Macroeconomics Final Exam Study Guide

51. The multiplier in a country is equal to 5, and households pay no taxes. At the current equilibrium real GDP of $14 trillion, total real consumption spending by households is $12 trillion. What is real autonomous consumption in this country?

$0.8 trillion

52. At an initial point on the aggregate demand curve, the price level is 125, the real GDP is $18 trillion. When the price level falls to a value of 120, total autonomous expenditures increase by $250 billion. The MPC is 0.75. What is the level of real GDP at a new point on the aggregate demand curve?

$19 trillion

27. Refer to Figure 34-7. 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

71. In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is

$360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in aggregate demand.

50. The marginal propensity to consume is equal to 0.80. An increase in household wealth causes autonomous consumption to rise by $10 million. By how much will equilibrium real GDP increase at the current price level, the other things being equal?

$50M

8. In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

$60.75

64. A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would

. increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate

75. The aggregate quantity of goods and services demanded changes as the price level falls because

. real wealth rises, interest rates fall, and the dollar depreciates

80. An individual would suffer lower losses or maybe even gain from an unexpectedly higher inflation rate if

. she held little currency and on net was a borrower

79. The six debates over macroeconomic policy exist mostly because

. there are tradeoffs and people disagree about the best way to deal with them

53. At an initial point on the aggregate demand curve, the price level is 100, the real GDP is $18 trillion. After the price level rises to 110, however there is an upward movement along the aggregate demand curve, and real GDP declines to $14 trillion. If total planned spending declines by $200 billion in response to the increase in the price level, what is the MPC in this economy?

0.95

65. Refer to Figure 35-4. Assume the figure charts possible outcomes for the year 2018. In 2018, the economy is at point B on the left-hand graph, which corresponds to point B on the right-hand graph. Also, point A on the left-hand graph corresponds to A on the right-hand graph. The price level in the year 2018 is

114.95

17. Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2020, and those two points correspond to points C and D, respectively, on the left-hand graph. Also, suppose we know that the price index equaled 120 in 2019. Then the numbers 115 and 130 on the vertical axis of the left-hand graph would have to be replaced by

138 and 156, respectively

28. Refer to Figure 35-2. Assume the figure depicts possible outcomes for the year 2022. In 2022, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2021 was

150

73. At the end of 2007, the government had a debt of about $5,000 billion. During 2007, real GDP grew by about 0.8 percent and inflation was about 2.7 percent. About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

175 billion

56. Scenario 1 Consider an economy described by the following equations Y = C + I + G C = 100 + 0.75(Y-T) I = 500 -50R G = 125 T = 100 Where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and R is the interest rate. If the economy were at full employment (that is, at its natural rate) GDP would be 2000 Refer to scenario 1, suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 4% (r = 4). Solve for GDP. How does it compare to the full employment level?

1800, less than full employment level.

15. Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then 1 + MPC + MPC2 + MPC3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of

2.5

57. Refer to scenario 1, assuming no change in fiscal policy what change in interest rate would restore full employment level?

3%

18. Refer to Figure 35-4. Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%. Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more expansionary monetary policy?

3% unemployment and 5% inflation

14. Refer to Figure 34-1. There is an excess demand for money at an interest rate of

3.25 percent

74. Last year a country's real GDP grew by 4%, its inflation rate was 2.5%, and it's government budget deficit was about $250 billion. It's debt to GDP ratio was unchanged. About what was its debt at the start of last year?

3.85 trillion

13. . Refer to Figure 35-4. If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to

7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.

66. Which of the following is correct? a. An increase in the money supply causes the interest rate to decrease so that aggregate demand shifts left. b. An increase in stock prices reduces consumption spending so that aggregate demand shifts left. c. An increase in the price level causes the exchange rate to rise so that aggregate demand shifts left. d. A recession in other countries reduces U.S. net exports so that U.S. aggregate demand shifts left.

A recession in other countries reduces U.S. net exports so that U.S. aggregate demand shifts left

42. Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2. Which curve shifts and in which direction

Aggregate demand shifts left

5. 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.

30. Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

By $30 billion

54. An economy is operating with output that is $400 billion below its natural level, and fiscal policy makers want to close the recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The MPC is 0.2, and the price level is completely fixed in the short-run. In what direction and by how much would the government funding need to change to close the recessionary gap?

Government spending must increase by $80 billion

33. Which of the following would not be directly included in aggregate demand?

Government's tax collections

32. Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

Increase government expenditures

45. Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Increase taxes

61. Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate. Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?

Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3

19. Refer to Figure 33-4. The short-run equilibrium is defined by the given AD and SRAS curves. Which of the long-run aggregate-supply curves is consistent with a short-run economic an expansion?

LRAS1

6. Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. What would the change in the interest rate created by foreigners wanting to buy more U.S. assets do to investment spending in the United States?

Make it fall which by itself would decrease U.S. aggregate demand.

1. Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand?

Net exports would fall which by itself would decrease U.S. aggregate demand.

60. A tax cut shifts aggregate demand a. by more than the amount of the tax cut. b. by the same amount as the tax cut. c. by less than the tax cut. d. None of the above is necessarily correct.

None of the above is necessarily correct.

76. According to liquidity preference theory, the slope of the money demand curve is explained as follows:

People will want to hold more money as the cost of holding it falls

38. Refer to Figure 33-2. If the economy is in long-run equilibrium, then an adverse shift in short-run aggregate supply would move the economy from

Q to R

63. Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in aggregate demand?

Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars

21. Refer to Figure 34-6. 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

34. Which of the following is not a determinant of the long-run level of real GDP?

The price level

12. Which of the following two effects of a decrease in the tax rate on saving would raise savings?

The substitution effect but not the income effect

35. Refer to Figure 33-1. The natural level of output occurs at

Y2

84. Which of the following shifts the long-run Phillips curve left?

a decrease in the minimum wage rate, but not an increase in the inflation rate

85. Which of the following will reduce the price level and real output in the short run?

a decrease in the money supply

68. In June of 2010, the government had a debt of about $8.6 trillion. Over the next year real GDP grew by about 1.6% and inflation was about 2%. What is the largest deficit the government could have run over this time without raising the debt-to-GDP ratio?

about $309.6 billion

69. From the end of 2005 to the end of 2006, the United States ran a deficit of about $309 billion. The debt at the start of this period was about $4,592 billion. Which of the following combinations of inflation and real GDP growth would have allowed the government to run this deficit while keeping the ratio of real GDP to the debt about the same?

about 3.4% inflation and about 3.3% real GDP growth

78. From 2006 to 2008 there was a dramatic fall in the price of houses. If this fall made people feel less wealthy, then it would have shifted

aggregate demand left

23. According to the theory of liquidity preference,

an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right

70. If the natural rate of unemployment falls,

both the short-run Phillips curve and the long-run Phillips curve shift.

16. A policy that lowered the natural rate of unemployment would shift

both the short-run and the long-run Phillips curves to the left.

58. If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run

both the unemployment rate and the inflation rate would be lower.

44. Monetary policy

can be described either in terms of the money supply or in terms of the interest rate

31. "Money is a veil" best describes

classical view of the economy

48. Suppose a decrease in interest rates causes falling unemployment and rising output. To counter this, the Federal Reserve would

decrease the money supply

20. If U.S. speculators gained greater confidence in foreign economies so that they wanted to move more of their wealth into foreign countries, the dollar would

depreciate which would cause aggregate demand to shift right

41. An increase in household saving causes consumption to

fall and aggregate demand to decrease.

2. Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will

fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

46. During recessions, taxes tend to

fall and thereby increase aggregate demand

86. If aggregate demand shifts right then in the short run

firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left

67. Suppose that the country of Aquilonia has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 400 billion units of currency and current nominal national debt of 200 billion units of domestic currency. Which of the following government spending and taxation figures will keep the debt to-income ratio constant?

government spending equal to 30 billion units and tax collections equal to 20 billion units

55. The mathematical equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), expresses

how output deviates in the short run from its long run natural rate.

24. A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would

increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate.

59. If the Federal Reserve accommodates an adverse supply shock

inflation expectations may rise which shifts the short-run Phillips curve shifts right.

89. In which of the following cases is the after-tax real interest rate highest?

inflation is 6%, the pre-tax real interest rate is 3%, and the tax rate is 20%.

29. If the unemployment rate is below the natural rate, then

inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right

81. According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

interest rate

40. The Federal Reserve will tend to tighten monetary policy with the goal is to stabilize the economy when

it thinks inflation is too high today, or will become too high in the future.

90. The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied.

49. One determinant of the long-run average unemployment rate is the

minimum wage, while the inflation rate depends primarily upon the money supply growth rate.

11. If an increase in inflation permanently reduced unemployment, then

money would not be neutral and the long-run Phillips curve would slope downward

10. Other things the same, if the U.S. price level falls, then U.S. residents want to buy

more foreign bonds. The real exchange rate falls

39. Refer to Figure 33-2. If the economy is at O and there is a reduction in aggregate demand, in the short run the economy

moves to R.

88. Suppose that the money supply decreases. In the short run, this increases prices according to

neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.

82. In the long run, an increase in the money supply growth rate

raises expected inflation so the short-run Phillips curve shifts right.

22. If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action

raises inflation but lowers unemployment

47. When measured over a long span of time, a tax on interest income

reduces the benefits from saving by a large amount

26. If inflation expectations rise, the short-run Phillips curve shifts

right, so that at any inflation rate output is lower in the short run than before.

4. If inflation expectations rise, the short-run Phillips curve shifts

right, so that at any inflation rate unemployment is higher in the short run than before.

7. Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would

rise which by itself would increase aggregate demand.

25. Changes in the interest rate

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

87. The long-run aggregate supply curve shifts right if

technology improves, but not if immigration from abroad increases.

9. A tax cut shifts the aggregate demand curve the farthest right if

the MPC is large and if the tax cut is permanent

62. Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged, then

the central bank would have to reduce interest rates which would increase output.

72. If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer U.S. bonds

the dollar would depreciate which would cause aggregate demand to shift right

43. According to liquidity preference theory, if the price level decreases, then

the interest rate falls because money demand shifts left

3. Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more

the larger the MPC and the weaker the influence of income on money demand.

77. The model of short-run economic fluctuations focuses on

the price level and real GDP.

36. The government of Blenova considers two policies. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A will lead

to a lower unemployment rate and a higher inflation rate than policy B

83. Other things the same, if the central bank decreases the rate at which it increases the money supply, then

unemployment and inflation rise in the short run

37. If the economy is at the point where the short-run Phillips curve intersects the long-run Phillips curve

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