ECON Test: 5
Adaptive expectations theory describes the use of _____ to form expectations of inflation. A)past rates of inflation only B)all publicly available information C)expected future policies D)present data
A
Assume that inflation rates for the past 5 years have been 1%, 2%, 2.5%, 2%, 2%. The Federal Reserve announces that it is going to decrease the money supply because it is concerned about inflationary pressures in the economy. If people form their expectations _____, then in light of the Fed's announcement, they will expect an inflation rate of _____. A)adaptively; 1.9% B)rationally; 4% C)adaptively; 2% D)rationally; 2.5%
A
Graph
B
If 1 dinar will buy 25 cents, how many dinar will one U.S. dollar buy? A)2.5 B)4 C)1 D)0.25
B
Graph
C
In the equation of exchange, if M= $2 trillion, P= 1.5, and Q= $8 trillion :A)real GDP is $12 trillion. B)the velocity of money (V) = 4. C)the velocity of money (V) = 6. D)nominal GDP is $16 trillion.
C
The money illusion: A)occurs when output rises. B)is the distinguishing factor between the short run and the long run. C)is the misperception that one is wealthier; it occurs when the money supply grows. D)is the misperception that prices have changed; it occurs when the Federal Reserve reduces the money supply.
C
The rational expectations theory describes the assumption that people are _____, and the adaptive expectations theory describes the assumption that people are _____. A)backward-looking; forward-looking B)profit maximizers; loss minimizers C)forward-looking; backward-looking D)rational; irrational
C
A nominal exchange rate: A)is equal to er* [Pd/ Pf]. B)is usually the same as the real exchange rate. C)takes the price level of both countries into account. D)is the price of one country's currency for another's.
D
Table
D
The short-run Phillips curve holds _____ constant. A)inflationary expectations B)wages C)taxes D)income
A
When the interest rate falls, American bonds become _____ attractive to foreign investors, often leading to a(n) _____ in the value of the U.S. dollar in foreign exchange markets. A)less; decrease B)more; increase C)more; decrease D)less; increase
A
table
B
A credit default swap: A)prevents investors from defaulting on a swap. \B)allows investors to trade one bad stock for another. C)is essentially the same as insurance against a default. D)is essentially the same as an adjustable-rate mortgage.
C
_____ occurs when the value of a currency falls relative to other currencies. A)Currency appreciation B)Currency depreciation C)A fixed exchange rate D)Purchasing power parity
B
A leveraged account: A)magnifies gains and reduces losses. B)reduces both gains and losses. C)magnifies both gains and losses. D)reduces gains and magnifies losses.
C
Foreign aid transfers are part of the _____ account. A)trade B)capital C)foreign aid D)current
D
Graph
D
Both _____ on credit by households and _____ interest rates set in motion the events that led to the 2007-2009 financial crisis. A)overspending; low B)overspending; high C)underspending; high D)underspending; low
A
If 1 euro will buy $1.30: A)$1 will purchase 0.77 euro. B)The real exchange rate equals one. C)$1 will purchase 1.30 euro. D)$1 will purchase 0.70 euro.
A
If the economy is facing inflationary pressures, the Federal Reserve will: A)raise interest rates. B)lower interest rates. C)decrease government spending. D)raise taxes.
A
In a liquidity trap: A)monetary policy is ineffective in changing income and output. B)monetary policy is very effective in changing income and output. C)monetary policy is somewhat effective in changing income and output in the short run. D)fiscal policy is ineffective in changing income and output.
A
In counteracting demand shocks, the Federal Reserve can achieve: A)both full employment and price stability .B)full employment but not price stability. C)neither full employment nor price stability. D)price stability but not full employment.
A
The graph that shows the tradeoff between inflation and money wages is called the: A)Phillips curve. B)misery index. C)minimization curve. D)employment line.
A
Tightening monetary policy causes interest rates to _____ and aggregate _____ to _____. A)rise; demand; decrease B)fall; supply; increase C)rise; supply; decrease D)fall; demand; increase
A
What occurs during a negative demand shock? A)Output and price level decrease. B)Output decreases and the price level increases. C)Output and price level increase. D)Output increases and the price level decreases.
