ECON305 learning catalitics, ECON305 Final Exam

In the goods market model for a closed economy, suppose that starting from an initial equilibrium the government decides to change autonomous taxes to increase GDP by $500 million. The marginal propensity to consume (c) is 80%. What would be the change in taxes needed to achieve the increase in GDP?

$ - 125 million

In a given year, suppose a company spends $100 million on intermediate goods and $200 million on wages, with no other expenses. Also assume that its total sales are $800 million. The value added by this company equals:

$700 million

Using the following​ formula: Y=(1/(1−c1))(c0+I+G−c1T) where c0 ​= autonomous consumption and c1 ​= propensity to consume. By how much does Y increase when G increases by​ one?

1/1-c

Consider a bond that promises to pay​ $100 in one year. If the​ bond's price today is ​$75​, the interest rate is:

33.3

Suppose the consumption equation is represented by the following: C= 250 + 0.75YD. Now assume government spending increases by 100 for the above economy. Given the above information, we know that equilibrium output will increase by

400

Suppose the consumption equation is represented by the​ following: C​ = 250​ + .8YD. The multiplier for the above economy equals:

5

Consider the money market model for a closed economy we studied in class. Nominal money demand is given by Md=$Y(0.3-i), nominal output ($Y) is $3,600 and nominal money supply (M) is equal to $900. What is the equilibrium interest rate? If the face value of a one-year bond is $100, what is its price today?

5%, 95.2

n a given​ year, suppose a company spends​ $100 million on intermediate goods and​ $200 million on​ wages, with no other expenses. Also assume that its total sales are​ $800 million. The value added by this company​ equals:

700 million

Suppose that the economy is characterized by the following behavioral​ equations: C​ = 160 + 0.6YD I​ = 150 T​ = 100 Assume that government spending ​(G​) is equal to 110110. Equilibrium output ​(Y​)=?.

900.

The recent sharp decline in oil prices will cause in the medium run?

A decline in the natural unemployment rate and an increase in the real wage in the medium run.

Which of the following will occur when the central bank pursues expansionary monetary policy?

A leftward shift in the money demand curve and a rightward shift in the money supply curve A rightward shift in the money demand curve and a leftward shift in the money supply curve A leftward shift in the money demand curve and a leftward shift in the money supply curve A rightward shift in the money demand curve and rightward shift in the money supply curve. None of the above

Suppose that policy makers are worried about an ongoing recession but also want the fiscal deficit to decrease. What combination of policies could they implement and what would be their result?

A purchase of bonds in the open market by the central bank and an increase in autonomous taxes. The result would be ambiguous with respect to output and investment but there would be a decrease in interest rates.

The IS curve will shift to the left when which of the following occurs?

A reduction in government spending

Which of the following will cause an increase in the amount of money that one wishes to hold?

A reduction in the interest rate increase

In the IS-LM model, a contractionary monetary policy with all else held constant leads to: A. An increase in the interest rate. B. A decrease in the interest rate and a shift up of the LM curve C. An increase in the interest rate and a decrease in output D. An increase in output, consumption and investment E. A decrease in output, consumption and investment.

A. An increase in the interest rate. C. An increase in the interest rate and a decrease in output E. A decrease in output, consumption and investment.

The high degree of securitization in the US financial system A. encouraged additional risk taking behavior in the economy. B. led to participants having a greater degree of leverage. C. amplified the negative effects from the mortgage crisis. D. Helped banks increase their capital stock E. reduced the size of the banks' balance sheets

A. encouraged additional risk taking behavior in the economy. B. led to participants having a greater degree of leverage. C. amplified the negative effects from the mortgage crisis

The money demand curve will shift to the right when which of the following occurs?

An increase in income

The LM curve shifts down when which of the following occurs?

An increase in output An increase in taxes An open market sale of bonds by the central bank An increase in consumer confidence None of the above

Which of the following events will cause a reduction in equilibrium output?

An increase in taxes; A reduction in the marginal propensity to consume; An increase in the marginal propensity to save

In the IS-LM-PC model for a closed economy, in the short run, an increase in the price of oil will cause:

An increase in the inflation rate

For this question, assume that the Phillips curve equation is represented by the following equation: pi t - pi t-1 = (m+z) - au t. A reduction in the unemployment rate will cause

An increase in the inflation rate over time

Supposed there is a simultaneous Fed sale of bonds and increase in consumer confidence. We know with certainty that these two simultaneous events will cause:

An increase in the interest rate (i)

Which of the following occurs as the economy moves leftward along a given IS curve?

An increase in the interest rate causes investment spending to decrease

In the Phillips curve equation, which of the following will cause a reduction in the current inflation rate?

