Macro test 4

If the MPC is 0.75 and there are no crowding-out or investment accelerator effects, then an initial increase in aggregate demand of $100 billion will eventually shift the aggregate demand curve to the right by

$400 billion.

If the exchange rate is .60 British pounds = $1, a bottle of ale that costs 3 pounds costs

$5.

The nominal exchange rate is 2 Barbados dollars per U.S. dollar. If the price of a good in Barbados is 3 Barbados dollars and the price in the U.S. is 2 U.S. dollars, what is the real exchange rate?

1.33 Barbados goods per U.S. good

Net capital outflow

10 billion euros

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

Government purchases (increase) GDP (increase) money demand (increase) equilibrium interest rate (increase) investement (decrease)

If U.S. exports are $300 billion and U.S. imports total $350 billion, which of the following is correct?

The U.S. has a trade deficit of $50 billion.

Suppose expected inflation and actual inflation are both low, and unemployment is at its natural rate. If the Fed then pursues an expansionary monetary policy, which of the following results would be expected in the short run?

The economy would move up and to the left along a given short-run Phillips curve.

Which of the following shifts the short-run aggregate supply curve to the right (or down)?

a decrease in the expected price level

Purchasing-power parity theory does not hold at all times because

a. many goods are not easily transported. b. the same goods produced in different countries may be imperfect substitutes for each other. c. Both a and b are correct.

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left.

The multiplier effect

amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.

A central bank sets out to reduce unemployment by changing the money supply growth rate. The long- run Phillips curve shows that in comparison to their original rates, this policy will eventually lead to

an increase in the inflation rate and no change in the unemployment rate

Suppose that the real exchange rate between the United States and Kenya is defined in terms of baskets of goods. Other things the same, which of the following will increase the real exchange rate (that is increase the number of baskets of Kenyan goods a basket of U.S. goods buys)?

an increase in the number of Kenyan shillings that can be purchased with a dollar b. an increase in the price of U.S. baskets of goods c. a decrease in the price in Kenyan shillings of Kenyan goods ( All of the above are correct.)

Automatic stabilizers

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

Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left. If there is no policy response, then eventually

because unemployment is high wages will be bid down and short-run aggregate supply will shift right.

A tax increase has

both a crowding out and multiplier effect

Monetary policy

can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is implemented.

Changes in the price level affect which components of aggregate demand?

consumption, investment, and net exports

When taxes increase, consumption

decreases, so aggregate demand shifts left.

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves.

If countries that imported goods and services from the United States went into recession, we would expect that U.S. net exports would

fall, making aggregate demand shift left.

During the mid and last part of the 1990's both inflation and unemployment were low. In general this could have been the result of

favorable supply shocks that shifted the short-run Phillips curve left.

Net capital outflow is defined as the purchase of

foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.

In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.

Most economists believe that money neutrality holds

in the long run but not the short run.

Keynes explained that recessions and depressions occur because of

inadequate aggregate demand.

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

increase taxes

Suppose investment spending falls. To offset the change in output the Federal Reserve could

increase the money supply. However, this increase would move the price level farther from its value before the decline in investment spending.

The misperceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has

increased, so they increase production.

Net capital outflow

is always equal to net exports.

A depreciation of the U.S. real exchange rate induces U.S. consumers to buy

more domestic goods and fewer foreign goods.

Over the past five decades, the U.S. economy has become

more open

Other things the same, a decrease in the price level makes consumers feel

more wealthy, so the quantity of goods and services demanded rises.

The sacrifice ratio is the

number of percentage points annual output falls for each percentage point reduction in inflation.

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

reduced unemployment and raised inflation.

Disinflation is defined as a

reduction in the rate of inflation.

Stagflation exists when prices

rise and output falls.

In 1979, Fed chair Paul Volcker decided to pursue a policy

that would lead to disinflation

The short-run Phillips curve intersects the long-run Phillips curve where

the actual rate of inflation equals the expected rate of inflation. the actual rate of unemployment equals the natural rate of unemployment.

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

the equilibrium interest rate decreases.

People choose to hold a smaller quantity of money if

the interest rate rises, which causes the opportunity cost of holding money to rise.

The variables on the vertical and horizontal axes of the aggregate demand and supply graph are

the price level and real output.

According to purchasing power parity what should the nominal exchange rate between the U.S. and another country be equal to?

the price level in the other country divided by the price level in the U.S.

If people believe that the central bank is going to reduce inflation

the short-run Phillips curve shifts left and the sacrifice ratio will fall.

A change in expected inflation shifts

the short-run Phillips curve, but not the long run Phillips curve.

In the late 1960s, Milton Friedman and Edmund Phelps argued that

the trade-off between inflation and unemployment did not apply in the long run. This claim is consistent with monetary neutrality in the long run.

If there is an adverse supply shock, then

unemployment rises and the short-run Phillips curve shifts right.