M&B Final
If the consumption function is C = 20 + 0.5YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by
$50.
If the consumption function is C = 20 + 0.8YD, then an increase in disposable income by $100 will result in an increase in consumer expenditure by
$80.
Assume that autonomous consumption equals $200 and that the mpc equals 0.8. If disposable income equals $1000, then total consumption equals
$800.
If the government finances its spending by issuing debt to the public, the monetary base will ________ and the money supply will ________.
) not change; not change
Assume that autonomous consumption equals $200 and disposable income equals $1000. If total consumption equal $800, then the mpc equals
0.6.
Which of the following statements are true?
A bank's balance sheet shows that total assets equal total liabilities plus equity capital
Which of the following would provide the strongest evidence that rapid money growth is the driving force behind inflation?
An exogenous increase in the money supply that preceded the onset of inflation
Which of the following statements is false?
Bank capital is recorded as an asset on the bank balance sheet
Which of the following are reported as liabilities on a bank's balance sheet?
Checkable deposits
New Keynesians object to which of the following assumptions?
Complete wage and price flexibility
Which of the following is least likely to lead to inflationary monetary policy?
Declining oil prices
Which of the following are reported as liabilities on a bank's balance sheet?
Discount loans
Which of the following statements concerning Keynesian ISLM analysis is true?
For a given change in taxes, the IS curve will shift less than for an equal change in government spending.
If the ________ curve is relatively more unstable than the ________ curve, a money supply target is preferred.
IS; LM
Other things equal, a decrease in autonomous consumption shifts the ________ curve to the
IS; left
Explain why anticipated policy has different short-run effects on real output and the price level in the new classical, new Keynesian, and traditional models. What are the long-run effects of anticipated policy in each model?
In the new classical model, wages and prices are fully flexible, and expectations are formed rationally. In the new classical model, an anticipated policy change results in a matching adjustment of wages and prices. Thus, AD and AS shift by matching amounts in the opposite direction. This results in no change in real output, and the largest change in the price level is in the short run. In the new Keynesian model, expectations are rational, but rigidities keep wages and prices from adjusting fully even when policy is anticipated. Thus, AD shifts by more than AS. As a result, real output and prices both change, with prices changing by less than in the new classical model.
Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel.
In the traditional channel, a monetary expansion reduces real interest rates, lowering the cost of capital and increasing investment spending. The increase in investment increases aggregate demand. A monetary contraction has the opposite effect, raising real interest rates, lowering investment and aggregate spending.
His analysis started with the recognition that the total quantity demanded of an economy's output was the sum of four types of spending: consumer expenditure, planned investment spending, government spending, and net exports.
John Maynard Keynes
Which of the following statements concerning Keynesian analysis are true?
Keynes recognized that equilibrium would occur in the economy when total quantity of output supplied (aggregate output produced) equals quantity of output demanded (Yad), that is, when Y = Y ad
If the ________ curve is relatively more unstable than the ________ curve, an interest rate target is preferred.
LM; IS
An autonomous increase in money demand, other things equal, shifts the ________ curve to the ________.
LM; left
An increase in the money supply, other things equal, shifts the ________ curve to the
LM; right
If the price level decreases, everything else held constant, the ________ curve shifts to the ________.
LM; right
Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. These lessons include
Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero.
Analysis of the transmission mechanisms of monetary policy provides four basic lessons for a central bank's conduct of monetary policy. Which of the following is not one of these lessons?
Rising interest rates indicate a tightening of monetary policy, whereas falling interest rates indicate an easing of monetary policy.
Which of the following is most likely to lead to inflationary monetary policy?
Rising unemployment
Suppose that the economy is at the natural rate of output. Explain how a positive supply shock, followed by a more restrictive monetary policy, allows policymakers a painless way to reduce inflation.
The positive supply shock increases aggregate supply, exerting downward pressure on prices. Policymakers can now reduce demand to further reduce inflationary pressure without reducing output below the natural rate.
Suppose the economy is at the natural rate of output. Explain how a tax increase reduces demand and increases unemployment. Why is the speed of the adjustment of wages and/or the role of expectations important in this situation?
The tax increase decreases aggregate demand. Output falls below the natural rate, increasing unemployment. If wages are slow to adjust, the economy remains below the natural rate for a long time, but adjustment back to the natural rate is rapid if wages adjust quickly or if expectations lead to rapid adjustment of wages.
