Econ 211 VCU Scotese Exam 2

In response to an economic shock, some firms will find it profitable to change prices, but other firms may find it more profitable not to change prices

True

When the MPC is equal to three-fifths, the value of the spending multiplier is

2.5

Assume MPC is 0.72. The multiplier is

3.57

At any meeting of the Federal Open Market Committee, that committee's voting members consist of

5 Federal Reserve Regional Bank Presidents and all the members of the Board of Governors

Which of the following is not a component of spending

Taxes

Monetary policy decisions are made by

The Federal Open Market Committee

From 2006 to 2008 there was a dramatic fall in the price of houses. If this fall made people feel less wealthy, then it would have shifted

aggregate demand left

other things the same, an increase in the price level makes the dollars people hold worth

less, so they can buy less

The Federal Open Market Committee is

the group at the Federal Reserve that sets monetary policy

Fiscal policy is determined by

the president and Congress and involves changing government spending and taxation

The variables on the vertical and horizontal axes of the aggregate demand and supply graph are

the price level and real output

Aggregate demand includes

the quantity of goods and services the government, households, firms, and customers abroad want to buy

The aggregate supply curve is upward sloping in

the short run, but no the long run

While some prices adjust fairly quickly, other prices tend to be more sticky. Which of the reasons below is NOT a possible explanation for sticky price adjustment

there are always government guidelines that govern how much prices can change

The logic of the multiplier effect applies

to any change in spending on any component of GDP

Wealth is redistributed from creditors to debtors when inflation is

unexpectedly high

Keynesian economics advocates the use of monetary or fiscal policy in response to a recessionary period because

when prices are sticky, the economy's self-adjustment mechanism will be slow

The average price level is measured by

the GDP deflator or the CPI

Suppose that government spending increases by $100 billion and that MPC is equal to three-fifths. How much will total spending change as a result of the government purchases and all of the subsequent rounds of the multiplier process?

$250 Billion

Suppose that government purchases increase by $100 billion and that the MPC is equal to three-fifths. In the 3rd round of the spending multiplier process, consumption increases by

$36 billion

The sticky-price theory implies that

(1) the short run aggregate supply curve is upward sloping (2) an unexpected fall in the price level induces firms to reduce the quantity of goods and services they produce (3) menu costs influence the speed of adjustment of prices

If the value of the US dollar appreciates against the currencies of our major trading partners, we would expect

- US exports to fall - US imports to rise - US net exports to decline

Which of the following is included in the aggregate demand for goods and services

- consumption demand - investment demand - net exports

Monetary policy in the United States aims to keep inflation in the vicinity of

2%

Deflation is economically very damaging because

-People will postpone spending -Asset values decline -The real value of debt rises

Wages tend to be downward rigid because

-firms tend to prefer to keep worker morale high to maintain productivity - firms tend to believe that productivity will be higher if costs are cut by laying off some workers rather than lowering wages across the board -Many employees have either explicit or implicit wage contracts

Moderately high levels of inflation can be economically harmful because

-inflation is rarely balanced -inflation changes relative prices -a change in relative prices driven by inflation creates economic inefficiency

When monetary policy lowers interest rates we would expect

-spending to rise -output to rise -employment to rise

If the multiplier is 6, then the MPC is

0.83

Deflation is

A decline in prices

All of the following are examples of investment spending EXCEPT

A household purchases 1000 shares of Google stock

Which of the following would help explain why the aggregate demand curve slopes downward?

A lower price level reduces the interest rate, which encourages greater spending on investment goods

When interest rates increase, the value of the US dollar in the foreign exchange market

Appreciates because foreigner purchase more US interest bearing assets

A long-run equilibrium occurs when aggregate demand and aggregate supply are in equilibrium

At potential output

The following expression represents total spending on all United States goods and services

C + I + G + EX - IM

Which of the following investment determinants is NOT negatively related to investment spending

Capital productivity

if the value of the stock market rise, we might expect

Consumption to increase

If the MPC is equal to three-fifths, then if income increases by $100

Consumption will increase by $60

The only type of unemployment that can be affected by monetary policy is

Cyclical

Those who lost their jobs due to the recession's impact on business

Cyclical

Which of the following is an example of the shoe leather costs of inflation?

During Bolivia's hyperinflation, workers rushed to immediately convert their wages from pesos t black-market dollars

The agency responsible for regulating the U.S. monetary system is the

Federal Reserve

Classical economics is associated with ____ and ____ while Keynesian economics is associated with ____ and ____.

