Wisman Macro Final

The formula for the money multiplier is:

1/r where r is the reserve ratio.

A reserve ratio of 0.10 means that a bank can lend an amount equal to:

90 percent of its deposit liabilities.

Which of the following monetary policies raises aggregate demand and output?

A cut in the reserve requirement

Which of the following would shift the aggregate demand curve to the right?

An increase in foreign income

In early 2000s, oil prices were rising because of concern about the Iraqi and other situations, along with rapid growth in demand in the Far East. Prices eventually reached over $100 a barrel. How would most economists predict these high prices should affect the U.S. economy in terms of the AD/AS model?

Because oil is an important input in many production processes, the higher prices should shift the short-run aggregate supply curve up (to the left).

Which of the following has been an effect of globalization and a large trade deficit?

Decreased employment in the tradable sector

In what way is government debt like individual debt?

Inflation reduces the real value of both types of debt.

Which of the following is an international financial institution concerned primarily with monetary issues and international financial arrangements?

International Monetary Fund

In the early 2000s, Ecuador replaced its currency, the sucre, with the U.S. dollar as its official currency to solve its inflation problem. As long as Ecuador maintains the U.S. dollar as its official currency, what will happen to the monetary policy of Ecuador?

It effectively will cease to exist.

What is the primary benefit for the United States of a high price for the dollar in the foreign exchange market?

It makes foreign goods cheaper, helping consumers.

Why does the author suggest that students be ineligible for the guaranteed jobs program even though many students are in need?

Limiting eligibility reduces the cost of the program and students often seek only part-time employment. Correct

Which of the following Fed policies would help the economy out of a recession?

Open market purchases of government securities

A country that wants to fix its exchange rate at a higher level than the market exchange rate would most likely:

Reduce the money supply

An increase in the federal funds rate is a signal that the Fed wants a tighter monetary policy. True or False?

True

Automatic stabilizers are government programs or policies that will counteract the business cycle without any new government action. True or false?

True

Economists who accept the quantity theory of money believe that inflation is always and everywhere a monetary phenomenon. True or False?

True

Economists who accept the quantity theory of money favor a monetary rule because they believe the short-run effects of monetary policy are unpredictable and the long-run effects are on the price level, not real output. True or False?

True

In the 1990s, the price level in Japan fell relative to the price level in the United States. If the exchange rate did not change, one would expect that:

U.S. exports to Japan would decline and U.S. imports from Japan would rise.

Interest rates on government bonds are relatively low because:

U.S. government bonds are considered one of the safest assets in the world.

World trade declined in the 1930s. Which of the following is the best explanation of that decline?

World income shrank, and trade restrictions increased.

An increase in the price level might cause:

a decrease in the quantity of aggregate demand because of the interest rate effect.

Keynesian economic tools are not adequately effective when

a trade-off exists between the rate of unemployment and the rate of inflation.

According to the AS/AD model, if the economy is in a recession and the Fed wants to increase output and employment, it should:

act to increase the money supply.

Because reducing both unemployment and inflation simultaneously are conflicting goals:

aggregate demand policy will allow policymakers to achieve one of these objectives, but not both.

Which of the following is NOT a reason for liquidity preference?

an equilibrium demand for money

In early 2000s, the dollar depreciated sharply against the euro and the yen. The dollar's depreciation should result in:

an increase in U.S. exports and an outward shift of the U.S. aggregate demand curve.

In the short-run framework, budget deficits should:

be run on a temporary basis whenever the economy is below potential output.

If the multiplier effect did not exist, the aggregate demand curve would:

be steeper.

A country can have a trade deficit as long as it can:

borrow from or sell assets to foreigners.

According to the short-run aggregate supply curve, firms are most likely to respond to an increase in aggregate demand by raising:

both production and prices.

Infant industry protection can be justified in theory by

both the "learning by doing" argument and the existence of economies of scale.

Foreign governments are holding fewer dollars as reserves. As a result, the value of the dollar is declining. If foreign governments want to keep the U.S. dollar from declining, they could:

buy more U.S. dollars.