A
Which of these is considered a supply shock? A)an increase in input costs B)an increase in consumer spending C)a decrease in imports D)a decrease in investment
A
Which statement about inflation targeting is true? A)If the Fed pursues an inflation target, it increases the money supply when the actual inflation rate is below the target inflation rate. B)If the Fed pursues an inflation target, it does not change the money supply unless the actual or forecast inflationrate is above the target inflation rate. C)Advocates of inflation targeting believe the economy is inherently stable. D)Inflation targeting calls for the Federal Reserve to set the growth rate of the money supply equal to the long-term growth rate of the economy.
A
If the dollar depreciates relative to the yuan, then American exports to China will: A)fall to zero. B)increase. C)decrease. D)remain the same.
B
If the economy has high levels of unemployment, the Federal Reserve will: A)increase government spending. B)reduce interest rates. C)lower taxes. D)raise interest rates.
B
If the unemployment rate is 4.5% and the inflation rate is 6%, the Federal Reserve will most likely: A)lower the reserve requirement. B)sell bonds .C)buy bonds .D)lower the discount rate.
B
Monetary policy is LEAST effective in maintaining low inflation and high GDP when: A)consumers do not want to save. B)there has been a supply shock. C)there has been a demand shock. D)the government is running a deficit.
B
The _____ summarizes the flow of money into and out of domestic and foreign assets. A)income account B)capital account C)income statement D)current account
B
The difference between the nominal and real exchange rates is that: A)the nominal exchange rate is approximate, while the real rate is precise. B)the real exchange rate takes relative purchasing power into account, while the nominal rate does not. C)nominal rates are temporary, while real rates are permanent. D)the real exchange rate is the actual rate used by traders.
B
The long-run Phillips curve shows: A)the relationship between inflation and unemployment when the expected inflation rate exceeds the actual inflation rate. B)the relationship between inflation and unemployment when the actual inflation rate and the expected inflation rate are equal. C)the relationship between unemployment and inflation when the inflation rate is zero. D)a tradeoff between inflation and unemployment.
B
The twin goals of monetary policy are: A)economic growth with low unemployment and falling prices with low long-term interest rates. B)economic growth with low unemployment and stable prices with moderate long-term interest rates. C)economic growth with moderate unemployment and stable prices with low long-term interest rates. D)economic growth with low unemployment and stable prices with moderate short-term interest rates.
B
If American farmers sell corn to a Russian grain dealer, then the _____ account is _____. A)capital; debited B)capital; credited C)current; credited D)current; debited
C
In the equation of exchange, if M= $1.5 trillion, V= 7, and P= 1.05, then: A)real GDP is $10.5 trillion. B)nominal GDP is $10 trillion. C)Q= $10 trillion. D)Q= $10.5 trillion.
C
Suppose a country faces an inflation rate = 5%; target inflation rate = 2%; current federal funds rate = 3%; current GDP is 4% below full-employment GDP, and long-run real GDP growth rate = 3%. Which statement correctly describes monetary policy actions that would be recommended according to the monetary rule, inflation targeting, and the Taylor rule? A)The monetary rule would recommend ongoing steady expansion; inflation targeting would recommend expansionary policy; the Taylor rule would recommend contractionary policy. B)The monetary rule would recommend contractionary policy; inflation targeting would recommend contractionary policy; the Taylor rule would recommend contractionary policy. C)The monetary rule would recommend ongoing steady expansion; inflation targeting would recommend contractionary policy; the Taylor rule would recommend expansionary policy. D)The monetary rule would recommend expansionary policy; inflation targeting would recommend expansionary policy; the Taylor rule would recommend expansionary policy.
C
Suppose an MP3 player sells for $75 in the United States and for 50 pounds in Britain. Which exchange rate is consistent with purchasing power parity? A)£3 for US$1 B)£1 for US$0.67 C)£1 for US$1.50 D)£1.50 for US$1
C
The Phillips curve tradeoff worsened in the 1970s because of: A)aggressive unions. B)the Watergate scandal. C)oil shocks. D)environmental concerns.
