Econ Test 4
The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.
national income; goods and services
"Crony capitalism" refers to situations in which banks make loans to those borrowers with the most:
political clout.
The marginal propensity to consume is:
positive.
The government can lower inflation with a low sacrifice ratio if the:
public rationally believe that policymakers are committed to reducing inflation.
In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.
rises; falls
Public policy can assist in improving the matching of jobs to workers by:
running job search centers to help businesses identify unemployed people with the right skills.
The loanable funds market is the market for:
loans.
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.
greater; increase
In order to compensate for an expected future decline in the Japanese yen relative to the U.S. dollar, the interest rate in Japan must be ______ the interest rate in the United States.
higher than
Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:
less than the expected price level.
The consumption function is a plot of the:
level of consumption associated with each level of income.
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.
The percentage of a year's real GDP that must be forgone to reduce inflation by 1 percentage point is called the:
sacrifice ratio.
In the Mundell-Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate to fall, giving arbitrageurs the incentive to ______ the central bank, which causes the money supply to ______.
sell domestic currency to; decrease
To maintain a fixed-exchange-rate system, if the exchange rate (foreign currency/local currency) moves below the fixed-exchange-rate level, then the central bank must:
sell foreign currency from reserves.
In the IS-LM model when the Federal Reserve decreases the money supply, the public ______ bonds, and the interest rate ______, leading to a(n) ______ in investment and income. This is called the monetary transmission mechanism.
sell; rises; decrease
Advocates of the rational-expectations approach predict that a credible policy to lower inflation will result in a loss of output that is ______ than expected based on the sacrifice ratio.
smaller
Using the IS-LM analysis, if the LM curve is not horizontal, the multiplier for an increase in government spending is ______ for an increase in government purchases using the Keynesian-cross analysis.
smaller than the multiplier
If the interest rate is above the equilibrium value, the:
supply of real balances exceeds the demand.
The slope of the IS curve depends on:
the interest sensitivity of investment and the marginal propensity to consume.
In the Mundell-Fleming model with a fixed exchange rate, a rise in the world interest rate will lead income:
to fall while net exports are unchanged.
The slope of the consumption function is the:
marginal propensity to consume.
If the interest rate is 6% and the average inflation rate is 3.1%, what is the approximate future value of $75,000 in 20 years?
$132,852
What is Uganda's real GDP if its nominal GDP is $27.5 billion (in current US$), and the GDP deflator is 163.4?
$16.8 billion
If the interest rate is 5%, what is the approximate future value of $500 in three years?
$579
Refer to the following statistics. Based on these statistics, the level of business investment is: Equipment: $2.5 billion Business structures: $2 billion Intellectual property: $4 billion Inventories: $0.2 billion Housing: $3 billion
$8.5 billion.
Consider the following basket of goods: 15 lollipops, 10 bars of chocolate, four jars of peanut butter, and two ice-cream cakes. Suppose that in 1999, each lollipop was 10 cents, each bar of chocolate was $1.50, each jar of peanut butter was $2.50, and each ice-cream cake was $7.99. In 2018, each lollipop was 80 cents, each bar of chocolate was $3.75, each jar of peanut butter was $4.25, and each ice-cream cake was 12.99.What was the value of the basket in 2018?
$92.48
Hand-to-mouth consumers: (i) spend more on necessities than on luxuries. (ii) save very little or nothing at all. (iii) purchase a large amount of luxury items. (iv) live paycheck to paycheck.
(i), (ii), and (iv)
Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (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:
70.
Which of the following shows the medium of exchange function of money?
Daniela goes to the store and purchases roses with U.S. dollars.
An increase in consumer saving for any given level of income will shift the:
IS curve downward and to the left.
In the IS-LM model, starting with zero expected inflation, if expected inflation becomes negative, then the:
IS curve shifts leftward.
Which of the following people can be classified as "unemployed"?
Laura, who has been seeking employment for two months
Both Keynesians and supply-siders believe a tax cut will lead to growth:
but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.
Which of these statements is correct? a. Savings plus consumption equals income. b. Income plus consumption equals saving. c. Dissaving equals consumption. d. Dissaving plus saving plus consumption equals income.
Savings plus consumption equals income.
Which of the following scenarios shows evidence of inflation?
The average house price in an economy rises.
Why does a temporary change in income lead to only a small change in consumption for a consumption smoother?
The consumer tends to spread a temporary spike in income over the lifetime of the consumer.
During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n):
contractionary shift in the LM curve.
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:
Y = 1,600 - 3T - 100r + 4G.
A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model, with fixed exchange rates, lead to:
a fall in consumption and income.
With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:
a higher interest rate.
Inflation inertia is represented in the aggregate supply-aggregate demand model by continuing upward shifts in the:
aggregate demand and short-run aggregate supply curves.
Henry Ford's $5 per day wage is an example of:
an efficiency wage.
In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will:
be horizontal.
When planned expenditure is drawn on a graph as a function of income, the slope of the line is:
between zero and one.
When inflation is lower than expected, there is redistribution from:
borrowers to lenders.
The IS and LM curves together generally determine:
both income and the interest rate.
The equilibrium unemployment rate is also known as the _____ unemployment rate.
long-run
In the Mundell-Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level will fall, the exchange rate will ______, and net exports will ______ to restore the economy to its natural rate.
depreciate; increase
One argument in favor of tax cuts over spending-based fiscal stimulus is that:
historically tax cuts have been more successful than spending-based fiscal stimulus.
