provides combination 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 _____. A) saving and investment; planned spending B) real-money balances; loanable funds C) goods and services; real money balances D) real-money balances; goods and services

C

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. A) positively; positively B) positively; negatively C) negatively; negatively D) negatively; positively

D

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: A) 100. B) 200. C) 300. D) 400.

D

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 ______ A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase

D

If income velocity is assumed to be constant, but no other assumptions are made, the level of _____ is determined by M. A) prices B) income C) transactions D) nominal GDP

D

If the Fed announces that it will raise the money supply in the future but does not change the money supply today, A) both the nominal interest rate and the current price level will decrease B) the nominal interest rate will increase and the current price level will decrease C) the nominal interest rate will decrease and the current price level will increase. D) both the nominal interest rate and the current price level will increase.

D

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income. A) increase by 100 B) increase by more than 100 C) decrease by 100 D) increase, but by less than 100

D

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by (MPCxchangeinT) ______ and increases the equilibrium level of income by (changeinY): _____. A) 1 billion, 1 billion B) .75 billion, .75 billion C) 1 billion, more than 1 billion D) .75 billion, more than .75 billion

D

Looking at the aggregate demand curve alone, one can tell _____ that will prevail in the economy A) the price level B) the quantity of output C) the quantity of output and the price level D) neither the quantity of output nor the price level

D

Most economists believe that prices are: A) sticky in both the short and long run B) flexible in both the short and long runs C) flexible int he short run by many are sticky in the long run D) flexible int he long run but many are sticky in the short run.

D

Stabilization policy refers to policy actions aimed at: A) preventing increases in the poverty rate B) equalizing incomes of households in the economy C) maintaining constant shares of output going to labor and capital D) reducing the severity of short-run economic fluctuations

D

Tax cuts stimulate ______ by improving workers' incentive and expand ______ by raising households' disposable income A) velocity; demand for loanable funds B) demand for loanable funds; velocity C) aggregate demand; aggregate supply D) aggregate supply; aggregate demand

D

The Keynesian- cross analysis assumes planned investment A) is fixed and so does the IS analysis B) depends on the interest rate and so does the IS analysis C) depend on expenditure and so does the IS analysis D) is fixed, whereas the IS analysis assumes it depends on the interest rate

D

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______ A) positive; money supply B) negative; money supply C) positive; price level D) negative; price level

D

The theory of liquidity preference implies that the quantity of real money balances demanded or demand for liquidity L(r,Y) is: A) Negatively related to both the interest rate and income B) positively related to both the interest rate and income C) positively related to the interest rate and negatively related to income D) negatively related to the interest rate and positively related to income

D

the version of Okun's law studied assumes that with no changed in unemployment, real GDP normally grows by 3 percent over a year. IF the unemployment rate fall by 2 percentage points over a year, Okun's law predicts that real GDP would: A) decrease by 1 percent B) decrease by 5 percent C) decrease by 7 percent D) increase by 7 percent

D