MACRO MIDTERM 2

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by _____ and increases the equilibrium level of income by _____. A. $2 billion; $8 billion B. $0.75 billion; $1 billion C. $0.75 billion; $0.75 billion D. $1 billion; $4 billion

A. $2 billion; $8 billion

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect: A. neither prices nor level of output. B. both prices and level of output. C. level of output but not prices. D. prices but not level of output.

D. prices but not level of output.

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth from _____, and that creditors have a _____ propensity to consume than debtors. A. debtors to creditors; smaller B. debtors to creditors; larger C. creditors to debtors; smaller D. creditors to debtors; larger

A. debtors to creditors; smaller

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: A. decreasing the money supply. B. increasing the money supply. C. decreasing the price level. D. increasing the price level.

A. decreasing the money supply.

An increase in income raises money _____ and _____ the equilibrium interest rate. A. demand; raises B. demand; lowers C. supply; raises D. supply; lowers

A. demand; raises

An increase in taxes shifts the IS curve: A. downward and to the left. B. upward and to the right. C. upward and to the left. D. downward and to the right.

A. downward and to the left.

Holding output, Y, fixed, a reduction in the demand for money is the equivalent of a(n) _____ in velocity and will shift the aggregate demand curve to the _____. A. increase; right B. increase; left C. decrease; right D. decrease; left

A. increase; right

In the Keynesian-cross model, a decrease in the interest rate _____ planned investment spending and _____ the equilibrium level of income. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

A. increases; increases

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. A. lower; raises; reduces B. higher; lowers; increases C. lower; lowers; increases D. higher; raises; reduces

A. lower; raises; reduces

One explanation for the impact of expected price changes on the level of output is that an increase in expected deflation _____ the nominal interest rate and _____ the real interest rate, so that investment spending declines. A. lowers; raises B. raises; lowers C. raises; raises D. lowers; lowers

A. lowers; raises

A change in income in the IS-LM model resulting from a change in the price level is represented by a _____ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a _____ aggregate demand curve. A. movement along the; shift in the B. shift in the; movement along the C. vertical; horizontal D. horizontal; vertical

A. movement along the; shift in the

The IS curve plots the relationship between the interest rate and _____ that arises in the market for _____. A. national income; goods and services B. the price level; goods and services C. national income; money D. the price level; money

A. national income; goods and services

Two interpretations of the IS-LM model are that the model explains: A. the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve. B. the short-run quantity theory of income or the short-run Fisher effect. C. the determination of investment and saving or what shifts the liquidity preference schedule. D. changes in government spending and taxes or the determination of the supply of real money balances

A. the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve.

The debt-deflation theory of the Great Depression suggests that an _____ deflation redistributes wealth in such a way as to _____ spending on goods and services. A. unexpected; reduce B. unexpected; increase C. expected; reduce D. expected; increase

A. unexpected; reduce

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 _____. A. $3 billion; $9 billion B. $2.25 billion; $9 billion C. $2.25 billion; $2.25 billion D. $3 billion; $3 billion

B. $2.25 billion; $9 billion

Based on the graph, which is the correct ordering of the price levels and money supplies? A. P1 > P2 and M1 > M2 B. P1 > P2 and M1 < M2 C. P1 < P2 and M1 > M2 D. P1 < P2 and M1 < M2

B. P1 > P2 and M1 < M2

According to classical theory, national income depends on _____, while Keynes proposed that _____ determines the level of national income. A. aggregate demand; aggregate supply B. aggregate supply; aggregate demand C. monetary policy; fiscal policy D. fiscal policy; monetary policy

B. aggregate supply; aggregate demand

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n): A. expansionary shift in the IS curve. B. contractionary shift in the IS curve. C. expansionary shift in the LM curve. D. contractionary shift in the LM curve.

B. contractionary shift in the IS curve.

If an aggregate demand curve is drawn with real gross domestic product (GDP) (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes _____ to the right and gets _____ as it moves farther to the right. A. downward; steeper B. downward; flatter C. upward; steeper D. upward; flatter

B. downward; flatter

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. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase

B. increase; decrease

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income: A. increases by 250 B. increases by more than 250. C. decreases by 250. D. increases but by less than 250.

B. increases by more than 250.

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change _____ in the short run and change _____ in the long run. A. only prices; only output B. only output; only prices C. both prices and output; only prices D. both prices and output; both prices and output

B. only output; only prices

If the short-run aggregate supply curve is horizontal, and each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then: A. output and employment will increase in the short run. B. output and employment will decrease in the short run.C. prices will increase in the short run. D. prices will decrease in the short run.

