ECON 2030 Final Quizzes
Which of the following correctly explains the crowding out effect
An increase in government expenditures increases the interest rate and so reduces investment spending.
What actions could be taken to stabilize output in repose to a large decrease in US net exports?
Decrease taxes or increase money supply
The price of imported oil rises. If the government wanted to stabilize output, which of the following could do it?
Increase government expenditures or increase the money supply
According to the interest rate effect, an increase in the price level
Increase money demand and interest rates. Investment declines.
Suppose there is a tax increase. To stabilize output, the federal reserve will
Increase the money sypply
It business and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by
Increasing the money supple which lowers interest rates
Suppose the economy is currently at point A. To resort full employment, the appropriate fiscal response
Is a reduction in government spending
Which is the following is correct
Unemployment rises as the economy moves from point a to point b. Either fiscal or monetary policy could be used to move the economy from point b to point a. If the economy is left alone, then as the economy moves from point b to long-run equilibrium, the price level will fall farther.
The natural rate of output occurs at
Y2
If the US imposes an import quota on clothing, then the
demand for dollars in the market for foreign-currency exchange shifts right
When a country experiences capital flight its currency
depreciates and net exports rise
When a country suffers from capital flight, the exchange right
depreciates, because supply in the market for foreign-currency exchange shifts right
According to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply leads to
a decrease in the price level but does not change real GDP
Other things the same, when the price level falls, interest rates
fall, so firms increase investment
During recessions, income
falls and unemployment rises
Suppose business 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
If the French government increases its expenditures and reduces taxes, then France's interest rate
and its exchange rate rise
If the Japanese government raised its budget deficit, then the yen would
appreciate and Japanese net exports would fall
Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. What happens to the price level and real GDP in the short run?
both the price level and real GDP fall
The long-run aggregate supply curve shifts right if
immigration from abroad increases, the capital stock increases, technology advances
The misconception theory of the short-run aggregate curve says if the price level in higher than people expected, then some firms believe that relative price of what they produce has
increased, so they increase production
If the supply of loanable funds shifts right, then the equilibrium
interest rate falls, so domestic residents will want to purchase more foreign assets
If people decide to hold less money, then
money demand decreases, there is an excess supply of money, and interest rates fall.
In the open-economy macroeconomic model, the supply of loanable funds equals
national saving. The demand for loanable funds comes from domestic investment + net capital outflow.
In the open-economy macroeconomic model, if foreign interest rates rise and the US interest rate stays the same then US
net capital outflow rises, so the supply of dollars in the market for foreign exchange shifts right
If the current interest rate is 2 percent
people will sell more bonds, which drives interest rates up.
The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected
production is more profitable and employment rises
If the government repeals an investment tax credit and increases income taxes
real GDP and the price level fall
If foreigners want to buy more US bonds, then in the market for foreign currency exchange the exchange rate
rises and the quantity of dollars traded falls
Other things the same, people in the US would want to save more if the real interest in the US
rose. The increased saving would increase the quantity of loanable funds supplied.
Suppose that US firms desire to purchase more equipment and build more factories and stores in the US. The effects of this are illustrated by
shifting the demand curve in panel a to the right and the supply curve in panel c to the left
An increase in a country's budget surplus shifts its
supply of loanable funds right and increases investment spending
If at a given real interest rate desired national saving is $60 billion, domestic investment is $30 billion, and net capital outflow is $20 billion, then at that real interest rate in the loanable funds market there is a
surplus. The real interest rate will fall.
Using the liquidity-preference model, when the Federal Reserve decreases the money supply,
the equilibrium interest rate increases.
People choose to hold a larger quantity of money if
the interest rate falls, which causes the opportunity cost of holding money to fall
In the open-economy macroeconomic model, if the investment demand decreases, then
the supply of dollars in the market for foreign-currency exchange shifts right
When the Fed buys bonds
the supply of money increases and so aggregate demand shifts right
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 $15 billion. Also, suppose the AD curve would shift from AD, to AD, if there were no crowding out; the AD curve actually shifts from AD, to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD, and AD, is $55 billion. The extent of crowding out, for any particular level of the price level, is
20 billion
If the MPC = 4/5, then the government purchases multiplier is
5
The aggregate demand curve could shift from AD1 to AD2 as a result of
A decrease in net exports
Other things the same, what would cause the exchange rate to rise?
Both an increase in the interest rate and an increase in foreign demand for US goods and services
A US grocery chain borrows money to buy a wardrobe in Ohio and another in Italy. Borrowing for which warehouse is included in the demand for loanable funds in the US?
Both the one in Ohio and the one in Italy
Which of the following would cause prices to fall and output to rise in the short run?
Short-run aggregate supply shifts right
For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?
The interest rate effect
Critics of stabilization policy argue that
The lag problem ends up being a cause of economic fluctuations
If the price level is higher than expected, firms might raise their production in the short run if
The nominal wage they pay their employees was set based on the expected price level. Prices are costly to adjust and they have set their price at some time in the past but are not ready to change it. They believe that the price of their product has risen relative to the price of other products, when in fact the rise in the price of their product reflects an increase in the general price level.
Other things the same, continued increases in technology lead to
continued increases in real GDP and continued decreases in the price level
Suppose households attempt to decrease their money holdings. To counter this decrease in money demand and stabilize output, the federal reserve will
decrease the money supply
The aggregate quantity of goods and services demanded changed as the price level falls because
real wealth rises, interest rates fall, and the dollar depreciates
When a country suffers from capital flight, the demand for loanable funds in that country shifts
right, which increases interest rates in that country
An economic expansion caused by a shift in aggregate demand prices to
rise in the short run, and rise even more in the long run
If the US raised its tariff on tires, then at the original exchange rate there would be a
shortage in the market for foreign-currency exchange, so the real exchange rate would appreciate
A movement from P1 and Y2, to P2 and Y1 would be consistent with
stagflation
If the economy starts at A, a decrease in the money supply moves the economy
to C in the long run
If the economy starts at A and there is a fall in aggregate demand, the economy moves
to C in the long term
In the graph of the money market, the money supply curve is
vertical. It shifts rightward if the Fed buys bonds.
If output is above its natural rate, then according to sticky-wage theory
workers will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.