Under Keynesian analysis, aggregate demand can be written as
Y ad = C + I + G + NX.
In a new classical view of the world, the best anti-inflation policy, when viewed as being credible, is
a cold turkey policy
If the economy is characterized by a stable IS curve and an unstable LM curve, then ________ target produces ________ fluctuations in aggregate output
a money supply; larger
If the economy is characterized by a certain and stable LM curve, then ________ target produces ________ fluctuations in aggregate output.
a money supply; smaller
If the Fed responds by increasing the money supply in response to a successful wage push by workers, monetary policy is said to be
accommodating
In the new classical model, an anticipated policy of a continually increasing money supply causes
aggregate demand continually increases while simultaneously aggregate supply continually decreases, leading to higher and higher price levels
The relationship between the price level and the quantity of aggregate output for which the goods and money markets are in equilibrium is called the ________.
aggregate demand curve
According to aggregate demand and supply analysis of inflation and with everything else held constant, a continually increasing money supply causes
aggregate demand to increase continually as aggregate supply decreases continually, leading to higher and higher price levels.
Wage and price rigidities created by long-term contracts suggest that an anticipated monetary expansion will have
an effect on both aggregate output and the price level.
Reverse causation between money and aggregate output is likely to be a problem when a central bank targets
an interest rate.
It is the existence of rigidities such as sticky wages, not adaptive expectations, that explains why ________ policies can affect real output in the ________ model.
anticipated; new Keynesian
A contractionary monetary policy raises the real interest rate, causing the domestic currency to ________, thereby ________ net exports.
appreciate; lowering
If the consumption function is expressed as C = a + mpc × YD, then "a" represents
autonomous consumer expenditure.
Since Regulation Q has been abolished, there have been doubts raised about the size of the effect of the ________ channel.
bank lending
The monetarists complained that early Keynesian structural models tended to ignore the impact of monetary policy changes on
consumption spending.
In deriving the aggregate demand curve a ________ in the price level leads to ________ in the real money supply because the nominal quantity of dollars can purchase ________ goods and services.
decline; an increase; more
If workers do not believe that policymakers are serious about fighting inflation, they are most likely to push for higher wages, which will ________ aggregate ________ and lead to unemployment or inflation or both, everything else held constant
decrease; supply
If the Federal Reserve conducts open market sales, the money supply ________, shifting the LM curve to the ________, everything else held constant
decreases; left
Keynes reasoned that consumer expenditure is most closely related to
disposable income.
Like the new classical model, the new Keynesian model
distinguishes between the effects of anticipated versus unanticipated policy, with unanticipated policy having a greater effect.
In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.
down; fall
The ________ held the view that monetary policy does not matter at all for movements in aggregate output
early Keynesians
According to aggregate demand and supply analysis, inflation is caused by
expansionary monetary policies.
A reduction in government spending causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.
fall; IS; left
In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes the aggregate demand function to shift down, the equilibrium level of aggregate output to ________, and the IS curve to shift to the ________, everything else held constant.
fall; left
Everything else held constant, a monetary contraction is characterized by ________ output and ________ interest rates.
falling; rising
In the new classical macroeconomic model an anticipated monetary expansion will
have no effect on aggregate output
In the absence of an accommodating monetary policy, a push by workers to get higher wages will cause
higher unemployment
Everything else held constant, a decrease in the price level will ________.
increase real aggregate output
In the ISLM framework, an expansionary monetary policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.
increase; decrease
If the government finances its spending by selling bonds to the central bank, the monetary base will ________ and the money supply will ________.
increase; increase
In the ISLM framework, an expansionary fiscal policy causes aggregate output to ________ and the interest rate to ________, everything else held constant.
increase; increase
If the Federal Reserve conducts open market purchases, the money supply ________, shifting the LM curve to the ________, everything else held constant.
increases; right
The condition of a continually rising price level is defined as
inflation.
A rise in short-term interest rates that is believed to be only temporary
is likely to have only a small impact on long-term interest rates.
Everything else held constant, a decrease in government spending will cause the IS curve to shift to the ________ and aggregate demand will ________.
left; decrease
The interest rate thought to have the most important impact on aggregate demand is the
long-term interest rate.
