chapter 33-35

Assuming that prices remain constant, suppose that consumer assets lose value. This will cause a:

shift of the aggregate demand curve to the left.

When the government increases spending, a multiplier effect will:

shift the AD curve further to the right than the effect of the spending.

Consumption is $45 billion, investment is $40 billion, government expenditure is $38 billion, exports are $20 billion, and imports are $25 billion. Aggregate expenditure is:

$118 billion.

(Figure: Shifts of the AD-AS Curves) An increase in wages in the short run is illustrated by panel:

(d) left shift of AS curve

There are 12 Federal Reserve districts. Why is the New York Federal Reserve bank given a permanent vote on the FOMC? (i) New York is the home of the Open Market Trading Desk. (ii) New York is the home of the New York Stock Exchange. (iii) New York is the home of Wall Street. (iv) The New York Federal Reserve district bank oversees a location with a very high concentration of financial transactions.

(i), (ii), (iii), and (iv)

The Board of Governors of the Federal Reserve: (i) guides the operations of the Federal Reserve. (ii) ensures that interest rate ceilings are maintained. (iii) ensures that monetary policy follows the guidelines from Congress. (iv) oversees all the Federal Reserve district banks.

(i), (ii), and (iv)

The higher the prices in an economy, the: (i) lower the purchasing power of the currency. (ii) lower the real wealth in the economy. (iii) higher the real wealth in an economy. (iv) more expensive the country's exports.

(i), (ii), and (iv)

The lower the GDP deflator in an economy, the: (i) higher the purchasing power of the currency. (ii) lower the real wealth in the economy. (iii) higher the real wealth in an economy. (iv) cheaper the country's exports.

(i), (iii), and (iv)

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 0.75%, and the output gap is -1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

1.125%

You are sitting at your desk in your new job as the Chair of the Federal Reserve Bank of the United States. The interest rate where potential GDP meets real GDP is 2%, the inflation rate is 1%, and the output gap is -1%. What is the appropriate new nominal federal funds rate that you should set for the economy?

1.5%

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 1%, and the output gap is -0.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

2%

When government expenditure rises by $180 million and the initial increase in government expenditure was $60 million, then the multiplier is:

3

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3%, and the output gap is 1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

6.5%

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the LONG-RUN impact of a decrease in aggregate demand?

All prices adjust, and the economy returns to long-run potential.

Why does the aggregate supply curve change from horizontal to vertical over the course of the very short run to the long run?

As prices begin to adjust, businesses adjust production and the economy recovers to potential GDP.

When prices rise in the United States, what is the effect on net exports and aggregate expenditure?

Exports become more expensive, imports become cheaper, net exports fall, and aggregate expenditure falls.

According to the _____, the target federal funds rate should be positively related to the _____ rate and _____ related to the unemployment rate.

Fed rule-of-thumb; inflation; negatively

When interest rates rise in the United States, what is the effect on net exports and aggregate expenditure?

Inflows of foreign savings cause the dollar to appreciate, and this reduces exports and increases imports, leading to a fall in net exports and a fall in aggregate expenditure.

When prices rise in Germany, what is the effect on nominal debt and consumption in Germany?

Nominal debt remains unchanged, but the real value of debt falls, and this encourages consumers to spend more.

When prices fall in Germany, what is the effect on nominal debt and consumption in Germany?

Nominal debt remains unchanged, but the real value of debt rises, and this discourages consumption.

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

SRAS and aggregate demand.

Critics of the Federal Reserve have accused the Fed of using the 2% inflation target as a ceiling. What does this mean?

The Fed ensures inflation does not rise above 2% instead of allowing inflation to fluctuate around 2%.

What might be an unintended effect of an inflation rate ceiling?

The real interest rate can become negative if inflation is high enough.

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the IMMEDIATE impact of a decrease in aggregate demand?

There is a recession as output falls sharply, and prices will not have had time to adjust.

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the medium run impact of a decrease in aggregate demand?

There is a slow fall in prices as the short-run aggregate supply begins to have a positive slope, and the initial decline in output will moderate.

Which statement is correct?

