T4 practice

According to the rational expectations model, individuals respond to expansionary monetary policy by predicting:

a higher rate of inflation.

Disinflation is costly to the economy if _____ is forced on the economy, _____, and _____.

a recession; unemployment increases; aggregate output falls

Disinflation refers to:

a reduction in the inflation rate.

A negative output gap implies an unemployment rate that is:

above the natural rate.

If a government fixes the exchange rate _____ the market equilibrium rate, there will be a(n) _____ of the country's currency in the foreign exchange market.

above; surplus

( Figure: AD-AS ) Use Figure: AD-AS . Suppose that the economy starts at E 1 and moves to E 2 , where AD 2 intersects SRAS 1. SRAS 1 will shift to SRAS 2 because:

aggregate output will rise in the long run. ​ real wages will rise in the long run. Correct Answer nominal wages will rise in the long run. the real money supply will rise in the long run.

A change in the U.S. balance of payments on financial account generates _____ reaction in the balance of payments on current account.

an equal and opposite

An economy's short-run Phillips curve will shift upward in response to:

an increase in expected inflation.

( Figure: Change in the Demand for U.S. Dollars) Use Figure: Change in the Demand for U.S. Dollars. A shift from D 1 to D 2 indicates:

an increase in the demand for euros. Correct Answer an increase in the demand for dollars. ​ a decrease in the supply of euros. a decrease in the demand for euros.

Classical economists maintained that:

an increase in the money supply leads to a proportional rise in the price level.

Assume that the economy is contracting, and unemployment is rising. Which of the following would be a logical explanation of a sudden fall in the unemployment rate even as the economy continues to contract?

an increase in the number of discouraged workers

If the dollar _____ because of a capital inflow from Asia, the U.S. balance of payments on financial account will _____, and the U.S. balance of payments on current account will _____.

appreciates; increase; decrease

From 2014 to 2015, many U.S. companies that sell a lot overseas experienced declining profits due to the:

appreciation of the dollar.

If Europeans begin to view the United States as a more attractive investment opportunity, the outcome will be a(n) _____ of the dollar, which will _____.

appreciation; discourage Europeans from buying U.S. goods and services

If potential output is less than actual output, then the unemployment rate is:

below the natural rate.

According to the short-run Phillips curve, when actual output is _____ potential output, the price level _____, and the unemployment rate rises.

below; decreases

During periods of deflation, _____ are hurt, and _____ are helped.

borrowers; lenders

If a country's fixed exchange rate is falling, it:

can use foreign exchange reserves to purchase some of its currency.

Artemus believes that in the long run, all prices are flexible and that any increase in the money supply will lead only to inflation, not to an increase in aggregate output. Because the economy would self-correct to long-run equilibrium output, there is no role for either fiscal or monetary policy. Artemus is best described as a:

classical economist.

A fixed exchange rate regime:

commits a country to avoid inflationary policies.

In 2008, _____ was not enough to prevent a _____.

conventional monetary policy; severe recession

If the government wants to _____ the value of its currency in the foreign exchange market, it can use _____ monetary policy.

decrease; expansionary

A supply shock caused by an increase in the price of gasoline causes a(n) _____ in output and a(n) _____ in prices.

decrease; increase

If a country's currency appreciates, all else equal, exports will _____ and imports will _____.

decrease; increase

If wages and prices are perfectly flexible, a decrease in aggregate demand will cause a(n) _____ in the price level and _____ in unemployment.

decrease; no change

A policy maker who aims to maintain unemployment at 5%, while the NAIRU for this economy is 4%, will most likely find the economy encountering:

deflation.

A policy maker who aims to maintain unemployment at 6%, while the NAIRU for this economy is 5%, will most likely find the economy encountering:

deflation.

Expansionary monetary policy in the United States will lead to a(n) _____ of the dollar.

depreciation

After a _____, other things equal, a country's balance of payments on current account will likely _____.

devaluation; increase

A factory owned by the Japanese car maker Toyota in San Antonio is an example of _____.

direct foreign investment

A reduction in inflation is called:

disinflation

If the unemployment rate rose, a classical economist would counsel the government to _____.

do nothing

In terms of foreign currency, a revaluation makes:

domestic goods more expensive relative to foreign goods.

