According to the Phillips curve, other things being equal, inflation depends positively
on:
A) expected inflation.
B) the unemployment rate.
C) the rate of technological change.
D) the quantities of capital and labor.
An increase in income raises money ______ and ______ the equilibrium interest rate.
A) demand; raises
B) demand; lowers
C) supply; raises
D) supply; lowers
According to the Mundell”Fleming model with floating exchange rates, political
uncertainty in Mexico in 1994 caused the risk premium on Mexican interest rates to
______ and the Mexican exchange rate to ______.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Other things equal, a given change in money supply has a larger effect on demand the:
A) flatter the IS curve.
B) steeper the IS curve.
C) smaller the interest sensitivity of expenditure demand.
D) larger the income sensitivity of money demand.
A situation where policymakers have the incentive to deviate from their initial course of
action once other agents in the economy have acted is called a(n):
A) rational expectation.
B) outside lag.
C) time-inconsistent policy.
D) active policy rule.
In the 1960s, in the United States:
A) both the inflation rate and the unemployment rate rose at the same time.
B) the unemployment rate rose but the inflation rate fell.
C) the inflation rate rose but the unemployment rate fell.
D) both the inflation rate and the unemployment rate fell.
According to the neoclassical model of investment, when the real interest rate increases,
business fixed investment ______ because the ______ of capital increases.
A) increases; marginal product
B) increases; cost
C) decreases; marginal product
D) decreases; cost
When an economy begins above the Golden Rule, reaching the Golden Rule:
A) produces lower consumption at all times in the future.
B) produces higher consumption at all times in the future.
C) requires initially reducing consumption to increase consumption in the future.
D) requires initially increasing consumption to decrease consumption in the future.
In the IS“LM model when government spending rises, in short-run equilibrium, in the
usual case the interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
Assume that the equation for demand for bread at a small bakery is Qd = 60 ” 10Pb +
3Y, where Qd is the quantity of bread demanded in loaves, Pb is the price of bread in
dollars per loaf, and Y is the average income in the town in thousands of dollars.
Assume also that the equation for supply of bread is Qs = 30 + 20Pb ” 30 Pf, where Qs
is the quantity supplied and Pf is the price of flour in dollars per pound. Assume finally
that markets clear, so that Qd = Qs.
a. If Y is 10 and Pf is $1, solve mathematically for equilibrium Q and Pb.
b. If the average income in the town increases to 15, solve for the new equilibrium Q
and Pb.
In the Solow growth model of Chapter 8, the economy ends up with a steady-state level
of capital:
A) only if it starts from a level of capital below the steady-state level.
B) only if it starts from a level of capital above the steady-state level.
C) only if it starts from a steady-state level of capital.
D) regardless of the starting level of capital.
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.
A) lowers; raises
B) raises; lowers
C) raises; raises
D) lowers; lowers
Cost-push inflation is the result of:
A) high aggregate demand.
B) low aggregate demand.
C) favorable supply shocks.
D) adverse supply shocks.
Other things equal, a given change in government spending has a larger effect on
demand the:
A) flatter the LM curve.
B) steeper the LM curve.
C) smaller the interest sensitivity of money demand.
D) larger the income sensitivity of money demand.
If the transactions velocity of money remains constant while the quantity of money
doubles, the:
A) price of the average transaction must double.
B) number of transactions must remain constant.
C) price of the average transaction multiplied by the number of transactions must
remain constant.
D) price of the average transaction multiplied by the number of transactions must
double.
An IS curve shows combinations of:
A) taxes and government spending.
B) nominal money balances and price levels.
C) interest rates and income that bring equilibrium in the market for real balances.
D) interest rates and income that bring equilibrium in the market for goods and services.
The dynamic aggregate supply curve is derived from which of the five equations of the
model of aggregate demand and aggregate supply?
A) the Fisher equation and adaptive expectations
B) the Phillips curve and adaptive expectations
C) the monetary policy rule and the Fisher equation
D) the Phillips curve and the monetary policy rule
(Table: Bank Balance Sheet) Based on the table, owners’ equity will fall to zero if loan
defaults reduce the value of total assets by _____ percent.
A) 10
B) 20
C) 30
D) 40
The Grameen Bank makes loans primarily to:
A) poor women.
B) first-time home buyers.
C) large corporations.
D) foreign governments.