When the economy is in a recession and jobs are hard to find, inflation tends to fall

(Figure: Shifts of the AD-AS Curves) Use Figure: Shifts of the AD-ASCurves. A short-run increase in net exports is illustrated by panel:

a (right shift of curve)

Suppose the equilibrium aggregate price level is rising and the equilibrium real GDP is falling. Which factor is MOST likely causing these changes?

a decrease in short-run aggregate supply

The wealth effect suggests:

a negative relationship between the price level and consumer spending.

Which of the following changes will lead to an increase in both the price level and the quantity of output in an economy?

a rise in aggregate demand

(Figure: Aggregate Supply) If the economy is at point E:

actaul output is greater than potential output.

The wealth effect explains why the:

aggregate demand curve slopes downward, since changes in the aggregate price level alter the purchasing power of people's wealth.

The interest rate effect of a change in the aggregate price level causes the:

aggregate demand curve to be negatively sloped.

A graphical representation of the relationship between the total quantity of goods and services demanded and the price level is the:

aggregate demand curve.

Macroeconomic equilibrium occurs where:

aggregate demand intersects with aggregate supply.

(Figure: Macroeconomic Equilibrium) Use Figure: Macroeconomic Equilibrium. Curve 1 represents _____, curve 2 represents _____, and curve 3 represents _____.

aggregate demand; long-run aggregate supply; short-run aggregate supply

Increasing the quantity of money in circulation shifts the _____ curve to the _____.

aggregate demand; right

Suppose that a presidential candidate who promised large personal income tax cuts is elected. Which outcome is MOST likely?

an increase in aggregate demand.

(Figure: Shift of the Aggregate Demand Curve) A movement from point B on AD1 to point E on AD2 may result from:

an increase in consumer optimism. (right shift)

(Figure: Shift of the Aggregate Demand Curve) Use Figure: Shift of the Aggregate Demand Curve. A movement from AD1 to AD2 may result from:

an increase in government spending.

When the Fed uses quantitative easing, it is:

buying longer-term government debt.

The short-run aggregate supply curve will shift to the left if:

commodity prices rise.

Suppose that the Mexican government lowers personal income tax rates. Ceteris paribus, which of the graphs shows the correct effect on the AD-AS framework in Mexico?

d. (right shift of AD)

Suppose the economy is operating in long-run equilibrium and that a positive demand shock hits. We would expect a short-run increase in real GDP and the price level and a long-run _____ in real GDP and _____ the price level.

decrease; increase

A decrease in the money supply is likely to cause a(n) _____ in borrowing, a(n) _____ interest rates, and a(n) _____ in aggregate demand.

decrease; increase; decrease

Banks whose current reserves are lower than the reserve requirement:

demand overnight loans

A decrease in the supply of money shifts the aggregate _____ curve to the _____.

demand; left

If declining labor union membership causes workers to lose bargaining power, resulting in lower wages, production costs will:

fall, and the SRAS curve will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.

When the price level in an economy increases, the quantity of output demanded in the economy:

falls.

Loans of reserves from one bank to another are made in the _____ market.

federal funds

The AD curve will shift to the left:

if household wealth decreases.

(Figure: Shift of the Aggregate Demand Curve) Use Figure: Shift of the Aggregate Demand Curve. A movement from point A on AD1to point C on AD2 may result from a(n):

increase in aggregate spending (right shift of AD)

Stagflation may result from a(n):

increase in the price of oil.

According to the interest rate effect, an increase in the price level causes the Fed to _____ the interest rate, which _____ investment spending and _____ aggregate output.

increase; decreases; decreases

If the Fed decreases the quantity of money in circulation, interest rates _____, investment spending _____, and the aggregate demand curve shifts to the _____.

increase; decreases; left

(Figure: Aggregate Supply) Use Figure: Aggregate Supply. If the economy is at point E, nominal wages will _____, and the short-run aggregate supply curve will shift _____ until actual output is _____ potential output.

increase; left; equal to

In the short run, a positive demand shock _____ aggregate output and _____ the aggregate price level.

increases; increases

Aggregate demand will NOT increase when:

interest rates increase.

The wealth effect is the:

inverse relationship between prices and consumption spending due to changes in real wealth.

The exchange rate effect is the:

inverse relationship between real interest rates and net exports.

