An estimate of what government spending and tax revenue would be if the economy
were operating at its natural rate of output and employment is called the ______ budget.
A) cyclically adjusted
B) inflation-adjusted
C) capital-asset
D) generational accounting
Assume that the consumption function is given by C = 200 + 0.7(Y ” T), the tax
function is given by T = 100 + 0.2Y, and Y = 50K0.5L0.5, where K = 100. If L increases
from 100 to 144, then consumption increases by:
A) 560.
B) 840.
C) 1,120.
D) 2,120.
Each of the two models of short-run aggregate supply is based on some market
imperfection. In the imperfect-information model, the imperfection is that:
A) some firms do not adjust their prices instantly to changes in demand.
B) contracts and arrangements may prevent nominal wages from adjusting rapidly to
changing economic conditions.
C) firms confuse changes in the overall level of prices with changes in relative prices.
D) the real wage adjusts to bring labor supply and labor demand into equilibrium.
The ex ante real interest rate is based on _____ inflation, while the ex post real interest
rate is based on _____ inflation.
A) expected; actual
B) core; actual
C) actual; expected
D) expected; core
In a simple model of the supply and demand for pizza, when the price of cheese
increases, the price of pizza ______ and the quantity purchased ______.
A) increases; increases
B) decreases; increases
C) decreases; decreases
D) increases; decreases
In the sticky-price model, if no firms have flexible prices, the short-run aggregate
supply schedule will:
A) be vertical.
B) be steeper than it would be if some firms had flexible prices.
C) slope upward to the right.
D) be horizontal.
During the 2008″2009 financial crisis, the Federal Reserve served as a lender of last
resort by providing liquidity to:
A) both banks and shadow banks with reliable collateral.
B) any insolvent domestic borrower in the economy.
C) state and local governments.
D) households that were underwater on their mortgages.
In the case of demand-pull inflation, other things being equal:
A) both the inflation rate and the unemployment rate rise at the same time.
B) the unemployment rate rises but the inflation rate falls.
C) the inflation rate rises but the unemployment rate falls.
D) both the inflation rate and the unemployment rate fall.
In a small open economy with a floating exchange rate, the exchange rate will
appreciate if:
A) the money supply is increased.
B) the money supply is decreased.
C) government spending is decreased.
D) taxes are increased.
Assume that the economy begins in long-run equilibrium. Then the Fed reduces the
money supply. In the short run ______, whereas in the long run prices ______ and
output returns to its original level.
A) output decreases and prices are unchanged; rise
B) output decreases and prices are unchanged; fall
C) output and prices both decrease; rise
D) output and prices both decrease; fall
The more funds that the Federal Reserve makes available for banks to borrow through
the Term Auction Facility, the _____ the monetary base and the _____ the money
supply.
A) smaller; smaller
B) smaller; greater
C) greater; greater
D) greater; smaller
The economy of Macroland is initially in long-run equilibrium. A severe drought causes
an adverse supply shock.
a. What happens to prices and output in the short run?
b. What would happen to prices and output in the long run if there is no policy
accommodation?
c. If the Central Bank of Macroland wants to prevent the short-run changes in price and
output, what policy action could it take? How would the results of this policy action
differ from the prices and output that would result in the long run with no policy action?
Analysis of population growth around the world concludes that countries with high
population growth tend to:
A) have high income per worker.
B) have a lower level of income per worker than other parts of the world.
C) have the same standard of living as other parts of the world.
D) tend to be the high-income-producing nations of the world.
a. Suppose a government education program succeeds in getting households to save
more (you may interpret this as a downward shift in the consumption function). Using
the long-run model of the economy developed in Chapter 3, graphically illustrate the
impact of the higher saving rate by households. Be sure to label: i. the axes; ii. the
curves; iii. the initial equilibrium values; iv. the direction curves shift; and v. the
terminal equilibrium values.
b. State in words what happens to: i. the real interest rate; ii. national saving; iii.
investment; iv. consumption; and v. output.
The TED spread is the difference between the interest rate paid on _____ and the
interest rate paid on _____.
