Falling house prices generate widespread insolvency of financial institutions by:
A) reducing the value of collateral assets.
B) reducing the value of liabilities.
C) increasing the value of assets.
D) increasing capital.
If real money balances enter the IS“LM model both through the theory of liquidity
preference and the Pigou effect, then a fall in the price level will result in higher income
and:
A) higher interest rates.
B) lower interest rates.
C) no change in interest rates.
D) either higher, lower, or unchanging interest rates.
If a change in government regulations allows banks to start paying interest on checking
accounts, this will:
A) increase the demand for money.
B) decrease the demand for money.
C) have no effect on the demand for money.
D) increase the demand for currency but decrease the demand for checking accounts.
In the United States, the money supply is determined:
A) only by the Fed.
B) only by the behavior of individuals who hold money and of banks in which money is
held.
C) jointly by the Fed and by the behavior of individuals who hold money and of banks
in which money is held.
D) according to a constant-growth-rate rule.
Expansionary fiscal policy in a large open economy ______ the real interest rate and
______ the real exchange rate.
A) does not change; increases
B) increases; increases
C) increases; decreases
D) decreases; increases
Assume the economy is initially in a short-run equilibrium at a level of output below
the natural rate.
a. Use the IS“LM model to graphically illustrate: (1) how the economy will adjust in the
long-run if the no policy action is taken; and (2) the long-run equilibrium if fiscal policy
is used to return the economy to the natural rate of output.
b. Explain how investment, the interest rate, and the price level differ in the new
long-run equilibrium in the two cases.
Assume that an economy is described by the IS curve Y = 3,600 + 3G ” 2T ” 150r and
the LM curveY = 2 M/P + 100r [or r = 0.01Y ” 0.02(M/P)]. The investment function for
this economy is 1,000 ” 50r. The consumption function is C = 200 + (2/3)(Y ” T).
Long-run equilibrium output for this economy is 4,000. The price level is 1.0.
a. Assume that government spending is fixed at 1,200. The government wants to
achieve a level of investment equal to 900 and also achieve Y = 4,000. What level of r is
needed for I = 900? What levels of T and M must be set to achieve the two goals? What
will be the levels of private saving, public saving, and national saving? (Hint: Check C
+ I + G = Y.)
b. Now assume that the government wants to cut taxes to 1,000. With G set at 1,200,
what will the interest rate be at Y = 4,000? What must be the value of M? What will I
be? What will be the levels of private, public, and national saving? (Hint: Check C + I +
G = Y.)
c. Which set of policies may be referred to as tight fiscal, loose money? Which set of
policies may be referred to as loose fiscal, tight money? Which “policy mix” most
encourages investment?
A decrease in the nominal money supply, other things being equal, will shift the LM
curve:
A) upward and to the right.
B) downward and to the right.
C) downward and to the left.
D) upward and to the left.
According to the traditional view of government debt, if taxes are cut without cutting
government spending, then the international effect initially will be a capital ______ and
a trade ______.
A) inflow; deficit
B) inflow; surplus
C) outflow; deficit
D) outflow; surplus
A well-functioning financial system does all of the following except:
A) foster economic growth by directing savings to its most productive use.
B) allocate risk among market participants.
C) eliminate risk through diversification.
D) direct resources from savers to borrowers.
When Paul Volcker tightened the money supply:
A) the inflation rate immediately fell.
B) nominal interest rates fell in the short run.
C) nominal interest rates fell in the long run.
D) real balances rose in the short run.
Among the four countriesthe United States, the United Kingdom, Germany, and
Japanthe one that experienced the most rapid growth rate of output per person between
1948 and 1972 was:
A) the United States.
B) the United Kingdom.
C) Germany.
D) Japan.
The employment statistics computed from the establishment survey do not include:
A) workers with two jobs.
B) the self-employed.
C) workers on firms’ payrolls.
D) part-time workers on firms’ payrolls.
When planned expenditure is drawn on a graph as a function of income, the slope of the
line is:
A) zero.
B) between zero and one.
C) one.
