EC 309 Final

In a time of inflation when the government budget is balanced in the conventional sense, the real (that is, deflated) value of the government debt is:

decreasing at the rate of inflation.

The amount by which government spending exceeds government revenues is called the _____, and the accumulation of past government borrowing is called the _____.

deficit; debt

The severity of the Great Depression may be partly explained by an increase in expected

deflation, which raised real interest rates above nominal interest rates.

A rightward shift in aggregate ______ moves the economy along the short-run Phillips curve to a point with ______ inflation.

demand, higher

If only unanticipated changes in the money supply affect real GDP, the public has rational expectations, and everyone has the same information about the state of the economy, then:

monetary policy cannot be used to systematically stabilize output.

An increase in taxes lowers income:

in the short run but leaves it unchanged in the long run, while lowering consumption and increasing investment

A central bank can reduce inflation at the smallest cost if people's expectations of inflation

respond quickly to new policy regimes

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, _____ output and _____ interest rates.

lower; raise

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a _____ real money supply M / P, which _____ the interest rate and _____ spending.

lower; raises; reduces

Economists who believe that monetary policy is more potent than fiscal policy argue that the:

responsiveness of money demand to the interest rate is small

The typical estimate of the sacrifice ratio is approximately:

5-6

. If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:

50 and the interest rate falls by 0.5 percent.

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by:

500.

An increase in the expected price level shifts the ______ aggregate supply curve to the ______.

short-run, left

The LM curve, in the usual case:

slopes up to the right.

Each of the two models of short-run aggregate supply is based on some market imperfection. In the sticky-price model, the imperfection is that:

some firms do not adjust their prices instantly to changes in demand.

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

A rightward shift in aggregate ______ shifts the short-run Phillips curve so that the economy experiences ______ inflation for any level of unemployment.

supply, lower

Along an IS curve all of these are always true EXCEPT:

the demand for real balances equals the supply of real balances.

The IS curve shifts when any of the following economic variables change EXCEPT:

the interest rate.

If an economy is in a liquidity trap, then an expansionary monetary policy ends up increasing:

the liquidity of household portfolio.

The debt-deflation theory of the Great Depression suggests that an _____ deflation redistributes wealth in such a way as to _____ spending on goods and services.

unexpected; reduce

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

Throughout U.S. history, the most common cause of large increases in government debt has been

wars, which cause large increases in government spending.

In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by _____ and increases the equilibrium level of income by _____.

$2.25 billion; $9 billion

According to the Keynesian cross model, if the marginal propensity to consume is 23 , an increase in government purchases of $120 billion increases equilibrium income by _____ billion.

$360

According to the Keynesian cross model, if the marginal propensity to consume is 23, a tax cut of $120 billion increases equilibrium income by _____ billion.

$360

If the debt of the U.S. federal government in 2022 was divided equally among the people in the United States, then the debt per person would equal approximately:

$92,000

Assume that the nominal interest rate is 11 percent, the inflation rate is 8 percent, and government debt at the beginning of the year equals $4 trillion. By how much is the government budget deficit overstated as a result of inflation?

. $0.32 trillion

Assume that an economy has the Phillips curve 𝜋𝜋 = 𝜋𝜋-1 - 0.5 (u - 0.06). Then the natural rate of unemployment is:

0.06.

. If the government debt, D, equals $5 trillion, the nominal interest rate is 7 percent, and the real interest rate is 3 percent, then nominal budget deficit overstates the real deficit by $___ trillion.

0.20

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

100

Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1600

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

70

Tax smoothing is a desirable policy because it:

reduces the distortions of incentives caused by taxes.

In the Keynesian-cross model, actual expenditures equal:

GDP.

The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the _____ curve to the _____

IS; left

A tax cut shifts the _____ curve to the right, and the aggregate demand curve _____.

IS; shifts to the right

In the IS-LM model, which of the following causes income to decline and the interest rate to rise?

a decrease in the money supply

Using fiscal policy, including automatic stabilizers, to stabilize output over a business cycle is not consistent with:

a strict balanced-budget rule.

The factors most responsible for forecasts of the U.S. government debt spiraling out of control in the next half century are the projected:

aging of the U.S. population and rising health care costs.

In the IS-LM model, which of the following causes both the interest rate and income to decline?

an increase in taxes

The IS and LM curves together generally determine:

both income and the interest rate.

When a government spends more than it collects in taxes, it runs a:

budget deficit.

Ricardian equivalence may fail to hold if

consumers face binding borrowing constraints.