A) three-month U.S. certificates of deposit; three-month eurodollar loans
B) overnight interbank loans in London; overnight interbank loans in the United States
C) four-week Treasury bills; overnight federal funds
D) three-month eurodollar interbank loans; three-month Treasury bills
According to the Phillips curve, inflation depends on expected inflation because:
A) the real interest rate depends on the expected rate of inflation.
B) the central bank sets its target inflation rate based on the expected rate of inflation.
C) the natural level of output depends on the expected rate of inflation.
D) when some firms set prices in advance, expected inflation influences future prices.
The unemployment insurance system may be desirable because unemployment
insurance:
A) raises the natural rate of unemployment.
B) reduces the rate of job finding.
C) increases workers’ uncertainty about their incomes.
D) induces workers to reject unattractive job offers.
If the government wants to raise investment but keep output constant, it should:
A) adopt a loose monetary policy but keep fiscal policy unchanged.
B) adopt a loose monetary policy and a loose fiscal policy.
C) adopt a loose monetary policy and a tight fiscal policy.
D) keep monetary policy unchanged but adopt a tight fiscal policy.
In a small open economy with a fixed exchange rate, if the central bank tries to increase
the money supply, then in the new short-run equilibrium:
A) income rises.
B) income falls.
C) the exchange rate falls.
D) income remains constant.
If investment demand is infinite below some certain r (e.g., r**) and zero above r**,
then the IS curve is ______ and ______ policy has no effect on output.
A) vertical; monetary
B) horizontal; monetary
C) vertical; fiscal
D) horizontal; fiscal
Results from the Euro-Barometer Survey series suggests that people are happier when
inflation is ______ and unemployment is ______.
A) high; high
B) high; low
C) low; high
D) low; low
The money hypothesis suggests that the Great Depression was caused by a:
A) leftward shift in the IS curve.
B) rightward shift in the IS curve.
C) leftward shift in the LM curve.
D) rightward shift in the LM curve.
Expectations of inflation based on recently observed inflation is called the assumption
of _____ expectations.
A) natural
B) rational
C) dynamic
D) adaptive
If income is 4,800, consumption is 3,500, government spending is 1,000, and taxes
minus transfers are 800, private saving is:
A) 300.
B) 500.
C) 1,000.
D) 1,300.
According to the IS“LM model, if Congress raises taxes but the Fed wants to hold
income constant, then the Fed must ______ the money supply.
A) increase
B) decrease
C) first increase and then decrease
D) first decrease and then increase
In the circular flow model, the flow of dollars from firms to households is paid _____
and the flow of dollars from households to firms is paid _____.
A) as wages and profits; for goods and services
B) for value added; as imputed values
C) in current dollars; in constant dollars
D) as interest and dividends; for depreciation and taxes
An increase in investment demand for any given level of income and interest ratesdue,
for example, to more optimistic “animal spirits”will, within the IS“LM framework,
______ output and ______ interest rates.
A) increase; lower
B) increase; raise
C) lower; lower
D) lower; raise
At long-run equilibrium in the dynamic model of aggregate demand and aggregate
supply, which variables will be at their natural levels?
A) inflation and output
B) real and nominal interest rates
C) inflation and the nominal interest rate
D) output and the real interest rate
In a fractional-reserve banking system, banks create money because:
A) each dollar of reserves generates many dollars of demand deposits.
B) banks have the legal authority to issue new currency.
C) funds are transferred from households wishing to save to firms wishing to borrow.
D) the wealth of the economy expands when borrowers undertake new debt obligations.
If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657,
investment is $741, and government purchases are $1,098, then net exports are:
A) $131.
B) “$131.
C) $31.
D) “$31.
One advantage of CoCo bonds (contingent convertible debt), over alternative methods
for recapitalizing banks, is that:
A) the interest rate paid on CoCo bonds would be lower than on bonds without the
conversion feature.
B) CoCo bonds provide banks with capital from private rather than taxpayer funds.
C) banks would only have to seek purchasers of CoCo bonds in times of financial
stress.
D) obtaining increased bank capital by converting CoCo bonds would increase bank
liabilities.
Under capital budgeting, all of the following transactions would affect the federal
budget deficit except the federal government’s:
A) sending a check to a welfare recipient.
B) sending a check to the state of Massachusetts.
C) selling a highway to the state of New York and using the proceeds to retire federal
debt.
D) selling an office building.