D) greater than one.
If 7 million workers are unemployed, 143 million workers are employed, and the adult
population equals 200 million, then the unemployment rate equals approximately
______ percent.
A) 3.5
B) 4.7
C) 4.9
D) 7
Investment depends on the ______ interest rate, and money demand depends on the
______ interest rate.
A) real; real
B) nominal; nominal
C) real; nominal
D) nominal; real
Equilibrium in the market for goods and services determines the ______ interest rate
and the expected rate of inflation determines the ______ interest rate.
A) ex ante real; ex ante nominal
B) ex post real; ex post nominal
C) ex ante nominal; ex post real
D) ex post nominal; ex post real
Suppose that two countries are exactly alike in every respect except that population
grows at a faster rate in country A than in country B.
a. Which country will have the higher level of output per worker in the steady state?
Illustrate graphically.
b. Which country will have the faster rate of growth of output per worker in the steady
state?
John Taylor’s rule for setting the federal funds rate proposes increasing the nominal
federal funds rate as inflation _____ and the GDP gap _____.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Which of the following policies are intended to reduce the likelihood of future financial
crises?
A) restricting the size of financial firms
B) limiting excessive risk taking
C) reforming regulatory agencies
D) all of the above
Assume that the government levies a one-time-only tax on oil companies equal to a
proportion of the value of the company’s oil reserves. According to the neoclassical
model, if firms face no financing constraints and also believe the tax will not be
repeated, the effect of this tax on investment by these firms will be to:
A) decrease investment.
B) not affect investment.
C) increase investment.
D) decrease the rental price of capital but not change the cost of capital.
The Solow model with population growth but no technological change cannot explain
persistent growth in standards of living because:
A) total output does not grow.
B) depreciation grows faster than output.
C) output, capital, and population all grow at the same rate in the steady state.
D) capital and population grow, but output does not keep up.
In a large but open economy, when a fiscal expansion takes place, the interest rate goes
up and some investment is crowded out; the expansion also causes a trade:
A) surplus and a fall in the real exchange rate.
B) deficit and a rise in the real exchange rate.
C) surplus and a rise in the real exchange rate.
D) deficit and a fall in the real exchange rate.
If purchasing-power parity holds, then changes in domestic saving will _____ the real
exchange rate.
A) increase
B) decrease
C) not change
D) either increase or decrease
Governments can reduce the problem of adverse selection by:
A) requiring disclosure about investment projects and a firm’s finances.
B) providing loans from public funds.
C) keeping interest rates low.
D) reducing corporate income tax rates.
Consumption depends ______ on disposable income, and investment depends ______
on the real interest rate.
A) positively; positively
B) positively; negatively
C) negatively; negatively
D) negatively; positively
According to the imperfect-information model, when the price level falls but the
producer did not expect it to fall, the producer:
A) increases production.
B) does not change production.
C) decreases production.
D) hires more workers.
A decline in the Index of Supplier Deliveries is typically an indicator of a future _____
in economic production, and a narrowing of the interest rate spread between the 10-year
Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in
economic production.
A) increase; slowdown
B) increase; increase
C) slowdown; increase
D) slowdown; slowdown
The marginal rate of substitution between first-period consumption and second-period
consumption:
A) is the inverse of the slope of an indifference curve, in which first-period
consumption is graphed along the horizontal axis.
B) is generally high when first-period consumption is high.
C) indicates by how much first-period consumption changes for a one-unit change in
first-period income.
D) reveals the rate at which the consumer is willing to substitute second-period
consumption for first-period consumption.
Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays
its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000.
In this case, the value added by the automobile company is:
A) $10,000.
B) $12,000.
C) $20,000.
D) $22,000.
In 2013, GDP per person in the United States was approximately:
A) $5,000.
B) $35,000.
C) $53,000.
D) $353,000.
The quantitative easing operations conducted by the Federal Reserve between 2007 and
2011 resulted in _____ increases in the monetary base and _____ increases in money
supply.
A) no; no
B) large; larger
C) large; smaller
D) small; smaller