An increase in the unemployment rate A reduction in the markup, m A reduction in the expected inflation rate

Which of the following statements is true? A. If there are no statistical discrepancies, countries with current account surpluses must receive net capital inflows B. If there are no statistical discrepancies, countries with current account deficits must receive net capital inflows. C. Statistical discrepancies are always positive for countries with current account surpluses D. Statistical discrepancies are always positive for countries with current account deficits. E. The current account and the capital account always add up to zero in practice.

B. If there are no statistical discrepancies, countries with current account deficits must receive net capital inflows.

Which of the following can be discerned from the relationship between nominal interest, real interest, and the expected rate of inflation? (Hint: jot down the relationship for yourself to consult as you evaluate each statement.) A. For a given nominal interest ate, the higher the expected rate of inflation, the higher the real interest rate. B. The expected rate of inflation can be discerned by examining the difference between the nominal interest rate and the real interest rate. C. When expected inflation equals zero, the nominal interest rate and the real interest rate are equal. D. Because expected inflation is typically positive, the real interest rate is typically lower than the nominal interest rate.

B. The expected rate of inflation can be discerned by examining the difference between the nominal interest rate and the real interest rate. C. When expected inflation equals zero, the nominal interest rate and the real interest rate are equal. D. Because expected inflation is typically positive, the real interest rate is typically lower than the nominal interest rate.

Why do central banks generally favor flexible exchange​ rates?

Because under a pegged exchange rate the central bank has no options other than to match the foreign interest​ rate, while under a flexible rate they can use monetary policy to adjust output.

If the CPI in Spain in 2014 is 108, then the rate of inflation in Spain from 2013 to 2014 must be: A. 4% B. 8% C. 108% D. None of the above-there is not enough information to answer the question

D. None of the above-there is not enough information to answer the question

Suppose that the domestic currency depreciates (E falls). Assume that P and P* remain constant. Which of the following is true? A. the real exchange rate falls, but the relative price of domestic goods remains the same. B. The relative price of domestic goods rises C. The real exchange rate rises, but the relative price of domestic goods remains the same. D. The relative price of domestic goods falls.

D. The relative price of domestic goods falls

Suppose we switch the base year from 2000 to 2008. This change in the base year will​ cause: A. nominal GDP in every year to decrease. B. real GDP in every year to decrease. C. nominal GDP in every year to increase. D. both nominal and real GDP in every year to decrease. E. none of the above.

E. non of the above

In the closed economy there is a larger increase in output than in the open economy. In the open economy the trade balance deteriorates.

Et+1 = 0.0642

The Phillips curve implies that when unemployment is​ high, inflation is​ low, and vice versa.​ Therefore, we may experience either high inflation or high​ unemployment, but we will never experience both together. Is this statement​ true, false, or​ uncertain?

False. If inflation expectations are​ high, it is possible to have high inflation and high unemployment simultaneously. (think stagflation)

Consider the following​ statement: As long as we do not mind having high​ inflation, we can achieve as low a level of unemployment as we want. All we have to do is increase the demand for goods and services by​ using, for​ example, expansionary fiscal policy. Is this statement​ true, false, or​ uncertain? Choose the answer that best explains

False. This would require not merely high inflation but​ ever-increasing inflation because expectations adjust.

The LM curve is horizontal because equilibrium in

Financial markets implies that as output increases, the central bank adjusts the money supply to maintain its interest rate target

The IS curve is downward sloping because equilibrium in the

Goods market implies that interest rate and output are inversely related

Which of the following is an exogenous variable in our model of the goods market in Chapter 3?

Government spending (G)

Fiscal policy refers to the _________.

Government's decisions on the uses of government spending and taxes

The IS-LM diagram on the right shows the initial equilibrium of a closed economy at point A. Now suppose that consumer confidence falls, inducing households to spend less and attempt to save more. In the IS-LM diagram, show the effect of the fall in consumer confidence on the equilibrium in the economy. At the economy's new equilibrium at point B it can be seen and/or inferred that

IS Curve shifts left; Output (income), consumption, saving, and investment are unambiguously lower

Why is the natural rate of unemployment also called the non accelerating inflation rate of unemployment (NAIRU)?

If the central bank tries to hold unemployment below the natural​ rate, it will cause inflation to increase.

An investor in Argentina is considering buying a domestic one-year bond that has a face value of 10,000 and sells for a price of 9,800 or a Brazilian bond that has a face value of 10,000 and sells for a price of 9,700. Under what condition would she buy the Argentine bond?

If the expected depreciation of the Brazilian currency was less than 1%.

If the trade deficit is equal to zero

Imports are equal to exports. Demand for domestic goods is equal to domestic demand for goods.

Consider two countries, one is a closed economy and the other trades with the rest of the world and has a flexible exchange rate. All other factors are the same in both economies. The governments of both economies decide to cut taxes to boost demand. Which of the following statements is correct?

In the closed economy there is a larger increase in output than in the open economy. In the open economy the trade balance deteriorates.

