AP MACRO #5

The inflation tax is likely to be larger when: A. there is a budget surplus. B. corporate and personal income tax rates are increased. C. the Fed decreases the money supply. D. the Fed sells Treasury bills to the public. E. the government relies on seigniorage to finance large portions of a budget deficit.

E. the government relies on seigniorage to finance large portions of a budget deficit.

Use the " Money Market I" Figure 31-1. If the money market is initially in equilibrium at point E and the central bank _____ bonds, then the interest rate will: A. buys; move toward point L. B. buys; move toward point H. C. sells; remain at point E. D. sells; move toward point L. E. buys; remain at point E.

A. buys; move toward point L.

Adam is an economist who believes that in the long run, all prices are flexible and that any increase in the money supply will lead only to inflation, not an increase in aggregate output. Because the economy would self-correct to long-run equilibrium output, there is no role for either fiscal or monetary policy. Adam is best described as a _____. A. classical economist B. rational expectations economist C. Keynesian economist D. supply-side economist E. Monetaris

A. classical economist

Using increased government spending and tax cuts to fight a recession is consistent with which of the following schools of thought? A. classical and monetarist B. Keynesian and the modern consensus C. Keynesian and monetarist D. classical E. classical and Keynesian

B. Keynesian and the modern consensus

The government budget balance equals: A. Government transfers - Taxes + Government purchases. B. Taxes - Government purchases - Government transfers. C. Taxes + Government purchases - Government transfers. D. Taxes + Government purchases + Government transfers. E. Taxes - Government purchases + Government transfers.

B. Taxes - Government purchases - Government transfers.

Use the " Expected Inflation and the Short-Run Phillips Curve" Figure 34-1. Suppose that this economy currently has an unemployment rate of 6%, inflation of 0%, and no expectation of future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation would: A. decrease to -4%. B. increase to 4%. C. increase to 2%. D. decrease to -2%. E. not change.

D. decrease to -2%.

Use the " Expected Inflation and the Short-Run Phillips Curve" Figure 34-1. Suppose that this economy currently has an unemployment rate of 6%, inflation of 2%, and has an expectation of 2% future inflation. If the central bank decreases the money supply such that aggregate demand shifts to the left and unemployment rises to 8%, then inflation would: A. increase to 4%. B. increase to 2%. C. decrease to -2%. D. decrease to 0%. E. not change

D. decrease to 0%.

Expansionary fiscal policies: A. affect only taxes. B. affect only government spending. C. make the budget deficit smaller. D. make the budget surplus smaller. E. move a budget deficit closer to a balanced budget.

D. make the budget surplus smaller.

The Fed affects interest rates by: A. setting them with regulations. B. convincing Congress to relax banking regulations. C. changing tax rates. D. open market operations that shift the money supply curve. E. open market operations that shift the money demand curve.

D. open market operations that shift the money supply curve.

A sale of bonds by the Fed: A. lowers interest rates and reduces the money supply. B. raises interest rates and decreases the money demand. C. raises interest rates and increases the money supply. D. raises interest rates and reduces the money supply. E. lowers interest rates and increases the money supply

D. raises interest rates and reduces the money supply.

The national debt _______ in years in which the federal government incurs a _______ . A. rises; surplus B. stays the same; surplus C. falls; deficit D. rises; deficit E. stays the same; deficit

D. rises; deficit

Use the " Money Market I" Figure 31-1. If the money market is initially in equilibrium at point E and the central bank _____ bonds, then the interest rate will: A. buys; move toward point H. B. sells; move toward point L. C. sells; remain at point E. D. sells; move toward point H. E. buys; remain at point E.

D. sells; move toward point H.

Suppose that U.S. debt is $7 trillion dollars at the beginning of the fiscal year. During the fiscal year, the government spending and government transfers are $2 trillion and tax revenues equal $1.5 trillion. At the end of the fiscal year, the debt is: A. $7.5 trillion. B. $9 trillion. C. $8.5 trillion. D. $10.5 trillion. E. $6.5 trillion.

A. $7.5 trillion.

Contractionary monetary policy causes _______ in the price level in the short run and _______ in the price level in the long run. A. a decrease; a decrease B. no change; no change C. a decrease; no change D. a decrease; an increase E. no change; a decrease

A. a decrease; a decrease

Nearly all economists agree that central banks need to: A. be independent. B. be elected by voters. C. play a minor role in the economy. D. be subject to political control. E. play a leading role in fiscal policy.

A. be independent.

If the government experiences a recessionary gap: A. holding everything else constant, the budget deficit would increase. B. unemployment would most likely be falling. C. an increase in taxes or a decrease in government purchases would shift the AD curve to the right. D. contractionary fiscal policy would help correct this problem. E. real GDP would most likely be rising.

A. holding everything else constant, the budget deficit would increase.

Use the " Classical Model of the Price Level" Figure 32-2. If the central bank increases the money supply such that aggregate demand shifts from AD 1 to AD 2, then, according to this classical model, the price level would: A. increase from P1 to P3. B. decrease from P1 to P2. C. increase from P1 to P2. D. not change. E. increase from P2 to P3.

