eco practice test for exam 4
According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then
the price level would rise by 5 percent and real GDP would be unchanged.
When the money market is drawn with the value of money on the vertical axis, long-run equilibrium is obtained when the quantity demanded and quantity supplied of money are equal due to adjustments in
the price level.
While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:
"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent."
If P denotes the price of goods and services measured in terms of money, then
1/P represents the value of money measured in terms of goods and services.
Based on the quantity equation, if M = 150, V = 4, and Y = 200, then P =
3
The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for
the slope of the aggregate-demand curve.
When the money market is drawn with the value of money on the vertical axis, an increase in the money supply causes the equilibrium value of money
to decrease, while the equilibrium quantity of money increases.
With the value of money on the vertical axis, the money supply curve is
vertical because we assume the central bank controls the money supply.
The long-run aggregate supply curve shifts right if
All of the above are correct.
When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded?
All of the above are correct.
Which of the following is included in the aggregate demand for goods and services?
All of the above are correct.
Which of the following policy actions shifts the aggregate-demand curve?
All of the above are correct.
If output is above its natural rate, then according to sticky-wage theory
will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.
Shifts in the aggregate-demand curve can cause fluctuations in
the level of output and in the level of prices.
Figure 34-6. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs.Refer to Figure 34-6. Suppose the multiplier is 5 and the government increases its purchases by $10 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $20 billion. The extent of crowding out, for any particular level of the price level, is
$30 billion.
The multiplier for changes in government spending is calculated as
1/(1 - MPC).
Which of the following correctly explains the crowding-out effect?
An increase in government expenditures increases the interest rate and so reduces investment spending.
Which of the following rises when the U.S. price level falls?
real wealth
Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real interest rate?
Inflation is 3 percent; the tax rate is 40 percent.
Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?
None of the above is correct
You put money into an account and earn a real interest rate of 6 percent. Inflation is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest?
None of the above is correct.
On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.
The $80 is a nominal variable. The quantity of shoes is a real variable.
In 2009 Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?
both the increased funding for states and the tax cuts
When shopping you notice that a pair of jeans costs $20 and that a tee-shirt costs $10. You compute the price of jeans relative to tee-shirts.
The dollar price of jeans is a nominal variable; the relative price of jeans is a real variable.
Shifts in aggregate demand affect the price level in
both the short and long run.
Which of the following policies would be advocated by proponents of stabilization policy when the economy is experiencing severe unemployment?
a reduction in tax rates
If the stock market crashes, then
aggregate demand decreases, which the Fed could offset by increasing the money supply.
Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift
aggregate demand left.
Other things the same, an increase in the amount of capital firms wish to purchase would initially shift
aggregate demand right.
The price level rises in the short run if
aggregate demand shifts right or aggregate supply shifts left.
Other things the same, when the government spends more, the initial effect is that
aggregate demand shifts right.
Which of the following shifts aggregate demand to the right?
an increase in the money supply
Which of the following events would shift money demand to the right?
an increase in the price level
According to the aggregate demand and aggregate supply model, in the long run an increase in the money supply leads to
an increase in the price level but does not change real GDP.
The evidence from hyperinflations indicates that money growth and inflation
are positively related, which is consistent with the quantity theory of money.
Wages tend to be sticky
because of contracts, social norms, and notions of fairness.
People hold money primarily because it
can directly be used to buy goods and services.
In the short run, open-market sales
decrease the price level and real GDP.
People are likely to want to hold more money if the interest rate
decreases, making the opportunity cost of holding money fall.
Monetary neutrality means that a change in the money supply
does not change real variables. Most economists think this is a good description of the economy in the long run but not the short run.
When the money market is drawn with the value of money on the vertical axis, the money demand curve slopes
downward, because at higher prices people want to hold more money.
When the dollar depreciates, U.S.
exports increase, while imports decrease.
The marginal propensity to consume (MPC) is defined as the fraction of
extra income that a household consumes rather than saves.
An economic contraction caused by a shift in aggregate demand causes prices to
fall in the short run, and fall even more in the long run.
As recessions begin, production
falls and unemployment rises.
Suppose an economy produces only ice cream cones. If the price level rises, the value of currency
falls, because one unit of currency buys fewer ice cream cones.
An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected price level
falls, shifting aggregate supply right.
If the Fed increases the money supply, then 1/P
falls, so the value of money falls.
If aggregate demand shifts right then in the short run
firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.
James took out a fixed-interest-rate loan when the CPI was 200. He expected the CPI to increase to 206 but it actually increased to 204. The real interest rate he paid is
higher than he had expected, and the real value of the loan is higher than he had expected.
If taxes
increase, then consumption decreases, and aggregate demand shifts leftward.
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
increased consumption, which shifts the aggregate-demand curve right.
If the CPI rises, the number of dollars needed to buy a representative basket of goods
increases, and so the value of money falls.
When the price level falls
investment spending rises.
Recession come at
irregular intervals. During recessions investment spending falls relatively more than consumption spending.
The inflation tax
is a tax on everyone who holds money.
According to the theory of liquidity preference, the money supply
is independent of the interest rate, while money demand is negatively related to the interest rate.
If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level
is lower and output is the same as the original long-run equilibrium.
Assume the MPC is 0.75. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the
left by $400 billion.
An increase in the expected price level shifts short-run aggregate supply to the
left, and an increase in the actual price level does not shift short-run aggregate supply.
Other things the same, as the price level falls, which of the following increases?
lending and investment spending
Other things the same, an increase in the price level makes consumers feel
less wealthy, so the quantity of goods and services demanded falls.
Sticky nominal wages can result in
lower profits for firms when the price level is lower than expected.
Government purchases are said to have a
multiplier effect on aggregate demand.
According to the classical dichotomy, which of the following is influenced by monetary factors?
nominal wages
As the price level falls
people will want to buy more bonds, so the interest rate falls.
Critics of stabilization policy argue that
policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.
If the price level rises above what was expected and nominal wages are fixed, then
production become more profitable so firms will hire more workers.
In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks in many countries increased their money supplies. The central banks might have done this by
purchasing bonds on the open market, which would have lowered the value of money.
As the price level rises, the exchange rate
rises, so exports fall and imports rise.
People go to the bank more frequently to reduce currency holdings when inflation is high. The sacrifice of time and convenience that is involved in doing that is referred to as
shoeleather cost.
Most economists use the aggregate demand and aggregate supply model primarily to analyze
short-run fluctuations in the economy.
The aggregate-demand curve
shows an inverse relation between the price level and the quantity of all goods and services demanded.
The price level falls. This might be because the Federal Reserve
sold bonds which reduced the money supply.
Economic expansions in Germany and Japan would cause
the U.S. price level and real GDP to rise.
Using the liquidity-preference model, when the Federal Reserve increases the money supply,
the equilibrium interest rate decreases.
According to liquidity preference theory, if the price level decreases, then
the interest rate falls because money demand shifts left.
According to liquidity preference theory, the opportunity cost of holding money is
the interest rate on bonds.
According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in
the interest rate.