Core inflation excludes:

energy and food prices.

If the Fed seeks to increase the inflation rate from 1% to 2%, it is:

engaging in inflation targeting.

According to the Great Moderation consensus:

expansionary monetary and fiscal policies are both effective in the short run but not in the long run.

Direct foreign investment means the purchase of:

factories in a foreign country.

Because Keynesian economics recognizes that nominal interest rates can hit a zero lower bound (a liquidity trap), it:

favors the use of fiscal policy over monetary policy during a slump.

A government with a large deficit will also produce high inflation in the economy if it:

finances the deficit via seigniorage.

If a country has a current account deficit, it must have a:

financial account surplus.

A liquidity trap is NOT associated with:

fiscal policy becoming ineffective.

Devaluation of a currency occurs under _____ exchange rates when the price of the domestic currency in terms of foreign currency _____.

fixed; falls

According to the classical model, prices are _____, making the aggregate supply curve _____ in the short run.

flexible; vertical

Historically, governments have turned to seigniorage to pay their bills when the:

government lacks the will to reduce the budget deficit by raising taxes or reducing spending.

According to the notion of Ricardian equivalence, households and businesses will view an increase in _____ as a sign that tax burdens will increase in the future, compelling them to ____ their private spending in anticipation of higher future taxes.

government spending; decrease

In the late 1970s and early 1980s, the U.S. economy had _____ inflation and _____ unemployment.

high; high

( Figure: Classical Model of the Price Level) Use Figure: Classical Model of the Price Level. If the central bank increases the money supply, such that aggregate demand shifts from AD 1 to AD 2 , according to the classical model, the equilibrium point will:

immediately move from E 1 to E 3 .

A current account deficit generally results from:

imports exceeding exports.

Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the aggregate demand curve would cause a(n):

increase in employment, production, and income.

According to supply-side economics, tax cuts:

increase incentives to work and save, fostering increases in potential output.

If a country with a floating exchange rate implements a contractionary monetary policy, other things equal, interest rates will _____, and the currency will _____.

increase; appreciate

According to Keynesian economics, a tax cut will _____ aggregate demand and output by _____.

increase; increasing income and consumption

As people try to avoid the inflation tax, the government must _____ the rate of growth of the money supply to _____.

increase; raise the same revenue from seigniorage

From 2000 to 2008, Zimbabwe's prices:

increased by 80 trillion percent.

According to the principle of purchasing power parity, the 2001 devaluation of the Argentine peso:

increased the inflation rate in Argentina relative to the inflation rate in the United States.

According to the classical model:

increases in the money supply lead to proportional increases in the price level but not to changes in real output.

All else equal, a decrease in the value of the dollar against the euro _____ U.S. net exports and shifts the aggregate demand curve to the _____.

increases; right

If the economy is in a liquidity trap, monetary policy is _____, and fiscal policy is _____.

ineffective; effective

In the classical model, an increase in the money supply will result in:

inflation only, without affecting aggregate output.

( Figure: Fiscal Policy with a Fixed Money Supply) Use Figure: Fiscal Policy with a Fixed Money Supply. Assume that this economy is initially at E 1 . The government now engages in deficit spending, and the Federal Reserve expands the money supply. According to this model:

interest rates will decrease. ​ real GDP will decrease because of the government's deficit spending. Correct Answer real GDP might increase in the short run, but a rising price level may cause real GDP to return to its initial level in the long run. real GDP will decrease but not by as much as it would have if the Federal Reserve had contracted the money supply.

Keynes believed that "animal spirits" had their greatest impact on:

investment spending.

A shift to the left of the demand curve for loanable funds could be caused by:

less business investment spending financed through borrowing.

