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Starting from long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, a temporary five-period tax increase causes output to _____ until
returning to the natural level in the long run.
A) remain continuously above the natural level of output
B) move above and then below the natural level of output
C) remain continuously below the natural level of output
D) move below and then above the natural level of output.
Use the model developed in Chapter 3, but assume that consumption decreases, other
things being equal, when the interest rate rises. If there is a technological advance that
leads to an increase in investment demand:
A) investment increases and the interest rate rises.
B) investment is unchanged and the interest rate rises.
C) investment and the interest rate are both unchanged.
D) investment decreases and the interest rate rises.
Exhibit: Shifting IS* and LM*
(Exhibit: Shifting IS* and LM*) A small open economy with a floating exchange rate is
initially in equilibrium at A with
Holding all else constant, if domestic consumers develop greater preferences for
imported goods, then the _____ curve will shift to _____.
A) LM1*;
B) LM1*;
C) IS1*;
D) IS1*;
According to the monetary policy rule, when inflation is at its target level and output is
at the natural level, then the real interest rate equals the:
A) nominal rate of interest.
B) target rate of inflation.
C) natural rate of interest.
D) current rate of inflation.
Beginning at long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, if the central bank permanently reduces its inflation target, then in the
initial period the DAS curve _____ and the DAD curve _____.
A) shifts upward; shifts rightward
B) does not shift; shifts leftward
C) does not shift; does not shift
D) shifts downward; shifts leftward
According to the theory of liquidity preference, if the supply of real money balances
exceeds the demand for real money balances, individuals will:
A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing
money.
C) purchase more goods and services.
D) be content with their portfolios.
Starting from long-run equilibrium in the dynamic model of aggregate demand and
aggregate supply, a five-period positive demand shock causes output to _____ until
returning to the natural level in the long run.
A) remain continuously above the natural level of output
B) move above and then below the natural level of output
C) remain continuously below the natural level of output
D) move below and then above the natural level of output
If the Fed has discretion to choose its own policy and announces a policy of low
inflation, then:
A) the policymaker is required to make the money supply grow at a low rate.
B) private economic agents are sure to believe the announcement because it is credible.
C) private economic actors are likely to discount the policy because the Fed has an
incentive to renege on its policy once expectations are formed.
D) the Fed is certain to renege on its policy once expectations are formed because then
it can lower unemployment with minimum inflation.
The U.S. recession of 2001 can be explained in part by a declining stock market and
terrorist attacks. Both of these shocks can be represented in the IS"LM model by
shifting the ______ curve to the ______.
A) LM; right
B) LM; left
C) IS; right
D) IS; left
The spending 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.
Net investment is the:
A) business fixed investment minus inventory investment.
B) change in the stock of capital.
C) gross investment minus the rate of inflation.
D) gross investment plus the replacement of depreciated capital.
According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium
wages because worker _____ increases.
A) productivity
B) turnover
C) unionization
D) shirking
In the classical model with fixed income, if the demand for goods and services is less
than the supply, the interest rate will:
A) increase.
B) decrease.
C) remain unchanged.
D) either increase or decrease, depending on whether consumption is greater or less
than investment.
When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the:
A) graph is a straight line.
B) slope of the line eventually gets flatter and flatter.
C) slope of the line eventually becomes negative.
D) slope of the line eventually becomes steeper and steeper.
Milton Friedman argued that, although household studies showed that high-income
households generally have lower average propensities to consume, this phenomenon is
due to the fact that these households have, on average:
A) positive transitory income.
B) negative transitory income.
C) higher permanent income.
D) lower permanent income.
Assume that the investment function is given by I = 1,000 " 30r, where r is the real rate
of interest (in percent). Assume further that the nominal rate of interest is 10 percent
and the inflation rate is 2 percent. According to the investment function, investment will
be:
A) 240.
B) 700.
C) 760.
D) 970.
If real interest rates increase, what will happen to:
a. business fixed investment?
b. residential investment?
c. inventory investment?
According to the definition used by the U.S. Bureau of Labor Statistics, people are
considered to be unemployed if they:
A) are out of a job, but not looking for work.
B) retired from the labor force before age 65.
C) do not have a job, but have looked for work in the past 4 weeks.