A. increase from P1 to P3.

Use the " Expected Inflation and the Short-Run Phillips Curve" Figure 34-1. Suppose that this economy currently has an unemployment rate of 6%, inflation of 2%, and has an expectation of 2% future inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation would: A. increase to 4%. B. increase to 6%. C. decrease to -2%. D. not change. E. increase to 2%.

A. increase to 4%.

Use the " Changes in the Money Supply" Figure 31-2. Fed policy to increase the supply of money and hence to lower the interest rate from 6% to 4%, is accomplished by action that _______ the _______ government bonds. A. increases; demand for B. increases; interest rate on C. decreases; issuing of D. increases; supply of E. lowers; price of

A. increases; demand for

Use the " Classical Model of the Price Level" Figure 32-2. If the central bank chooses to provide a large increase in the money supply such that aggregate demand shifts from AD 1 to AD 2, then, according to this classical model, real GDP would: A. not change. B. establish a new potential output. C. increase from YE to Y1. D. increase from Y1 to YE. E. increase from P1 to P3.

A. not change.

The difference between real GDP and potential GDP is known as the: A. output gap. B. price gap. C. budget deficit. D. unemployment gap. E. trade gap.

A. output gap.

When the government borrows funds in financial markets to pay for budget deficits: A. private investment spending may be crowded out. B. the interest rate rises and consumption spending increases. C. planned aggregate spending decreases rather than increases. D. the interest rate and savings decrease. E. the multiplier effect of government purchases increases.

A. private investment spending may be crowded out.

A supply shock: A. shifts the short-run Phillips curve and the short-run aggregate supply curve.. B. Shifts the short-run Phillips curve, but not the short-run aggregate supply curve. C. Only moves us along the short-run aggregate supply curve. D. Only moves us along the short-run Phillips curve. E. shifts the short-run aggregate supply curve, but not the short-run Phillips curve.

A. shifts the short-run Phillips curve and the short-run aggregate supply curve..

When the actual unemployment rate is equal to the natural rate of unemployment: A. the output gap is zero. B. potential output exceeds actual output. C. the output gap is positive. D. the unemployment rate is zero. E. actual output exceeds potential output

A. the output gap is zero.

Politicians have an incentive to push the unemployment rate below the natural rate of unemployment right before their re-election because: A. the political benefits are immediate and the economic costs are delayed. B. the Phillips curve is horizontal in the long run. C. the opportunistic seignorage gains are very large. D. the expansionary monetary policy is used to finance the political campaigns. E. the contractionary fiscal policy increases political contributions.

A. the political benefits are immediate and the economic costs are delayed.

If the money supply decreases by 5%, in the long run: A. the price level drops by 5%. B. real GDP drops by 5%. C. the interest rate rises by 5%. D. the unemployment rate rises by 10%. E. interest rates rise by 5%.

A. the price level drops by 5%.

If the money supply increases by 10%, in the long run: A. the price level increases by 10%. B. real GDP increases by 10%. C. unemployment drops by 10%. D. the interest rate falls by 10%. E. unemployment drops by 20%.

A. the price level increases by 10%.

Which of the following would be the BEST explanation for an upward-sloping short-run aggregate supply curve? A. Prices are perfectly flexible. B. Wages and prices are sticky in the short run but flexible in the long run. C. Wages are flexible in the long run, but prices are sticky in the short run. D. Wages and prices are flexible in the short run but sticky in the long run. E. Wages are perfectly flexible

B. Wages and prices are sticky in the short run but flexible in the long run.

Use the " AD-AS Model" Figure 32-1. Suppose the economy is currently at YE with a price level of P 1. Which of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD 1 to AD 2 as a result of an increase in the money supply? A. YE and P2 B. YE and P3 C. Y1 and P3 D. Y1 and P2 E. YE and P1

B. YE and P3

Use the " Changes in the Money Supply" Figure 31-2. If the supply of money shifts from S 1 to S 2, the Fed must have _______ government bonds in the open market. A. lent B. bought C. issued new D. sold E. borrowed

B. bought

An expansionary fiscal policy: A. shifts AD to the left and decreases the size of the government budget deficit. B. would shift AD to the right and increase the size of the government budget deficit. C. will not be effective if there is a budget surplus present. D. in the presence of a budget deficit would decrease the size of the government debt. E. would shift AD to the right and move the budget balance from deficit to surplus

B. would shift AD to the right and increase the size of the government budget deficit.

The General Theory of Employment, Interest, and Money was written by: A. Karl Marx B. Paul Samuelson. C. John Maynard Keynes. D. Joseph Schumpeter. E. Adam Smith.

C. John Maynard Keynes.

In the long run, changes in the money supply: A. affect only aggregate output but not the aggregate price level. B. have no impact on either the aggregate price level or aggregate output. C. affect only the price level but they do not change aggregate output. D. affect only the unemployment rate, but not the aggregate price level. E. affect both the aggregate price level and aggregate output.

