Macroeconomics Exam #4

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 money demand function is (M/P)^d=2,200-200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1,600

Using the Keynesian-cross analysis, assume that the consumption function is given by C=200+0.7(Y-T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equals 1,000 is:

170

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, a cut in taxes of $120 billion increases equilibrium income by A. $160 billion. B. $180 billion. C. $240 billion. D. $360 billion.

C. $240 billion.

In the Keynesian cross diagram, if the marginal propensity to consume is 0.75, then a $100 million increase in government spending will increase output by A. $100 million B. $250 million C. $400 million D. $500 million

C. $400 million

Expansionary fiscal policy shifts the ---- curve to the ----. A. LM; right B. LM; left C. IS; right D. IS; left

C. IS; right

Contractionary monetary policy results in A. a shift of the IS curve to the left. B. a shift of the LRAS curve to the right. C. a shift of the AD curve to the left. D. a shift of the LM curve to the right.

C. a shift of the AD curve to the left.

If the government wants to raise investment but keep output constant, it should A. adopt expansionary monetary policy but keep fiscal policy unchanged. B. adopt expansionary monetary policy and expansionary fiscal policy. C. adopt expansionary monetary policy and contractionary fiscal policy. D. keep monetary policy unchanged but adopt contractionary fiscal policy.

C. adopt expansionary monetary policy and contractionary fiscal policy.

A country with a fixed exchange rate can expand aggregate demand by its currency, which would net exports. A. revaluing, increase B. revaluing, decrease C. devaluing, increase D. devaluing, decrease

C. devaluing, increase

Suppose there is a housing market crash. In the IS-LM model, this will cause consumption to ____ and investment to ____. A. rise; rise B. rise; fall C. fall; rise D. fall; fall

C. fall; rise

In a small open economy with a floating exchange rate, output can be increased in the short run by A. increasing government spending. B. increasing taxes. C. increasing the money supply. D. decreasing the money supply.

C. increasing the money supply.

Following the 2008 financial crisis, many financial institutions stopped making loans even to creditworthy customers. In the IS-LM model, we can represent this by a ____ shift in the ____ curve. A. rightward; IS B. rightward; LM C. leftward; IS D. leftward; LM

C. leftward; IS D. leftward; LM

At the intersection of the IS and LM curves, A. the economy has reached full employment. B. the economy has the right balance of inflation and unemployment. C. the goods market and money market are both in equilibrium. D. the goods market disequilibrium offsets the money market disequilibrium.

C. the goods market and money market are both in equilibrium.

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

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

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

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Flemming model, with fixed exchange rates, lead to:

a fall in consumption and income

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

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

between zero and one

The IS and LM curves together generally determine:

both income and the interest rate

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

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

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 LM curve

In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short tun, 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

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 equilibrium of the Keynesian cross shows:

equality of planned expenditure and income in the short time

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

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

falls; rises

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

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

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

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

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

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 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 the Keynesian-cross model, a decrease in the interest rate ___ planned investment spending and ____ the equilibrium level of income

increases; increases

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

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

In the IS-LM model when the Federal Reserve decreases the money supply, the public ___ bonds, and the interest rate ____, leading to a(n) _____ in investment and income. This is called the monetary transmission mechanism

sells; rises; decrease

Using the IS-LM analysis, if the LM curve is horizontal, the multiplier for an increase in government spending is ____ for an increase in government purchases using the Keynesian-cross analysis

smaller than the multiplier

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand

The slope of the IS curve depends on:

the interest sensitivity of investment and the marginal propensity to consume

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

the price level

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

to fall while net exports are unchanged

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

unplanned inventory investment

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

upward and to the left

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

vertical; fiscal

Suppose a wave of credit card fraud causes consumers to use cash more frequently in transactions. How will this affect the LM curve? A. It will shift up. B. It will shift down. C. There will be a movement along it.