A primary goal of the World Bank is to:

channel low-interest loans to developing countries to foster economic growth.

The IMF often requires countries that borrowed from it to introduce policies that privatized government-owned industries such as telecommunications and power generation. This is an example of:

conditionality.

In developing countries, government expenditure levels are most closely related to:

considerations about what will keep the existing government in power.

A trade deficit allows a country to:

consume more than it produces.

A country that wants to increase its exchange rate to a higher level than the market exchange rate would most likely adopt:

contractionary monetary policy.

A large trade deficit that the United States has with China would be narrowed by a:

decline in the value of the U.S. dollar or by Chinese inflation.

Considering only its direct effect on income, contractionary fiscal policy tends to:

decrease income and imports and lower the trade deficit.

According to the AS/AD model, an expansionary monetary policy:

decreases interest rates, raises investment, and increases income.

The basic idea of crowding out is that a budget:

deficit will cause the interest rate to go up.

A quota differs from a tariff in that quotas:

do not generate tax revenues, unlike tariffs.

As the reserve ratio goes up, the money multiplier goes:

down, and less money will be created.

From 2008 to 2009, the interest rate on 10-year government bonds fell to 2.75 percent, its lowest level in many years. This is most likely the result of:

easier monetary policy.

When the euro rose relative to the dollar in the early 2000s, it:

encouraged European imports and discouraged European exports.

An increase in a balance of trade surplus tends to:

exert an expansionary effect on the economy.

Suppose most economists agree that the target rate of unemployment is between 4 and 7 percent. If the actual unemployment rate is 11 percent, then most economists would agree that:

expansionary monetary and fiscal policies are appropriate.

Considering only its direct effect on income, the effect of monetary policy is that:

expansionary policy tends to increase the trade deficit and contractionary policy tends to decrease it.

As the economy contracts, tax revenues:

fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers.

If productivity increases by 5 percent but wages increase by 2 percent, then it is most likely that the price level will:

fall by 3 percent.

The interest rate banks charge each other to borrow excess reserves is called the:

federal funds rate.

The part of the balance of payments account that lists all long-term flows of payments is called the:

financial and capital account.

Countries are unlikely to maintain fixed exchange rates for long periods of time because:

fixed exchange rates impede a nation's ability to use monetary and fiscal policy to pursue domestic macroeconomic goals.

Higher U.S. interest rates usually cause:

foreign capital to enter the United States.

When the economy entered a serious recession in 2008, the response of the U.S. government was to institute a $700 billion bailout plan, pursue other heavy deficit spending, and take on unusually large liabilities through bond and money market fund guarantees. This is an example of:

functional finance and expansionary fiscal policy.

The goldsmith's ability to create money was based on the fact that:

gold receipts were rarely exchanged for gold

External government debt is:

government debt owed to individuals in foreign countries.

If the economy is caught in a liquidity trap, the appropriate government response is:

government deficit spending

One of the reasons government debt is different from individual debt is:

government never really needs to pay back its debt.

Deficits may be desirable in the short run if they:

help to stabilize the economy when the economy falls below potential output.

Stagflation is a combination of:

high and accelerating inflation and high unemployment.

If foreign producers can supply an infinite amount of tradable goods at the world price, this would imply that the world supply curve is:

horizontal.

Considering only its direct effect on income, expansionary fiscal policy tends to:

increase imports.

When the Fed lowered the discount rate in late 2008 the action was ultimately designed to:

increase the money supply.

The quantity theory of money implies that an increase in the money supply will ultimately:

increase the price level and leave real GDP unchanged.

In the early 2000s, the Bush administration passed a series of tax cuts and spending increases. This combination of policies most likely:

increased the U.S. trade deficit.

A month ago, you bought a one-year bond with a value of $100 that pays a fixed interest rate of 5 percent per year. The interest rate of the economy was also 5 percent. Today you read in the newspaper that the interest rate in the economy increased to 6 percent. You are holding a bond that is:

less desirable to other investors.

