MACRO FINAL FML:(
Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is
vertical, which implies that monetary and fiscal policies cannot influence the level of unemployment in the long run.
Phillips found a negative relation between
wage inflation and unemployment.
According to 2009 data on the U.S. population, which of the following groups of teenagers (ages 16-19) had the lowest unemployment rate?
white females
If output is above its natural rate, then according to sticky-wage theory
will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.
Any policy change that reduced the natural rate of unemployment
would shift the long-run aggregate-supply curve to the right.
Assume the analysis of Friedman and Phelps is correct, so that the following equation is valid: Unemployment rate = Natural rate of unemployment - a ´ (Actual inflation - x). In this equation,
x is the expected rate of inflation.
Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes
your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.
If the reserve ratio is 12.5 percent, then $2,000 of additional reserves can create up to
$16,000 of new money.
Suppose expected inflation and actual inflation are both relatively high, and unemployment is at its natural rate. If the Fed then pursues a contractionary monetary policy, which of the following results would be expected in the short run?
Expected inflation would exceed actual inflation, and unemployment would exceed its natural rate.
Which of the following would cause prices to rise and real GDP to fall in the short run?
an increase in the expected price level
Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?
both the multiplier effect and the crowding-out effect
Of the following theories, which is consistent with a vertical long-run aggregate supply curve?
both the sticky-wage and misperceptions theories.
Suppose that some people are counted as unemployed when, to maintain unemployment compensation, they search for work only at places where they are unlikely to be hired. If these individuals were counted as out of the labor force instead of as unemployed, then
both the unemployment rate and labor-force participation rate would be lower.
If the Federal Reserve increases the money supply, then initially people want to
buy bonds so the interest rate falls.
A tax cut shifts aggregate demand
by more than the amount of the tax cut. by the same amount as the tax cut. by less than the tax cut. ___________________ d. None of the above is necessarily correct.
The Volcker disinflation
caused output to fall, but by less than the typical estimate of the sacrifice ratio suggested.
Monetary policy affects the economy with a long lag, in part because
changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.
The primary difference between commodity money and fiat money is that
commodity money has intrinsic value but fiat money does not.
The Fed's primary tool to change the money supply is
conducting open market operations.
Changes in the price level affect which components of aggregate demand?
consumption, investment, and net exports
Efficiency wages
create a shortage of labor, and so reduce unemployment.
If the Federal Open Market Committee decides to increase the money supply, then the Federal Reserve
creates dollars and uses them to purchase government bonds from the public.
An increase in government purchases is likely to
crowd out investment spending by business firms.
If the natural rate of unemployment is 5.2 percent and the actual rate of unemployment is 5.7 percent, then by definition there is
cyclical unemployment amounting to 0.5 percent of the labor force.
Frictional unemployment can be the consequence of
workers leaving existing jobs to find ones they like better. one industry declining while another is growing. changes in the working conditions offered by competing firms. _________________________ All of the above are correct.
During recessions, banks typically choose to hold more excess reserves relative to their deposits. This action
decreases the money multiplier and decreases the money supply.
The value of money rises as the price level
falls, because the number of dollars needed to buy a representative basket of goods falls.
High and unexpected inflation has a greater cost
for those who save than for those who borrow.
Which of the following will not help to prevent bank runs?
fractional reserve banking
Fiscal policy refers to the idea that aggregate demand is affected by changes in
government spending and taxes.
Over the past several decades, the difference between the labor-force participation rates of men and women in the U.S. has
gradually decreased.
In Belgium, Norway, and Sweden, the percentage of workers who belong to unions is
greater than it is in the United States.
For the Bureau of Labor Statistics to place someone in the "unemployed" category, that person must
have worked no more than 10 hours during the past week.. have tried to find employment during the previous year. not have been laid off. ____________________ None of the above is correct.
Samuelson and Solow reasoned that when aggregate demand was low, unemployment was
high, so there was downward pressure on wages and prices.
When the price level falls
households want to lend less. the interest rate rises. firms want to spend less on investment goods. = None of the above are correct.
If the reserve ratio is 8 percent, banks do not hold excess reserves, and people do not hold currency, then when the Fed purchases $20 million of government bonds, bank reserves
increase by $20 million and the money supply eventually increases by $250 million.
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
Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?
increase taxes
For a given real interest rate, a decrease in the inflation rate would
increase the after-tax real interest rate and so increase saving.
