macro final

In a certain economy, when income is $100, consumer spending is $60. The value of the multiplier for this economy is 4. It follows that, when income is $101, consumer spending is

$60.75.

One determinant of the long-run average unemployment rate is the

minimum wage, while the inflation rate depends primarily upon the money supply growth rate.

If an increase in inflation permanently reduced unemployment, then

money would not be neutral and the long-run Phillips curve would slope downward.

Other things the same, if the U.S. price level falls, then U.S. residents want to buy

more foreign bonds. The real exchange rate falls.

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action

raises inflation but lowers unemployment.

The aggregate quantity of goods and services demanded changes as the price level falls because

real wealth rises, interest rates fall, and the dollar depreciates.

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would

rise which by itself would increase aggregate demand.

An individual would suffer lower losses or maybe even gain from an unexpectedly higher inflation rate if

she held little currency and on net was a borrower.

The long-run aggregate supply curve shifts right if

technology improves, but not if immigration from abroad increases.

The six debates over macroeconomic policy exist mostly because

there are tradeoffs and people disagree about the best way to deal with them.

Other things the same, if the central bank decreases the rate at which it increases the money supply, then

unemployment and inflation rise in the short run.

The multiplier in a country is equal to 5, and households pay no taxes. At the current equilibrium real GDP of $14 trillion, total real consumption spending by households is $12 trillion. What is real autonomous consumption in this country?

$0.8 Trillion

An increase in household saving causes consumption to

fall and aggregate demand to decrease.

If aggregate demand shifts right then in the short run

firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the right.

. The mathematical equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), expresses

how output deviates in the short run from its long run natural rate.

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

increase government expenditures

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would

increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate.

Refer to scenario 1, assuming no change in fiscal policy what change in interest rate would restore full employment level?

3%

An economy is operating with output that is $400 billion below its natural level, and fiscal policy makers want to close the recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The MPC is 0.2, and the price level is completely fixed in the short-run. In what direction and by how much would the government funding need to change to close the recessionary gap?

Government spending must increase by $320 billion

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. What would the change in the interest rate created by foreigners wanting to buy more U.S. assets do to investment spending in the United States?

Make it fall which by itself would decrease U.S. aggregate demand.

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets, 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.

Which of the following shifts the long-run Phillips curve left?

a decrease in the minimum wage rate, but not an increase in the inflation rate

If the natural rate of unemployment falls,

both the short-run Phillips curve and the long-run Phillips curve shift.

Monetary policy

can be described either in terms of the money supply or in terms of the interest rate.

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will

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

During recessions, taxes tend to

fall and thereby increase aggregate demand

In a certain economy, when income is $400, consumer spending is $325. The value of the multiplier for this economy is 3.33. It follows that, when income is $450, consumer spending is

$360. For this economy, an initial increase of $50 in consumer spending translates into a $166.50 increase in aggregate demand.

The marginal propensity to consume is equal to 0.80. An increase in household wealth causes autonomous consumption to rise by $10 million. By how much will equilibrium real GDP increase at the current price level, the other things being equal?

$50M

Refer to Figure 35-4. Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%. Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more expansionary monetary policy?

3% unemployment and 5% inflation

There is an excess demand for money at an interest rate of refer to the figure

3.25 percent.

Last year a country's real GDP grew by 4%, its inflation rate was 2.5%, and it's government budget deficit was about $250 billion. It's debt to GDP ratio was unchanged. About what was its debt at the start of last year?

3.85 trillion

The model of short-run economic fluctuations focuses on

. the price level and real GDP.

At an initial point on the aggregate demand curve, the price level is 100, the real GDP is $18 trillion. After the price level rises to 110, however there is an upward movement along the aggregate demand curve, and real GDP declines to $14 trillion. If total planned spending declines by $200 billion in response to the increase in the price level, what is the MPC in this economy

.95

Figure 35-4. The left-hand graph shows a short-run aggregate-supply (SRAS) curve and two aggregate-demand (AD) curves. On the left-hand diagram, the price level is measured on the vertical axis; on the right-hand diagram, the inflation rate is measured on the vertical axis.Refer to Figure 35-4. Assume the figure charts possible outcomes for the year 2018. In 2018, the economy is at point B on the left-hand graph, which corresponds to point B on the right-hand graph. Also, point A on the left-hand graph corresponds to A on the right-hand graph. The price level in the year 2018 is

114.95

Refer to Figure 35-1. Suppose points F and G on the right-hand graph represent two possible outcomes for an imaginary economy in the year 2020, and those two points correspond to points C and D, respectively, on the left-hand graph. Also, suppose we know that the price index equaled 120 in 2019. Then the numbers 115 and 130 on the vertical axis of the left-hand graph would have to be replaced by

138 and 156, respectively.

Refer to Figure 35-4. If the economy starts at 5% unemployment and 5% inflation then if the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to

7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation.

Which of the following is correct?

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

Scenario 33-2 Imagine that in the current year the economy is in long-runequilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2. Which curve shifts and in which direction

Aggregate demand shifts left.

Refer to Figure 34-2. A decrease in Y from Y1 to Y2 is explained as follows:

An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

BY 30 billion

Which of the following would not be directly included in aggregate demand?

Government's tax collections

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

Increase Taxes

Monetary Policy in Mokania Mokania has had inflation of 15% for many years. Mokania establishes a new central bank, the Bank of Mokania, with the hopes of reducing the inflation rate. Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?

Initially people's inflation expectations had been higher than 5%. The sacrifice ratio was 3.

