Macro Practice Exam 7

Spending multiplier > Tax multiplier > Balanced budget multiplier

Assuming that households save a proportion of disposable income, which of the following relationships between multipliers is correct?

An increase in government spending with no change in taxes

If the economy is operating at full employment, which of the following policies will create the most inflation in the short run?

Inflation (At the peak of the business cycle, the economy is very strong. Real GDP and incomes are high, unemployment is low, and the threat is a rapid increase in the price level).

At the peak of a typical business cycle, which of the following is likely the greatest threat to the macroeconomy?

$4,500

If the reserve ratio is 10 percent and a new customer deposits $500, what is the maximum amount of money created?

- Nominal Interest Rate - Increases - Aggregate Demand - Decreases - Output - Decreases - Price Level - Decreases

A contractionary monetary policy will cause the nominal interest rate, aggregate demand, output, and the price level to change in which of the following ways?

contractionary monetary policy.

A likely cause of falling Treasury bond prices might be

This nation is experiencing an economic recession. (Points within the PPC imply unemployed resources, and this is indicative of a recession).

A nation is producing at a point inside of its production possibility curve. Which of the following is a possible explanation for this outcome?

increase in the LRAS curve.

A nation's economic growth can be seen as a(n)

the value of the dollar rises as demand for dollars increases. (More exports means an increased demand for the dollar. Stronger demand for the dollar increases the value of the dollar).

All else equal, when the United States exports more goods and services,

this shows an increase in full employment real GDP.

An increase (or rightward shift) in the LRAS curve represents economic growth because

inflation.

An increase in the consumer price index is commonly referred to as

lessening the impact of a recession.

Automatic stabilizers in the economy serve an important role in

an increase in AS (either SRAS or LRAS).

If the unemployment rate and inflation rate are both falling, they are likely the result of

the United States to be a net exporter of copper.

If the world price of copper exceeds the domestic (U.S.) price of copper, we would expect

price inflation.

Computing the change in the CPI is the most common way to measure

new home demand, investment spending, and AD, and increase the unemployment rate.

Contractionary monetary policy increases interest rates. Higher interest rates decrease

Supply shifts to the left; demand shifts to the right. (Combining a leftward supply shift with a rightward demand shift unambiguously raises the price).

Corn is exchanged in a competitive market. Which of the following definitely increases the equilibrium price of corn?

lowers interest rates and increases investment spending (I), aggregate demand (AD), real GDP, and employment

Increasing the money supply

5 percent increase (The %Δ in real income is equal to the %Δ in nominal income less the rate of inflation).

If your nominal income rises 4 percent and your real income falls 1 percent, by how much did the price level change?

the checking deposits increase.

Excess reserves in the banking system will increase if

the interest rate, increases investment, and stimulates AD.

Expanding the money supply decreases

decrease the interest rate, increase private investment, increase aggregate demand, and increase domestic output.

Expansionary monetary policy is designed to

that increases interest rates.

Falling bond prices correspond to rising interest rates, so look for the choice

always 1.

For a given MPC, the spending multiplier exceeds the tax multiplier, which exceeds the balanced budget multiplier, which is

- Market for loanable funds - Decrease in supply - Interest Rate - Rising (Increased consumer wealth shifts the saving function downward. Less saving decreases the supply of loanable funds, raising the interest rate).

Higher levels of consumer wealth and optimism would likely have which of the following changes in the market for loanable funds?

the nominal interest rate falls.

Households demand more money as an asset when

Higher spending Higher taxes Lowering the discount rate

How would fiscal and monetary policymakers combine spending, tax, and monetary policy to fight a recessionary gap, while avoiding large budget deficits?

interest rate- increases, the purchases of new homes decrease, and the unemployment rate increases

If a nation is operating at full employment, and the central bank engages in contractionary monetary policy, the nation can expect the interest rate, the purchases of new homes, and the unemployment rate to change in which of the following ways?

A decrease in taxes and a lower discount rate (With the economy operating beyond full employment, look for a combination of expansionary policies).

If current real GDP is $5,000 and full employment real GDP is at $4,000, which of the following combinations of policies is the most likely to have brought the economy to this point?

The entire consumption function would shift upward. (Greater optimism shifts the consumption function upward. The MPC is unchanged).

If households are more optimistic about the future, how would the consumption function be affected?

real GDP rises and the price level rises.

If the economy is experiencing a recession, how will a plan to decrease taxes for consumers and increase spending on government purchases affect real gross domestic product (GDP) and the price level?

horizontal.

If AD is falling and prices are not also falling, the AS curve must be

25%, $750, M = 4

If a bank has $1,000 in checking deposits and the bank is required to reserve $250, what is the reserve ratio? How much does the bank have in excess reserves? What is the size of the money multiplier?

increase aggregate demand, which will increase real output and increase employment.

In a recession, expansionary monetary policy is designed to

vertical at full employment.

In the long run, aggregate supply is

Money Market - Decreased demand Interest Rate - Falling Dollar - Depreciates (An increase in demand for bonds as a financial asset decreases the demand for money and lowers the interest rate. A lower interest rate in the U.S. money market makes the United States a less attractive place for foreign investors to place their money. This decreased demand for dollars depreciates the value of the dollar relative to foreign currencies).

Suppose that households increase the demand for U.S. Treasury bonds as financial assets. Which of the following accurately describes changes in the money market, the interest rate, and the value of the dollar in foreign currency markets?

investor optimism improves. (Increased optimism shifts investment demand to the right).

