Inventory investment will decrease when interest rates _____ and credit conditions are
_____.
A) decrease; tight
B) decrease; easy
C) increase; easy
D) increase; tight
If the short-run aggregate supply curve is assumed to be horizontal and international
capital flows are infinitely elastic, then the mother of all models in the Appendix to
Chapter 14 corresponds to which of the following special cases?
A) classical closed economy
B) aggregate demand and aggregate supply
C) IS“LM model
D) Mundell”Fleming model with floating exchange rate
In a small, open economy if net exports are negative, then:
A) domestic spending is greater than output.
B) saving is greater than investment.
C) net capital outflows are positive.
D) imports are less than exports.
a. The interest rate affects which variable in: (1) the market for goods and services and
(2) the market for real money balances?
b. The level of income affects which variable in: (1) the market for goods and services
and (2) the market for real money balances?
The world interest rate:
A) is equal to the domestic interest rate.
B) makes domestic saving equal to domestic investment.
C) is the interest rate charged on loans by the World Bank.
D) is the interest rate prevailing in world financial markets.
International data suggest that economies of countries with different steady states will
converge to:
A) the same steady state.
B) their own steady state.
C) the Golden Rule steady state.
D) steady states below the Golden Rule level.
The government can lower inflation with a low sacrifice ratio if the:
A) money supply is reduced slowly.
B) public has adaptive expectations.
C) short-run aggregate supply schedule is relatively flat.
D) public believes that policymakers are committed to reducing inflation.
The upward slope of the dynamic aggregate supply curve indicates that, holding other
factors constant, high levels of economic activity are associated with:
A) the natural level of output.
B) the inflation target.
C) positive supply shocks.
D) high inflation.
Disposable personal income:
A) is computed by subtracting personal tax from personal income.
B) is generally greater than personal income.
C) includes corporate profits but not dividends.
D) does not include government transfers to individuals.
a. Suppose Congress decides to reduce the budget deficit by cutting government
spending. Use the Keynesian-cross model to illustrate graphically the impact of a
reduction in government purchases on the equilibrium level of income. Be sure to label:
i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curve
shifts; and v. the terminal equilibrium values.
b. Explain in words what happens to equilibrium income as a result of the cut in
government spending and the time horizon appropriate for this analysis.
Net capital outflow is equal to:
A) national saving minus the trade balance.
B) domestic investment plus the trade balance.
C) domestic investment minus national saving.
D) national saving minus domestic investment.
In the Fisher two-period model, if the consumer is a saver, consumption in periods one
and two are normal goods, and the income effect of an increase in interest rate is greater
than the substitution effect, then saving:
A) will increase.
B) will decrease.
C) will not change.
D) may either increase or decrease.
If the per-worker production function is given by y = k1/2, the saving ratio is 0.3, and
the depreciation rate is 0.1, then the steady-state ratio of output per worker (y) is:
A) 1.
B) 2.
C) 3.
D) 4.
In a small open economy, if exports equal $5 billion and imports equal $7 billion, then
there is a trade ______ and ______ net capital outflow.
A) deficit; negative
B) surplus; negative
C) deficit; positive
D) surplus; positive
The natural level of output is:
A) affected by aggregate demand.
B) the level of output at which the unemployment rate is zero.
C) the level of output at which the unemployment rate is at its natural level.
D) permanent and unchangeable.
Which of the following is a stock variable?
A) wealth
B) consumption
C) investment
D) income
In the Mundell”Fleming model with fixed exchange rates, the imposition of trade
restrictions results in an increase in net exports because:
A) investment increases.
B) investment decreases.
C) saving increases.
D) saving decreases.
Exhibit: IS”LM Monetary Policy
(Exhibit: IS“LM Monetary Policy) Based on the graph, starting from equilibrium at
interest rate r1 and income Y1, a decrease in the money supply would generate the new
equilibrium combination of interest rate and income:
A) r2, Y2
B) r3, Y2
C) r2, Y3
D) r3, Y3
According to supply siders, tax cuts can raise total tax revenue if the tax cuts generate
large enough:
A) decrease in aggregate supply.
B) increase in aggregate supply.
C) decrease in the money supply.
D) increase in the money supply.
The cyclically adjusted budget deficit:
A) adjusts the deficit for inflation.
B) estimates what the deficit would be if the economy were operating at the natural rate
of output.
C) accounts for assets as well as liabilities.
D) measures the impact of fiscal policy on the lifetime incomes of individuals of
different ages.
In the Mundell”Fleming model with fixed exchange rates, attempts by the central bank
to decrease the money supply:
A) lead to a lower equilibrium level of income.
B) lead to a higher equilibrium level of income.
C) must be abandoned in order to maintain the fixed exchange rate.
D) must be offset by expansionary fiscal policy.
Exhibit: Supply Shock
(Exhibit: Supply Shock) Assume that the economy is at point B. With no further shocks
or policy moves, the economy in the long run will be at point:
A) A.
B) B.
C) C.
D) D.
The Pigou effect:
A) suggests that as prices fall and real money balances rise, consumers should feel less
wealthy and spend less.
B) suggests that as prices fall and real money balances rise, consumers should feel
wealthier and spend more.
C) suggests that as prices fall and real money balances rise, consumers should feel less
wealthy but spend more.
D) is generally accepted as adequate proof that the economy must be able to correct
itself.
Unions contribute to structural unemployment when collective bargaining results in
wages:
A) above the equilibrium level.
B) below the minimum wage.
C) below the equilibrium level.
D) above the level of unemployment compensation.
