question

The saying "Money is a veil." means that

answer

while nominal variables are the first thing we may observe about an economy, what's important are the real variables and the forces that determine them.

question

Historical evidence for the U.S. economy indicates that

answer

changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle.

question

The quantity of money has no real impact on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning

answer

the long run, but not the short run.

question

Which of the following fall during a recession?

answer

both retail sales and employment

question

Suppose businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases. Their reaction would initially shift

answer

aggregate demand left.

question

Which of the following shifts the short-run aggregate supply curve to the right?

answer

a decrease in the expected price level

question

If the dollar appreciates, perhaps because of speculation or government policy, then U.S. net exports

answer

decrease which shifts aggregate demand left.

question

Which of the following rises during recessions?

answer

layoffs but not consumer spending

question

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. What would happen in the market for foreign-currency exchange?

answer

the supply of dollars would shift right and the exchange rate would fall.

question

Aggregate demand includes

answer

the quantity of goods and services households, firms, the government, and customer abroad want to buy.

question

Which of the following will reduce the price level and real output in the short run?

answer

a decrease in the money supply

question

Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the long run, the change in price expectations created by the stock market boom shifts

answer

short-run aggregate supply left.

question

A candidate for political office announces the following policies which, he says, economics clearly demonstrates will lead to higher output in the long run: 1. reduce immigration from abroad 2. make trade more open between the US and other countries:

answer

1 shifts long-run aggregate supply left, 2 shifts long-run aggregate supply right.

question

Other things the same, if workers and firms expected prices to rise by 2 percent but instead they rise by 3 percent, then

answer

employment and production rise.

question

The long-run aggregate supply curve shifts right if

answer

technology improves.

question

Which of the following does not help explain the direction the quantity of aggregate goods demanded changes when the price level decreases?

answer

the dollar appreciates relative to other currencies

question

Other things the same, if the price level falls, domestic interest rates

answer

fall, so domestic residents will want to hold more foreign bonds.

question

The long-run aggregate supply curve shifts right if

answer

either immigration from abroad increases or technology improves.

question

If there are sticky wages, and the price level is greater than what was expected, then

answer

the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve.

question

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

answer

the slope of the aggregate-demand curve.

question

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

answer

the multiplier effect

question

The theory of liquidity preference is most helpful in understanding

answer

the interest-rate effect.

question

Which of the following events would shift money demand to the left?

answer

a decrease in the price level

question

According to liquidity preference theory, an increase in the price level causes the interest rate to

answer

increase, which decreases the quantity of goods and services demanded.

question

Critics of stabilization policy argue that

answer

policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.

question

According to liquidity preference theory, if the price level decreases, then

answer

the interest rate falls because money demand shifts left.

question

The lag problem associated with fiscal policy is due mostly to

answer

the political system of checks and balances that slows down the process of implementing fiscal policy.

question

A policy that results in slow and steady growth of the money supply is an example of

answer

a "passive" monetary policy.

question

Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium.

answer

...

question

Which of the following illustrates how the investment accelerator works?

answer

An increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants.

question

A decrease in government spending initially and primarily shifts

answer

aggregate demand to the left.

question

The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates

answer

the multiplier effect.

question

Keynes used the term "animal spirits" to refer to

answer

arbitrary changes in attitudes of household and firms.

question

In recent years, the Federal Reserve has conducted policy by setting a target for the

answer

federal funds rate.

question

Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?

answer

$500 billion and $300 billion

question

Which of the following raises the interest rate?

answer

an increase in government expenditures and a decrease in the money supply

question

When the Fed decreases the money supply, we expect

answer

interest rates to rise and stock prices to fall.

question

Samuelson and Solow reasoned that when aggregate demand was low, unemployment was

answer

high, so there was downward pressure on wages and prices.

question

An adverse supply shock will shift short-run aggregate supply

answer

left, making prices rise.

question

Which of the following would shift the long-run Phillips curve to the right?

answer

increases in unemployment compensation

question

An increase in expected inflation shifts the

answer

short-run Phillips curve right.

question

Suppose expected inflation and actual inflation are both low, and unemployment is at its natural rate. If the Fed then pursues an expansionary monetary policy, which of the following results would be expected in the short run?

answer

The economy would move up and to the left along a given short-run Phillips curve.

question

The economy will move to a point on the short-run Phillips curve where unemployment is higher if

answer

the inflation rate decreases.

question

In the equation, Unemployment rate = Natural rate of unemployment - a ´ (Actual inflation - Expected inflation), the variable a is a parameter that measures how much

answer

actual unemployment responds to unexpected inflation.

question

Which of the following is not associated with an adverse supply shock?

answer

the short-run Phillips curve shifts left

question

In the long run, an increase in the money supply growth rate

answer

raises expected inflation so the short-run Phillips curve shifts right.

question

Samuelson and Solow argued that a combination of low unemployment and low inflation

answer

was impossible given the historical data as summarized by the Phillips curve.

question

n the long run a reduction in the money supply growth rate affects

answer

the inflation rate but not the natural rate of unemployment.

question

Moving from the late 1960s to 1970-1973,

answer

inflation remained high while the unemployment rate was higher than in the late 1960s.

question

Which of the following would not be associated with a favorable supply shock?