In general, the IMF provides developing countries with:

loans but only if the government adopts certain policies specified by the IMF in return.

IMF officials stated in 2009 that the Chinese currency, the renminbi, which is counted in yuan, was undervalued. By keeping its exchange rate low, the Chinese government helps:

lower Chinese imports but boost Chinese exports.

A month ago, you bought a one-year bond with a value of $100 that pays a fixed interest rate of 5 percent per year. The interest rate of the economy was also 5 percent. Today you read in the newspaper that the interest rate in the economy decreased to 3 percent. You are holding a bond that is:

more desirable to other investors.

If the euro rises in price, it becomes:

more expensive for Americans to buy European products but cheaper for Europeans to buy American products.

When a U.S. Company establishes a call center in India that answers its customer service calls, the US is

outsourcing, a form of importing services

A weaker dollar:

raises inflation and expands the economy.

Most economists agree that the aggregate demand curve is:

relatively steep.

The wage a person requires before accepting a job is referred to as the _____ wage:

reservation

If businesses expect future demand to increase, this will cause a:

rightward shift of the aggregate demand curve.

The concept of fiscal policy refers to the:

running of a deficit or surplus to affect the level of output in the economy.

The process of packaging a variety of loans together and slicing them up into new financial instruments is called:

securitization.

If someone invested in a large quantity of long term bonds and wished to sell them, he/she should

sell immediately if interest rates are expected to rise

From the mid-1980s to 2009, the value of the Japanese yen fell from over 300 yen per dollar to about 100 yen per dollar. Considering the impact of this alone, this would likely:

shift the U.S. AD curve to the right.

If total income in Sweden remains the same but the wage share of income rises, the Swedish AD curve will most likely:

shift to the right.

Developing countries employ the inflation tax because it provides a:

short-run solution that helps keep the government afloat, even if only temporarily.

If a country wants maximum flexibility to pursue its domestic macroeconomic goals, it:

should use a flexible exchange rate.

If the national debt increases in any given year, it follows that the government:

sold bonds in that year to finance a budget deficit.

If I am worried about the price of assets such as bonds falling, I may be more inclined to hold money instead. You hold cash for the:

speculative motive

Holding money for the transactions motive implies the need to hold money for:

spending.

The provisions in state constitutions requiring them to balance their budgets means that:

state governments often behave procyclically because lower revenues during recessions means lower state spending.

Technological change can result in:

structural unemployment.

If the debt of the federal government decreases by $20 billion in one year the budget:

surplus in that year must be $20 billion.

If the economy falls into a recession, automatic stabilizers will cause:

tax receipts to fall and government spending to rise

Open market operations are related to:

the Fed's buying and selling of government securities.

Economists who believe in the quantity theory of money argue that:

the causation in the equation of exchange goes from MV to PQ.

On January 1, 2001, El Salvador "dollarized" its economy. The U.S. dollar circulated throughout the country along with the Salvadoran colon for the first year. By the end of 2002 the official currency circulating in this economy was the U.S. dollar. El Salvador abandoned its own currency and adopted the currency of the United States because:

the government would no longer be able to finance deficits by printing money, and inflation would be under control.

The financial crisis of 2008 led to massive federal spending in an effort to stimulate the economy. The combination of the new federal spending and the automatic stabilizers led to:

the largest budget deficit since World War II.

According to the quantity theory of money, inflation is attributable to increase in:

the money supply in excess of increases in real GDP

In a dual economy, it is generally the case that the majority of the population works in the:

traditional (barter) economy.

An unanticipated increase in the inflation rate will most likely:

transfer wealth from bondholders to the government.

According to the quantity theory of money, if the money supply increases by 12 percent, then in the long run prices go:

up by 12 percent.

The safety net in the proposed guaranteed jobs program differs from the current safety net because unlike the current program, the guaranteed jobs proposal provides a safety net to those people:

who either don't have a job or haven't held a job for very long.

In the mid-1960s, the UNITED STATES was running an expansionary fiscal policy to support the war effort in Vietnam. This likely:

worsened the trade deficit.