( Figure: The Loanable Funds Model in the U.S. Market) Use Figure: The Loanable Funds Model in the U.S. Market. If the actual interest rate is 4% in the U.S. market, then the quantity supplied of loanable funds will be _____ the quantity of loanable funds demanded.

less than unrelated to ​ Correct Answer equal to greater than

If the money supply is growing at a constant rate of 3%, and the economy undergoes a negative demand shock, monetarist theory recommends:

maintaining the growth rate of the money supply at 3% and letting the aggregate price level fall.

A revaluation of a currency, other things equal:

makes foreign goods more attractive in the domestic economy.

Economists of which school of macroeconomic thought are most likely to recommend that the government avoid deficit spending because of the crowding-out effect on investment spending?

monetarist

According to the Great Moderation consensus:

monetary policy should play the main role in stabilization policy.

During the Great Moderation, most economists believed that _____ policy should be the main tool of stabilization policy and were skeptical about the use of _____ policy.

monetary; fiscal

( Figure: Classical Versus Keynesian Macroeconomics) Use Figure: Classical Versus Keynesian Macroeconomics. According to the Keynesian view, if the economy shifts from AD 1 to AD 2 because of a large decline in investment spending by businesses, the price level will _____, and real GDP will _____.

ncrease; decrease increase; not change not change; increase Correct Answer decrease; decrease ​

A fixed exchange rate: I. leaves monetary policy available for domestic stabilization. II. is less expensive to maintain than a floating exchange rate.

neither I nor II

A currency has depreciated when:

one unit of that currency buys fewer foreign goods than it did previously.

( Figure: Classical Versus Keynesian Macroeconomics) Use Figure: Classical Versus Keynesian Macroeconomics. According to the Keynesian view, if the economy shifts from AD 2 to AD 1 , perhaps because of an increase in government spending, the price level will _____, and real GDP will _____.

ot change; rise rise; fall rise; not change Correct Answer rise; rise ​

According to monetarism:

output will grow steadily if the money supply grows at a steady rate.

If the government decides to print money to finance a deficit:

people who hold money will be penalized as inflation increases.

Disinflation:

policies may plunge the economy into a recession.

Fixed exchange rates are determined by the:

policies of the domestic government.

If an administration pursues expansionary policy before an election to bring down the unemployment rate, it can:

produce inflation if the targeted rate of unemployment is too low.

Economists usually use GDP rather than GNP because they are tracking:

production rather than income.

( Figure: Fiscal Policy with a Fixed Money Supply) Use Figure: Fiscal Policy with a Fixed Money Supply. Assume that this economy is initially at E 2 . The government now cuts its deficit spending, but the Federal Reserve expands the money supply. According to this model:

real GDP will expand but not by as much as it would have if the Federal Reserve had not expanded the money supply. interest rates will increase. ​ real GDP will decrease just by as much as it would have if the Federal Reserve had not expanded the money supply. Correct Answer real GDP will decrease but not by as much as it would have if the Federal Reserve had not expanded the money supply.

( Figure: Fiscal Policy with a Fixed Money Supply II) Use Figure: Fiscal Policy with a Fixed Money Supply. Assume that this economy is at E 1 . The government now decreases deficit spending, and the Federal Reserve contracts the money supply. According to this model:

real GDP will increase but not as much as it would if the Federal Reserve had expanded the money supply. Correct Answer real GDP might decrease in the short run, but deflation can lead to a return to the original level of real GDP in the long run. interest rates will increase. ​ real GDP will increase because the government has decreased deficit spending.

If a high inflation rate leads people to _____ their money holdings, this may lead to a further increase in the money supply and _____ inflation.

reduce; higher

A(n) _____ in the value of a floating currency is called a(n) _____.

reduction; depreciation

An increase in the value of a currency under a fixed exchange rate regime is a(n):

revaluation.

Expectations of a lower inflation rate shift the short-run aggregate supply curve to the _____, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _____.

right; downward

If an economy has just had a serious recession, but real GDP is expanding once again, we can expect the unemployment rate to:

rise if previously discouraged workers enter the work force but do not find jobs immediately.

