Implied in new Keynesian theory is that when policy is correctly anticipated, there is a
tradeoff between inflation and unemployment in
a. neither the short run nor the long run.
b. both the short run and the long run.
c. the short run, but not in the long run.
d. the long run, but not in the short run.
When a decrease in one or more components of private spending completely offsets an
increase in government spending, there is
a. incomplete crowding out.
b. zero crowding out.
c. complete crowding out.
d. complete crowding in.
e. either c or d
Exhibit 8-3
A shift in aggregate demand from AD2 to AD1could have been the result of
a. a decrease in the price level.
b. an increase in the price level.
c. businesses become more optimistic about future sales.
d. businesses become more pessimistic about future sales.
One of the reasons why the AD curve slopes downward is that as the
a. price level rises, purchasing power rises.
b. price level falls, purchasing power rises.
c. nation’s income level rises, purchasing power rises.
d. nation’s income level rises, purchasing power falls.
e. This is a trick question, because the AD curve is upward sloping.
The demand for money rises. According to the Keynesian transmission mechanism, the
interest rate __________, investment spending __________(assuming it is
interest-sensitive), the AD curve shifts to the __________ and if the AS curve is
horizontal, Real GDP __________.
a. rises; falls; left; rises
b. falls; rises; right; does not change
c. rises; falls; right; rises
d. falls; falls; left; does not change
e. rises; falls; left; falls
Total bank reserves equal
a. checkable deposits + vault cash + traveler’s checks.
b. vault cash + currency in the hands of the nonbanking public.
c. bank deposits at the Federal Reserve.
d. bank deposits at the Federal Reserve + vault cash.
If the AS curve is vertical, then it follows that
a. Real GDP changes will always arise from the supply side of the economy.
b. Real GDP changes will always arise from the demand side of the economy.
c. Price level changes will always arise from the demand side of the economy.
d. Price level changes will always arise from the supply side of the economy.
e. a and c
Exhibit 10-1
Equilibrium Real GDP occurs at
a. Q1.
b. Q2.
c. Q3.
d. Q1 and Q3.
e. none of the above
In 1820, the country with the highest per capita GDP was
a. Australia.
b. the United States.
c. Austria.
d. Germany.
e. the Netherlands.
The J-curve summarizes the phenomenon that occurs when import spending initially
falls after a depreciation of a country’s currency and then import spending later rises.
a. True
b. False
To eliminate an inflationary gap, Keynesian theory indicates that government should
a. increase taxes.
b. decrease taxes.
c. increase government purchases.
d. decrease government purchases.
e. either a or d
The spread (difference) between the yield on conventional bonds and the yield on
indexed bonds with the same maturities is an indication of the expected inflation rate.
a. True
b. False
Economists believe that people’s wants are
a. finite.
b. infinite.
c. irrational.
d. unimportant because needs are more important than wants.
Which of the following statements is false?
a. India and China are examples of countries that have been opening up their economies
to globalization.
b. Globalization will cause some people to lose jobs, but even without globalization,
some people will lose jobs.
c. The end of the Cold War is one of the factors that many believe has lead to an
increase in globalization.
d. Income per person has decreased in China and India in recent decades.
Which of the following statements is false?
a. Keynesians would not advocate an expansionary monetary policy to eliminate a
recessionary gap if they believed that investment demand was interest-insensitive.
b. Keynesians would not advocate an expansionary monetary policy to eliminate a
recessionary gap if they believed the money market was in the liquidity trap.
c. Keynesians would advocate an expansionary monetary policy to eliminate a
recessionary gap if they believed investment spending was insensitive to changes in the
interest rate.
d. Keynesians believe that money wages are inflexible in the downward direction.