ECO 119 - EXAM 3

Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency? The central bank's foreign-currency reserves are increasing. The government has a budget surplus. The central bank's foreign-currency reserves are decreasing. The government has a budget deficit.

The central bank's foreign-currency reserves are increasing.

The time between when government spending increases and when aggregate demand starts to increase is an example of an: outside lag of fiscal policy. inside lag of monetary policy. inside lag of fiscal policy. outside lag of monetary policy.

outside lag of fiscal policy.

In the IS-LM analysis, the increase in income resulting from a tax cut is ______ the increase in income resulting from an equal rise in government spending. usually equal to usually less than sometimes less and sometimes greater than usually greater than

usually less than

In the Mundell-Fleming model, the domestic interest rate is determined by the: domestic rate of inflation. intersection of the LM and IS curves. world interest rate. world rate of inflation.

world interest rate.

A small open economy with a floating exchange rate is initially at equilibrium A with IS*1, LM*1, equilibrium exchange rate e2, and equilibrium output Y1. If there is an increase in government spending to IS*2, the new equilibrium will be at ____, holding everything else constant. D B A C

B

A small open economy with a fixed exchange rate e2 is initially at equilibrium A with IS1 * , LM1* and equilibrium output Y1.. If there is an increase in government spending to IS2 * the new equilibrium will be at ____, holding everything else constant. A C B D

C

A small open economy with a floating exchange rate is initially in equilibrium at A with IS1* ; LM1*. If there is an increase in the risk premium, then LM1* will shift to _____ and IS1* will shift to _____. LM3* ; IS3* LM2* ; IS3* LM3* ; IS2* LM2* ; IS2*

LM2* ; IS3*

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______. IS; does not shift LM; does not shift LM; shifts to the right IS; shifts to the right

LM; does not shift

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______. IS; left IS; right LM; left LM; right

LM; right

A small open economy with a fixed exchange rate e2 is initially at equilibrium A with IS1 * , LM1* and equilibrium output Y1. If there is a monetary expansion to the new equilibrium will be at ____, holding everything else constant. A C D B

A

Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____, with a _____ price level. B; higher C; higher B; lower C; lower

C; higher

A small open economy with a floating exchange rate is initially in equilibrium at A with IS1*. Holding all else constant, if domestic consumers develop greater preferences for imported goods, then the _____ curve will shift to _____. LM1* ; LM3* LM1* ; LM2* IS1* ; IS2* IS1* ; IS3*

IS1* ; IS3*

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with fixed exchange rates, lead to: a fall in income but no change in net exports. a fall in income and net exports. no change in income but a fall in net exports. no change in income or net exports.

a fall in income and net exports.

Increasing government spending when the economy is in a recession is an example of: passive monetary policy. active monetary policy. active fiscal policy. passive fiscal policy.

active fiscal policy.

Which of the following is an example of a fiscal policy that has no inside lag? a decrease in income tax rates an increase in government spending for job training an ongoing unemployment insurance program a reduction in the age at which people become eligible for retirement benefits

an ongoing unemployment insurance program

Policy is conducted by discretion if policymakers: are free to size up the situation case by case and choose whatever policy seems appropriate at the time. announce in advance how policy will respond to various situations and commit themselves to following through on this announcement. announce and achieve a balanced government budget. announce and maintain a constant growth rate of the money supply.

are free to size up the situation case by case and choose whatever policy seems appropriate at the time

Policies that stimulate or depress the economy without any deliberate policy change are called: leading indicators. time-inconsistent policies. automatic stabilizers. rational expectations policies.

automatic stabilizers.

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift: both the LM and the IS curves. only the LM curve. neither the LM nor the IS curve. only the IS curve.

both the LM and the IS curves.

In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short-run equilibrium the IS* curve shifts to the right, raising the exchange rate: and net exports but not income. net exports and income. but not raising net exports or income. and income but not net exports.

but not raising net exports or income.

According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy ______ increase income, and under fixed exchange rates, expansionary monetary policy ______ increase income. can; can cannot; can cannot; cannot can; cannot

can; cannot

The Pigou effect suggests that falling prices will increase income because real balances influence ______ and will shift the ______ curve. government spending; IS consumer spending; IS the money supply; LM money demand; LM

consumer spending; IS

In the IS-LM model, changes in taxes initially affect planned expenditures through: the interest rate. consumption. government spending. investment.

consumption.

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n): contractionary shift in the IS curve. expansionary shift in the LM curve. expansionary shift in the IS curve. contractionary shift in the LM curve.

contractionary shift in the LM curve.