( Figure: Expected Inflation and the Short-Run Phillips Curve) Use Figure: Expected Inflation and the Short-Run Phillips Curve. SRPC 0 is the Phillips curve with an expected inflation rate of zero; SRPC 2 is the Phillips curve with an expected inflation rate of 2%. Suppose that this economy has an unemployment rate of 6%, no inflation, and inflation expectations of zero. If the central bank decreases the money supply, so that the aggregate demand curve shifts to the left, and the unemployment rate rises to 8%, then the inflation rate will:

rise to 2%. Correct Answer fall to - 2%. rise to 4%. ​ not change.

( Figure: Expected Inflation and the Short-Run Phillips Curve) Use Figure: Expected Inflation and the Short-Run Phillips Curve. SRPC 0 is the Phillips curve with an expected inflation rate of zero; SRPC 2 is the Phillips curve with an expected inflation rate of 2%. Suppose that this economy has an unemployment rate of 6%, inflation of 2%, and inflation expectations of 2%. If the central bank increases the money supply, so that the aggregate demand curve shifts to the right, and the unemployment rate falls to 4%, then the inflation rate will:

rise to 2%. Correct Answer rise to 4%. ​ not change. fall to - 2%.

( Figure: Expected Inflation and the Short-Run Phillips Curve) Use Figure: Expected Inflation and the Short-Run Phillips Curve. SRPC 0 is the Phillips curve with an expected inflation rate of zero; SRPC 2 is the Phillips curve with an expected inflation rate of 2%. Suppose that this economy has an unemployment rate of 6%, no inflation, and inflation expectations of zero. If the central bank increases the money supply, so that the aggregate demand curve shifts to the right, and the unemployment rate falls to 4%, then the inflation rate will:

rise to 4%. ​ not change. fall to - 2%. Correct Answer rise to 2%.

If a country's loanable funds market is initially in equilibrium and then there are capital outflows, the equilibrium interest rate will _____, and the equilibrium quantity of loanable funds will _____.

rise; fall

( Figure: Classical Versus Keynesian Macroeconomics) Use Figure: Classical Versus Keynesian Macroeconomics. According to the classical view, if the economy shifts from AD 2 to AD 1 , perhaps because of an increase in government spending, the price level will _____ and real GDP will _____.

rise; fall not change; rise Correct Answer rise; not change fall; fall ​

All else equal, in the classical model, an increase in the money supply leads to a proportional _____ in _____, with no effect on _____.

rise; the aggregate price level; aggregate output

If a country runs a deficit in its balance of payments on goods and services, to pay for its imports, it must:

sell assets to foreigners.

A large inflation tax does NOT cause people to:

sell gold.

A fixed exchange rate is:

set by the government

Key features of Keynesian economics are the importance of the _____ and emphasis on _____.

short run over the long run; the AD curve and an upward-sloping SRAS curve

Crowding out is MOST likely when expansionary fiscal policy is accompanied by:

slow growth of the money supply.

If real business cycle theory uses an upward-sloping aggregate _____ curve, aggregate _____ is _____ to the determination of aggregate output.

supply; demand; potentially relevant

If the Fed increases the monetary base by $60 billion through open-market operations:

the U.S. government debt held by the public will fall by $60 billion.

A current account deficit exists when:

the balance of payments on current account is negative.

If the U.S. dollar changes from $1 = €1 to $1 = €0.8:

the dollar depreciates against the euro.

If the U.S. dollar changes from $1 = ¥200 to $1 = ¥100, then:

the dollar has depreciated relative to the yen.

Along the Phillips curve:

the inflation rate varies inversely with the unemployment rate.

During the Great Recession, critics warned that a surge in _____ would lead to _____.

the monetary base; high inflation

Disinflation means a decrease in:

the rate of inflation.

As a result of a downturn in the economy, a firm reduces workers' hours but does not fire workers. Following Okun's law, this is one reason:

the relationship between the output gap and the unemployment is negative and less than one-to-one.