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ΔT will:

decrease equilibrium income by ΔT (MPC) / (1 - MPC).

Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to _____ in the short run; and in the long run the expected price level will _____, causing the level of output to return to the natural level.

decrease; decrease

A debt-financed tax cut will _____ saving in the traditional view and _____ saving in the view of Ricardian equivalence.

decrease; not change

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income

decreases; downward

The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:

equals the inflation rate.

The cyclically adjusted budget deficit:

estimates what the deficit would be if the economy were operating at the natural rate of output.

Historically, the primary cause of increases in government debt has been:

financing wars.

Other things equal, a given change in government spending has a larger effect on demand the:

flatter the LM curve.

If fiscal policymakers are motivated by tax smoothing, then budget surpluses are appropriate when income is unusually ______ or government expenditure is unusually ______.

high, low

The LM curve slopes upward because ______ income increases money demand and, in turn, increase the ______.

higher, interest rate

The IS curve slopes downward because a ______ interest rate reduces ______ and thus income

higher, planned investment

Suppose that a heightened risk of terrorist attack reduces consumer confidence, inducing people to save more. To stabilize aggregate demand, the Fed should a. increase the money supply to raise the interest rate.

increase the money supply to lower the interest rate.

If the Fed holds the interest rate constant in response to an increase in government purchases, the money supply will ______, and the impact on income will be _____ than if the money supply were held constant.

increase, larger

According to the theory of liquidity preference, the central bank can ______ the supply of money and ______ the interest rate.

increase, lower

. If the hypothesis of hysteresis is correct and output is lost even after a period of disinflation, the sacrifice ratio for an economy will:

increase.

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.

increase; decrease

According to the traditional view of government debt, a debt-financed tax cut

increases output in the short run but decreases it in the long run.

According to the Ricardian view of government debt, a debt-financed tax cut

increases private saving but has no effect on national saving.

When the federal government incurs additional debt to acquire an asset, under current budgeting procedures the deficit _____, while under capital budgeting procedures the deficit _____.

increases; does not change

The reason that the income response to a fiscal expansion is generally less in the IS- LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment

A given increase in taxes shifts the IS curve more to the left the:

larger the marginal propensity to consume.

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production.

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:

less than the expected price level.

As a result of a contraction in aggregate demand, the ______ declines, but over time it returns to its former level as the expected price level ______.

level of output, falls

According to the traditional view of government debt, if taxes are cut without cutting government spending, then the long-run effects will be _____ steady-state capital and _____ consumption

lower; lower

According to the traditional view of government debt, if taxes are cut without a cut in government spending, then in the United States this situation will lead to _____ net indebtedness on the part of the United States to foreign countries and _____ net exports.

more; fewer

The IS-LM model is generally used:

only in the short run.

High levels of government debt that raise investors' fear of a government default on debt will result in capital _____ and a(n) _____ of the country's exchange rate.

outflows; depreciation

The sticky-price model of aggregate supply explains why

output declines when prices fall below expected prices.

In times of inflation, the government's budget deficit is ______ because government expenditure includes the ______ interest payments on government debt.

overstated, nominal

A recession may alter an economy's natural rate of unemployment in all of these ways EXCEPT by:

permanently reducing the money supply.

Along a short-run aggregate supply curve, output is related to unexpected movements in the _____. Along a Phillips curve, unemployment is related to unexpected movements in the _____.

price level; inflation rate

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of these reasons EXCEPT:

prices do not adjust when there is perfect competition.

Financing a budget deficit by _____ leads to inflation, and inflation _____ the real value of government debt.

printing money; decreases

Other things equal, an expected deflation can change demand by:

raising the real interest rate for any given nominal interest rate, thus reducing desired investment.

If output is above its natural level, over time the price level will ______, shifting the _____ curve and moving the economy toward its long‐run equilibrium.

rise, LM

The percentage of a year's real GDP that must be forgone to reduce inflation by 1 percentage point is called the:

sacrifice ratio.

Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would _____ the extra take home pay, while those facing binding borrowing constraints would _____ the extra-take home pay.

save; spend

To illustrate inflation inertia in an aggregate demand-aggregate supply model, the short-run aggregate supply curve shifts upward because of increases in _____, and the aggregate demand curve shifts upward because of increases in _____.

the expected price level; the money supply

At the intersection of the IS and LM curves,

the goods market and money market are both in equilibrium.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

the government-spending multiplier is larger than the tax multiplier

The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances.

the interest rate and the level of income

Ricardian equivalence refers to the same impact of financing government:

whether by debt or taxes.