Macroeconomics Final Exam

In an open economy, gross domestic product equals $1,850 billion, consumption expenditure equals $975 billion, government expenditure equals $225 billion, investment equals $500 billion. What is net capital outflow?

$150 billion

If a country had a trade surplus of $50 billion and its exports rose by $30 billion while its imports rose by $20 billion, its net exports would now be

$60 billion.

In an open economy, gross domestic product equals $1,850 billion, consumption expenditure equals $975 billion, government expenditure equals $225 billion, investment equals $500 billion, and net exports equals $150 billion. What is national savings?

$650 billion

In the AS-AD model, a decrease in consumer confidence will cause

. a shift of the aggregate demand curve to the left.

Suppose that in an economy GDP is equal to 11,000, taxes are equal to 1,500, consumption equals 7,500, and government purchases equal 2,000. What is national saving?

1,500

Which of the following is included in the supply of U.S. dollars in the market for currency exchange in the open-economy macroeconomic model?

A U.S.-based law firm wants to build a new office in Japan.

Fran buys 1,000 shares of stock issued by Miller Brewing. In turn, Miller uses the funds to buy new machinery for one of its breweries

Fran is saving; Miller is investing.

Which of the following is not an alleged disadvantage of expansionary monetary policy?

It tends to worsen the government's budget deficit.

You observe a closed economy that has a government deficit and positive investment. Which of the following is correct?

Private saving is positive; public saving is negative.

Which of the following did not happen during the onset of the Great Depression?

The Fed conducted expansionary monetary policy

The corporation Titan Bikes borrows funds from U.S. capital markets to build a factory in the U.S. and also to build a factory in Denmark. Borrowing for the factories in which location(s) is (are) included in the demand for U.S. loanable funds?

The U.S. and Denmark.

Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?

The demand for loanable funds would shift right.

In the short run, what will happen to the economy's equilibrium price level and equilibrium quantity of output if income taxes are raised?

The equilibrium price level and quantity of real output will both decrease.

Consider the expressions (T - G) and (Y - T - C). Which of the following statements is correct?

The first of these is public saving; the second one is private saving.

Which of the following events could explain a decrease in interest rates together with an increase in the quantity of investment spending?

The government reduced the tax rate on savings.

Which of the following is correct?

The long-run, but not the short-run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables.

Which of the following is correct concerning recessions?

They are associated with comparatively large declines in investment spending

Which of the following decreases if the U.S. imposes an import quota on computer components?

U.S. imports and U.S. exports.

Which of the following expressions is a correct definition of national saving?

Y - C - G

Which of the following equations correctly represents GDP for a closed economy?

Y = C + I + G

Which of the following equations correctly represents GDP for an open economy?

Y = C + I + G + NX

Which of the following would cause the Phillips curve to shift?

a change in expected inflation

Other things the same, which of the following would make India's net capital outflow increase?

a decrease in Indian interest rates

Which of the following shifts short-run, but not long-run, aggregate supply right?

a decrease in the expected price level

Suppose the central bank pursues an unexpectedly expansionary monetary policy, in the short run, the effects of this is shown by

a movement upward and to the left along the short run Phillips curve

Suppose the central bank pursues an unexpectedly expansionary monetary policy. In the short run, the effects of this are shown by

a movement upward and to the left along the short-run Phillips Curve

Advocates of stabilization policy would advocate which of the following for an economy experiencing severe unemployment?

a reduction in tax rates

The long-run result of government countercyclical policy (a.k.a., government stabilization policy) in response to a demand-driven recession will be

a return to the original pre-recession level of output, albeit at higher prices than if the economy had been allowed to self-correct.

A year-long drought that destroys most of the summer's crops would be considered

a short-run supply shock.

In the 1970s, the Fed accommodated a(n)

adverse supply shock, and so contributed to higher inflation

In the AS-AD model, the relationship between the overall price level in the economy and total production by firms is shown by

aggregate supply curves.

In which of the following set of circumstances can we be certain the price level will increase?

aggregate supply decreases and aggregate demand increases

In the AS-AD model, which of the following shifts short-run aggregate supply curve left?

an increase in price-level expectations

The interest-rate effect suggests that

an increase in the price level will increase the demand for money, thus increasing interest rates and hence decreasing investment spending.