A. It will shift up.

In the IS-LM model, which of the following causes both the interest rate and income to decline? A. an increase in taxes B. a decrease in taxes C. an increase in the money supply D. a decrease in the money supply

A. an increase in taxes

In the Mundell-Fleming model with a floating exchange rate, which of the following increases income? A. an increase in the money supply B. a decrease in the money supply C. an increase in taxes D. a decrease in taxes

A. an increase in the money supply

If a country is trying to keep its currency undervalued to promote its ____ sectors, its central bank's foreign reserves will be ____. A. export-oriented; increasing B. export-oriented; decreasing C. import-competing; increasing D. import-competing; decreasing

A. export-oriented; increasing

If a country chooses to have free capital flows and a fixed exchange rate, then it will A. give up the use of monetary policy for purposes of domestic stabilization. B. give up the use of fiscal policy for purposes of domestic stabilization. C. give up nothing. D. find it impossible to maintain this policy.

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

The IS curve slopes downward because a interest rate reduces and thereby income. A. higher, planned investment B. higher, money demand C. lower, planned investment D. lower, money demand

A. higher, planned investment

If the Fed holds the interest rate constant in response to an increase in government purchases, the money supply will , and the impact on income will be than if the money supply were held constant. A. increase, larger B. increase, smaller C. decrease, larger D. decrease, smaller

A. increase, larger

If the Fed wants to lower short-term interest rates, it should ____ the money supply, which would cause real money balances to ____. A. increase; rise B. increase; fall C. decrease; rise D. decrease; fall

A. increase; rise

A small open economy with a floating exchange rate wants to smooth output. It can use A. monetary policy but not fiscal policy. B. fiscal policy but not monetary policy. C. either fiscal or monetary policy. D. neither fiscal nor monetary policy.

A. monetary policy but not fiscal policy.

For a given interest rate, an increase in the money supply ____ income, shifting the LM curve to the ____. A. raises; right B. raises; left C. lowers; right D. lowers; left

A. raises; right

If a small open economy's output is above its long-run level, then over time the price level will ----, causing the the exchange rate to ----. A. rise; appreciate B. rise; depreciate C. fall; appreciate D. fall; depreciate

A. rise; appreciate

The fact that output and interest rates both fell during the Great Depression is consistent with a shift in the ---- curve to the ----. A. IS; right B. IS; left C. LM; right D. LM; left

B. IS; left

Which is the more volatile component of GDP over the business cycle? A. Consumption B. Investment

B. Investment

Suppose a small open economy has a fixed exchange rate and the government raises taxes. What will happen to income in the short run? A. It will rise. B. It will fall. C. It will remain unchanged.

B. It will fall.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed should ____ the money supply. A. increase B. decrease C. not change

B. decrease

The LM curve slopes upward because income increases the of money and thereby the interest rate. A. higher, supply B. higher, demand C. lower, supply D. lower, demand

B. higher, demand

A permanent increase in government spending raises income A. and the interest rate in the short run, but leaves both unchanged in the long run. B. in the short run, but leaves it unchanged in the long run, while lowering investment. C. in the short run, but leaves it unchanged in the long run, while lowering consumption. D. and the interest rate in both the short and long runs.

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

Suppose the sudden death of a popular president reduces consumer confidence, inducing people to save more. To stabilize aggregate demand, the Fed should A. increase the money supply to raise interest rates. B. increase the money supply to lower interest rates. C. decrease the money supply to raise interest rates. D. decrease the money supply to lower interest rates.

B. increase the money supply to lower interest rates.

If a country has a floating exchange rate and some event leads people to believe that its currency will be worth less in the future, then today the interest rate in that country will , and its currency will . A. increase, appreciate B. increase, depreciate C. decrease, appreciate D. decrease, depreciate

B. increase, depreciate

In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports A. decrease but the money supply falls and income falls. B. increase, the money supply increases, and income increases. C. are unchanged but the money supply falls and income falls. D. are unchanged, the money supply is unchanged, and income is unchanged.

