Economics Final

Take the following information as given for a small economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. Refer to Scenario 34-1. For this economy, an initial increase of $200 in net exports translates into a(n)

$800 increase in aggregate demand in the absence of the crowding-out effect.

If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as

(eP)/P*.

In an open economy, national saving equals

domestic investment plus net capital outflow

The effect of an increase in the price level on the aggregate-demand curve is represented by a

movement to the left along a given aggregate-demand curve.

The value of net exports equals the value of

national saving - domestic investment

In the open-economy macroeconomic model, the supply of loanable funds comes from

national saving.

National saving is represented by the

supply curve in graph (a).

The explanation for the slope of the

supply of loanable funds curve is based on the logic that a higher real interest rate leads to higher saving.

In the long run, money demand and money supply determine

the value of money but not the real interest rate.

Suppose the current equilibrium interest rate is r 1. If the Federal

there will be an increase in the equilibrium quantity of goods and services demanded.

Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD 1 to AD 2 if there were no crowding out; the AD curve actually shifts from AD 1 to AD 3 with crowding out. Also, suppose the horizontal distance between the curves AD 1 and AD 3 is $55 billion. The extent of crowding out, for any particular level of the price level, is

$20 billion

A country has I = $200 billion, S = $400 billion, and purchased $600 billion of foreign assets, how many of its assets did foreigners purchase?

$400 billion

If a U.S. dollar purchases 4 Argentinean pesos, and a gallon of milk costs $3 in the U.S. and 6 pesos in Argentina what is the real exchange rate?

2 gallons of Argentinean milk/1 gallon of U.S. milk

If the price level increased from 120 to 144, then what was the inflation rate?

20 percent

At the end of 2009 the relevant money-supply curve was the one labeled MS 1 . At the end of 2010, the relevant money-supply curve was the one labeled MS 2 . Assuming the economy is always in equilibrium, what was the economy's approximate inflation rate for 2010?

50 percent

If M = 2,000, P = 2.25, and Y = 6,000, what is velocity?

6.75

A decrease in taxes would move the economy from C to

B in the short run and A in the long run.

The short-run equilibrium is defined by the given AD and SRAS curves. Which of the long-run aggregate-supply curves is consistent with a short-run economic expansion?

LRAS1

A U.S. company uses U.K. pounds it already owned to purchase bonds issued by a company in the U.K. Which of these countries has an increase in net capital outflow?

Neither the U.S. nor the U.K.

What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand?

Net exports would fall which by itself would decrease U.S. aggregate demand.

A large and sudden movement of funds out of a country is called

capital flight.

"Money is a veil" best describes the

classical view

Domestic saving must equal domestic investment in

closed, but not open economies.

If a country places tariffs on imported goods, then its

currency appreciates which reduces exports leaving the trade balance unchanged.

Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation

does not change the real interest rate but reduces the after-tax real rate of interest.

Purchasing-power parity theory does not hold at all times because

many goods are not easily transported and the same goods produced in different countries may be imperfect substitutes.

During the 1970s, U.S. prices rose by 7.8 percent per year and real GDP increased. Holding velocity constant and using the quantity equation, we conclude that

money growth must have been greater than the growth of real income.

If the economy starts at A and moves to D in the short run, the economy

moves to C in the long run.

At an interest rate of 4 percent, the diagram indicates that

net capital outflow + domestic investment = national saving.

According to the assumptions of the quantity theory of money, if the money supply decreases by 7 percent, then

nominal GDP would fall by 7 percent; real GDP would be unchanged.

In countries that have high minimum wages and require a lengthy and costly process to get permission to open a business,

reducing the minimum wage and the time and cost to open a business would both shift the long-run aggregate supply curve to the right.

When the money supply curve shifts from MS 1 to MS 2,

the equilibrium value of money decreases.

The inflation tax refers to

the revenue a government creates by printing money

Suppose that a country imports $90 million worth of goods and services and exports $80 million worth of goods and services. What is the value of net exports?

-$10 million

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

In the open-economy macroeconomic model, the market for loanable funds identity can be written as

S = I + NCO.

Which of the following can a country increase in the long run by increasing its money growth rate?

The nominal wage

Which of the following is not a determinant of the long-run level of real GDP?

The price level

When looking at a graph of aggregate demand, which of the following is correct?

The variable on the vertical axis is nominal; the variable on the horizontal axis is real.

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then

aggregate demand falls by 11/2 × $40 billion.

Which of the following would cause stagflation?

aggregate supply shifts left

Economic expansions in Europe and China would cause the U.S. price level

and real GDP to rise.

A country's trade balance will fall if either

saving falls or investment rises.

Take the following information as given for a small economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. Refer to Scenario 34-1. The marginal propensity to consume for this economy is

0.750.

If the real exchange rate for coal is 1.5, the price of coal in the United States is $50 per ton, and the price of coal in Britain is 20 British pounds per ton, what is the nominal exchange rate?

3/5 or 0.6 pounds per dollar

If the real interest rate is 6 percent and the price level is falling at a rate of 2 percent, what is the nominal interest rate?

4%

Take the following information as given for a small economy: • When income is $10,000, consumption spending is $6,500. • When income is $11,000, consumption spending is $7,250. Refer to Scenario 34-1. The multiplier for this economy is

4.00.

Which of the following is an example of menu costs?

Advertising new prices

Which of the following events shifts aggregate demand rightward?

An increase in government expenditures, but not a change in the price level

Which of the following properly describes the interest-rate effect that helps explain the slope of the aggregate-demand curve?

As the price level increases, the interest rate rises, so spending falls.

An increase in the money supply will

Reduce interest rates and increase aggregate demand.

The purchase of U.S. government bonds by Egyptians is an example of

foreign portfolio investment by Egyptians.

Other things the same, an increase in the U.S. real interest rate induces

foreigners to buy more U.S. assets, which reduces U.S. net capital outflow.

According to purchasing-power parity, when a country's central bank decreases the money supply, a unit of money

gains value both in terms of the domestic goods and services it can buy and in terms of the foreign currency it can buy.

Net exports of a country are the value of

goods and services exported minus the value of goods and services imported

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases.

Other things the same, a higher real interest rate raises the quantity of

loanable funds supplied.

Other things the same, if technology increases, then in the long run

output is higher and prices are lower.

If a country has positive net capital outflows, then its net exports are

positive, and it's saving is larger than its domestic investment.

Other things the same, automatic stabilizers tend to

raise expenditures during recessions and lower expenditures during expansions