In a neoclassical economy, assume that the government lowers both government
spending and taxes by $100 billion. If the marginal propensity to consume is 0.6,
investment will:
A) rise $100 billion.
B) rise $60 billion.
C) rise $40 billion.
D) not change.
The ratio of the money supply to the monetary base is called:
A) the currency”deposit ratio.
B) the reserve”deposit ratio.
C) high-powered money.
D) the money multiplier.
In a large open economy with a floating exchange rate, such as in the United States, in
the short run a monetary contraction:
A) raises the interest rate, lowers investment and income, but does not affect the
exchange rate.
B) raises the exchange rate, lowers net exports and income, but does not affect the
interest rate.
C) initially raises the exchange rate, causing arbitrageurs to sell dollars and return the
money supply to its initial level.
D) raises the interest rate and lowers investment and income, but also raises the
exchange rate and lowers net exports.
Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the
short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve
is Y = 3(M/P) and M = 1,000.
a. If the economy is initially in long-run equilibrium, what are the values of P and Y?
b. Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5.
What are the new short-run P and Y?
c. If the aggregate demand curve and long-run aggregate supply curve are unchanged,
what are the long-run equilibrium P and Y after the supply shock?
d. Suppose that after the supply shock the Fed wanted to hold output at its long-run
level. What level of M would be required? If this level of M were maintained, what
would be long-run equilibrium P and Y?
If the Fed reduces the money supply by 5 percent and the quantity theory of money is
true, then:
A) every point on the aggregate demand curve moves 5 percent to the left.
B) every point on the aggregate demand curve moves up 5 percent.
C) the aggregate demand curve moves down and to the left, but it is impossible to
determine exactly by how much.
D) the aggregate demand curve moves up and to the right, but it is impossible to
determine exactly by how much.
In a simple model of the supply and demand for pizza, the endogenous variables are:
A) the price of pizza and the price of cheese.
B) aggregate income and the quantity of pizza sold.
C) aggregate income and the price of cheese.
D) the price of pizza and the quantity of pizza sold.
The unemployment rate:
A) was zero during the 1990s in the United States.
B) was zero on average between 1900 and 1950 in the United States.
C) has never been zero in the United States.
D) is usually zero when the economy is not in a recession or depression.
In the long run, what determines the level of total production of goods and services in
an economy?
A) the interest rate and the amount of national saving
B) the quantity of capital, quantity of labor, and production technology
C) consumption, investment, and government spending
D) the marginal products of capital and labor, constant returns to scale, and competition
In a country on a gold standard, the quantity of money is determined by the:
A) government.
B) central bank.
C) amount of gold.
D) buying and selling of government securities.
Column A below lists the names of four U.S. presidents, while Column B lists four
economic events that occurred during the tenures of those U.S. presidents. Match each
president to the economic event that occurred during his tenure.
Column A
1) Jimmy Carter
2) Ronald Regan
3) Bill Clinton
4) Barrack Obama
Column B
a. budget surplus
b. inflation
c. steep rise in mortgage defaults
d. budget deficit
A ‘small” economy is one in which the:
A) level of output is fixed.
B) price level is fixed.
C) domestic interest rate equals the world interest rate.
D) domestic saving is less than domestic investment.
In a steady-state economy with population growth n and labor-augmenting
technological progress g, persistent increases in standards of living are possible because
the:
A) capital stock grows faster than does the labor force.
B) capital stock grows faster than does the number of effective workers.
C) rate of depreciation constantly decreases.
D) saving rate constantly increases.
If a larger share of national output is devoted to investment, starting from an initial
steady-state capital stock below the Golden Rule level, then productivity growth will:
A) increase in the short run but not in the long run.
B) increase in the long run but not in the short run.
C) increase in both the short run and the long run.
D) not increase in either the short run or the long run.
When the Federal Reserve conducts an open-market purchase, it buys bonds from the:
A) public.
B) U.S. Treasury.
C) Internal Revenue Service.
D) International Monetary Fund.
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.
A) lower; raises; reduces
B) higher; lowers; increases
C) lower; lowers; increases
D) higher; raises; reduces
Spells of unemployment end when the unemployed person finds a job or:
A) withdraws from the labor force.
B) enters the labor force.
C) runs out of unemployment insurance compensation.
D) refuses to answer unemployment survey questions.