MacroFinal

In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:

-$10 billion.

If nominal gross domestic product (GDP) grew by 5 percent and real GDP grew by 3 percent, then the GDP deflator grew by approximately _____ percent.

2

If the consumption function is given by the equation C = 500 + 0.5Y, the production function is Y = 50K0.5L0.5, where K = 100 and L = 100, then C equals:

3,000.

If the central bank wants to set the interest rate to 5 percent, it should set a money supply of _____.

300

If the central bank wants to set the interest rate to 4 percent, it should set a money supply of

360

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate, in percent. In addition, assume that G = 0. In this case, the equilibrium real interest rate is:

5 percent.

According to the quantity theory of money, 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 ____ percent.

5; 5

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.

6

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor-force participation rate equals _____ percent.

60

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?

7 percent

Assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest (in percent). Assume further that the nominal rate of interest is 10 percent and the inflation rate is 2 percent. According to the investment function, investment will be:

760

A small open economy with a floating exchange rate is initially in equilibrium at A with IS*1. Holding all else constant, if the government imposes a tariff on imports in order to protect domestic jobs, then the _____ curve will shift to _____.

IS; IS2*

c. The previous two exercises show that shocks to the _____ curve have a larger impact on equilibrium income if the central bank holds the _____ constant.

IS; money supply

If the ratio of reserves to deposits (rr) increases, while the ratio of currency to deposits (cr) is constant and the monetary base (B) is constant, then:

the money supply decreases.

f. The previous two exercises show that shocks to the _____ curve have a larger impact on equilibrium income if the central bank holds the _____ constant.

LM; money supply

The U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with high inflation rates relative to the United States has tended to _____, and the U.S. dollar exchange rate (units of foreign currency per U.S. dollar) for currencies of countries with low inflation rates relative to the United States has tended to _____.

appreciate; depreciate

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:

be smaller

Based on the graph, if the interest rate is r1, then people will _____ bonds, and the interest rate will _____.

buy; fall

b. Suppose you wanted to make domestic industries more competitive but did not want to alter national income. Assuming a floating exchange rate, what policy or combination of policies should you pursue, according to the Mundell-Fleming model?

contractionary fiscal

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _____, generating a _____ quantity of output demanded.

higher; greater

. If the goal of the Fed is to stabilize the price level, the Fed should _____ the money supply what should the Fed do with the money supply in response to this regulatory change.

increase

If the goal of the Fed is to stabilize output, the Fed should _____ the money supply in response to this regulatory change.

increase

This example illustrates that to reduce the interest rate, the central bank must _____ the money supply.

increase

If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:

increase by 4 percent.

The Bank of Canada should _____ the money supply, and the government should increase _____.

increase; purchases

Lowering taxes increased income (Y) and _____ demand in the money market, while decreasing the money supply increased the interest rate (r) and _____ in the goods market.

increased money; decreased investment

As a result of this regulatory change, The demand for money ______, and the velocity of money _____.

increases; decreases

It is cheaper only if the increase in the nominal exchange rate of pesos per dollar is _____ than the increase in the Mexican price level relative to the Canadian price level.

larger

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income:

r2, Y2.

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be:

r2, Y3.

If the Fed keeps the money supply constant, in the short run, the price level will _____. and output will _____. In the long run, the price level will _____, and output will _____.

remain unchanged; decrease; decrease; return to its original level.

In this graph, if firms are producing at level Y3, then inventories will _____, inducing firms to _____ production.

rise; decrease

According to purchasing-power parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will _____ oil in New York and _____ oil in London to drive _____ the price of oil in New York.

sell; buy; down

Ten years ago the price (in dollars) of a Mexican taco was

$1.00

Today the price (in dollars) of a Mexican taco is

$1.33

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals:

$150 billion.

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real gross domestic product (GDP) (in 2002 prices) in 2009 was:

$6.50.

A small open economy with a fixed exchange rate e2 is initially at equilibrium A with LM*1 and equilibrium output Y1. If there is an increase in government spending to the new equilibrium will be at _____, holding everything else constant.

C

d. Again, suppose you wanted to make domestic industries more competitive but did not want to alter aggregate income. Assuming now a fixed exchange rate, what policy or combination of policies should you pursue, according to the Mundell-Fleming model?

Contractionary fiscal; devaluation

A small open economy with a floating exchange rate is initially at equilibrium A with LM*1 equilibrium exchange rate e2, and equilibrium output Y1. If there is a monetary expansion to the new equilibrium will be at _____, holding everything else constant.

D

Which of the panels illustrates the impact of protectionist trade policies on the real exchange rate?

D

b. Policy uncertainty after a political scandal in the White House leads to a fall in consumer confidence, reducing household spending. The central bank holds the interest rate constant.

IS (left); LM (left)

a. Suppose the government wants to raise investment but keep output (Y) constant. Adjust the IS‐LM graph below to reflect the necessary fiscal and montary policy mix necessary to achieve this goal.

IS (left); LM (right)

a. Policy uncertainty after a political scandal in the White House leads to a fall in consumer confidence, reducing household spending. The central bank holds the money supply constant.

IS (left); LM (stay)

e. In the accompanying diagram, show the effects of the policy or combination of policies you have identified.

IS (left); LM (stay); e (down)

b. In the early 1980s, the U.S. government cut taxes and ran a budget deficit, while the Fed pursued a tight monetary policy.

IS (right); LM (left)

d. Expanded use of online payments reduces the amount of money people want to hold. The central bank holds the money supply constant.

IS (stay); LM (right)

e. Expanded use of online payments reduces the amount of money people want to hold. The central bank holds the interest rate constant.

IS (stay); LM (stay)

In a small open economy, if the world interest rate is r3, then the economy has:

a trade deficit.

If the money supply is held constant, then an increase in the nominal interest rate will _____ the demand for money and _____ the price level.

decrease; increase

A higher interest rate _____ the quantity of money demanded.

decreases

Assume that the consumption function is given by C = 150 + 0.85 (Y - T) and the tax function is given by T = t0 + t1Y. If t0 increases by 1 unit, then consumption:

decreases by 0.85 units.

a. In the short run when prices are sticky, a depreciation of the nominal exchange rate would make American goods _____ competitive.

more

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.

output; prices