When an economy's actual output differs from its potential output at some point in time, we say that it is experiencing

an output gap.

In the AS-AD model, tax cuts

and increases in government expenditures shift aggregate demand to the right

In the open-economy macroeconomic model, if the supply of loanable funds increases, then the interest rate

and the real exchange rate decrease

Keynes used the term "animal spirits" to refer to

arbitrary swings in the attitudes of household and firms from excessive pessimism to excessive optimism

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

Two of the economy's most important financial intermediaries are

banks and mutual funds.

As the price level increases, the opportunity cost of holding wealth in_______form increases, and hence people must be paid_______to continue doing it in the same amount

bond;more

If business opportunities in a country become relatively less attractive relative to those of other countries, then

both its net exports and net capital outflows rise.

If the Federal Reserve decided to lower short-term interest rates, it could

buy bonds to raise the money supply

Which of the following would both raise the U.S. exchange rate?

capital flight from other countries to the U.S. occurs and the U.S. moves from budget surplus to budget deficit because of higher government spending

Domestic saving must equal domestic investment in

closed, but not open economies.

If U.S. citizens decide to save a smaller fraction of their incomes, U.S. domestic investment

decreases, and U.S. net capital outflow decreases.

Demand from foreigners to buy U.S. bonds is accounted for on the _____ side of the U.S. market for loanable funds, and on the _____ side of the U.S. market for currency exchange.

demand; supply

In the AS-AD model, the aggregate demand curve

depicts the inverse relationship between the overall price level and the total quantity of real output demanded

The size of the multiplier associated with initial increase in aggregate demand will be

diminished if inflation occurs

The short-run Phillips Curve is _____, but the long-run Phillips Curve is _____.

downward sloping; vertical

If a firm sells a total of 100 shares of its stock, then

each share represents ownership of 1 percent of the firm.

Which of the following is most likely to increase exports?

ending investment tax credits

On a given Phillips Curve, which of the following is held constant?

expected inflation

According to Milton Friedman and Anna Schwartz, the real cause of the Great Depression — what made the Great Depression "great" — was

failure by the U.S. Federal Reserve to prevent the nation's money supply from contracting in the wake of bank failures and deposit withdrawals.

An economic contraction caused by a reduction in aggregate demand will remedy itself over time (i.e., in the long run) as the expected price level

falls, shifting short-run aggregate supply right in the AS-AD model.

When the price level falls, the interest rate

falls. When the money supply falls, the interest rate rises.

From a long-run perspective, the result of a government responding to a negative supply shock by increasing its spending will be a

faster recovery than otherwise, but even greater inflation.

Net capital outflow is defined as the purchase of

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

In the AS-AD model, the long-run aggregate supply curve is located at the level of output consistent with

full employment

The Phillips curve depicts

high amounts of unemployment in an economy will coincide with low inflation

Suppose that Greta, a U.S. resident, purchases a foreign bond. Her transactions are included

in the demand for U.S. loanable funds, as well as the supply of dollars in the U.S. market for currency exchange.

The aggregate quantity of real output which firms supply changes in response to changes in the price level

in the short run only

The amount of real output which firms supply changes in response to changes in the price level

in the short run only

Keynes explained that recessions and depressions occur because of

inadequate aggregate demand

Keynes explained that recessions and depressions occur because of

inadequate aggregate demand.

Keynes believed that economies experiencing high unemployment should adopt policies to

increase aggregate demand

In an effort to move an economy currently in recession back to its full employment level of output, a government could

increase spending in order to increase aggregate demand

In an effort to move an economy currently in recession back to its full-employment level of output, a government could

increase spending in order to increase aggregate demand.

When Mexico suffered from capital flight in 1994, Mexico's net exports

increased.

People will want to hold more money if the price level

increases or if the interest rate decreases.

Which of the following is included in the demand for loanable funds?

investment but not government borrowing

Alyssa is opening a bicycle shop, and her monthly expenditures to get the shop up and running exceed her monthly income. Alyssa is best described as a(n)

investor or demander of funds.

U.S. net capital outflow

is a part of the demand for U.S. loanable funds, and the source of the supply of dollars in the foreign exchange market.