Rigidities that diminish wage and price flexibility such as long-term contracts suggest that an increase in the expected price level
might not translate into complete adjustment of wages and prices.
With regard to aggregate demand, early Keynesians tended to believe that
monetary policy did not matter
Early Keynesians felt that ________ policy was ________, so they stressed the importance of ________ policy.
monetary; ineffective; fiscal
An autonomous rise in ________ shifts the LM curve to the ________, everything else held constant.
money demand; left
Aggregate demand and supply analysis conclude that continuously growing ________ will cause the price level to rise continually, thus generating inflation.
money supply
The more interest-sensitive is money demand, the ________.
more effective is fiscal policy relative to monetary policy
The less interest-sensitive is money demand, the ________.
more effective is monetary policy relative to fiscal policy
The rate of output at which the price level has no tendency to rise or fall is called the ________.
natural rate of output
The model that assumes that expectations are formed rationally but does not assume complete wage and price flexibility is known as the
new Keynesian model.
An anticipated increase in the money supply has no effect on aggregate output in the ________ model.
new classical
An anticipated increase in the money supply causes the largest long-run increase in real output in
no model, as monetary policy does not affect real output in the long run.
Early Keynesians concluded that changes in monetary policy had no impact on aggregate output because early empirical studies found no linkage between movements in ________ and ________. nominal interest rates; investment spending
nominal interest rates; investment spending
Early Keynesians viewed monetary policy as influencing aggregate demand solely through its impact on ________ interest rates, which, in turn, affect ________ spending.
nominal; investment
In the new classical macroeconomic model developed by Lucas and Sargent, expansionary macropolicies affect aggregate output
only when the macropolicy change is unanticipated
In the Keynesian model the quantity of money demanded is ________ related to income and ________ related to the interest rate.
positively; negatively
Due to asymmetric information in credit markets, monetary policy may affect economic activity through the balance sheet channel, where an increase in the money supply
raises firms' net worth, decreasing adverse selection and moral hazard problems, thus increasing banks' willingness to lend to finance investment spending
The new classical macroeconomic model assumes that expectations are ________ formed and that wages and prices are ________ with respect to the expected price level
rationally; completely flexible
At first cut, the simple solution to fighting inflation is
reducing the growth rate of the money supply
An increase in autonomous consumer expenditure causes the equilibrium level of aggregate output to ________ at any given interest rate and shifts the ________ curve to the ________, everything else held constant.
rise; IS; right
In the money market, a condition of excess supply of money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant.
rise; fall
If the Fed adopts a policy of pegging the interest rate, a ________ in government spending forces the Fed to increase the money supply to prevent interest rates from ________.
rise; increasing
A decline in the money ________ shifts the LM curve to the ________, causing the interest rate to rise and output to fall, everything else held constant
supply; left
The LM curve will be vertical and fiscal policy ineffective when ________.
the demand for money is unaffected by changes in the interest rate
Suppose that the economy is at the natural rate of output. In the absence of accommodating policy and everything else held constant, the net result of a negative supply shock is that
the economy returns to full employment at the initial price level
Evidence strongly supports the view that countries with high inflation also have
the highest rates of money growth.
An expansionary monetary policy may cause asset prices to rise, thereby reducing the likelihood of financial distress and causing consumer durable and housing expenditures to rise. This monetary transmission mechanism is referred to as
the household liquidity effect
If the consumption function is expressed as C = a + mpc × YD, then mpc represents
the marginal propensity to consume.
An anticipated increase in the money supply causes the largest short-run increase in the price level in
the new classical model.
Inflation occurs whenever
the price level rises continuously over a period of time.
In the new classical model, an anticipated increase in the money stock will cause
the price level to increase
In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to rise, and the IS curve to shift to the ________, everything else held constant
up; right
In the Keynesian cross diagram, an increase in autonomous consumer expenditure causes the aggregate demand function to shift ________ and the equilibrium level of aggregate output to ________, everything else held constant.
up; rise
If moderate deficits put ________ pressure on interest rates, the Fed may ________ bonds, leading to an increase in high-powered money.
upward; buy
If the quantity of money demanded is not affected by changes in the interest rate, the LM curve is ________ and fiscal policy will be ________.
vertical; ineffective
In the new Keynesian model
wages and prices are assumed to be sticky with respect to expected changes in the price level