To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could
increase the money supply by buying bonds.
Sectoral shifts in demand for output
increase unemployment due to job search.
Open-market purchases by the Fed make the money supply
increase, which makes the value of money decrease.
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
increased consumption, which shifts the aggregate-demand curve right.
In response to the sharp decline in stock prices in October 1987, the Federal Reserve
increased the money supply and decreased interest rates.
In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households
increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.
Which of the following shifts aggregate demand to the right?
increases in the profitability of capital due perhaps to technological progress.
An increase in the MPC
increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand.
An open-market purchase
increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public.
If the minimum wage is currently above the equilibrium wage, then a decrease in the minimum wage
increases the quantity of labor demanded but decreases the quantity of labor supplied.
Critics of stabilization policy argue that
policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.
If policymakers expand aggregate demand, then in the long run
prices will be higher and unemployment will be unchanged.
An increase in the money supply might indicate that the Fed had
purchased bonds in an attempt to reduce the federal funds rate.
The Fed can increase the money supply by conducting open-market
purchases or by lowering the discount rate.
In 2001, Congress and President Bush instituted tax cuts. According to the short-run Phillips curve, in the short run this change should have
raised inflation and reduced unemployment.
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. Refer to The Economy in 2008. In the short run the increased prices of world commodities
raised the price level and reduced output.
Reserves decrease if the Federal Reserve
raises the discount rate but not if it auctions more credit.
Other things the same, the aggregate quantity of goods demanded decreases if
real wealth falls. the interest rate rises. the dollar appreciates. =All of the above are correct.
In the first half of June 2008 the effects of a housing and financial crisis and an increase in world prices of oil and foodstuffs were affecting the economy. Refer to the Economy in 2008. In the short-run the housing and financial crises
reduced both the price level and output.
If inflation expectations rise, the short-run Phillips curve shifts
right, so that at any inflation rate unemployment is higher in the short run than before.
Which of the following would cause stagflation?
rising oil prices
Other things the same, continued technological progress and continued increases in the money supply would unambiguously lead to
rising real GDP only.
The Fed can decrease the money supply by conducting open-market
sales or by raising the discount rate.
Disinflation is like
slowing a car down, whereas deflation is like putting the car into reverse gear.
Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity preference theory there is an excess
supply of money until the interest rate decreases.
If the Federal Reserve increases the money supply, then initially there is a
surplus in the money market, so people will want to buy bonds.
Minimum wages create unemployment in markets where they create a
surplus of labor. Minimum wage laws are not the predominant reason for unemployment in the U.S.
The long-run aggregate supply curve shifts right if
technology improves.
The Fed sets the interest that borrowers pay on loans from
the discount window but not the term auction facility
Using the liquidity-preference model, when the Federal Reserve increases the money supply,
the equilibrium interest rate decreases.
In the long run, which of the following depends primarily on the growth rate of the money supply?
the inflation rate but not the natural rate of unemployment
If velocity and output were nearly constant, then
the inflation rate would be about the same as the money supply growth rate.
In the long run an increase in the money supply growth rate affects
the inflation rate, but not the natural rate of unemployment.
If efficiency wages became more common,
the long-run Phillips curve would shift right, and the long-run aggregate supply curve would shift left.
Under the assumptions of the Fisher effect and monetary neutrality, if the money supply growth rate falls, then
the nominal interest rate falls, but the real interest rate does not.
The Fisher effect is crucial for understanding changes over time in
the nominal interest rate.
Which of the following is not a determinant of the long-run level of real GDP?
the price level
Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, the value of the dollar falls. In the short-run
the price level will rise, and real GDP might rise, fall, or stay the same.
Collective bargaining refers to
the process by which unions and firms agree on the terms of employment.
If there are sticky wages, and the price level is greater than what was expected, then
the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve.
When the money market is drawn with the value of money on the vertical axis, as the price level increases which of the following increases?
the quantity of money demanded but not the quantity of money supplied
As the interest rate falls,
the quantity of money demanded rises, which would reduce a surplus.
The inflation tax refers to
the revenue a government creates by printing money.
On the graph that depicts the theory of liquidity preference,
the supply-of-money curve is vertical.