International macroeconomics concerns:

the relationships between economies of different nations.

If a contraction in aggregate demand causes a recession, the Great Moderation consensus on macroeconomics suggests that:

the use of discretionary fiscal policy would be counterproductive except in special circumstances.

Keynes argued that the most effective way to bring the economy out of the Great Depression was:

through expansionary fiscal policy.

A major drawback of a floating exchange rate is the:

uncertainty it generates regarding the value of goods traded internationally.

A negative output gap is associated with a(n) _____ unemployment rate.

unusually high

According to the classical model of the price level, the short-run aggregate supply curve is:

vertical.

According to classical economists, the short-run aggregate supply curve is _____, while according to Keynesian economists, the short-run aggregate supply curve is _____.

vertical; upward sloping

As people get used to inflation:

wages adjust more quickly, and the short-run aggregate supply shifts quickly to the left.

During the 1960s and 1970s, most monetarists believed that the velocity of money:

was stable.

If the rate of exchange is €1 = US$2, then US$1 =

€0.50.

If money held by the public is $300 billion, and the inflation rate is 5%, then the inflation tax that year is:

$15 billion.

If the United States exports $100 billion of goods and services and imports $150 billion of goods and services, and balances on factor income and transfers are zero, the balance of payments on current account is:

-$50 billion.

Assume the nominal exchange rate is £0.593 per dollar, the price level in the United States is 250, and the price level in Britain is 225. The real exchange rate is £_____ per dollar.

0.659

If the U.S. dollar-euro exchange rate is $1.38, $1 exchanges for €_____.

0.7246

( Figure: Actual and Natural Rates of Unemployment) Use Figure: Actual and Natural Rates of Unemployment. In 1982, the natural unemployment rate (structural plus frictional) was approximately:

10%. ​ 4%. Correct Answer 6%. zero.

( Figure: Actual and Natural Rates of Unemployment) Use Figure: Actual and Natural Rates of Unemployment. In 1982, the cyclical unemployment rate was approximately:

10%. ​ Correct Answer 4%. zero. 6%.

If the monetary authorities decide to increase the nominal money supply by 10% when the economy is potential output, in the long run, the aggregate price level will increase by _____%, and real GDP will _____.

10; return to potential output

If the exchange rate is $1 = 12.95 Mexican pesos, then the price of a $10,000 Harley Davidson motorcycle is _____ pesos in Mexico.

129,500

During the hyperinflation in Germany in 1922-1923, prices rose at _____% per day.

16

If the money held by the public is $3 billion, and inflation is 6%, the inflation tax is:

180 billion

In the late _____ and the first couple of years of the _____, the U.S. economy had high inflation and high unemployment.

1970s; 1980s

If the exchange rate is $1 = 12.95 Mexican pesos, then the price of a $20,000 Harley Davidson motorcycle is _____ pesos in Mexico.

259,000

According to current estimates of Okun's law, if the output gap is 3%, the natural rate of unemployment is 5%, and the expected rate of inflation is 5%, the unemployment rate will be _____%.

3.5

( Figure: AD-AS Model and the Short-Run Phillips Curve) Use Figure: AD-AS Model and the Short-Run Phillips Curve. If the central bank decreases the money supply, so that aggregate demand shifts from AD 2 to AD 1 , then the unemployment rate will be:

4%. Correct Answer 6%. ​ zero. 2%.

( Figure: Actual and Natural Rates of Unemployment) Use Figure: Actual and Natural Rates of Unemployment. In 1982, the actual unemployment rate was approximately:

6%. 4%. Correct Answer 10%. ​ zero.

( Figure: AD-AS ) Use Figure: AD-AS . If the economy is in equilibrium with low inflation at E 1 , and the Fed uses expansionary monetary policy, the initial effect will be a shift of _____ to _____, and the macroeconomic equilibrium will move from _____.