If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, then it must: give up the use of fiscal policy for purposes of domestic stabilization. give up the use of monetary policy for purposes of domestic stabilization. live with exchange-rate volatility. control its citizens' access to world financial markets.

control its citizens' access to world financial markets.

The risk premium included in the interest rate of small open economies incorporates: inefficient activity by arbitrageurs. capital mobility. country risk and expectations of future exchange-rate changes. the law of one price.

country risk and expectations of future exchange-rate changes

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, then in order to keep output constant, the Federal Reserve should _____ the money supply, shifting to _____. increase; LM3 decrease; LM2 increase; LM2 decrease; LM3

decrease; LM3

The severity of the Great Depression may be partly explained by an increase in expected inflation, which raised nominal interest rates above real interest rates. deflation, which raised real interest rates above nominal interest rates. inflation, which raised real interest rates above nominal interest rates. deflation, which raised nominal interest rates above real interest rates.

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

In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate. appreciate; increase depreciate; increase appreciate; decrease depreciate; decrease

depreciate; increase

All of the following could be considered automatic stabilizers except: transfer payments that increase during recessions. the federal income tax. discretionary changes in taxes. a system of unemployment insurance.

discretionary changes in taxes.

In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short-run equilibrium, the: interest rate falls and the level of investment rises. interest rate falls but the level of investment does not rise. exchange rate falls and net exports increase. exchange rate falls but net exports do not increase.

exchange rate falls and net exports increase.

The lag between the time that economic stimulus is needed and the time that a tax cut is passed by Congress is an example of a: fiscal inside lag. monetary outside lag. monetary inside lag. fiscal outside lag.

fiscal inside lag.

The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have: free capital flows, a fixed exchange rate, and an independent monetary policy. high interest rates, a budget deficit, and a trade deficit. an expansionary fiscal policy, a contractionary monetary policy, and a flexible exchange rate. low inflation, low unemployment, and a rapid rate of GDP growth.

free capital flows, a fixed exchange rate, and an independent monetary policy.

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have a ______ propensity to consume than debtors. from creditors to debtors; larger from debtors to creditors; smaller from debtors to creditors; larger from creditors to debtors; smaller

from debtors to creditors; smaller

If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must: restrict its citizens from participating in world financial markets. give up the use of monetary policy for purposes of domestic stabilization. live with exchange-rate volatility. give up the use of fiscal policy for purposes of domestic stabilization.

give up the use of monetary policy for purposes of domestic stabilization.

An argument in favor of allowing discretionary macroeconomic policy is that: policymakers may make erratic shifts in policy in response to changing political situations. the objectives of policymakers may be in conflict with the well-being of the public. uninformed policymakers may choose incorrect policies. giving policymakers flexibility will allow them to respond to changing conditions.

giving policymakers flexibility will allow them to respond to changing conditions.

Automatic stabilizers: require congressional action before each time that they are put into effect. have long and variable inside lags. have no outside lag. have no inside lag.

have no inside lag.

According to the Lucas critique, when economists evaluate alternative policies they must take into consideration: how the policies will affect expectations and behavior. whether the policy will offset the impact of automatic stabilizers. the length of the inside lags associated with the policies. the stage of the political business cycle in which the policy is to be implemented.

how the policies will affect expectations and behavior.

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium: imports will decrease and exports will decrease by an equal amount. both imports and exports will remain unchanged. imports will decrease while exports remain constant, leading to a rise in net exports. imports will decrease and exports will increase, leading to a rise in net exports.

imports will decrease and exports will decrease by an equal amount.

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts: income, the interest rate, consumption, and investment all rise. income and the interest rate rise, whereas consumption and investment fall. income and the interest rate fall, whereas consumption and interest rise. income, the interest rate, consumption, and investment are unchanged.

income and the interest rate rise, whereas consumption and investment fall.

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium: neither income nor the exchange rate rises, as the money supply contracts. both income and the exchange rate rise. income rises, but the exchange rate does not rise. the exchange rate rises, but income does not rise.

income rises, but the exchange rate does not rise.

Suppose the sudden death of a popular president reduces consumer confidence, inducing people to save more. The Fed desires to stabilize demand in the economy. Use this information to answer the following question. The Fed should increase the money supply to raise the interest rate. increase the money supply to lower the interest rate. decrease the money supply to lower the interest rate. decrease the money supply to raise the interest rate.

increase the money supply to lower the interest rate.

In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to: increase the money supply. decrease the money supply. increase taxes. increase government spending.

increase the money supply.