The short-run Phillips curve:
shifts upward if expected inflation increases.
You've graduated from college and are now working in an investment firm where you advise clients on investment decisions. Here is the information on a proposed project. Up-front cost: $350,000 Next year's revenue: $45,000 Real interest rate: 8% Depreciation rate: 10% What is the present value of the stream of payments from this project?
$250,000
What is the United Arab Emirates' real GDP if its nominal GDP is $414.18 billion (in current US$) and the GDP deflator is 105.45?
$392.77 billion
In order to be considered unemployed, a person must:(i) be part of the working-age population. (ii) be actively looking for work. (iii) not have been self-employed. (iv) must be noninstitutionalized.
(i), (ii), and (iv)
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:
both the LM and the IS curves.
In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate.
capital inflow
If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must:
give up the use of monetary policy for purposes of domestic stabilization.
According to the natural-rate hypothesis, output will be at the natural rate:
if inflation meets expectations in the short run.
In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium:
imports will decrease and exports will decrease by an equal amount.
An increase in the money supply:
lowers the interest rate and increases income in the short run but leaves both unchanged in the long run.
Menu costs are the:
marginal costs of adjusting prices.
If the frictional rate of unemployment is 1%, the structural rate of unemployment is 2.1%, and the total unemployment rate is 7%, then we can conclude that:
the equilibrium rate of unemployment is 3.1%.
What is the permanent income hypothesis?
the idea that people choose how much to consume based on their long-term average income
In the case of demand-pull inflation, other things being equal:
the inflation rate rises but the unemployment rate falls.
If the demand function for money is M / P = 0.5Y - 100r, then the slope of the LM curve is:
0.005.
Meredith has purchased a guaranteed income certificate (GIC) in Canada. This financial instrument pays her1% interest per year. However, inflation during the same year is 2%. What was Meredith's nominal interest rate on her GIC?
1%
Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:
1,600.
According to the Phillips curve, other things being equal, inflation depends positively on:
expected inflation.
In the IS-LM model when M / P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.
falls; rises
In a small open economy with a fixed exchange rate, if the government imposes an import quota, then net exports:
increase, the money supply increases, and income increases.
In 1971, the cost of a four-year college degree from a public university was about $1,410. The consumer price index was 40.48 in January 1971. If the current consumer price index is 251.1, what is the approximate cost of the four-year degree in current dollars?
$8,746
Which of the following can help you protect yourself from the harmful effects of unemployment? (i) Build up some savings. (ii) Watch for new opportunities even while you are employed. (iii) Maintain a good network of friends and colleagues who might be able to refer you to new jobs. (iv) Send out as many job applications as possible.
(i), (ii), (iii,) and (iv)
Consider the following basket of goods: 10 loaves of bread, 300 oranges, four pairs of jeans, and two pairs of shoes. Suppose that in 2017, each loaf of bread was $2.99, each orange was $1, each pair of jeans was $47,and each pair of shoes was $95. In 2018, each loaf of bread was $2.99, each orange was $0.75, each pair of jeans was $49.50, and each pair of shoes was $99.99. What was the inflation rate in 2018?
-7.8%
You open a savings account that pays 1.67% interest a year. What is your real rate of return if the actual inflation rate is 1.67%?
0%
What is the marginal propensity to consume if a $10 million increase in total income leads to a $7.9 million increase in consumption?
0.79
You purchase a certificate of deposit and expect an inflation rate of 1.25% over the next year. Your nominal rate of interest is 2.1%. What is your expected real rate of return?
0.85%
The goods produced in U.S. industries may be made more competitive in world markets by:
depreciating the U.S. currency.
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.
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:
drop by 2 percent.
The equilibrium of the Keynesian cross shows:
equality of planned expenditure and income in the short run.
The tradeoff between inflation and unemployment does not exist in the long run because people will adjust their expectations so that expected inflation:
equals the inflation rate.
Dissaving is:
excess consumption over and above income.
In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short-run equilibrium, the:
exchange rate falls and net exports increase.
The short-run aggregate supply curve is drawn for a given:
expected price level.
In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium:
income rises, but the exchange rate does not rise.
In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.
increase but by less than 100
In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.
increases; increases
A savvy investor seeks:
inflation-indexation clauses.
A speculative attack on a currency occurs when:
investors' perceptions change, making a fixed exchange rate untenable.
If short-run equilibrium in the Mundell-Fleming model is represented by a graph with Y along the horizontal axis and the exchange rate along the vertical axis, then the LM* curve:
is vertical because the exchange rate does not enter into the LM* equation.
The money hypothesis suggests that the Great Depression was caused by a:
leftward shift in the LM curve.
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:
monetary policy cannot be used to systematically stabilize output.
Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.
negatively; positively
Along a short-run aggregate supply curve, output is related to unexpected movements in the ______. Along a Phillips curve, unemployment is related to unexpected movements in the ______.
price level; inflation rate
An economic change that does not shift the aggregate demand curve is a change in:
the price level.
In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:
unplanned inventory investment.
A decrease in the nominal money supply, other things being equal, will shift the LM curve:
upward and to the left.
If money demand does not depend on the interest rate, then the LM curve is ______, and ______ policy has no effect on output.
vertical; fiscal
