MACROECONOMICS FINAL
A decrease in the financial friction will shift the aggregate demand curve to the right. shift the aggregate demand curve to the left. shift the aggregate supply curve to the right. shift the aggregate supply curve to the left.
a
A high value of the parameter implies that policymakers aggressively increase the interest rate to combat inflation. policymakers aggressively decrease the interest rate to combat inflation. policymakers only slightly increase the interest rate to combat inflation. policymakers only slightly decrease the interest rate to combat inflation.
a
A positive aggregate demand shock will result in an economy having net losses. net gains. no cost effects because steady state is unchanged. It will have an ambiguous impact on the economy.
a
A tight monetary policy by the European Central Bank will result in an increase in the nominal interest rate. true false
a
According to the LC/PI hypothesis, a college student should consume more than she has in income. consume less than she has in income. consume exactly her income. not consume.
a
An implication of adaptive expectations and sticky inflation is that the Federal Reserve must push output below potential to lower inflation. true false
a
As the zero lower bound is approached, monetary policy falls into a liquidity trap. true false
a
At the interest rate targeted by the central bank, the money supply is horizontal. true false
a
Suppose an economy is hit with a positive oil price shock in one period that raises the level of oil prices permanently. If adaptive expectations hold, this will shift the AS curve up initially and then shift the AS curve back to original position in the following period. shift the AS curve up initially and gradually shift the AS curve back to original position over time. shift the AS curve up permanently. shift the AS curve down permanently.
b
Suppose the Federal Reserve decreases interest rates from 4 percent to 3 percent, which leads to an increase in short-run output of 1.5 percent. If there are no other shocks to the economy, and the resulting change in inflation is +0.375 percent, what is the value of the parameter ? 4 0.25 1.5 0.66
b
To reduce the rate of inflation, the Federal Reserve must lower the nominal interest rate. true false
b
Suppose that last year the investment parameter was equal to 0.12 but this year it fell to 0.1. This change can be explained by a decrease in the marginal product of capital. a decrease in the real interest rate. firms being optimistic about the future and willing to invest more at any level of the interest rate. firms being pessimistic about the future and willing to invest less at any level of the interest rate.
d
The Great Inflation of the 1970s was partially caused by the inflation tax used to finance the Vietnam War. increases in oil prices. a money supply that was growing too quickly. both B and C.
d
The current rate of inflation exceeds the target inflation rate by 2 percent and there are no shocks to the economy. If m= 0.25 b=0.5 v=0.5 and , the change in inflation is equal to_____. 1 percent 0.5 percent 0.25 percent 0.125 percent
d
The mission of the Federal Reserve is to preserve price stability. foster maximum sustainable growth in output and employment. promote a stable and efficient financial system. All of these choices are correct.
d
Which of the following explains why an increase in the interest rate reduces short-run output? The cost of borrowing increases for firms. The cost of borrowing increases for households. Firms reduce business investment. All of these choices are correct.
d
Suppose a negative aggregate demand shock causes short-run output to drop to -1 percent. To stimulate investment and bring the economy back to potential output, the interest rate decreases by 1 percentage point. However, as a result, investment increases more than expected and short-run output reaches 1 percent. This result could be caused by an increase in the consumption share of potential output. an increase in the government purchases share of potential output. a decrease in the import share of potential output. the presence of a consumption multiplier. All of these are correct.
e
Between 2006 and 2008, as the Fed cut interest rates, ten-year Treasury yields fell and the yield on corporate bonds rose. true false
a
If aggregate consumption responds to changes in temporary income, fluctuations in short-run output will be larger than if consumption is unresponsive to a temporary change in income. true false
a
If an economy has actual output equal to potential output, then the aggregate demand shock equals 0. true false
a
If real GDP is growing at a rate of 2 percent, the central bank should grow the money supply at a rate of 2 percent to keep prices unchanged. true false
a
If the aggregate demand parameter increases and the central bank wishes to stabilize output at potential, it should raise the nominal interest rate. lower the nominal interest rate. buy government bonds. expand the money supply.
a
If the inflation rate is high and the Federal Reserve seeks to best lower the inflation rate, the Federal Reserve should raise interest rates. lower interest rates. do nothing. raise interest rates and request Congress run larger deficits.
