Econ 101

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

LM; shifts to the right

In the dynamic model, the supply shock variable, t, is a variable appearing in which of the following equations of the model?

Phillips curve

Of the five endogenous variables in the dynamic model of aggregate demand and aggregate supply, which two real variables do not depend on monetary policy in long-run equilibrium?

Yt and rt

According to the theory of Ricardian equivalence, if consumers are forward-looking, they will view a tax cut combined with no plans to reduce government spending as ______, so their consumption will ______.

a rescheduling of taxes into the future; remain unchanged

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

To follow a monetary policy rule, the central bank raises the nominal interest rate by:

decreasing the money supply.

According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer:

does not change production.

Long-run equilibrium occurs in the dynamic model of aggregate demand and aggregate supply when:

dynamic aggregate demand equals dynamic aggregate supply.

The cyclically adjusted budget deficit:

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

In the Solow model with technological progress and population growth, the steady-state growth rate of output per worker is:

g

In the IS-LM model, a decrease in the interest rate would be the result of a(n):

increase in the money supply.

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

rises; falls

According to the sticky-price model:

some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.

According to the traditional viewpoint of government debt, a tax cut without a cut in government spending:

stimulates consumer spending in the short run and reduces national saving.

Government debt equals the:

sum of past budget deficits and surpluses.

Which of the following is an exogenous variable in the dynamic model of aggregate demand and aggregate supply?

t, supply shock

Which of the following would be represented by a positive value of the demand shock, t?

an irrational wave of optimism among investors

In the Solow model with technological progress and population growth, the steady-state growth rate of capital per effective worker is:

0

In the Solow growth model, an economy in the steady state with a population growth rate of n but no technological growth will exhibit a growth rate of output per worker at rate:

0.

In the Keynesian-cross analysis, if the consumption function is given by C = 200 + 0.7 (Y - T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

1,100

If the per-worker production function is given by y= k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is:

4

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:

According to multiplier formula,Change in IS/Change in G = 1/(1-MPC) = 1/(1-0.6) = 1/0.4 So, Change in IS = Change in G*(1/0.4) = (200/0.4) = 500

In this graph, assume that the economy starts at point A, and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium, and point ______ represents long-run equilibrium.

B; C

In this graph, initially the economy is at point E, with price P0 and output aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______.

C; B

In the Keynesian-cross model, actual expenditures equal:

GDP.

An increase in consumer saving for any given level of income will shift the:

IS curve downward and to the left.

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 monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in:

inflation and output.

In the Solow growth model with population growth but no technological progress, if in the steady state the marginal product of capital equals 0.10, the depreciation rate equals 0.05, and the rate of population growth equals 0.03, then the capital per worker ratio ____ the Golden Rule level.

is below

The theory of liquidity preference states that, other things being equal, an increase in the real money supply will:

lower the interest rate.

The real interest rate at which, in the absence of any shock, the demand for goods and services equals the natural rate of output is called the _____ rate of interest.

natural

According to the monetary policy rule, when inflation is at its target level and output is at the natural level, then the real interest rate equals the:

natural rate of interest.

The dynamic aggregate supply curve shows the short-run relation between:

output and inflation.

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

output will decrease, but the price level will increase.

Based on the graph, starting from equilibrium at interest rate r1and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

r3, Y2.

When the central bank lowers its target inflation rate, it _____ the nominal and real interest rate, which shifts the dynamic aggregate demand curve to the _____.

raises; left

The dynamic model of aggregate demand and aggregate supply assumes that people form expectations of inflation based on:

recently observed inflation.

The dynamic aggregate supply curve is derived from:

the Phillips curve and adaptive expectations.

According to the sticky-price model, output will be at the natural level if:

the price level equals the expected price level.

According to the Phillips curve, the inflation rate depends on all of the following except:

the real interest rate.

The Phillips curve analysis described in Chapter 15 implies that there is a negative tradeoff between inflation and unemployment in:

the short run only.

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

upward and to the right.

An increase in government spending generally shifts the IS curve:

upward and to the right.

If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock:

will be at the same level as in the steady state of the high capital economy.