Flexible prices, the long run Sticky prices, the short run

If a person is unemployed because they have just graduated college and are in the process of searching for full-time employment, that person's unemployment is categorized as

Frictional

Fiscal policy creates a multiplier effect because

Government spending and tax changes will generate additional changes in consumer spending, creating more jobs, production and even more ripples of additional spending

Which of the following consumption determinants is NOT an aggregate demand shock and therefore doesn't shift the aggregate demand curve

Income

Which of the following consumption determinants is NOT positively related to consumption

Income Taxes

An increase in budget deficit will tend to

Increase interest rates

When taxes fall, spending

Increases

Which of the following does NOT describe an economic mechanism that makes total spending on goods and services negatively related to the price level

Inflation effect

A decrease in government spending

Is a negative aggregate demand shock and will shift the curve to the left

A foreign increase in tariffs on US goods

Is a negative aggregate demand shock and will shift the curve to the left

Effectively, the Fed's stable price mandate means that monetary policy aims to

Keep inflation low and stable

If cyclical unemployment is high monetary policy would try to lower unemployment by

Lower interest rates to increase spending and production

The aggregate demand curve shows the ____ relationship between total spending and the price level

Negative

A higher price level tends to increase interest rates because

People shift funds out of short-term interest bearing assets and into cash or checking accounts

The Federal Reserve follows a dual mandate when conducting monetary policy. the two economic variables referred to in the dual mandate are

Prices and employment

When there is excess supply or demand in a market, _____ adjust to return the economy to _____.

Prices, Euilibrium

If the Federal Reserve thought inflation was too high, the appropriate monetary policy action would be to

Raise interest rates to lower spending and production

Output levels that remain below potential output are associated with ______ while output levels that exceed potential output can generate _____.

Recessions, Inflation

If the MPC is equal to three-fifths, then if income increases by $100

Saving will increase by $40

If the economy begins in a long-run equilibrium when a negative aggregate demand shock hits, the economy will initially lead to a _____ equilibrium in a _____ period.

Short-Run, Recessionary

John Maynard Keynes described the economy's protracted recovery from the Great Depression as due, at least in part, to

Sluggish price adjustment

If a person is unemployed because the skills they have are outdated and employers are looking for workers with other skills, that person's unemployment is categorized as

Structural

Monetary policy can DIRECTLY affect which interest rate?

The federal funds rate

All of the following are examples of government purchases of goods & services EXCEPT

The government makes social security payment to your grandmother

Fiscal policy is

The government's decisions on spending and taxation

A $50 billion increase in government spending will increase overall spending more than a $50 billion tax cut because

The initial spending change is larger for the $50 government spending change

According to the wealth effect, when the price level rises

The purchasing power of cash and checking accounts falls

If income in our major trading partners rises we would expect

US exports to rise

Downward wage rigidity refers to the observation that

Wages tend to adjust downwards more slowly than they adjust upwards

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, and increase in the amount of capital firms wish to purchase would initially shift

aggregate demand right

Other things the same, when government spends more, the initial effect is that

aggregate demand shifts right

The Federal Reserve Board of Governors

are appointed by the president and confirmed by the senate

Other things the same, as the price level decreases it induces greater spending on

both net exports and investment

When inflation causes relative price variability

consumer decisions are distorted and the ability of markets to efficiently allocate factors of production is impaired

Suppose a fall in stock prices makes people feel poorer. the decrease in wealth would increase people to

decrease consumption, shown by shifting the aggregate-demand curve to the left

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves

During recessions, income

falls and unemployment rises

Inflation is problematic if

it distorts relative prices, causing a misallocation of resources

When taxes decrease, consumption

increases as shown by a shift of the aggregate demand curve to the right.

Which part of real GDP fluctuates most over the course of the business cycle?

investment expenditures

A decrease in income taxes

is a positive aggregate demand shock and will shift the curve to the right

An increase in capital productivity

is a positive aggregate demand shock and will shift the curve to the right

At full employment, the unemployment rate

is at the natural rate of unemployment

Most economists believe that the classical model is the appropriate model for analysis of the economy in the

long run, because real and nominal variables are essentially determined separately in the long run

Sticky nominal wages can result in

lower profits for firms when the price level is lower than expected

The sticky-price theory of the short-run aggregate supply curve says that wen the price level is higher than expected, some forms will have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied

Marta lends money at a fixed interest rate and then inflation turns out to be higher than she had expected it to be. The real interest rate she earns is

lower than she had expected, and the real value of the loan is lower than she had expected

When inflation rises, firms make

more frequent price changes. This raises their menu costs

Economic fluctuations are

output movements away from potential output

As the price level rises

people will want to buy fewer bonds, so the interest rate rises

If the price level rises above what was expected and nominal wages are fixed, then

production becomes more profitable so firms will hire more workers

A relatively mild period of falling incomes and rising unemployment is called a(n)

recession

Market economies rely on which of the following to allocate scarce resources?

relative prices

other things the same, when price level rises, interest rates

rise, so firms decrease investment

The aggregate demand is described graphically as

sloping downward

Which group within the Federal Reserve System meets to discuss changes in the economy and determine monetary policy?

the FOMC

Monetary policy is determined by

the Federal Reserve and involves changing the money supply