ECO 305 Final
13. According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P. A) higher; lower B) lower; higher C) higher; higher D) lower; lower
A
14. For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are ______, generating a ______ quantity of output demanded. A) higher; greater B) higher; smaller C) lower; greater D) lower; smaller
A
18. If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect: A) level of output but not prices. B) prices but not level of output. C) both prices and level of output. D) neither prices nor level of output.
A
19. If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: A) is horizontal. B) is vertical. C) slopes upward and to the right. D) slopes downward and to the right
A
28. When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift: A) downward and to the left. B) downward and to the right. C) upward and to the left. D) upward and to the right
A
35. Stabilization policy refers to policy actions aimed at: A) reducing the severity of short-run economic fluctuations. B) equalizing incomes of households in the economy. C) maintaining constant shares of output going to labor and capital. D) preventing increases in the poverty rate.
A
37. A reduction in the demand for money is the equivalent of a(n) _______ in velocity and will shift the aggregate demand curve to the _____. A) increase; right B) increase; left C) decrease; right D) decrease; left
A
38. Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: A) decreasing the money supply. B) increasing the money supply. C) decreasing the price level. D) increasing the price level.
A
4. Okun's law is the ______ relationship between real GDP and the ______. A) negative; unemployment rate B) negative; inflation rate C) positive; unemployment rate D) positive; inflation rate
A
According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase. A) greater; increase B) smaller; increase C) greater; decrease D) smaller; decrease
A
An increase in income raises money ______ and ______ the equilibrium interest rate . A) demand; raises B) demand; lowers C) supply; raises D) supply; lowers
A
Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation. A) increase; higher B) increase; lower C) decrease; higher D) decrease; lower
A
Changes in monetary policy shift the: A) LM curve. B) planned spending curve. C) money demand curve. D) IS curve.
A
Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will: A) lower equilibrium income by the decrease in the intercept multiplied by the multiplier. B) lower equilibrium income by the decrease in the intercept. C) raise equilibrium income by the decrease in the intercept D) raise equilibrium income by the decrease in the intercept multiplied by the multiplier.
A
Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will: A) increase saving by the decrease in the intercept. B) lead to no change in saving. C) decrease saving by the decrease in the intercept. D) lead to an increase in investment.
A
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: A) some firms do not adjust their prices instantly to changes in demand. B) expectations are formed adaptively rather than rationally. C) firms confuse changes in the overall level of prices with changes in relative prices. D) the real wage adjusts to bring labor supply and labor demand into equilibrium.
A
If investment does not depend on the interest rate, then the ______ curve is ______. A) IS; vertical B) IS; horizontal C) LM; vertical D) LM; horizontal
A
If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output. A) vertical; monetary B) horizontal; monetary C) vertical; fiscal D) horizontal; fiscal
A
If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by: A) Y = 1,100, r = 6 percent. B) Y = 1,200, r = 5 percent. C) Y = 1,000, r = 5 percent. D) Y = 1,100, r = 5 percent.
A
In the sticky-price model, the relationship between output and the price level depends on: A) the proportion of firms with flexible prices. B) the target real wage rate. C) the target nominal wage rate. D) the implicit agreements between workers and firms.
A
Other things equal, a given change in money supply has a larger effect on demand the: A) flatter the IS curve. B) steeper the IS curve. C) smaller the interest sensitivity of expenditure demand. D) larger the income sensitivity of money demand.
A
The IS-LM model is generally used: A) only in the short run B) only in the long run. C) both in the short run and the long run. D) in determining the price level.
A
The assumption of rational expectations for inflation means that people will form their expectations of inflation by: A) optimally using all available information, including information about current policies, to forecast the future. B) asking the opinions of the best experts. C) subscribing to the forecasting service that uses the best econometric model D) basing their opinions on recently observed inflation.
A
. In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income: A) increases by 250. B) increases by more than 250. C) decreases by 250. D) increases, but by less than 250.
B
. With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______. A) right; decumulation B) right; accumulation C) left; decumulation D) left; accumulation
B
10. If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves farther to the right. A) downward; steeper B) downward; flatter C) upward; steeper D) upward; flatter
B
15. The short run refers to a period: A) of several days. B) during which prices are sticky and unemployment may occur. C) during which capital and labor are fully employed. D) during which there are no fluctuations.
B
16. If the short-run aggregate supply curve is horizontal, then the: A) classical dichotomy is satisfied. B) money supply cannot affect prices in the short run. C) money supply cannot affect output in the short run. D) money supply is irrelevant in the short run.
B
17. In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where: A) aggregate demand equals long-run aggregate supply. B) aggregate demand equals short-run aggregate supply. C) aggregate demand equals short-run and long-run aggregate supply. D) short-run aggregate supply equals long-run aggregate supply.
B
2. Over the business cycle, investment spending ______ consumption spending. A) is inversely correlated with B) is more volatile than C) has about the same volatility as D) is less volatile than
B
20. The long-run aggregate supply curve is vertical at the level of output: A) determined by aggregate demand. B) at which unemployment is at its natural rate. C) at which the inflation rate is zero. D) at a predetermined price level.