Refer to Figure 33-4. 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 an expansion?

LRAS1

A tax cut shifts aggregate demand

None of the above is necessarily correct.

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

People will want to hold more money as the cost of holding it falls.

Refer to Figure 33-2. If the economy is in long-run equilibrium, then an adverse shift in short-run aggregate supply would move the economy from

Q to R.

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. There is no crowding out

Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.

Refer to Figure 34-6. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?

The government reduces government spending, resulting in a decrease in people's incomes.

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

The price level

Which of the following two effects of a decrease in the tax rate on saving would raise savings

The substitution effect but not the income effect

The natural level of output occurs at

Y2

Assume a central bank follows a rule that requires it to take steps to keep the price level constant. If the price level

the central bank would have to reduce interest rates which would increase output.

Which of the following will reduce the price level and real output in the short run?

a decrease in the money supply

In June of 2010, the government had a debt of about $8.6 trillion. Over the next year real GDP grew by about 1.6% and inflation was about 2%. What is the largest deficit the government could have run over this time without raising the debt-to-GDP ratio?

about $309.6 billion

From 2006 to 2008 there was a dramatic fall in the price of houses. If this fall made people feel less wealthy, then it would have shifted

aggregate demand left.

According to the theory of liquidity preference,

an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.

A policy that lowered the natural rate of unemployment would shift

both the short-run and the long-run Phillips curves to the left.

If the government reduced the minimum wage and pursued contractionary monetary policy, then in the long run

both the unemployment rate and the inflation rate would be lower.

From the end of 2005 to the end of 2006, the United States ran a deficit of about $309 billion. The debt at the start of this period was about $4,592 billion. Which of the following combinations of inflation and real GDP growth would have allowed the government to run this deficit while keeping the ratio of real GDP to the debt about the same?

bout 3.4% inflation and about 3.3% real GDP growth

"Money is a veil" best describes

classical view of the economy.

If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer U.S. bonds,

the dollar would depreciate which would cause aggregate demand to shift right.

Suppose a decrease in interest rates causes falling unemployment and rising output. To counter this, the Federal Reserve would

decrease the money supply.

If U.S. speculators gained greater confidence in foreign economies so that they wanted to move more of their wealth into foreign countries, the dollar would

depreciate which would cause aggregate demand to shift right.

If the Federal Reserve accommodates an adverse supply shock,

inflation expectations may rise which shifts the short-run Phillips curve shifts right.

In which of the following cases is the after-tax real interest rate highest?

inflation is 6%, the pre-tax real interest rate is 3%, and the tax rate is 20%.

If the unemployment rate is below the natural rate, then

inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

According to the theory of liquidity preference, which variable adjusts to balance the supply and demand for money?

interest rate

In the long run, an increase in the money supply growth rate

raises expected inflation so the short-run Phillips curve shifts right.

When measured over a long span of time, a tax on interest income

reduces the benefits from saving by a large amount.

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

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

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

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

Changes in the interest rate

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

tax cut shifts the aggregate demand curve the farthest right if

the MPC is large and if the tax cut is permanent.

According to liquidity preference theory, if the price level decreases, then

the interest rate falls because money demand shifts left

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,

the larger the MPC and the weaker the influence of income on money demand.

The government of Blenova considers two policies. Policy A would shift AD right by 500 units while policy B would shift AD right by 300 units. According to the short-run Phillips curve, policy A will lead

to a lower unemployment rate and a higher inflation rate than policy B.

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.

At an initial point on the aggregate demand curve, the price level is 125, the real GDP is $18 trillion. When the price level falls to a value of 120, total autonomous expenditures increase by $250 billion. The MPC is 0.75. What is the level of real GDP at a new point on the aggregate demand curve?

$19 trillion

Refer to Figure 34-7. Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is

$20 billion

Refer to Figure 35-2. Assume the figure depicts possible outcomes for the year 2022. In 2022, the economy is at point A on the left-hand graph, which corresponds to point A on the right-hand graph. The price level in the year 2021 was

150

At the end of 2007, the government had a debt of about $5,000 billion. During 2007, real GDP grew by about 0.8 percent and inflation was about 2.7 percent. About what is the largest deficit the government could have run without raising the debt-to-GDP ratio?

175 billion

Consider an economy described by the following equations Y=C+I+G C = 100 + 0.75(Y-T) I = 500 -50RG = 125T = 100 Where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and R is the interest rate. If the economy were at full employment (that is, at its natural rate) GDP would be 2000 56. Refer to scenario 1, suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 4% (r = 4). Solve for GDP. How does it compare to the full employment level?

1800, less than full employment level.

Suppose an economy's marginal propensity to consume (MPC) is 0.6. Then 1 + MPC + MPC2 + MPC3 = 2.176 and, if we continued adding up terms in this geometric series, we would get closer and closer to the multiplier value of

2.5

Suppose that the country of Aquilonia has an inflation rate of about 2 percent per year and a real growth rate of about 3 percent per year. Suppose also that it has nominal GDP of about 400 billion units of currency and current nominal national debt of 200 billion units of domestic currency. Which of the following government spending and taxation figures will keep the debt to-income ratio constant?

government spending equal to 30 billion units and tax collections equal to 20 billion units

The Federal Reserve will tend to tighten monetary policy with the goal is to stabilize the economy when

it thinks inflation is too high today, or will become too high in the future.

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied.

Refer to Figure 33-2. If the economy is at O and there is a reduction in aggregate demand, in the short run the economy

moves to R

Suppose that the money supply decreases. In the short run, this increases prices according to

neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.