D) are absent from work because of bad weather or illness.
Economic research finds that greater central-bank independence is ______ correlated
with lower and more stable inflation as well as ______ correlated with the average
growth and variability of real GDP.
A) strongly; strongly
B) strongly; not
C) not; strongly
D) not; not
Exhibit: Supply Shock
(Exhibit: Supply Shock) In this graph, assume that the economy starts at point A and
there is a favorable supply shock that does not last forever. In this situation, point
______ represents short-run equilibrium and point ______ represents long-run
equilibrium.
A) B; C
B) B; A
C) E; D
D) E; A
a. If corporate downsizing and lack of job security cause consumers to spend less and
save more, what will be the impact on the exchange rate and trade balance? Use the
long-run model of a small open economy to illustrate graphically the impact of this
decline in consumer confidence on the exchange rate and the trade balance. Assume the
country starts from a position of trade balance, i.e., exports equal imports. Be sure to
label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the
curves shift; and v. the new long-run equilibrium values.
b. Based on your graphical analysis, explain the predicted impact of a decline in
consumer confidence on the exchange rate and the U.S. trade balance.
Exhibit: Market for Real Money Balances
(Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r3,
then people will ______ bonds and the interest rate will ______.
A) sell; rise
B) sell; fall
C) buy; rise
D) buy; fall
You are given information about the following leading indicators. For each indicator
explain whether the information suggests that a recession or expansion should be
expected in the future.
a. Average initial weekly claims for unemployment insurance rise.
b. New building permits issued increases.
c. The interest rate spread between the 10-year Treasury note and the 3-month Treasury
bill narrows.
d. The Index of Supplier Deliveries falls.
In the IS"LM model, which two variables are influenced by the interest rate?
A) supply of nominal money balances and demand for real balances
B) demand for real money balances and government purchases
C) supply of nominal money balances and investment spending
D) demand for real money balances and investment spending
In an economy with population growth at rate n, the change in capital stock per worker
is given by the equation:
A) Dk = sf(k) + dk.
B) Dk = sf(k) " dk.
C) Dk = sf(k) + (d + n)k.
D) Dk = sf(k) " (d + n)k.
Since GDP includes only the additions to income, not transfers of assets, ______ are
not included in the computation of GDP.
A) final goods
B) used goods
C) consumption goods
D) goods produced for inventory
The Phillips curve describing an economy takes the form u = un " a(p " Ep). The central
bank directly sets the inflation rate to minimize the following loss function, L(u, p) = u
+ gp2. The symbol u denotes the unemployment rates, un is the natural rate of
unemployment, p is the inflation rate, Ep is the expected inflation rate, and a and g are
behavioral response parameters of the economy. Private agents form their expectations
rationally before the central bank sets the inflation rate. Compared to making monetary
policy with discretion, the optimal inflation rate will be ______ under a fixed rule and
the unemployment rate will be ______.
A) higher; lower
B) higher; the same
C) lower; lower
D) lower; the same
Exhibit: Quantity Consumed and Price of Good
In the exhibit, the citizens of country XYZ come to desire more of good A. As a result,
the quantity and price of the good both rise.
a. Compute nominal GDP in the base year and later year.
b. Compute real GDP in the base and later years (in base-year prices).
c. Compute the GDP deflator in the later year, using your answers to parts a and b.
d. Compute a fixed-weight price index for the later year, using the base-year quantities
as weights.
e. Which price index rises faster, the GDP deflator (Paasche) index or the fixed-weight
index (Laspeyres) index?
The marginal product of labor is:
A) output divided by labor input.
B) additional output produced when one additional unit of labor is added.
C) additional output produced when one additional unit of labor and one additional unit
of capital are added.
D) value of additional output when one dollar's worth of additional labor is added.
In the dynamic model of aggregate demand and aggregate supply, increases in the
natural level of output lead to _____ in output and ______ in inflation.
A) increases; increases
B) increases; no change
C) no change; increases
D) no change; no change
An indicator of the increased lack of confidence in the banking system during the
financial crisis of 2008"2009 was the:
A) increase in the federal government budget deficit.
B) decrease in interest rates.
C) increase in the TED spread.
D) decrease in the TED spread.