B. increase, the money supply increases, and income increases.

If output is above its natural level, over time the price level will , shifting the curve and moving the economy toward its long-run equilibrium. A. rise, IS B. rise, LM C. fall, IS D. fall, LM

B. rise, LM

In the Mundell-Fleming model with a floating exchange rate, if a country restricts imports, the value of its currency will , while its net exports will . A. rise, fall B. rise, remain unchanged C. fall, rise D. fall, remain unchanged

B. rise, remain unchanged

According to the IS-LM model, if the central bank decreases the money supply, interest rates will ____ and output will ____. A. rise; rise B. rise; fall C. fall; rise D. fall; fall

B. rise; fall

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 ----. A. rise; rise B. rise; fall C. fall; rise D. fall; fall

B. rise; fall

In IS-LM equilibrium, in absolute value the government spending and tax multipliers are both ____ the multipliers from Keynesian-cross analysis. A. greater than B. smaller than C. the same as

B. smaller than

According to the theory of liquidity preference, the central bank can increase the of money and the interest rate. A. supply, raise B. supply, lower C. demand, raise D. demand, lower

B. supply, lower

In a small open economy with a floating exchange rate, the exchange rate will appreciate if A. the money supply is increased. B. the money supply is decreased. C. government spending is decreased. D. taxes are increased.

B. the money supply is decreased.

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

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, an increase in government purchases of $120 billion increases equilibrium income by A. $160 billion. B. $180 billion. C. $240 billion. D. $360 billion.

D. $360 billion.

If the marginal propensity to consume is 0.75 and the interest rate is fixed, then a $100 million increase in taxes will eventually change equilibrium output by A. $400 million B. -$400 million C. $300 million D. -$300 million

D. -$300 million

A decrease in the price level shifts the ____ curve to the ____ and the AD curve ____. A. IS; right; shifts to the right B. LM; right; shifts to the right C. LM; left; does not shift D. LM; right; does not shift

D. LM; right; does not shift

In the Mundell-Fleming model with a fixed exchange rate, which of the following increases income? A. an increase in the money supply B. a decrease in the money supply C. an increase in taxes D. a decrease in taxes

D. a decrease in taxes

In the IS-LM model, which of the following causes income to decline and the interest rate to rise? A. an increase in taxes B. a decrease in taxes C. an increase in the money supply D. a decrease in the money supply

D. a decrease in the money supply

The severity of the Great Depression may be partly explained by an increase in expected A. inflation, which raised nominal interest rates above real interest rates. B. inflation, which raised real interest rates above nominal interest rates. C. deflation, which raised nominal interest rates above real interest rates. D. deflation, which raised real interest rates above nominal interest rates.

D. deflation, which raised real interest rates above nominal interest rates.

For any given interest rate, a decrease in government spending causes the planned expenditure curve to shift ____ and the IS curve to shift to the ____. A. up; right B. up; left C. down; right D. down; left

D. down; left

Suppose a country with a fixed exchange rate experiences political shocks that foreign investors believe make it a riskier place to invest in. If the central bank is successful in defending the exchange rate, then output will ----. If not, the exchange rate will ----. A. rise; appreciate B. rise; depreciate C. fall; appreciate D. fall; depreciate

D. fall; depreciate

Suppose an economy is in a recession. If no policy changes are made, then over time the price level will ----, causing a ---- the AD curve. A. rise; shift in B. rise; movement along C. fall; shift in D. fall; movement along

D. fall; movement along

In the IS-LM model, when government spending falls, the interest rate ____ and income ____. A. rises; rises B. rises; falls C. falls; rises D. falls; falls

D. falls; falls

If an open economy has an independent monetary policy, it cannot have both A. restricted capital flows and a floating exchange rate. B. restricted capital flows and a fixed exchange rate. C. free capital flows and a floating exchange rate. D. free capital flows and a fixed exchange rate.

D. free capital flows and a fixed exchange rate.

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 zero expected inflation, if expected inflation becomes negative, then the:

IS curve shifts leftward

A speculative attack on a currency occurs when:

investors' perceptions change, making a fixed exchange rate untenable

If short-run equilibrium in the Mundell-Flemming 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

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

leftward shift in the LM curve

The IS curve plots the relationship between the interest rate and ___ that arises in the market

national income; goods and services

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

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

"Crony capitalism" refers to situations in which banks make loans to those borrowers with the most:

political clout