B
25. The relationship between the quantity of goods and services supplied and the price level is called: A) aggregate demand. B) aggregate supply. C) aggregate investment. D) aggregate production.
B
26. When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______. A) greater; inward B) greater; outward C) lower; inward D) lower; outward
B
30. According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased: A) increases. B) decreases. C) does not change. D) may either increase or decrease.
B
31. If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run. A) only prices; only output B) only output; only prices C) both prices and output; only prices D) both prices and output; both prices and output
B
34. Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run. A) prices; output B) output; prices C) output; output D) prices; prices
B
36. Which of the following is an example of a demand shock? A) a large oil-price increase B) the introduction and greater availability of credit cards C) a drought that destroys agricultural crops D) unions obtain a substantial wage increase
B
6. Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______. A) variations in labor-market utilization; technological progress B) technological progress; variations in labor-market utilization C) money supply growth rates; changes in velocity D) changes in velocity; money supply growth rates
B
7. Most economists believe that prices are: A) flexible in the short run but many are sticky in the long run. B) flexible in the long run but many are sticky in the short run . C) sticky in both the short and long runs . D) flexible in both the short and long run
B
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: A) 0. B) 100. C) 150. D) 250.
B
According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer: A) increases production. B) does not change production. C) decreases production. D) hires more workers.
B
According to the natural-rate hypothesis, fluctuations in aggregate demand affect output in: A) both the short run and the long run. B) only in the short run. C) only in the long run. D) in neither the short run nor the long run
B
According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase
B
An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output. A) raises; but cannot affect B) raises; and may also lower C) lowers; but cannot affect D) lowers; and may also lower
B
Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will: A) drop by 4 percent. B) drop by 2 percent. C) drop by 1 percent. D) remain unchanged.
B
If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is: A) Y = 400 - 0.75T - 25r + G. B) Y = 1,600 - 3T - 100r + 4G. C) Y = 400 + 0.75T - 25r - G. D) Y = 1,600 + 3T - 100r - 4G
B
If money demand does not depend on the interest rate, then the LM curve is ______ and ______ policy has no effect on output. A) horizontal; fiscal B) vertical; fiscal C) horizontal; monetary D) vertical; monetary
B
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: A) monetary policy can be used to systematically stabilize output. B) monetary policy cannot be used to systematically stabilize output. C) a policy of keeping the money supply constant is optimal. D) a policy of adjusting the money supply in response to the state of the economy is optimal.
B
If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is: A) 0.001. B) 0.005. C) 0.01. D) 0.05.
B
In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will: A) not change. B) be smaller. C) be bigger. D) be equal to 1.
B
Other things equal, a given change in government spending has a larger effect on demand the: A) flatter the IS curve. B) steeper the IS curve. C) larger the interest sensitivity of expenditure demand. D) smaller the interest sensitivity of money demand.
B
Those economists who believe that monetary policy is more potent than fiscal policy argue that the: A) responsiveness of money demand to the interest rate is large. B) responsiveness of money demand to the interest rate is small . C) IS curve is nearly vertical. ) LM curve is nearly horizontal.
B
. Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent. A) 2 B) 4 C) 6 D) 8
C
. Based on the sticky-price model, the short-run aggregate supply curve will be steeper, the greater the: A) target nominal-wage rate. B) target real-wage rate. C) proportion of firms with flexible prices. D) proportion of firms with sticky prices.
C
. In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: A) liquidity preference. B) the government-purchases multiplier. C) unplanned inventory investment. D) real money balances
C
22. The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on: A) the labor supply. B) the supply of capital. C) the money supply. D) technology.
C
23. In the long run, the level of output is determined by the: A) interaction of supply and demand. B) money supply and the levels of government spending and taxation. C) amounts of capital and labor and the available technology. D) preferences of the public.
C
27. When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______. A) greater; inward B) greater; outward C) lower; inward D) lower; outward
C
29. The aggregate demand curve tells us possible: A) combinations of M and Y for a given value of P. B) combinations of M and P for a given value of Y. C) combinations of P and Y for a given value of M. D) results if the Federal Reserve reduces the money supply
C
3. When GDP growth declines, investment spending typically ______ and consumption spending typically ______. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases
C
32. In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where: A) aggregate demand is greater than long-run aggregate supply. B) aggregate demand equals short-run aggregate supply. C) aggregate demand equals short-run and long-run aggregate supply. D) short-run aggregate supply equals long-run aggregate supply.
C
33. If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______ and output will ______. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase
C
8. A difference between the economic long run and the short run is that: A) the classical dichotomy holds in the short run but not in the long run. B) monetary and fiscal policy affect output only in the long run. C) demand can affect output and employment in the short run, whereas supply is the ruling force in the long run. D) prices and wages are sticky in the long run only.
C
A supply shock does not occur when: A) a drought destroys crops. B) unions push wages up. C) the Fed increases the money supply. D) an oil cartel increases world oil prices
C
According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount G and the planned expenditure schedule by an equal amount, then equilibrium income rises by: A) one unit. B) G. C) G divided by the quantity one minus the marginal propensity to consume. D) G multiplied by the quantity one plus the marginal propensity to consume.