If there is deflation of 1% and a firm wants to lower real wages by 1%, it will need to:

lower nominal wages by 2%

If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy.

lower; downward; increase

If the problem in the economy is very high cyclical unemployment, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

lower; induce

If the output gap is negative, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

lower; up

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 2%, then, the Fed will:

not change the real interest rate

If unemployment is below its sustainable level, then the economy is:

operating above capacity, and inflation will likely rise.

The debt effect helps explain the:

positive relationship between prices and consumption spending.

The level of output that the economy would produce if all prices, including wages, were fully flexible is called:

potential output.

The short-run aggregate supply curve may shift to the right if:

productivity increases.

Government bonds in the United Kingdom are called gilts. In 2016, the Bank of England attempted to boost the economy through purchases of long-term gilts. This is evidence of:

quantitative easing

In late 2008, the Federal Reserve began purchasing billions of dollars' worth of mortgage-backed securities from banks. This was evidence of:

quantitative easing

If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.

raise; more; increase

If the problem in the economy is continuous higher-than-expected increases in the consumer price index, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

raise; reduce

If the output gap is positive, then the Federal Reserve will use its floor framework to _____ the federal funds rate, influence short- and long-term interest rates _____, and _____ total spending in the economy.

raise; upward; decrease

If inflation is 4% and a firm gives its workers a 1.5% nominal wage raise, then:

real wages have fallen by 2.5% (1.5-4)

Aggregate demand will increase if:

the public becomes more optimistic about future income.

The aggregate supply curve shows the relationship between the price level and the:

total quantity of output that suppliers collectively produce.

Producing a short-run level of aggregate output that exceeds the economy's potential output results in a(n) _____ adjustment in _____.

upward; nominal wages

The higher the GDP deflator in an economy, the:(i) higher the purchasing power of the currency.(ii) lower the real wealth in the economy.(iii) higher the real wealth in an economy.(iv) more expensive the country's exports.

(ii) and (iv)

Suppose you have the following statistics for the economy. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. If the Federal Reserve sets the federal funds rate according to the Fed's rule of thumb, then what is the real interest rate?

4.25%

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

7.75%

Which of these is a tool of monetary policy used by the Federal Reserve? I. open-market operations II. government purchases of goods and services

I only

Why might maintaining an interest rate ceiling in an economy be a bad idea?

If deflation occurs and the real interest rate rises, it will discourage consumption and investment.

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when imported inputs become cheaper?

Prices decrease, and GDP increases.

Which statement is FALSE?

The Fed rule-of-thumb sets the federal funds rate on the basis of past inflation rates, whereas inflation targeting is based on a target interest rate and business cycles.

Which of the following changes will lead to a decrease in the price level but an increase in the quantity of output in an economy?

a rise in aggregate supply

Minimum wages rise sharply in the economy. Ceteris paribus, which of the graphs shows the correct effect on the AD-AS framework?

graph C (left shift of AS)

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. Which graph shows the correct effect on prices and GDP when the government engages in expansionary fiscal policy?

graph D (increased AD)

(Figure: Aggregate Supply) Use Figure: Aggregate Supply. At point F, potential output is _____ than actual output, and unemployment is _____.

greater; high

Ceteris paribus, a decrease in exports leads to a:

left shift of the aggregate demand curve

Ceteris paribus, an increase in imports leads to a:

left shift of the aggregate demand curve.

Contractionary monetary policy causes a:

left shift of the aggregate demand curve.

If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.

lower; less; decrease

When the Federal Reserve purchases more long-term bonds, this:

lowers long-term bond interest rates

Expansionary fiscal policy _____ taxes, _____ government expenditure, _____ aggregate expenditures, and ____ aggregate demand.

lowers; raises; boosts; raises

When the economy is on the short-run aggregate supply curve and to the left of the long-run aggregate supply curve, actual aggregate output will eventually equal potential output as _____ fall(s) and the _____ aggregate _____ curve shifts to the _____.

nominal wages; short-run; supply; right

If the output gap is positive, the Federal Reserve will _____ the real interest rate to _____.

raise; cool inflationary pressures

If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

raise; down

If all prices, including the nominal wage rate, double in the long run, then aggregate output supplied will:

remain unchanged.

An increase in aggregate demand is seen as a(n) _____ the aggregate demand curve.

shift to the right of