Based on the IS-LM-PC model for a closed economy studied in class, which of the following statements is correct?

In the medium run monetary policy can only be used to control inflation, but it will not affect production.

Suppose that the government would like to stimulate investment spending by firms. The best policy mix to achieve this goal with certainty would be to:

Increase government spending and increase the money supply

An increase in unemployment benefits would be expected to ______.

Increase the natural rate of unemployment because it allows unemployed workers to hold out for better wages

Which of the following explains why the original Phillips curve relation disappeared or, as some economists have remarked, "broke down" in the 1970s?

Individuals changed the way they formed expectations of inflation

Suppose fiscal policy makers implement a policy to reduce the size of a budget deficit. Based on the IS-LM model, we know with certainty that the following will occur as a result of this fiscal policy action.

Investment spending will decrease

Which of the following is true regarding the natural rate of unemployment?

It is the unemployment rate at which the actual inflation rate is equal to the expected inflation rate It is the unemployment rate at which the actual price level is equal to the expected price level When unemployment is at the natural rate, the inflation rate is constant

Which of the following best explains why the increase in the markup causes the natural rate of unemployment to rise?

It shifts the price-setting relation downward, decreasing the real wage

Suppose the economy shown in the accompanying figure is experiencing a recession at point A and policymakers want to implement a same-direction policy mix to raise output.

LM curve shifts down, IS curve shifts right

What do we know about your process of the formation expected inflation when theta = 1?

Last​ year's inflation rate will be the only input for you to revise your estimates for this​ year's expected rate regardless of what the​ long-run average inflation rate is.

Each point along the LM curve illustrates the level of output where:

Money supply equals money demand

Efficiency wage theory would predict that relative to the wage of your first job, the job you will have in 10 years will pay ________.

More, because firms will want to pay more to increase morale and productivity and reduce turnover.

Which of the following best explains why a fiscal expansion tends to decrease net​ exports?

Net​ exports, NX​ = NX​(Y​, ​Y*​, E​), depend negatively on domestic​ output, Y​, and negatively on the exchange​ rate, E. An expansionary fiscal policy leads to an increase in output but has no impact on the exchange rate.​ Therefore, net exports decrease.

Suppose the domestic currency depreciates ​(E​ falls). Assume that P and ​P* remain constant. Given the foreign price​ level, ​P*​, what is the price of foreign goods in terms of domestic​ currency? The price of foreign goods in terms of domestic currency is

P*/E

Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the following is true for this economy?

Production equals demand The quantity supplied of bonds equals the quantity demanded of bonds Financial markets are in equilibrium The money supply equals money demand

What do we know about your process of the formation of expected inflation when theta = 0?

Regardless of what inflation was last​ year, you would expect it to be at the​ long-run average inflation rate this year.

Suppose policy makers decide to reduce taxes. This fiscal policy action will cause which of the following to occur?

The IS curve shifts and the economy moves along the LM curve

Suppose that the perceived value of a bank's assets falls. Assuming the bank cannot raise additional capital, how can it raise the funds necessary to repay the debt coming due?

The bank must sell some of its assets.

The marginal propensity to consume represents

The change in consumption caused by a one- unit change in disposable income

Deflation generally occurs when which of the following occurs?

The consumer price index increases

How does a nominal depreciation affect the domestic consumer price​ index?

The domestic consumer price index will rise.

Consider two economies, Mexico (foreign) and U.S.A. (domestic) that trade freely. Suppose that the dollar has depreciated with respect to the peso by 2%, but there has been no change in the real exchange rate. What implications does this information have?

The inflation rate in the U.S.A is 2% greater than the inflation rate in Mexico.

Consider the IS-LM-PC model for a closed economy and suppose that the economy is at its natural output level initially. If the government increases its expenditures and expectations of inflation are based on last period's inflation, in the medium run we would observe that:

The inflation rate increases while production returns to its natural level.

Suppose again that the Phillips curve is given by pi(t)-pi(et) = 0.08 + .1μ(t) - 2μ(t). where μ is the markup of prices over wages. Suppose that μ is initially equal to​ 20%, but that as a result of a sharp increase in oil​ prices, μ increases to​ 40% in year t and after. What is the effect of the increase in μ on the natural rate of​ unemployment? Why would an increase in oil prices result in an increase in μ​? What happens to the Phillips curve?

The natural rate of unemployment will increase from 5% to 6%. An increase in μ means a higher cost of production which means a higher markup of the price level over wages. The Phillips curve would shift up and to the left, increasing both unemployment and inflation.

How does a nominal depreciation affect the price of foreign goods in terms of domestic​ currency?

The price of foreign goods in terms of domestic currency will rise.

If we observe that the GDP deflator remains constant for two consecutive periods, this is indicates that:

The prices of goods in the economy could have had variations between the first and second period, but the increases in some prices were compensated by the fall in other prices.