AD 2 ; AD 1 ; E 2 to E 1 ​ Correct Answer AD 1 ; AD 2 ; E 1 to E 2 SRAS 2 ; SRAS 1 ; E 3 to E 2 SRAS 1 ; SRAS 2 ; E 2 to E 3

( Figure: Short-Run Phillips Curve) Use Figure: Short-Run Phillips Curve. SRPC 2 is based on an expected inflation rate of:

Correct Answer 2%. 5%. ​ zero. 1%.

( Figure: AD-AS Model and the Short-Run Phillips Curve) Use Figure: AD-AS Model and the Short-Run Phillips Curve. If the central bank decreases the money supply, so that aggregate demand shifts from AD 2 to AD 1 , then the unemployment rate will be:

Correct Answer 6%. ​ 2%. 4%. zero.

( Figure: Change in the Demand for U.S. Dollars) Use Figure: Change in the Demand for U.S. Dollars. An increase in capital flows from Europe to the United States would cause a shift from:

Correct Answer D 1 to D 2 . E 1 to E 2 . ​ D 2 to D 1 . E 2 to E 1 .

( Figure: Classical Model of the Price Level) Use Figure: Classical Model of the Price Level. If the central bank increases the money supply such that aggregate demand shifts from AD 1 to AD 2 , according to the classical model, the price level will:

Correct Answer increase from P 1 to P 3 . decrease from P 1 to P 2 . ​ not change. increase from P 1 to P 2 .

( Figure: AD-AS ) Use Figure: AD-AS . Suppose that the economy is initially at E 1 , where AD 1 intersects SRAS 1 and LRAS . Now suppose that AD 1 shifts to AD 2. In an economy with low inflation, that shift could be due to a(n):

Correct Answer increase in money supply. ​ decrease in government expenditure. increase in tax rates. increase in the aggregate price level

( Figure: AD-AS ) Use Figure: AD-AS . Suppose that the economy is initially at E 1 , where AD 1 intersects SRAS 1 and LRAS . Now suppose that AD 1 shifts to AD 2. In an economy with low inflation, that shift could be due to a(n):

Correct Answer increase in money supply. ​ increase in tax rates. decrease in government expenditure. increase in the aggregate price level.

According to some economic historians, the first true modern recession took place in:

Great Britain in 1825.

Economists of which school of macroeconomic thought are most likely to generally recommend the use of monetary policy to stabilize the economy and the use of fiscal policy only when monetary policy is ineffective?

Great Moderation consensus

If the equilibrium exchange rate is above the target rate, the government should: I. buy its domestic currency in foreign exchange markets. II. engage in expansionary monetary policy. III. restrict the purchase of foreign currencies.

II only

_____ argued that the most effective way to bring the economy out of the Great Depression was through expansionary fiscal policy.

John Maynard Keynes

_____ emphasized the short-run effects of aggregate demand on aggregate output.

John Maynard Keynes

Economists of which school of macroeconomic thought are most likely to recommend a decrease in taxes to alleviate a recessionary gap?

Keynesian

If asset owners in China and the United States consider Chinese and U.S. assets to be substitutes, and the U.S. interest rate is 6%, and the Chinese interest rate is 3%, what will NOT occur?

Loanable funds will be exported from the United States to China.

_____ asserted that GDP will grow steadily if the money supply grows steadily.

Milton Friedman

Between 1993 and 2013, the Mexican peso fell against the U.S. dollar by almost three-fourths of its initial value. However, economists have concluded that this did not result in a corresponding fall in the prices of Mexican products expressed in dollars. What explains this apparent paradox?

The inflation rate in Mexico over that period was higher than in the United States.

_____ is the idea that efforts to keep unemployment below the natural rate of unemployment will cause accelerating inflation.

The natural rate hypothesis

( Figure: AD-AS Model) Use Figure: AD-AS Model. Suppose that the economy is at Y E , with a price level of P 1. Which of the following would represent the new long-run equilibrium position if the aggregate demand curve shifted to the right from AD 1 to AD 2 as a result of an increase in the money supply?

Y E and P 1 Correct Answer Y E and P 3 ​ Y E and P 2 Y 1 and P 2