C
The Taylor rule suggests that: A)the Federal Reserve should always increase the money supply at exactly the rate of inflation. B)the Federal Reserve should target a federal funds rate that will ensure a 1% rate of unemployment. C)the federal funds target rate should be equal to 2% plus the inflation rate plus one-half the inflation gap plus one-half the output gap. D)the money supply should be targeted so that the value of the dollar is fixed with respect to the price of gold.
C
The short-run aggregate supply curve is _____ and the long-run aggregate supply curve is _____. A)vertical; horizontal B)vertical; upward sloping C)upward sloping; vertical D)horizontal; vertical
C
A country decides to depreciate its currency. In the short run _____, but in the long run _____. A)prices will rise; prices will return to their previous level B)imports will increase aggregate supply; exports will increase aggregate demand C)unemployment will rise; unemployment will return to its natural rate D)exports will increase aggregate demand; rising costs of imported inputs will decrease aggregate supply
D
Collateralized debt obligations: A)are home loans made to borrowers with poor credit. B)are financial instruments that provide insurance against a default. C)are mortgages whose interest rates can change. D)are financial instruments backed by a collection of mortgages.
D
If the unemployment rate is 10% and the inflation rate is 2%, the Federal Reserve will most likely: A)lower the reserve requirement. B)raise the discount rate. C)sell bonds. D)buy bonds.
D
In a jobless recovery: A)the economy falls back into a recession. B)neither output nor employment growth occurs. C)employment growth begins when output falls. D)output begins to rise but employment growth does not.
D
Monetary policy deals with how: A)taxes, government transfer payments, and government spending are controlled to target unemployment. B)taxes, government transfer payments, and government spending are controlled to target interest rates. C)the money supply is controlled to target specific prices D)the money supply is controlled to target interest rates.
D
One implication of the Phillips curve when it is unable to shift in the short run, is that: A)fiscal policy is more effective than monetary policy. B)fiscal and monetary policies have no impact on the economy. C)the economy is in a liquidity trap. D)policymakers face a tradeoff between low unemployment and low inflation.
D
One of the problems with deflation is that it: A)decreases the real value of existing debt. B)shifts the aggregate demand curve to the right. C)shifts the aggregate supply curve to the right. D)increases the real value of existing debt.
D
The Taylor rule: A)is the official rule adopted in the Federal Reserve Act. B)is equivalent to the inflation rule. C)targets GDP and employment. D)targets the federal funds rate.
D
The balance of trade is(are): A)the total amount of exported capital assets. B)the total amount of imported capital assets. C)exports of money minus imports of money. D)exports of goods and services minus imports of goods and services.
D
The concept of purchasing power parity implies that the: A)Big Mac is a poor measurement value. B)cost of a Big Mac cannot be predicted across countries because it is only one product. C)Big Mac should cost more in countries that are large beef consumers, because the demand for hamburgers is greater. D)Big Mac should cost about the same in all countries.
D
The phenomenon that interest rates may be so low that increases in the money supply will have no impact on aggregate demand is called: A)the horizontality of demand. B)the sterilization of money. C)monetary incapacitation. D)the liquidity trap.
D
The simultaneous occurrence of rising inflation and rising unemployment is called: A)disinflation. B)deflation. C)disintermediation. D)stagflation.
D
The stagflation of the 1960s and 1970s showed policymakers that: A)Keynes was wrong in his analysis of aggregate demand. B)the Phillips curve should slope upward. C)the Phillips curve was always a useful tool of analysis. D)the Phillips curve could shift over time.
D
To counteract a positive demand shock, the Federal Reserve uses _____ monetary policy, which _____. A)contractionary; reduces output and increases the price level B)expansionary; increases both output and the price level C)expansionary; reduces output and increases the price level D)contractionary; reduces both output and the price level
D
Which of these was NOTa factor leading to the financial crisis of 2007-2009? A)Policymakers underestimated the level of risk inherent in the mortgage market. B)Investors borrowed heavily to purchase securitized mortgages. C)Low interest rates encouraged a housing boom. D)The public lacked faith in the ability of the U.S. Treasury to pay government bonds.
D