a
If the real interest rate is 3 percent and the nominal interest rate is 1 percent, then the economy is experiencing deflation according to the Fisher equation. true false
a
In the AS/AD model, an economy is in its steady state if all the endogenous variables are constant, and there are no shocks to the economy. the endogenous variables are growing at a positive constant rate, and there are no shocks to the economy. the endogenous variables are constant, and there are shocks to the economy. the endogenous variables are growing at a positive constant rate, and there are shocks to the economy.
a
Last quarter, GDP grew at a rate of 0.5 percent. The annualized rate of GDP growth is 2 percent. true false
a
Misperceiving a long-lasting slowdown in labor productivity as a recession will result in an increase in inflation. a decrease in inflation. actual output equaling potential output. actual output being below potential output.
a
Suppose that a shock to the economy increases the bargaining power of labor unions. The Phillips curve will shift upward. true false
a
Suppose the United States is currently at its trend level of potential output. All economies are open. Europe enters into a recession. Short-run output in the United States will be negative. positive. unchanged because European fluctuations do not impact the United States. uncertain.
a
The AS curve slopes upward because firms raise their prices by more than usual when they are faced with actual output above potential output. true false
a
The American Recovery and Reinvestment Act of 2009 contained more additional spending in government purchases than in tax cuts. true false
a
The natural rate of unemployment is 5 percent. Cyclical unemployment is 2 percent. The level of short-run output is -4 percent. 4 percent. -6 percent. 6 percent.
a
The simple monetary policy rule we have specified in the text implicitly responds to changes in output. true false
a
The wholesale price of one pound of coffee was 8.25 cents in 1900 and $1.50 in 2015. If the CPI was 3.43 for 1900 and 100 for 2015, coffee was less expensive in 2015 compared to 1900. more expensive in 2015 compared to 1900. less expensive in 1900 compared to 2015. as expensive in 2015 as it was in 1900.
a
When the economy is experiencing deflation, it is preferable to use the IS/MP diagram as opposed to the AS/AD diagram in order to analyze the economy. true false
a
Which of the following is an example of moral hazard? A person with automobile insurance is less likely to drive carefully. A firm that is highly leveraged is likely to become insolvent. A financial institution that is systemically important is too big to fail. A person who is most likely to purchase insurance is usually the most likely to need to make a claim.
a
A recession is usually declared over when short-run output returns to potential output. true false
b
According to the quantity theory of money, increases in the money supply and in real GDP will cause inflation. true false
b
An increase in the aggregate demand parameter for imports will shift the IS curve in the same direction as an increase in the aggregate demand parameter for consumption. true false
b
An incumbent Democratic president is up for reelection. Real GDP growth is very high and inflation very low. Ray Fair's model will likely predict that the Democrat will win reelection. the Republican challenger will win. who wins depends on whether the economy is at war. the candidate with most money raised will win.
b
Central Bank A has a poor reputation for making the right long-run choices. Central Bank B has a good reputation for making such choices. Central Banks A and B will each have an equally hard time overcoming time inconsistency problems. true false
b
During a recession, the inflation rate increases. true false
b
Economists today believe that the Phillips curve demonstrates that the level of inflation is related to economic activity and that there is a permanent trade-off between inflation and economic performance. true false
b
Empirically, money is neutral in the short run as well as the long run. true false
b
Foreign savings is equal to exports minus imports. true false
b
If the Federal Reserve had followed the Taylor rule from the previous chapter during the Great Recession, interest rates would have been about the same as the interest rates the Federal Reserve actually implemented during the recession. true false
b
If the economy begins at its long-run values and the parameter increases, short-run output will increase. true false
b
If the economy is in a period of deflation, the Phillips curve implies that actual output is below potential output. true false
b
If the inflation rate is plotted on the vertical axis and short-run output is plotted on the horizontal axis, over time, the short-run model will predict that the economy will evolve in clockwise loops. true false
b
If the marginal product of capital decreases, what happens to the IS curve? It shifts outward. It shifts inward. There is movement along the curve. It remains the same
b
Inflation changes from 0 percent to 1 percent. Given empirical data on the Phillips curve and Okun's law, we can expect cyclical unemployment to be approximately -2 percent. -1.5 percent. 1.5 percent. 2 percent.