In the late 1960s, Milton Friedman and Edmund Phelps argued that
the trade-off between inflation and unemployment did not apply in the long run This claim is consistent with monetary neutrality in the long run
Of the following groups, who is eligible for unemployment insurance benefits?
the unemployed who were laid off because their previous employers no longer needed their skills
The primary argument against active monetary and fiscal policy is that
these policies affect the economy with a long lag.
An increase in government spending shifts aggregate demand
to the right. The larger the multiplier is, the farther it shifts.
Which of the following is correct?
typically more than one third of the unemployed are new entrants into the job market. most spells of unemployment are short. most unemployment observed at any time is long term. ___________________________ All of the above are correct.
Jouke is on a temporary layoff from his factory job but has not looked for work in the last four weeks. The Bureau of Labor Statistics counts Jouke as
unemployed and in the labor force.
The short-run Phillips curve shows the combinations of
unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.
Which of the following does not help reduce frictional unemployment?
unemployment insurance
Which of the following shifts both the short-run and long-run aggregate supply right?
an increase in the capital stock
In the short-run an increase in the costs of production makes
output fall and prices rise.
If there are floods or droughts or a decrease in the availability of raw materials
output falls in the short run.
Other things the same, if the capital stock increases, then in the long run
output is higher and prices are lower.
You put money into an account and earn a real interest rate of 5 percent. Inflation is 2 percent, and your marginal tax rate is 40 percent. What is your after-tax real rate of interest?
2.2 percent
Suppose some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were employed?
28.5 million
The nominal interest rate is 4.5 percent and the inflation rate is 0.9 percent. What is the real interest rate?
3.6 percent
Suppose some country had an adult population of about 46 million, a labor-force participation rate of 75 percent, and an unemployment rate of 8 percent. How many people were employed?
31.74 million
If M = 10,000, P = 2, and Y = 20,000, then velocity =
4. Velocity will rise if money changes hands more frequently.
Economists at the Congressional Budget Office estimated that for 2009, the U.S. natural rate of unemployment was
5.0 percent.
If the MPC = 0.85, then the government purchases multiplier is about
6.67
If the reserve ratio is 12.5 percent, the money multiplier is
8.
Suppose that the adult population is 4 million, the number of unemployed is 0.25 million, and the labor-force participation rate is 75%. What is the unemployment rate?
8.3%
Other things the same, which of the following responses would we expect to result from an decrease in U.S. interest rates?
All of the above are correct.
Given a nominal interest rate of 8 percent, in which of the following cases would you earn the highest after-tax real rate of interest?
Inflation is 3 percent; the tax rate is 25 percent.
Who is included in the labor force by the Bureau of Labor Statistics?
Juan, who works most of the week in a steel factory Molly, who is on temporary layoff Charlie, who does not have a job, but is looking for work __________________________ All of the above are included in the labor force.
If P = 4 and Y = 450, then which of the following pairs of values are possible?
M = 600, V =3
Friedman argued that the Fed could use monetary policy to peg
None of the above is correct.
In the long run, if the Fed decreases the rate at which it increases the money supply,
None of the above is correct.
Which of the following statements is correct for the long run?
Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.
Which of the following did not happen during the onset of the Great Depression?
The Fed conducted expansionary monetary policy.
An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?
The aide thought the tax cut would be permanent, but the actual tax cut was temporary.
The lag problem associated with fiscal policy is due mostly to
The lag problem associated with fiscal policy is due mostly to
Which of the following both increase the money supply?
a decrease in the discount rate and a decrease in the interest rate on reserves
Most economists believe that monetary neutrality provides
a good description of the long run, but not the short run.
You bought some shares of stock and, over the next year, the price per share decreased by 7 percent and the price level decreased by 9 percent. Before taxes, you experienced
a nominal loss and a real gain.
Which of the following functions of money is also a common function of most other financial assets?
a store of value
Paying efficiency wages means that wages are
above equilibrium and profits are higher than otherwise.
The classical dichotomy argues that changes in the money supply
affect nominal variables, but not real variables.
If businesses in general decide that they have overbuilt and so now have too much capital, their response to this would initially shift
aggregate demand left.
In 1986, OPEC countries increased their production of oil. This caused
aggregate supply to shift right.
Which of the following events would shift money demand to the right?
an increase in the price level
Tax cuts
and increases in government expenditures shift aggregate demand right.
Marginally attached workers are people who
are not working and are not looking for work, but would work if asked.
In the late 1960s, economist Edmund Phelps published a paper that
argued that there was no long-run tradeoff between inflation and unemployment.