Investment demand most likely increases when

An increase in aggregate supply.

Suppose that the unemployment rate falls from 6 percent to 5 percent and the inflation rate falls from 3 percent to 2 percent. Which of the following best explains these trends?

Exports to Japan decrease, Demand for the $ decrease, Value of the $ decrease. (When relative incomes are falling in Japan, fewer U.S. goods are demanded, so U.S. exports fall. The decrease in the demand for U.S. dollars causes the dollar to depreciate).

Suppose the Japanese economy is suffering a prolonged recession. Lower Japanese household incomes will affect U.S. exports to Japan, demand for the dollar, and the value of the dollar relative to the yen in which of the following ways?

Money supply increases by $10 million, the interest rate does not fall, and AD does not increase.

Suppose the reserve ratio is 10 percent and the Fed buys $1 million in Treasury securities from commercial banks. If money demand is perfectly elastic, which of the following is likely to occur?

a tax credit on capital investment. (Supply-side economists advocate increased aggregate supply through incentives for investment and productivity. These would likely come in the form of lower taxes on interest income from savings or tax credits for investment).

Of the following choices, the one most likely to be preferred by supply-side economists would be

increasing interest rates from expansionary fiscal policy.

The "crowding-out" effect is the result of

fiscal policy made by the executive and legislative branches.

Remember that the Fed does not impact taxes, as taxes are

horizontal below full employment.

Some economists believe that when aggregate demand declines, prices are inflexible or "sticky" in the downward direction. This implies that the short-run aggregate supply curve is

boost investment and productivity to increase LRAS and foster economic growth over time.

Supply-side fiscal policy tries to

inflation and unemployment.

The Phillips curve represents the relationship between

unexpectedly higher resource prices.

The best example of a negative supply shock to the economy would be

Short-Run GDP - Falls Short-Run Price Level - Falls Long-Run GDP - No Change Long-Run Price Level - Falls

The economy is currently operating at full employment. Assuming flexible wages and prices, how would a decline in aggregate demand affect GDP and the price level in the short run, and GDP and the price level in the long run?

banks hold excess reserves.

The fractional reserve banking system's ability to create money is lessened if

Higher disposable income, higher consumption, higher real GDP, lower unemployment

The government has just lowered personal income taxes. Which of the following best describes the effects that this policy has on the economy?

rising price levels.

When government uses expansionary fiscal policy, the spending multiplier is often smaller than predicted because of

increase as consumers demand more money for transactions, increasing the interest rate.

When nominal GDP is rising, we would expect money demand to

upward sloping.

The short-run AS curve is

the value of the dollar, relative to foreign currencies, is high. (If the value of the dollar is high, it makes American goods more expensive to foreign consumers. This decreases net exports and lowers U.S. real GDP. All other choices likely increase real GDP).

U.S. real GDP most likely falls when

Discouraged workers are counted as "out of the labor force," thus the unemployment rate is understated, making the economy look stronger than it is.

What does the presence of discouraged workers do to the measurement of the unemployment rate?

Real GDP rises, but the change in the price level is uncertain.

When both short-run aggregate supply and aggregate demand increase, which of the following can be said for certain?

Savers who have put their money in long-term assets that pay a fixed interest rate.

Which of the following are harmed by unexpectedly high rates of inflation?

The GDP deflator

Which of the following best measures changes in the price level of national product?

Cash and coins

Which of the following is a component of the M 1 measure of money supply?

Net exports will rise and the dollar will appreciate in value. (A tariff causes imports to fall, so net exports rise for the U.S. With fewer consumers demanding foreign-built cars, the demand for foreign currency falls, decreasing the value of foreign currency, appreciating the value of the U.S. dollar).

Which of the following is a likely effect of a higher tariff imposed by the United States on imported automobiles?

A lower discount rate.

Which of the following is a tool used by the Fed to increase the money supply?

The most liquid measure of money is M1.

Which of the following is an accurate statement of the money supply in the United States?

Government planners decide how best to produce goods and services.

Which of the following is characteristic of a centrally planned economic system?

The government collects taxes from firms and households in exchange for goods and services.

Which of the following is true of the complete circular flow model of an open economy?

Higher interest rates that decrease private investment.

Which of the following lessens the impact of expansionary fiscal policy?

Selling Treasury securities to commercial banks.

Which of the following monetary policies would lessen the effectiveness of expansionary fiscal policy?

A Mexican entrepreneur founds and locates a software company in St. Louis.

Which of the following most likely increases aggregate demand in the United States?

Lower taxes on research and development of new technology

Which of the following policies best describes supply-side fiscal policy?

Higher taxes Buying Treasury securities

Which of the following represents a combination of contractionary fiscal and expansionary monetary policy?

Free trade allows each nation to consume beyond the production possibility curve.

Which of the following statements is true of production possibility curves and trade between nations?

Dollars earned today have more purchasing power than dollars earned a year from today.

Which of the following statements is true?

An increase in the marginal propensity to consume

Which of the following tends to increase the spending multiplier?

supply-side economics

is a macroeconomic theory arguing that economic growth can be most effectively created by lowering taxes and decreasing regulation, by which it is directly opposed to demand-side economics.

demand-side economics

is a macroeconomic theory which argues that economic growth is most effectively created by high demand for products and services.