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 _____.

$2 billion; $8 billion

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

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, a tax cut of $120 billion increases equilibrium income by _____ billion.

$240

According to the Keynesian cross model, if the marginal propensity to consume is 2/3, an increase in government purchases of $120 billion increases equilibrium income by _____ billion.

$360

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

100

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

70

(GRAPH) Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

A

(GRAPH) 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

(GRAPH) 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

In the Keynesian-cross model, actual expenditures equal:

GDP

Analysis of the short run and long run indicates that the _____ assumptions are most appropriate in _____.

Keynesian; the short run

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____.

LM; does not shift

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

P1 > P2 and M1 < M2

Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely?

a decline in the slope of the yield curve

According to classical theory, national income depends on _____, while Keynes proposed that _____ determines the level of national income.

aggregate supply; aggregate demand

Stagflation—lower output and higher prices—is caused by

an adverse shock to aggregate supply.

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

both Central Bank A and Central Bank B should increase the quantity of money.

The IS and LM curves together generally determine:

both income and the interest rate.

The economic response to the overnight reduction in the French money supply by 20 percent in 1724:

confirmed that money is not neutral in the short run because both output and prices dropped.

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.

debtors to creditors; smaller

The version of Okun's law studied in Chapter 11 assumes that with no change in unemployment, real gross domestic product (GDP) normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:

decrease by 1 percent.

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of

decrease equilibrium income by ΔΔT (MPC) / (1 - MPC).

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

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:

decreasing the money supply.

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

demand for real balances per unit of output.

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

demand; raises

An increase in taxes shifts the IS curve:

downward and to the left.

The equilibrium of the Keynesian cross shows:

equality of planned expenditure and income in the short run.

(GRAPH) In this graph, if firms are producing at level Y1, then inventories will _____, inducing firms to _____ production.

fall; increase

In a typical recession, consumption ____________. Investment moves in the same direction but proportionately ____________.

falls, more

The LM curve slopes upward because ____ income increases money _____ and, in turn, the interest rate.

higher; demand

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in _____ prices and _____ output in the short run.

higher; lower

The IS curve slopes downward because a ________ interest rate reduces _______ and thus income.

higher; planned investment

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

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

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:

increases by more than 250.

In the Keynesian-cross model, a decrease in the interest rate _____ planned investment spending and _____ the equilibrium level of income.

increases; increases

Business cycles are:

irregular and unpredictable.

Over the business cycle, investment spending _____ consumption spending.

is more volatile than

If the Fed responds to an adverse supply shock by expanding the money supply, it will

keep the economy closer to its natural levels of output and employment.

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production.

Using the aggregate demand-aggregate supply (AD-AS) model, the economic downturn caused by Covid-19 can be BEST described by a:

leftward shift of LRAS and leftward shift of AD.

If the Fed accommodates an adverse supply shock, output falls _____, and prices rise _____.

less; more

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

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.

movement along the; shift in the

Planned expenditure is a function of:

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

The IS-LM model is generally used:

only in the short run.

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.

only output; only prices

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

output and employment will increase 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.

output; prices

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.

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:

r2, Y3.

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.

(GRAPH) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

r3, Y2.

An expansion in aggregate demand increases ____ in the short run In the long run, however, it increases only the ____

real GDP price level

Investment depends on the _____ interest rate, and money demand depends on the _____ interest rate.

real; nominal

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

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 _____.

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

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

rise; decrease

(GRAPH) Based on the graph, if the interest rate is r3, then people will _____ bonds, and the interest rate will _____.

sell; rise

The LM curve, in the usual case:

slopes up to the right.

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

Along an IS curve all of these are always true EXCEPT:

the demand for real balances equals the supply of real balances.

At the intersection of the IS and LM curves,

the goods market and money market are both in equilibrium.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

the government-spending multiplier is larger than the tax multiplier.

The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances.

the interest rate and the level of income

The IS curve shifts when any of the following economic variables change EXCEPT:

the interest rate.

Which of these is an example of a demand shock?

the introduction and greater availability of credit cards

The IS-LM model takes _____ as exogenous.

the price level

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.

unexpected; reduce

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left.

Measures of average workweeks and building permits for new housing units are included in the index of leading indicators, because shorter workweeks tend to indicate _____ future economic activity and increased permits for new units tend to indicate _____ future economic activity.

weaker; stronger

Assume that the money demand function is (M / P)d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1,600

Two interpretations of the IS-LM model are that the model explains:

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

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:

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.

consumer spending; IS

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):

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.

downward; flatter

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _____, generating a _____ quantity of output demanded.

higher; greater

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures _____ for any given level of income.

increase, but by less than 100

(GRAPH) Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) _____ in the money supply or a(n) _____ in velocity.

increase; increase

Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) _____ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _____.

increase; 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 _____.

increase; right

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.

lowers; raises

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

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:

output and employment will decrease in the short run.

In the short run, a favorable supply shock causes:

prices to fall and output to rise.

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____.

prices; output

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

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

According to the theory of liquidity preference, the central bank can increase the _____ of money and ____ the interest rate

supply; lower

The tax multiplier indicates how much _____ change(s) in response to a $1 change in taxes.

income

1. If a computer glitch at credit card companies makes stores start accepting only cash payments, the demand for money will 2. If the money supply is held constant, the aggregate demand curve will shift to the

increase left

The money hypothesis suggests that the Great Depression was caused by a:

leftward shift in the LM curve.