ECON TEST 4

An increase in government spending initially and primarily shifts

aggregate demand to the right.

Which of the following results in higher inflation and higher unemployment in the short run?

an adverse supply shock such as an increase in the price of oil

If the short-run Phillips curve were stable, which of the following would be unusual?

an increase in inflation and a decrease in output

In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.

in the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.

According to classical macroeconomic theory, changes in the money supply affect

nominal variables, but not real variables.

The sacrifice ratio is the

number of percentage points annual output falls for each percentage point reduction in inflation.

An increase in expected inflation shifts the

short-run Phillips curve right.

The aggregate-demand curve

shows an inverse relation between the price level and the quantity of all goods and services demanded.

Sometimes during wars, government expenditures are larger than normal. To reduce the effects this spending creates on interest rates,

the Federal Reserve could increase the money supply by buying bonds.

For the U.S. economy, which of the following helps explain the slope of the aggregate-demand curve?

An increase in the price level increases the interest rate.

The exchange-rate effect is based, in part, on the idea that

a decrease in the price level reduces the interest rate.

Which of the following shifts short-run aggregate supply right?

a decrease in the price of oil

A decrease in U.S. interest rates leads to

a depreciation of the dollar that leads to greater net exports.

Which of the following would cause the price level to fall and output to rise in the short run?

a favorable supply shock

The short-run effects of an increase in the expected price level include

a lower level of output and a higher price level.

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting

aggregate demand right.

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left.

Assume the MPC is 0.75. Assume there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand to the

right by $34 billion.

Which of the following is upward-sloping?

neither the long-run nor the short-run Phillips curve

If it were not for the automatic stabilizers in the U.S. economy,

output and employment would probably be more volatile than they are now.

Proponents of rational expectations theory argued that, in the most extreme case, if policymakers are credibly committed to reducing inflation and rational people understand that commitment and quickly lower their inflation expectations, the sacrifice ratio could be as small as

0

If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year, the sacrifice ratio is

3/2.

Which of the following is correct?

A recession in other countries reduces U.S. net exports so that U.S. aggregate demand shifts left.

If unemployment is above its natural rate, what happens to move the economy to long-run equilibrium?

Inflation expectations fall which shifts the short-run Phillips curve to the left.

Which of the following is correct concerning the long-run Phillips curve?

Its position depends on the natural rate of unemployment.

A policy that results in slow and steady growth of the money supply is an example of

a "passive" monetary policy.

An increase in the money supply

and an investment tax credit both cause aggregate demand to shift right.

Tax cuts

and increases in government expenditures shift aggregate demand right.

In the last half of 1999, the U.S. unemployment rate was about 4 percent. Historical experience suggests that this is

below the natural rate, so real GDP growth was likely high.

Which of the following shifts aggregate demand to the right?

both an investment tax credit and a decrease in income tax rates

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

If, at some interest rate, the quantity of money supplied is greater than the quantity of money demanded, people will desire to

buy interest-bearing assets, causing the interest rate to decrease.

Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. This can be explained

by technological progress and money supply growth.

At a given price level, an increase in which of the following shifts aggregate demand to the right?

consumption, investment, government expedentures

On a given short-run Phillips curve which of the following is held constant?

expected inflation

Other things equal, in the short run a higher price level leads households to

decrease consumption and firms to buy fewer capital goods.

Other things the same, if workers and firms expected inflation to be 2%, but it is only 1% then

employment and production fall.

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.

Other things the same, when the price level falls, interest rates

fall, which means consumers will want to spend more on homebuilding.

An adverse supply shock causes output to

fall. To counter this a central bank would increase the money supply.

When aggregate demand shifts right along the short-run aggregate supply curve, unemployment

falls, so there are upward pressures on wages and prices.

The experience of the Volcker disinflation of the early 1980s

generally decreased estimates of the sacrifice ratio.

If inflation is less than expected, then the unemployment rate is

greater than the natural rate. In the long run the short-run Phillips curve will shift left.

According to liquidity preference theory, an increase in the price level causes the interest rate to

increase, which decreases the quantity of goods and services demanded.

According to the liquidity preference theory, an increase in the overall price level of 10 percent

increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.

A 2009 article in The Economist noted that some studies have provided evidence indicating that multipliers are

larger in closed economies than in open economies.

Which of the following rises during recessions?

layoffs but not consumer spending

The "natural" rate of unemployment is the unemployment rate toward which the economy gravitates in the

long run, and the natural rate is not necessarily the socially optimal rate of unemployment.

Which of the following did the Fed do during the recession of 2008-2009?

lowered the federal funds rate and purchased securities and loans

If the government cuts the tax rate, workers get to keep

more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.

During recessions, automatic stabilizers tend to make the government's budget

move toward deficit.

According to the Phillips curve, unemployment and inflation are positively related in

neither the long run nor the short run.

Other things the same, a decrease in the price level causes real wealth to

rise, interest rates to fall, and the dollar to depreciate.

Other things the same, if the price level rises, then domestic interest rates

rise, so domestic residents will want to hold fewer foreign bonds.

If the central bank increases the money supply, in the short run, output

rises so unemployment falls.

As the price level rises, the interest rate

rises, so the supply of dollars in the market for foreign currency exchange shifts left.

The Employment Act of 1946 states that

the government should promote full employment and production.

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

the interest rate rises and aggregate supply is relatively steep

If a government redesigned its unemployment insurance programs so that the unemployed had greater incentives to quickly find appropriate jobs, then which of the following curves would shift right?

the long-run aggregate supply curve but not the long-run Phillips curve

Suppose the economy is in long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run,

the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

As the interest rate falls,

the quantity of money demanded rises, which would reduce a surplus.

Sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied in

the short run, but not the long run.

An increase in expected inflation shifts

the short-run Phillips curve right.

Other things the same, if the U.S. price level rises, then

the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate rises.

In his famous article published in an economics journal in 1958, A.W. Phillips

used data for the United Kingdom to show a negative relationship between the rate of change of wages in the U.K. and the U.K. unemployment rate.

According to classical macroeconomic theory, changes in the money supply affect

variables measured in terms of money but not variables measured in terms of quantities or relative prices

Samuelson and Solow argued that a combination of low unemployment and low inflation

was impossible given the historical data as summarized by the Phillips curve.

Paul Samuelson, a famous economist, said that

"the stock market has predicted nine out of the past five recessions."

Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?

$500 billion and $300 billion

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 3. It follows that, when income is $101, consumer spending is

$60.67.

Which of the following sequences best represents the crowding-out effect?

government purchases Þ GDP Þ demand for money Þ equilibrium interest rate Þ quantity of goods and services demanded ¯

Other things the same, a country that decides to reduce inflation will

have a higher unemployment rate only in the short run.

If a central bank decreases the money supply, then

prices and output fall and unemployment rises.

If inflation expectations rise, the short-run Phillips curve shifts

right, so that at any inflation rate unemployment is higher in the short run than before.

If inflation expectations rise, the short-run Phillips curve shifts

right, so that at any unemployment rate inflation is higher in the short run than before.

If the economy is at the point where the short-run Phillips curve intersects the long-run Phillips curve,

unemployment equals the natural rate and expected inflation equals actual inflation.