b
Loose monetary policy is one explanation for the Great Depression. true false
b
Price-setting behaviors become more sensitive to demand conditions. This results in a larger recession occurring to change the inflation rate by a given amount. a smaller recession occurring to change the inflation rate by a given amount. the IS curve becoming steeper. the IS curve becoming flatter.
b
Of the following, which is NOT something that the Troubled Asset Relief Program was used to finance? purchasing equity in banks guaranteeing loans to financial institutions expanding lending by the Federal Reserve bailing out some automakers
c
Suppose that a shock to the economy reduces consumer wealth, which lowers consumption while simultaneously increasing the financial friction. Which of the following will characterize the outcome after the shock but before any policy intervention by the Federal Reserve? Short-run output will fall, and the real interest rate will fall. Short-run output will fall, and the real interest rate will rise. Short-run output will rise, and the real interest rate will fall. Short-run output will rise, and the real interest rate will rise.
b
Suppose the government increases discretionary spending. Ricardian equivalence implies that consumption will be higher today if the government announces that taxes will be increased next year as opposed to if it announces taxes will be increased in two years. true false
b
The European sovereign debt crisis has not affected output. true false
b
The LC/PI hypothesis implies that an individual will make consumption decisions based on current income. average income. short-run output. actual output.
b
The Lucas critique implies that technology shocks are the main source of economic fluctuations. economists must take into account effects on expectations when evaluating policy changes. an inflation target will help to anchor fiscal determinants. monetary policy rules may sometimes lead to better outcomes than discretionary policy.
b
The Troubled Asset Relief Program established a $700 billion fund to purchase assets held by financial institutions and is expected to have a cost of $700 billion to taxpayers. true false
b
The U.S. government and the Federal Reserve desire to keep actual GDP as high as possible in order to reduce unemployment and increase per capita income. true false
b
The aggregate demand curve slopes downward because individual microeconomic demand curves slope downward. according to the monetary policy rule, the response of policymakers is to increase the interest rate if inflation is high. the price-setting behavior of firms is embodied in the Phillips curve. according to the monetary policy rule, the response of policymakers is to decrease the interest rate if inflation is high.
b
The current rate of inflation exceeds the target inflation rate by 2 percent. If m=0.25 b=0.5 and there are no aggregate demand shocks, short-run output will be equal to_____. 0.5 percent 0.25 percent 0.10 percent 0.00 percent
b
The inflation tax will affect an individual who holds all his assets in artwork. true false
b
The marginal product of capital can differ from the real interest rate because the MPK is exogenous while the real interest rate is endogenous. installing new capital takes time to equalize the MPK and the real interest rate. the MPK depends on how sensitive firms are to changes in the economy. the MPK and the real interest rate are always equal to each other.
b
The nominal interest rate must always be higher than the real interest rate. true false
b
The quantity theory of money says that a doubling of the growth rate in the money supply will, in the long run, lead to a doubling of real GDP growth. a doubling of inflation. a decrease of inflation. a doubling of the price level.
b
The total cost of bailing out the financial institutions can be measured solely by the amount of tax revenue spent on the bailouts. true false
b
Under rational expectations, people use only the simplest information to make forecasts on the inflation rate. true false
b
Unlike fiscal policy, which often takes months to have substantial effects on the economy, the effect on economic activity of monetary policy is instantaneous. true false
b
When an aggregate demand shock ends, the AD curve will return to its original position, obeying the principle of transition dynamics. true false
b
All economies are open. A recession in Europe decreases demand for U.S. goods. The U.S. economy will have initially higher short-run output and inflation, but lower short-run output and inflation in the long run. initially lower short-run output and inflation, but higher short-run output and inflation in the long run. initially lower inflation and short-run output, but in the long run will have the same long-run steady state as before the shock. initially higher inflation and short-run output, but in the long run will have the same long-run steady state as before the shock.
c
An economy starts at its long-run values. A recession will then cause the inflation rate to increase, because firms seek to sell more. the inflation rate to increase, because firms seek to sell less. the inflation rate to decrease, because firms seek to sell more. the inflation rate to decrease, because firms seek to sell less.