C
According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income: A) income falls. B) planned expenditure falls. C) unplanned inventory investment is negative. D) prices rise.
C
According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer: A) increases production. B) does not change production. C) decreases production. D) hires more workers.
C
According to the natural-rate hypothesis, output will be at the natural rate: A) if inflation exceeds expected inflation. B) if inflation falls below expected inflation. C) in the long run. D) if aggregate demand affects output in the long run
C
According to the sticky-price model, output will be at the natural level if: A) firms expect a high price level and the demand for goods is high. B) the proportion of firms with flexible prices equals the proportion of firms with sticky prices. C) the price level equals the expected price level. D) expectations are formed adaptively, but not if expectations are formed rationally
C
Assume that the money demand function is (M/P) d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: A) 2,000. B) 1,800. C) 1,600. D) 1,400.
C
If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by: A) 100. B) 200. C) 300. D) 400.
C
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: A) only the LM curve. B) only the IS curve. C) both the LM and the IS curves. D) neither the LM nor the IS curve.
C
If the investment demand function is I = c - dr and the quantity of real money demanded is eY - fr, then fiscal policy is relatively potent in influencing aggregate demand when d is ______ and f is ______ . A) large; small B) small; small C) small; large D) large; large
C
In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is: A) 350. B) 400. C) 600. D) 750.
C
Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except: A) it is costly to alter prices. B) they do not want to annoy their frequent customers. C) prices do not adjust when there is perfect competition D) some prices are set by long-term contracts between firms and customers
C
The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______. A) saving and investment; planned spending B) real-money balances; loanable funds C) goods and services; real money balances D) real-money balances; goods and services
C
The imperfect-information model bases the difference in the short-run and long-run aggregate supply curve on: A) sticky wages. B) sticky prices. C) temporary misperceptions about prices. D) procyclical real wages
C
The interest rate determines ______ in the goods market and money ______ in the money market. A) government spending; demand B) government spending; supply C) investment spending; demand D) investment spending; supply
C
When Paul Volcker tightened the money supply: A) the inflation rate immediately fell. B) nominal interest rates fell in the short run. C) nominal interest rates fell in the long run. D) real balances rose in the short run.
C
. If money demand is extremely sensitive to the interest rate, then the ______ curve is ______. A) IS; vertical B) IS; horizontal C) LM; vertical D) LM; horizontal
D
11. The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant: A) short-run aggregate supply curve. B) long-run aggregate supply curve. C) price level in the short run. D) demand for real balances per unit of output.
D
12. Along an aggregate demand curve, which of the following are held constant? A) real output and prices B) nominal output and velocity C) the money supply and real output D) the money supply and velocity
D
21. If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect: A) neither prices nor level of output. B) both prices and level of output. C) level of output but not prices. D) prices but not level of output.
D
24. Aggregate supply is the relationship between the quantity of goods and services supplied and the: A) money supply. B) unemployment rate. C) interest rate. D) price level.
D
5. The short-run aggregate supply curve is horizontal at: A) a level of output determined by aggregate demand. B) the natural level of output. C) the level of output at which the economy's resources are fully employed. D) a fixed price level.
D
9. The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______. A) positive; money supply B) negative; money supply C) positive; price level D) negative; price level
D
According to the sticky-price model: A) all firms announce their prices in advance. B) all firms set their prices in accord with observed prices and output. C) some firms set their prices according to the aggregate supply equation. D) some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.
D
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. A) increase; lower B) increase; raise C) lower; lower. D) lower; raise
D
Business cycles are: A) regular and predictable B) irregular but predictable. C) regular but unpredictable. D) irregular and unpredictable
D
Each of the following phenomena hinders the precise estimation of the natural rate of unemployment except: A) supply shocks such as oil price increases. B) demographic changes such as the aging baby boomers. C) policy changes such as minimum wage increases. D) introduction of new products such as DVD players.
D
For the purposes of the Keynesian cross, planned expenditure consists of: A) planned investment. B) planned government spending. C) planned investment and government spending. D) planned investment, government spending, and consumption expenditures.
D
If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent. A) 4 B) 1 C) 0 D) -2
D
If investment demand is infinite below some certain r (e.g., r**) and zero above r**, then the IS curve is ______ and ______ policy has no effect on output. A) vertical; monetary B) horizontal; monetary C) vertical; fiscal D) horizontal; fiscal
D
If the demand for real money balances does not depend on the interest rate, then the LM curve: A) slopes up to the right. B) slopes down to the right. C) is horizontal. D) is vertical.
D
If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level. A) increase; IS B) decrease; IS C) increase; LM D) decrease; LM
D
The basic aggregate supply equation implies that output exceeds natural output when the price level is: A) low. B) high. C) less than the expected price level. D) greater than the expected price level.
D
The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately: A) 5 . B) 2.8. C) 1. D) 0.
D
Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(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: A) 200. B) 240. C) 250. D) 260
D
Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run. A) output; prices B) prices; output C) short-run aggregate supply; long-run aggregate supply D) the money supply; the natural rate of output
a