The federal funds rate is the interest rate
banks charge each other for short-term loans of reserves.
According to 2009 data on the U.S. population, which of the following groups of teenagers (ages 16-19) had the highest unemployment rate?
black males
Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this
both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther.
Which of the following would cause investment spending to increase and aggregate demand to shift right?
both an increase in the money supply and an investment tax credit
President Bigego is running for re-election against Senator Pander. Bigego proclaims that more people are working now than when he took office. Pander says that the unemployment rate is higher now than when Bigego took office. You conclude that
both of them could be telling the truth if the labor force grew faster than employment.
Which of the following fall during a recession?
both retail sales and employment
The large increase in oil prices in the 1970s was caused primarily by a(n)
decrease in the supply of oil.
During the recent financial crisis velocity decreased. This means that the rate at which money changed hands
decreased. Other things the same, a decrease in velocity decreases the price level.
When the interest rate decreases, the opportunity cost of holding money
decreases, so the quantity of money demanded increases.
If you deposit $100 of currency into a demand deposit at a bank, this action by itself
does not change the money supply.
In response to the financial crisis of 2007-2008, policymakers used
expansionary monetary policy and expansionary fiscal policy.
In order to simplify the equation for the multiplier to its familiar, relatively simple form, we make use of the
fact that the multiplier effect is represented by an infinite geometric series.
If the central bank decreases the money supply, then in the short run prices
fall and unemployment rises.
People will buy more if the price level
falls because falling prices increase the real value of a dollar.
As aggregate demand shifts right along the aggregate supply curve,
inflation is higher and unemployment is lower.
If the Federal Reserve increases the growth rate of the money supply, in the long run
inflation is higher while the unemployment rate is unchanged.
According to the theory of liquidity preference, a decrease in the price level causes the
interest rate to fall and investment to rise.
If the Fed conducts open-market sales, which of the following quantities increase(s)?
interest rates, but not investment or prices
With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?
interest-rate effect, exchange-rate effect, wealth effect
If an economy uses silver as money, then that economy's money
is commodity money.
Other things the same, the aggregate quantity of output supplied will increase if the price level
is higher than expected so that firms believe the relative price of their output has increased.
If a bank desires to hold no excess reserves, the reserve requirement is 5 percent, and it receives a new deposit of $1,000
its required reserves increase by $50. its total reserves initially increase by $1,000. it will be able to make a new loan of up to $950. All of the above are correct.
Which of the following rises during recessions?
layoffs but not consumer spending
An increase in the expected price level shifts short-run aggregate supply to the
left, and an increase in the actual price level does not shift short-run aggregate supply.
When inflation rises, people will desire to hold
less money and will go to the bank more frequently.
Other things the same, an increase in the price level makes consumers feel
less wealthy, so the quantity of goods and services demanded falls.
The "natural" rate of unemployment is the unemployment rate toward which the economy gravitates in the
long run, and the natural rate is not necessarily the socially optimal rate of unemployment.
Which of the following, other things the same, would make the price level decrease and real GDP increase?
long-run aggregate supply shifts right
Wealth is redistributed from creditors to debtors when inflation was expected to be
low and it turns out to be high.
Other things the same, when the price level rises more than expected, some firms will have
lower than desired prices which increases their sales.
If it were not for the automatic stabilizers in the U.S. economy,
output and employment would probably be more volatile than they are now.
Unemployment insurance
may improve the ability of the economy to match workers with appropriate jobs. reduces the job search efforts of the unemployed. increases the amount of frictional unemployment in the economy. ____________________________ All of the above are correct.
Which of the following was not among the four industries with the largest employment in the United States a century ago?
meat packing
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.
When the money market is drawn with the value of money on the vertical axis,
money demand slopes downward and money supply is vertical.
U.S. Department of Labor data show that minimum-wage workers tend to be
more likely to be working part time and in the leisure and hospitality industry.
Historically, the change in real GDP during recessions has been
mostly a change in investment spending.
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.
Which of the following is upward-sloping?
neither the long-run nor the short-run Phillips curve
If the inflation rate is zero, then
neither the nominal interest rate nor the real interest rate can fall below zero.
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.
The aggregate demand and aggregate supply model implies monetary neutrality
only in the long run.
In the long run, policy that changes aggregate demand changes
only the price level.
If the interest rate increases
or if the price level decreases, then people will want to hold less money.