In the AS-AD model, fluctuations around the long run aggregate supply curve

is called the business cycle, are experienced as expansions, recessions, and recoveries, and are normal for economies

When the economy is producing a quantity of real output greater than that indicated by the location of its long-run aggregate supply curve,

it is pushing some of its resources to operate beyond capacity.

When the economy is producing a quantity of real output greater than that indicated by the location of its long run aggregate supply curve

it is pushing some of resources to operate beyond capacity

Wages often don't fall as quickly as the price level does, a phenomenon referred to as "sticky wages". The main reason wages are sticky is because people's price-level expectations are themselves sticky — basically, people aren't immediately aware when the price level falls, and hence don't immediately downward-adjust their nominal wage demands when the price level does fall. This explanation puts the emphasis on people's awareness (or lack thereof). In addition, there are institutional factors which can contribute to the problem. That is, there are several institutional factors which can also cause wages to remain stuck at above-equilibrium levels in response to falling aggregate demand, rather than quickly adjusting downward, even after people have themselves become aware of the changed price level. Which of the following institutions would not contribute to this problem? That is, which of the following things does not interfere with downward wage flexibility?

laws which make hiring and firing employees easier

Contractionary monetary policy

leads to disinflation and eventually makes the Phillips Curve shift left.

contractionary monetary policy

leads to disinflation and eventually makes the short run Phillips curve shift left

If inflation expectations decline, then the short run Phillips curve shifts

left, so that at any inflation rate unemployment is lower in the short run then before

Wilma is considering expanding her dress shop and borrowing the funds to do it. If interest rates rise, she is

less likely to expand. This illustrates why the demand for loanable funds slopes downward.

Other things the same, a higher real interest rate raises the quantity of

loanable funds supplied

The classical model is appropriate for analysis of the economy in the

long run, since real and nominal variables are essentially determined separately in the long run.

According to the definitions of private and public saving, if Y, C, and G remained the same, an increase in taxes would

lower private saving and raise public saving.

The primary economic function of the financial system is to

match one person's saving — their future spending — with another person's investment — their present spending.

The interest rate falls in the short-run money market if

money demand shifts left or money supply shifts right

In essence, people can hold their wealth in just two forms, _____ and _____, or some combination thereof

money; bonds

During recessions, automatic stabilizers tend to make the government's budget

move toward deficit.

The value of net exports equals the value of

national saving minus domestic investment.

An increase in the price level together with a reduction in real output would result from

natural disasters such as hurricanes, floods, and droughts

An economy in which output has decreased and prices have increased would suggest the occurrence of a

negative supply shock.

In the open-economy macroeconomic model, the supply of dollars in the U.S. market for currency exchange comes from U.S.

net capital outflow

In the open-economy macroeconomic model, if a country's interest rate falls, then its

net capital outflow and its net exports rise.

In the open-economy macroeconomic model, if the U.S. interest rate rises, then its

net capital outflow falls, so the supply of dollars in the market for currency exchange shifts left.

If U.S. net exports are positive, then U.S

net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.

At equilibrium in the open-economy loanable funds market, the amount that people want to save equals the desired quantity of

net capital outflow plus domestic investment.

The linkage between the market for loanable funds and the market for foreign-currency exchange is

net capital outflow.

Suppose that because of legal and financial reforms in the country of Splat, foreigners find business opportunities there more attractive. We would expect the more attractive opportunities would cause Splat's

net exports and net capital outflow to decrease.

If a country has positive net capital outflow, then

on net it is purchasing assets from abroad. This adds to its demand for domestic loanable funds.

The aggregate demand-aggregate supply model depicts the existence of monetary neutrality

only in the long run.

Suppose short-term interest rates increase. The reason could be

open-market sales of U.S. Treasuries by the Fed, or a higher price level.

Other things the same, when interest rates rise,

people want to lend more, making the quantity of loanable funds supplied increase

As the price level rises,

people will want to buy fewer bonds, so the interest rate rises.

If for a country it is the case that Y > C + I + G, then it has

positive net capital outflow and positive net exports.

If a country exports more than it imports, then it has

positive net exports and positive net capital outflows.

