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In the dynamic model of aggregate demand and aggregate supply, one period in time is
connected to the next period through:
A) the monetary policy rule.
B) demand shocks.
C) inflation expectation.
D) the natural level of output.
Fiscal policy has a relatively long ______ lag, and monetary policy has a relatively long
______ lag.
A) inside; outside
B) outside; inside
C) inside; inside
D) outside; outside
The long run refers to a period:
A) of decades.
B) during which capital and labor are sometimes not fully employed.
C) during which prices are flexible.
D) during which output deviates from the full-employment level.
Banks help mitigate the problem of moral hazard in lending by:
A) requiring lengthy applications for loans.
B) making loans to many different types of borrowers.
C) adjusting the amount of the loan to fit the requirements of the borrower.
D) monitoring the business after a loan is made to the business.
Inventory investment is the ______ component of aggregate spending and is very
______.
A) largest; volatile
B) largest; stable
C) smallest; volatile
D) smallest; stable
Analysis of the short-run Phillips curve suggests that policymakers who want to reduce
unemployment in the short run should ______ aggregate demand at a cost of generating
______ inflation.
A) increase; higher
B) increase; lower
C) decrease; higher
D) decrease; lower
In the Mundell"Fleming model:
A) the exchange rate system must have a floating exchange rate.
B) the exchange rate system must have a fixed exchange rate.
C) it makes no difference whether the exchange rate system has a floating or a fixed
exchange rate.
D) the behavior of the economy depends on whether the exchange rate system has a
floating or fixed exchange rate.
Assume that the demand for real money balance (M/P) is M/P = 0.6Y " 100i, where Y is
national income and i is the nominal interest rate (in percent). The real interest rate r is
fixed at 3 percent by the investment and saving functions. The expected inflation rate
equals the rate of nominal money growth.
a. If Y is 1,000, M is 100, and the growth rate of nominal money is 1 percent, what must
i and P be?
b. If Y is 1,000, M is 100, and the growth rate of nominal money is 2 percent, what must
i and P be?
Consider the impact of an increase in thriftiness in the Keynesian-cross analysis.
Assume that the marginal propensity to consume is unchanged, but the intercept of the
consumption function is made smaller so that at every income level saving is greater.
This will:
A) lower equilibrium income by the decrease in the intercept multiplied by the
multiplier.
B) lower equilibrium income by the decrease in the intercept.
C) raise equilibrium income by the decrease in the intercept.
D) raise equilibrium income by the decrease in the intercept multiplied by the
multiplier.
The possibility of capital flight is likely to be greater at higher levels of government
debt because there is a greater:
A) temptation to default on the debt.
B) likelihood that the government will begin issuing indexed bonds.
C) probability that a balanced budget will be adopted by the government.
D) potential for tax smoothing policies to be eliminated.
The monetary transmission mechanism in the IS"LM model is a process whereby an
increase in the money supply increases the demand for goods and services:
A) directly.
B) by lowering the interest rate so that investment spending increases.
C) by raising the interest rate so that investment spending increases.
D) by increasing government spending on goods and services.
Beginning at long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, in the first period of a four-period positive demand shock, the DAS
curve _____ and the DAD curve _____.
A) shifts upward; shifts rightward
B) does not shift; shifts rightward
C) does not shift; does not shift
D) shifts downward; shifts leftward
Holding everything else constant, compare the impact of a monetary expansion in a
small open economy with a floating exchange rate and in a large open economy with a
floating exchange rate on:
a. domestic investment
b. domestic output
A bond (or debt instrument) is a(n):
A) ownership claim by the shareholder of a firm.
B) loan to a firm.
C) ongoing relationship between customers and a firm.
D) legal restriction on products a firm may produce.
Those economists who believe that monetary policy is more potent than fiscal policy
argue that the:
A) responsiveness of money demand to the interest rate is large.
B) responsiveness of money demand to the interest rate is small.
C) IS curve is nearly vertical.
D) LM curve is nearly horizontal.
If the underground economy is larger in Europe than in the United States, then the
difference in the _____ number of hours worked between Europe and the United States
may be smaller than the difference in the _____ numbers of hours worked.
A) measured; actual
B) actual; measured
C) annual; monthly
D) monthly; annual
Which of the following conjectures that underlie the Keynesian consumption function is
not consistent with aggregate U.S. data?
A) The marginal propensity to consume is between 0 and 1.
B) The average propensity to consume decreases as income increases.
C) There is a high correlation between income and consumption.
D) Current income is a determinant of consumption.
Holding other factors constant, a fall in the interest rate will ______ inventory
investment.
A) increase
B) decrease
C) have no impact on
D) sometimes increase and sometimes decrease
According to the model developed in Chapter 3, when taxes are increased but
government spending is unchanged, interest rates:
A) increase.
B) are unchanged.
C) decrease.
D) can vary wildly.
If velocity is constant and, in addition, the factors of production and the production
function determine real GDP, then:
A) the price level is proportional to the money supply.
B) real GDP is proportional to the money supply.
C) the price level is fixed.
D) nominal GDP is fixed.
Graphically illustrate the traditional view of the long-run impacts of a debt-financed tax
cut on :
a. saving, investment, and real interest rate using the classical model (Chapter 3).
b. steady state capital per worker and output per worker using the Solow growth model.
An increase in the trade deficit of a small open economy could be the result of:
A) an increase in taxes.
B) an increase in government spending.
C) an increase in the world interest rate.
D) the expiration of an investment tax-credit provision.
Along an IS curve all of the following are always true except:
A) planned expenditures equal actual expenditures.
B) planned expenditures equal income.
C) the demand for real balances equals the supply of real balances.
D) there are no unplanned changes in inventories.
Conducting monetary policy so that the FF rate = 0.05, where the FF rate is the nominal
federal funds interest rate, is an example of :
A) an active policy rule.
B) a passive policy rule.
C) discretionary policy.
D) an automatic stabilizer.
In the IS"LM model when M rises but P remains constant, 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
If consumers want consumption to be as constant as possible over their life cycles and
income rises gradually over their periods of employment, then if borrowing constraints
prevent their wealth from falling below zero:
A) they can achieve constant consumption by borrowing.
B) their consumption in retirement will be higher than it was in earlier parts of the life
cycle.
C) their consumption during their younger years will be lower than it will be in later
parts of the life cycle.
D) their consumption during their later working years will be higher than it was or will
be in other parts of the life cycle.
When the Fed makes an open-market sale, it:
A) increases the money multiplier (m).
B) increases the currency"deposit ratio (cr).
C) increases the monetary base (B).
D) decreases the monetary base (B).
In the long run, the level of national income in an economy is determined by its:
A) factors of production and production function.
B) real and nominal interest rate.
C) government budget surplus or deficit.
D) rate of economic and accounting profit.
The manipulation of the economy to win elections is called:
A) discretionary monetary policy.
B) discretionary fiscal policy.
C) the political business cycle.
D) an automatic stabilizer.
If government purchases exceed taxes minus transfer payments, then the government
budget is:
A) balanced.
B) in deficit.
C) in surplus.
D) endogenous.
