Macro Actual Midterm

Based on the graph, which is the correct ordering of the price levels and money supplies?

P1 > P2 and M1 < M2

An increase in income raises money _____ and _____ the equilibrium interest rate.

demand; raises

On Macro Island, a closed economy described by the Keynesian cross, consumers spend two-thirds of their disposable income. Investment, government purchases, and taxes are each equal to $300. d. If the government wants to change equilibrium income to $1,500, by how much must it change government purchases? (Use a negative sign to indicate a decrease, if warranted.) $________

$100

On Macro Island, a closed economy described by the Keynesian cross, consumers spend two-thirds of their disposable income. Investment, government purchases, and taxes are each equal to $300. a. What is equilibrium income? Y = $________

Y = $1200

Show the shifts that result from each of the following shocks. Then use point E to identify the new short-run equilibrium. b. A bumper crop drives down food prices.

SRAS shifts down and equilibrium shifts down and right

On Macro Island, a closed economy described by the Keynesian cross, consumers spend two-thirds of their disposable income. Investment, government purchases, and taxes are each equal to $300. c. What is the value of the tax multiplier (TM)? TM =

TM = -2

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:

r2, Y3.

Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be:

r2, Y3.

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. b. The equation for the LM curve is

𝑌=300+20𝑟

Show the shifts that result from each of the following shocks. Then use point E to identify the new short-run equilibrium. d. A newly elected anti-business president imposes burdensome regulations, driving up firms' costs. The Fed decides to accommodate the shock.

SRAS and equilibrium shift up

On Macro Island, a closed economy described by the Keynesian cross, consumers spend two-thirds of their disposable income. Investment, government purchases, and taxes are each equal to $300. e. If the government wants to change equilibrium income to $1,500, by how much must it change taxes? (Use a negative sign to indicate a decrease, if warranted.) $________

-$150

Show the shifts that result from each of the following shocks. Then use point E to identify the new short-run equilibrium. c. Computer hackers cause malfunctions among ATMs, increasing money demand and decreasing the velocity of money.

AD and equilibrium shift left

Show the shifts that result from each of the following shocks. Then use point E to identify the new short-run equilibrium. a. The Fed increases the money supply.

AD and equilibrium shift right

On Macro Island, a closed economy described by the Keynesian cross, consumers spend two-thirds of their disposable income. Investment, government purchases, and taxes are each equal to $300. b. What is the value of the government-purchases multiplier (GPM)? GPM =

GPM = 3

Based on the graph, if the interest rate is r1, then people will _____ bonds, and the interest rate will _____.

buy; fall

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will _____, and output will _____.

increase; decrease

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. e. The calculations in part d illustrate that, according to the IS-LM model, an increase in government purchases _____________ the equilibrium interest rate and ___________ equilibrium income.

increases; increases

The IS curve plots the relationship between the interest rate and _____ that arises in the market for _____.

national income; goods and services

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

In this graph, if firms are producing at level Y3, then inventories will _____, inducing firms to _____ production.

rise; decrease

In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by _____ and increases the equilibrium level of income by _____.

$2.25 billion; $9 billion

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. a. The equation for the IS curve is.

𝑌=900−100𝑟

In this graph, initially the economy is at point E, with price P0 and output Ῡ Aggregate demand is given by curve AD0, and short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point _____ and then, in the long run, to point _____.

C; B

Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _____, with a _____ price level.

C; higher

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will _____, shifting the _____ curve to the right and returning output to the natural level.

decrease; LM

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income.

decreases; downward

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. g. The calculations in part f illustrate that, according to the IS-LM model, an increase in the money supply __________ the equilibrium interest rate and _________ equilibrium income.

decreases; increases

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.

increase; decrease

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. i. The calculations in part h illustrate that, according to the IS-LM model, an increase in the price level _____________ the equilibrium interest rate and ___________ equilibrium income. This result explains why the aggregate ___________ curve slopes ______________.

increases; decreases; demand; downward

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a _____ real money supply M / P, which _____ the interest rate and _____ spending.

lower; raises; reduces

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run, and:

prices will fall 5 percent in the long run.

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. f. If the central bank increases the money supply to 720 (with government purchases remaining at 100), what is the new equilibrium interest rate and level of income? r = _______ % Y = _________

r = 4.5% Y = 450

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. c. Calculate the equilibrium interest rate and level of income. r = _______ % Y = _________

r = 5% Y = 400

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. d. If the government increases its purchases by 30 (without changing taxes), what is the new equilibrium interest rate and level of income? r = _______ % Y = _________

r = 6% Y = 420

Macro Island is well described by the IS-LM model. Government purchases are 100, the money supply is 600, the price level is 2, and the government runs a balanced budget. People always save a quarter of their disposable income. The demand for investment goods is given by I = 200 − 25r, and the demand for real money balances is given by (𝑀𝑃)𝑑=𝑌−20𝑟(MP)d=Y−20r. h. If the price level increases from 2 and 4 (and the money supply remains at 600), what is the new equilibrium interest rate and level of income? r = _______ % Y = _________

r = 6.25% Y = 275