c
Consider the simple policy rule presented by equation 13.1. The current rate of inflation exceeds the target inflation rate by 1 percent. If m=0.25 and the marginal product of capital is 3 percent, what should the real interest rate be? 1.25 percent 2.25 percent 3.25 percent 4.25 percent
c
Potential output is $100 in 2010. Actual output is $110 in 2010. Actual output in 2009 was $105. Short-run output for 2010 is $10. $5. 10 percent. 5 percent.
c
Suppose the Fed funds rate has hit the zero lower bound. Which of the following might the Federal Reserve engage in to stimulate the economy? lower the federal funds rate below zero in nominal terms pay a higher interest rate on excess reserves generate a higher rate of inflation When the federal funds rate has reached the zero lower bound, the Federal Reserve cannot engage in any monetary policy.
c
The Federal Reserve will lower short-run output by lowering the nominal interest rate. lowering the real interest rate. decreasing the money supply. increasing the money supply.
c
The rate of inflation during the past year was 3 percent. If firms expect higher demand for their products, you expect inflation during the coming year to be__________ during the past year because__________. higher; firms are producing less than potential lower; firms are producing more than potential higher; firms are producing more than potential lower; firms are producing less than potential
c
The short-run model determines potential output and current inflation. current output and long-run inflation. current output and current inflation. potential output and current output.
c
The unemployment rate is 6 percent and the natural rate of unemployment is 3 percent. If potential output is $100, what is actual output? $106 $100 $94 $90
c
Which of the following is not an example of an automatic stabilizer? Medicaid unemployment insurance discretionary spending on highways welfare transfer payments
c
Which of the following people benefits from a surprise increase in inflation? a person receiving a fixed pension a person with a variable rate mortgage a person who borrowed large amounts of money on a fixed payment schedule a lender of large amounts of money who is repaid on a fixed schedule
c
According to Ben Bernanke, which of the following policies should be used to manage bubbles? changing interest rates changing the money supply unconventional monetary policy capital requirements and regulation of lending standards
d
An advantage of explicit inflation targeting is that it helps to anchor inflation expectations. it helps make it easier for the central bank to stabilize output. it makes firms less tempted to deviate from standard price-setting behavior. All of these choices are correct.
d
In our model, a hurricane that damages some physical capital in an economy will typically increase short-run output and potential output. decrease short-run output and potential output. decrease short-run output and increase potential output. increase short-run output and decrease potential output.
d
In the LC/PI model, do individuals prefer a smooth consumption path (corresponding to their permanent income) to a fluctuating consumption path (corresponding to their actual income)? No, they are indifferent because the utility of every additional unit of consumption does not change. No, they don't, because the utility of every additional unit of consumption is smaller. No, they don't, because the utility of every additional unit of consumption is larger. Yes, they do, because the utility of every additional unit of consumption is smaller. Yes, they do, because the utility of every additional unit of consumption is larger.
d
Inflation is equal to 4 percent. Predict the nominal interest rate if the marginal product of capital is 2 percent, the inflation target is 2 percent, and m=0.5 4 percent 5 percent 6 percent 7 percent
d
Suppose that a shock to the macroeconomy lowers financial frictions. Which of the following curves shifts and in which direction? The IS curve shifts left. The IS curve shifts right. The MP curve shifts up. The MP curve shifts down.
d
Which of the following items was the largest category of assets on the Federal Reserve's balance sheet by May of 2009 following the financial crisis? U.S. Treasuries loans currency assets other than loans and Treasuries
d
Which of the following might explain why firms will raise prices when the economy is booming? Firms seek to take advantage of high demand. Firms need to pay laborers higher wages in order to produce more output. Firms do not raise prices in a boom; they lower prices, which explains why output is higher. both A and B
d
Which of these features is not a part of a proposed financial reform? enhancing capital requirements requiring convertible debt linking executive compensation to long-term performance bailing out financial institutions that are too big to fail
d
Why does the classical dichotomy fail to hold in the short run? Firms have imperfect information. Unions negotiate contracts that set wages for long periods of time. Sometimes people think it is unfair to lower nominal wages. All of these choices are correct.
d