In the Mundell-Fleming model with flexible exchange rates, an increase in the price level results in a(n) ______ in the real exchange rate and a(n) ______ in net exports. increase; increase decrease; decrease increase; decrease decrease; increase

increase; decrease

According to the Mundell-Fleming model, under fixed exchange rates, expansionary fiscal policy causes income to ______, and under flexible exchange rates expansionary fiscal policy causes income to ______. remain unchanged; increase increase; remain unchanged remain unchanged; remain unchanged increase; increase

increase; remain unchanged

In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short-run equilibrium, the money supply: remains unchanged, and there is no effect of government spending on income. decreases to keep the exchange rate unchanged, thus offsetting the effect of government spending on income. remains unchanged to keep the interest rate at the world interest rate, so that government spending reduces income. increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income.

increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income.

A given increase in taxes shifts the IS curve more to the left the: smaller the marginal propensity to consume. larger the marginal propensity to consume. larger the government spending. smaller the government spending.

larger the marginal propensity to consume.

What are two types of tools that economists use to forecast future economic developments? monetary instruments and fiscal instruments leading indicators and macroeconometric models direct imputations and indirect attributions visual assessment and global positioning

leading indicators and macroeconometric models

The money hypothesis suggests that the Great Depression was caused by a: rightward shift in the LM curve. leftward shift in the LM curve. rightward shift in the IS curve. leftward shift in the IS curve.

leftward shift in the LM curve.

The intersection of the IS* and LM* curves shows the ______ and the ______ at which both the goods market and the money market are in equilibrium. level of output; exchange rate price level; exchange rate interest rate; price level level of output; price level

level of output; exchange rate

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. increase; raise lower; raise lower; lower. increase; lower

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. higher; raises; reduces lower; raises; reduces higher; lowers; increases lower; lowers; increases

lower; raises; reduces

The political business cycle refers to the: manipulation of the economy to win elections. pattern of holding primaries, conventions, and general elections every four years. pattern of recession and expansion that follows every election. cycle of electing U.S. representatives every two years, the U.S. president every four years, and U.S. senators every six years.

manipulation of the economy to win elections.

The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a: monetary outside lag. fiscal inside lag. monetary inside lag. fiscal outside lag.

monetary outside lag.

A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve. vertical; horizontal horizontal; vertical shift in the; movement along the movement along the; shift in the

movement along the; shift in the

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to: a fall in consumption and income. no change in income or net exports. no change in consumption or income. no change in income but a rise in net exports.

no change in income but a rise in net exports.

The introduction of automatic teller machines, which reduces the demand for money, will, according to the Mundell-Fleming model with fixed exchange rates, lead to: no change in income but a rise in net exports. a rise in income and net exports. no change in income or net exports. a rise in income but no change in net exports.

no change in income or net exports.

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium: both output and the price level will decrease. output will decrease, but the price level will increase. both output and the price level will increase. output will increase, but the price level will decrease.

output will decrease, but the price level will increase.

If all past economic fluctuations resulted from inept economic policies, then the historical evidence would support using: active macroeconomic policy only. neither active nor passive macroeconomic policy. passive macroeconomic policy only. either active or passive macroeconomic policy.

passive macroeconomic policy only.

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income: r2, Y3. r3, Y3. r3, Y2. r2, Y2.

r2, Y3.

According to the Mundell-Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to ______, and in an economy with fixed exchange rates, import restrictions cause net exports to ______. remain unchanged; increase increase; remain unchanged remain unchanged; remain unchanged increase; increase

remain unchanged; increase

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______. resulting from a change in fiscal policy; resulting from a change in monetary policy resulting from a change in the price level; at a given price level at a given price level; resulting from a change in the price level resulting from a change in monetary policy; resulting from a change in fiscal policy

resulting from a change in the price level; at a given price level

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______. rises; falls falls; falls rises; rises falls; rises

rises; falls

In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to ______ the central bank, which causes the money supply to ______. buy domestic currency from; decrease buy domestic currency from; increase sell domestic currency to; decrease sell domestic currency to; increase

sell domestic currency to; decrease

Active economic policy seeks to do all of the following except: take a hands-off approach to macroeconomic policy. use monetary and fiscal policy to shift aggregate demand. offset fluctuations in real GDP. respond to changing economic conditions.

take a hands-off approach to macroeconomic policy.

In the Mundell-Fleming model: the exchange-rate system must have a floating exchange rate. it makes no difference whether the exchange-rate system has a floating or a fixed exchange rate. the exchange-rate system must have a fixed exchange rate. the behavior of the economy depends on whether the exchange-rate system has a floating or fixed exchange rate.

the behavior of the economy depends on whether the exchange-rate system has a floating or fixed exchange rate.

A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called a(n): time-inconsistent policy. rational expectation. outside lag. active policy rule.

time-inconsistent policy.

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 unexpected; increase expected; reduce expected; increase

unexpected; reduce