The prices of goods in the economy could have had variations between the first and second period, but the increases in some prices were compensated by the fall in other prices.

The prices of goods in the economy could have had variations between the first and second period, but the increases in some prices were compensated by the fall in other prices.

For this question, assume that the expected rate of inflation is a function of past year's inflation. Also assume that the unemployment rate has been greater than the natural rate of unemployment for a number of years. Given this information, we know that

The rate of inflation should steadily decrease

Suppose that for given labor-market conditions, worker bargaining power throughout the economy increases. What happens to the graph?

WS shifts to the right

A simplified production function showing output Y as a function of employment N and labor productivity A can be written as: ________. An even more simplified version, which takes advantage of the fact that we don't particularly care about the units of output per unit of employment in our context, would be: ________.

Y=AN; Y=N

In the IS​-LM ​model, investment spending is specified as:

a positive function of output and a negative function of the interest rate.

In an open​ economy, an increase in government spending will​ cause:

a reduction in net exports.

Based on our model, equal increases in taxation and government spending will cause:

an increase in output

Exports will decrease when there​ is:

an increase in the real exchange rate

Assume the Marshall−Lerner condition holds. Which of the following will cause a reduction in net​ exports?

an increase in the real exchange rate.

The preference investors have for riskless bonds even when risky bonds possess the same expected return as riskless bonds is attributed to investors being risk ____

averse.

Suppose a firm is considering using its own funds​ (rather than​ borrowing) to finance investment projects. If the firm faces higher interest​ rates, _________.

bonds will become more attractive financial​ assets, so firms are more likely to purchase bonds rather than to finance investment projects.

If the central bank wants to increase the money supply, it can

buy bonds on the open market.

More often than not, policymakers find it useful to employ monetary and fiscal policies in

combination.

The figure on the right shows an economy in overall equilibrium at point A. If the output level associated with this point corresponds to an unacceptably high inflation rate, the government may pursue a monetary policy that is

contractionary. LM Curve shifts up

According to the equation for the natural rate of unemployment, an increase in a will lead to a ______________ in the natural rate of unemployment

decrease

Which of the following is true when a country is experiencing a trade surplus​ (NX >​ 0)?

demand for domestic goods is greater than the domestic demand for goods

the fight against a recession is done via _______________ monetary and fiscal policies.

expansionary

The LM curve is horizontal because equilibrium in

financial markets implies that as output​ increases, the central bank adjusts the money supply to maintain its interest rate target.

Suppose there is a real depreciation of the dollar. Which of the following may have​ occurred?

foreign goods have become more expensive to Americans. foreign currency has become more expensive in dollars. the foreign price level has increased relative to the U.S. price level.

An appreciation of the exchange rate, holding everything else constant, will lead to:

higher imports and lower exports, reducing the trade balance.

According to the J-curve, a real appreciation of the exchange rate will:

improve the trade balance in the short run and deteriorate it after about 1 year.

Part of the policy response to the crisis-induced recession in 2009 was to extend the length of time workers could receive unemployment benefits. If this change were made permanent, it would be expected that reservation wages would _________

increase

An increase in the firm's leverage ratio tends to ___________ the expected profit per unit of capital ____ ___________ the amount of risk associated with the firm

increase ; and increase

In equilibrium, the effect of an increase in worker bargaining power is an _____________ in the natural rate of unemployment and _____________ in the real wage.

increase; no change

The bargaining power possessed by workers increases as the skill level of their job _______ and as the overall unemployment rate _______.

increases; decreases

If the dollar is expected to appreciate against the​ yen, uncovered interest parity implies that the U.S. nominal interest rate will be ____________than the Japanese nominal interest rate.

lower

For a given level of nominal income ($Y), we see the money demand (Md) curve modeled in terms of a downward sloping relationship between the interest rate (i) and the amount of money people want to hold (M). Suppose there is an increase in nominal income ($Y). (Ask yourself what happens to the money demand (Md) curve here.) People want to hold __________ at any given interest rate.

more money

An increase in the expected price level leads to an increase in the _____ wage since both workers and firms care about _____ wages.

nominal; real

Policymakers can exploit the​ inflation-unemployment trade-off _______. Additionally, we know that if the output gap is negative, then inflation will be _______.

only​ temporarily, because expectations adapt to higher levels of inflation. Decreasing.

The demand for money in the economy depends on the

rate of interest and level of overall transactions

Which of the following best defines the real exchange​ rate?

the price of domestic goods in terms of foreign goods.

Suppose that over the past​ decade, U.S. inflation is less than that in Mexico. Further assume that during this same​ period, the dollar depreciates relative to the Mexican peso. Given this​ information,

the real exchange rate must decrease.

If you look mainly at what the long-run trends have been for inflation when trying to predict what inflation will be this year, then you believe that theta is near _______

zero