The relationship between the price level and interest rate is ___________ , which means by extension that the relationship between the price level and investment spending is __________.

positive; negative

For a closed economy, T = $5,000; S = $11,000; C = $50,000; and the government is running a budget deficit of $1,000. Then

private saving = $12,000 and GDP = $67,000.

An economy in which output has decreased and nominal wages are temporarily fixed then

production becomes more profitable, so firms will hire more workers

Other things the same, an increased government budget deficit will reduce

public saving, but not necessarily national saving.

The country of Hogwarts is politically very stable and has a long tradition of respecting property rights. If several other neighboring countries suddenly became politically unstable, we would expect Hogwarts'

real exchange rate to rise.

In the open-economy macroeconomic model, the key determinant of net capital outflow is the

real interest rate.

In the early 1970s, the U.S. Phillips Curve shifted

right as inflation expectations rose.

If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the exchange rate

rises and the quantity of dollars traded falls

A bond buyer is a

saver. Bond are certificates of indebtedness — instruments of debt finance.

If a country has a trade surplus, then its

saving is greater than domestic investment and Y > C + I + G.

The source of the supply of loanable funds is

saving, and the source of the demand for loanable funds is investment.

When a large, well-known corporation wishes to borrow directly from the public, it can

sell bonds.

Suppose price-level expectations increase, that is, suppose the public expects higher price levels. On the Phillips Curve graph, the Phillips Curve will

shift outward, but the long run Phillips Curve will remain stationary

Suppose price-level expectations increase; that is, suppose the public expects higher price levels. On the Phillips Curve graph, the Phillips Curve itself will

shift outward, but the long-run Phillips Curve will remain stationary.

A year-long drought that destroys most wheat crops for the season would

shift the short-run aggregate supply curve

Most economists use the aggregate supply aggregate demand (AS-AD) model primarily to analyze

short-run fluctuations in the economy

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

that would lead to disinflation.

During wars, government spending is larger than normal. More government spending means a higher price level, and higher price levels mean higher money demand, which in turn means higher interest rates. Higher interest rates are bad because they choke off investment spending. To reduce these effects on interest rates,

the Federal Reserve could increase the money supply by buying bonds.

In the AS-AD model, which of the following would cause prices and real GDP to both rise in the short run?

the aggregate demand curve shifts right

If nominal wages are sticky and the price level is greater than expected then

the aggregate quantity of products and services supplied rise. This is shown in the AS-AD model by movement rightward and upward along the short run aggregate supply curve

If nominal wages are sticky and the price level is greater than what was expected, then

the amount of products and services supplied rises. This is shown in the AS-AD model by a movement rightward and upward along the short-run aggregate supply curve.

In macroeconomics, the long run refers to

the amount of time it takes for prices of inputs to fully adjust to changes in economic conditions (most especially, changes in the price level).

According to the long run Phillips curve, in the long run monetary policy influences

the inflation rate but not the unemployment rate

In the AS-AD model, which of the following is drawn as perfectly inelastic?

the long-run aggregate supply curve

The government builds a new water-treatment plant. The owner of the company that built the plant pays his workers. The workers increase their spending. Firms from which the workers buy goods increase their spending. And so on. This overall pattern is called

the multiplier effect

In the language of macroeconomics, investment refers to

the purchase of new capital.

The term crowding-out refers to

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

Sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied in

the short run, but not the long run

Sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied in

the short run, but not the long run.

An increase in the expected price level shifts the

the short-run, but not the long-run, aggregate supply curve left.

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

the slope of the aggregate demand curve.

If U.S. net capital outflow increases then

the supply of dollars in the market for currency exchange shifts right.

In the open-economy macroeconomic model, if the supply of loanable funds shifts right, then

the supply of dollars in the market for currency exchange shifts right.

The primary argument against active (i.e., discretionary) fiscal policy is that

these policies affect the economy with a long lag.

The Phillips Curve shows the combinations of

unemployment and inflation that result as the aggregate demand curve shifts upward along the short-run aggregate supply curve in the AS-AD model.

contractionary monetary policy

when a central bank uses its monetary policy tools to fight inflation, how the bank slows economic growth -raises interest rates, stimulates demand since more people want the lower interest rate

expansionary monetary policy

when a central bank uses its tools to stimulate the economy increases money supply, lowers interest rates and increases aggregate demand