If taxes are raised, but the Fed prevents income from falling by raising the money
supply, then:
A) both consumption and investment remain unchanged.
B) consumption rises but investment falls.
C) investment rises but consumption falls.
D) both consumption and investment fall.
Short-run Phillips Curve
(Exhibit: Short-Run Phillips Curve) As the short-run Phillips curve shifts from A to B to
C to D:
A) the expected rate of inflation is unchanged at every level of unemployment.
B) there is a lower-expected rate of inflation at every level of unemployment.
C) there is a higher-expected rate of inflation for every level of unemployment.
D) the natural rate of unemployment falls
For a fixed money supply, the aggregate demand curve slopes downward because at a
lower price level real money balances are ______, generating a ______ quantity of
output demanded.
A) higher; greater
B) higher; smaller
C) lower; greater
D) lower; smaller
Exhibit: Shift in Aggregate Demand
(Exhibit: Shift in Aggregate Demand) Assume that the economy is initially at point A
with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0
could be the result of either a(n) ______ in the money supply or a(n) ______ in
velocity.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
a. Graphically illustrate the impact of an open-market purchase by the Federal Reserve
on the equilibrium interest rate using the theory of liquidity preference and the market
for real money balances. Be sure to label: i. the axes; ii. the curves; iii. the initial
equilibrium values; iv. the direction the curve shifts; and v. the terminal equilibrium
values.
b. Explain in words what happens to the equilibrium interest rate as a result of the
open-market purchase.
Exhibit: Shift in Aggregate Demand
(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E,
with price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and
LRAS represent, respectively, short-run and long-run aggregate supply. Now assume
that the aggregate demand curve shifts so that it is represented by AD1. The economy
moves first to point ______ and then, in the long run, to point ______.
A) A; D
B) D; A
C) C; B
D) B; C
The assumption of adaptive expectations for inflation means that people will form their
expectations of inflation by:
A) taking all information into account using the best economic model available.
B) asking the opinions of experts.
C) basing their opinions on recently observed inflation.
D) flipping a coin.
If the real exchange rate between the United States and Japan remains unchanged, and
the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3
percent, the:
A) dollar will appreciate by 3 percent against the yen.
B) yen will appreciate by 3 percent against the dollar.
C) yen will appreciate by 6 percent against the dollar.
D) yen will appreciate by 9 percent against the dollar.
The government spending component of GDP includes all of the following except:
A) federal spending on goods.
B) state and local spending on goods.
C) federal spending on transfer payments.
D) federal spending on services.
Consumers with time-inconsistent preferences:
A) base consumption decisions on transitory rather than permanent income.
B) seek to consume more in retirement than during their working years.
C) may alter decisions simply because time passes.
D) face borrowing constraints that prevent rational behavior.
Empirical evidence supports the theory that free trade:
A) increases economic growth.
B) decreases economic growth.
C) increases imports, but decreases exports because of greater global competition.
D) increases both imports and exports, but does not contribute to overall economic
growth.
If one were to own government bonds or other forms of financial assets, they would
earn a real interest rate. Yet, the opportunity cost of holding money is equal to the
nominal interest rate. Explain why and how.
How does the DAS curve reflect the Phillips curve? Explain.
What is stabilization policy?
Major improvements in computer information technology and communications in the
late 1990s fueled an increase in investment demand in the United States, which is a
large open economy. What is the predicted impact of this increased investment demand
in the United States on the U.S. interest rate, the U.S. exchange rate, and U.S. net
exports, holding other factors constant? Illustrate your answer graphically and explain
in words.
Suppose that droughts in the Southeast and floods in the Midwest substantially reduce
food production in the United States. Use the aggregate demand”aggregate supply
model to illustrate graphically the impact in the short run and the long run of this
adverse supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial
equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values;
and vi. the long-run equilibrium values. State in words what happens to prices and
output in the short run and the long run.
The U.S. Treasury reports the budget deficit or surplus of the federal government. Give
at least one reason why the measured budget deficit might overstate the “true” deficit
and at least one reason the measured figure might understate the “true” deficit.
The development of fiat money is quite perplexing, as people began to value something
that is intrinsically useless. Explain why fiat money came into use.
How is hysteresis related to recession? Explain.
Explain the meaning of monetary neutrality and illustrate graphically that there is
monetary neutrality in the long run in the aggregate demand”aggregate supply model.
Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the
direction the curves shift; v. the short-run equilibrium values; and vi. the long-run
equilibrium values. Explain in words what your graph illustrates.
If the demand for money depends positively on real income and depends inversely on
the nominal interest rate, what will happen to the price level today, if the central bank
announces (and people believe) that it will decrease the money growth rate in the
future, but it does not change the money supply today?
Assume that the following equations characterize a large open economy:
(1) Y = 5,000
(2) Y = C + I + G + NX
(3) C = 1/2(Y ” T)
(4) I = 2,000 ” 100r
(5) NX = 500 ” 500e
(6) CF = “100r
(7) CF = NX
(8) G = 1,500
(9) T = 1,000.
Where NX is net exports, CF is net capital outflow, and Î is the real exchange rate.
Solve these equations for the equilibrium values of C, I, NX, CF, r, and e. (Hint:
Substitute equations (9) and (1) into (3), then substitute (1), (3), (4), (8), and (5) into
(2). Then substitute (5) and (6) into (7). Now you have two equations in r and e. Check
your work by seeing that all of these equations balance given your answers.)
Under what condition does a liquidity trap occur?
The demand for money (even if we take into account real balances, it is demand for
money deflated by price levels) helps determine the equilibrium level of the interest
rate, even though holding money does not earn any interest income. How is this
possible?