C. affect only the price level but they do not change aggregate output.

The short-run Phillips curve shows: A. the optimum level of employment. B. consequences of the misperceptions theory. C. an inverse relationship between unemployment and inflation. D. an inverse relationship between unemployment and the real interest rate. E. a direct relationship between unemployment and inflation.

C. an inverse relationship between unemployment and inflation.

When the federal government finances a deficit, the government may: A. increase transfer payments. B. lower taxes. C. borrow funds. D. increase spending. E. reduce interest rates.

C. borrow funds.

Use the " Classical Model of the Price Level" Figure 32-2. If the central bank increases the money supply such that aggregate demand shifts from AD 1 to AD 2, then, according to this classical model, the SRAS would: A. increase from SRAS2 to SRAS1. B. not change. C. decrease from SRAS1 to SRAS2. D. decrease from SRAS2 to SRAS1. E. increase from SRAS1 to SRAS2.

C. decrease from SRAS1 to SRAS2.

SRPC 0 is the Phillips curve with an expected inflation rate of 0%; SRPC 2 is the Phillips curve with an expected inflation rate of 2%. Use the " Expected Inflation and the Short-Run Phillips Curve" Figure 34-1. Suppose that this economy currently has an unemployment rate of 6%, inflation of 0%, and no expectation of future inflation. If the central bank increases the money supply such that aggregate demand shifts to the right and unemployment falls to 4%, then inflation would: A. increase to 4%. B. not change. C. increase to 2%. D. increase to 8%. E. decrease to -2%.

C. increase to 2%.

Because in the Keynesian model, prices and nominal wages are _________, the short-run aggregate supply curve is upward sloping and, as a result, an increase in the money supply leads to _________ in the aggregate price level. A. flexible; an equal proportional increase B. sticky; a less than proportional decrease C. sticky; a less than proportional increase D. flexible; an equal proportional decrease E. sticky; an equal proportional increase

C. sticky; a less than proportional increase

The inflation tax is: A. the higher nominal wages received by workers due to inflation. B. the higher prices consumers pay due to inflation. C. the taxes paid during periods of inflation. D. the reduction in the value of money that is held by the public caused by inflation. E. the higher tax paid by individuals whose incomes are indexed to inflation.

D. the reduction in the value of money that is held by the public caused by inflation.

If the public holds $300 billion in monetary purchasing power and the inflation rate is 5%, then the inflation tax that year is: A. $60 billion. B. $5 billion. C. $1.5 billion. D. $1500 billion. E. $15 billion.

E. $15 billion.

An increase in the money supply causes ______ in output in the short run, and _______ in output in the long run. A. a decrease; an increase an B. no change; an increase C. an increase; an increase D. no change; no change E. an increase; no change

E. an increase; no change

Monetary policy involves: A. changes in government spending. B. changes in government tax receipts. C. changes in tax rates. D. changes in import tariffs. E. changes in the quantity of money.

E. changes in the quantity of money.

The federal budget tends to move toward _____ as the economy ____. A. deficit; expands B. surplus; contracts C. a balanced budget; expands D. a balanced budget; contracts E. deficit; contracts

E. deficit; contracts

The federal funds rate is: A. equal to the nominal interest rate plus the real interest rate. B. set by Congress. C. determined in the aggregate output market by the aggregate supply and aggregate demand curves. D. the interest rate that banks pay when they borrow directly from the Fed. E. determined in the money market by the supply and demand for money.

E. determined in the money market by the supply and demand for money.

Use the " Classical Model of the Price Level" Figure 32-2. If the central bank increases the money supply such that aggregate demand shifts from AD 1 to AD 2, then, according to this classical model, the equilibrium point would: A. not change. B. immediately move from E3 to E1. C. immediately move from E1 to E2. D. immediately move from E2 to E1. E. immediately move from E1 to E3

E. immediately move from E1 to E3

Money is neutral: A. in both the short and long run since it cannot alter price levels. B. in the short run since it cannot alter the price levels. C. in the short run since it cannot alter the real aggregate output. D. in the long run since it cannot alter the real interest rate. E. in the long run since it cannot alter the real aggregate output.

E. in the long run since it cannot alter the real aggregate output.

If the natural rate of unemployment is 5%, and the actual rate of unemployment is 4%: A. there will be no effect on prices. B. the short-run Phillips curve will shift down. C. deflation is likely to occur. D. disinflation is likely to occur. E. inflation will increase.

E. inflation will increase.

Monetary policy attempts to affect the overall level of spending in the economy by changes in: A. taxes. B. imports and exports. C. taxes and interest rates. D. taxes and spending. E. interest rates and the quantity of money.

E. interest rates and the quantity of money.

The government has a budget surplus if: A. its total revenues are less than its total expenditures. B. the money supply is less than total expenditures. C. the money supply is less than the money demand. D. its total revenues are equal to its total expenditures. E. its total revenues are greater than its total expenditures.

E. its total revenues are greater than its total expenditures.

The government has a budget deficit if: A. its total revenues are greater than its total expenditures. B. the money supply is less than total expenditures. C. its total revenues are equal to its total expenditures. D. the money supply is greater than the money demand. E. its total revenues are less than its total expenditures

E. its total revenues are less than its total expenditures