B. output and employment will decrease in the short run.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then _____ increase(s) in the short run, and _____ increase(s) in the long run. A. prices; output B. output; prices C. output; output D. prices; prices

B. output; prices

If the Fed reduces the money supply by 5 percent, then the real interest rate will: A. rise in both the short run and the long run. B. rise in the short run but return to its original equilibrium level in the long run. C. rise in the short run but fall below its original equilibrium level in the long run. D. be unaffected in both the short run and the long run.

B. rise in the short run but return to its original equilibrium level in the long run.

Which of these is an example of a demand shock? A. a large increase in the price of oil B. the introduction and greater availability of credit cards C. a drought that destroys agricultural crops D. unions obtain a substantial wage increase

B. the introduction and greater availability of credit cards

The IS-LM model takes _____ as exogenous. A. the price level and national income B. the price level C. national income D. the interest rate

B. the price level

A decrease in the real money supply, other things being equal, will shift the LM curve: A. downward and to the left. B. upward and to the left. C. downward and to the right. D. upward and to the right.

B. upward and to the left.

The tax multiplier indicates how much _____ change(s) in response to a $1 change in taxes. A. the budget deficit B. Consumption C. Income D. real balances

C. Income

The IS and LM curves together generally determine: A. income only. B. the interest rate only. C. both income and the interest rate. D. income, the interest rate, and the price level.

C. both income and the interest rate.

If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a fall in the price level will shift: A. only the LM curve. B. only the IS curve. C. both the LM and the IS curves. D. neither the LM nor the IS curve.

C. both the LM and the IS curves.

The Pigou effect suggests that falling prices will increase income because real balances influence _____ and will shift the _____ curve. A. money demand; LM B. the money supply; LM C. consumer spending; IS D. government spending; IS

C. consumer spending; IS

The equilibrium of the Keynesian cross shows: A. determination of equilibrium income and the interest rate in the short run. B. determination of equilibrium income and the interest rate in the long run. C. equality of planned expenditure and income in the short run. D. equality of planned expenditure and income in the long run.

C. equality of planned expenditure and income in the short run.

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 _____. A. increase; increase B. decrease; decrease C. increase; decrease D. decrease; increase

C. increase; decrease

The money hypothesis suggests that the Great Depression was caused by a: A. leftward shift in the IS curve. B. rightward shift in the IS curve. C. leftward shift in the LM curve. D. rightward shift in the LM curve.

C. leftward shift in the LM curve.

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: A. prices will remain unchanged in the long run. B. output will fall 5 percent in the long run. C. prices will fall 5 percent in the long run. D. output will remain unchanged in the long run.

C. prices will fall 5 percent in the long run.

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____. A. output; output B. prices; prices C. prices; output D. output; prices

C. prices; output

Investment depends on the _____ interest rate, and money demand depends on the _____ interest rate. A. real; real B. nominal; nominal C. real; nominal D. nominal; real

C. real; nominal

The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances. A. inflation and unemployment B. the price level and real output C. the interest rate and the level of income D. the interest rate and real money balances

C. the interest rate and the level of income

Analysis of the short run and long run indicates that the _____ assumptions are most appropriate in _____. A. classical; both the short run and the long run B. Keynesian; both the short run and the long run C. classical; the short run D. Keynesian; the short run

D. Keynesian; the short run

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____. A. IS; shifts to the right B. IS; does not shift C. LM; shifts to the right D. LM; does not shift

D. LM; does not shift

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. A. increase; IS B. decrease; IS C. increase; LM D. decrease; LM

D. decrease; LM

The fact that due to Covid-19 people stopped going out and spending money, most likely led to a(n)_____ in the velocity of money and a _____ shift in the aggregate demand (AD) curve. A. increase; rightward B. decrease; rightward C. increase; leftward D. decrease; leftward

D. decrease; leftward

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. A. increases; downward B. increases; upward C. decreases; upward D. decreases; downward

D. decreases; downward

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures _____ for any given level of income. A. increase by 100 B. increase by more than 100 C. decrease by 100 D. increase, but by less than 100

D. increase, but by less than 100

Planned expenditure is a function of: A. planned investment. B. planned government spending and taxes. C. planned investment, government spending, and taxes. D. national income and planned investment, government spending, and taxes.

D. national income and planned investment, government spending, and taxes.

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 A. positively; positively B. positively; negatively C. negatively; negatively D. negatively; positively

D. negatively; positively

A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model _____, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model _____. A. resulting from a change in monetary policy; resulting from a change in fiscal policy B. resulting from a change in fiscal policy; resulting from a change in monetary policy C. at a given price level; resulting from a change in the price level D. resulting from a change in the price level; at a given price level

D. resulting from a change in the price level; at a given price level

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in: A. both the short run and the long run. B. neither the short run nor the long run. C. the short run but not in the long run. D. the long run but not in the short run.

D. the long run but not in the short run.