answer

the price level rises

question

If inflation is greater than expected, then the unemployment rate is

answer

below the natural rate. In the long run the short-run Phillips curve will shift right.

question

If the Federal Reserve accommodates an adverse supply shock,

answer

inflation expectations may rise which shifts the short-run Phillips curve shifts right.

question

As an economist working for a U.S. government agency you determine that a particular country has a sacrifice ratio of 3. Policy-makers in that country are thinking of lowering the inflation rate from 10% to 4%. Is this sacrifice ratio higher or lower than the typical estimate? From your numbers, what is the amount of output that will be lost for this country to reduce its inflation rate?

answer

The sacrifice ratio is lower than the typical estimate. It will cost 18% of annual output to reach the new inflation target.

question

The consequences of the Volcker disinflation demonstrated that when Volcker announced his intention to reduce inflation quickly, on average the public thought

answer

inflation would fall but not by as much or as quickly as Volcker claimed.

question

Ultimately, the change in unemployment associated with a change in inflation is due to

answer

unanticipated inflation, not inflation per se.

question

If inflation expectations rise, the short-run Phillips curve shifts

answer

right, so that at any unemployment rate inflation is higher in the short run than before.

question

Samuelson and Solow reasoned that when aggregate demand was high, unemployment was

answer

low, so there was upward pressure on wages and prices.

question

If a U.S. shirt maker purchases cotton from Egypt, U.S. net exports

answer

decrease, and U.S. net capital outflow decreases.

question

If Norway sold more goods and services abroad than it purchased from abroad, then it had

answer

positive net exports which is a trade surplus.

question

Foreign-produced goods and services that are purchased domestically are called

answer

imports.

question

Which of the following is correct?

answer

NCO = NX

question

A U.S. firm buys apples from New Zealand with New Zealand dollars it got in exchange for U.S. dollars. New Zealand residents then use these dollars to purchase oranges from the U.S. Which of the following increases?

answer

neither New Zeland's net exports nor New Zeland's capital outflow

question

If the price of a good in the U.S. is $10 and the unit of foreign currency is the stone, in which case is the real exchange rate 4/5?

answer

the foreign price is 5 stones and the exchange rate is 2/5 stones per dollar

question

Jill, a U.S. citizen, uses some euros to purchase a bond issued by a French vineyard. This exchange

answer

does not change U.S. net capital outflow.

question

Paine Pharmaceuticals produces medicines in the U.S. Its overseas sales

answer

are an export of the U.S. and increase U.S. net exports

question

Other things the same, a country could move from having a trade surplus to having a trade deficit if either

answer

saving fell or domestic investment rose.

question

A Ukrainian firm sells diesel locomotives to a U.S. railroad. Other things the same, these sales

answer

decrease U.S. net exports and increase Ukrainian net exports.

question

One year a country has positive net exports. The next year it still has positive but larger net exports

answer

its trade surplus rose.

question

If the American company Stryker builds and operates a new factory in France,

answer

it engages in foreign direct investment. By itself this action raises U.S. net capital outflow.

question

If saving is greater than domestic investment, then

answer

there is a trade surplus and Y > C + I + G.

question

Other things the same, which of the following could explain a rise in Sweden's net capital outflow?

answer

the probability of default on Swedish bonds rises

question

A country has net capital outflow of $20 billion. Which of the following is consistent with this net capital outflow?

answer

It has $20 billion of net exports.

question

An increase in a country's budget surplus shifts its

answer

supply of loanable funds right and increases investment spending.

question

If a country experiences capital flight, which of the following curves shift right?

answer

the demand for loanable funds, the net capital outflow curve, and the supply of dollars in the market for foreign currency exchange.

question

When a country experiences capital flight its currency

answer

depreciates and net exports rise.

question

In which case(s) does(do) a country's demand for loanable funds shift right?

answer

capital flight, but not an increase in the budget deficit

question

If the supply of loanable funds shifts right, then

answer

the real interest rate falls and the equilibrium quantity of loanable funds rises.

question

When the U.S. real interest rate falls, owning U.S. assets becomes

answer

less attractive and so U.S. net capital outflow rises.

question

In 1998 the Russian government defaulted on its bonds. According to the open-economy macroeconomic model, this should have

answer

increased Russian interest rates and net exports.

question

If at a given real interest rate desired national saving were $50 billion, domestic investment were $40 billion, and net capital outflow were $20 billion, then at that real interest rate in the loanable funds market there would be a

answer

shortage. The real interest rate would rise.

question

The slope of the supply of loanable funds is based on an increase in

answer

only national saving when the interest rate rises.

question

An increase in the budget surplus

answer

raises net exports and domestic investment.

question

If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the exchange rate

answer

rises and the quantity of dollars traded falls.

question

Which of the following is the most likely result from an increase in a country's government budget surplus?

answer

lower imports

question

If U.S. residents want to buy more foreign bonds, then in the market for foreign-currency exchange the exchange rate

answer

falls and the quantity of dollars traded rises.

question

If the budget deficit increases, then

answer

U.S. residents will want to purchase fewer foreign assets and foreign residents will want to purchase more U.S. assets

question

Which of the following could explain a decrease in the U.S. real exchange rate?

answer

the default risk of U.S. assets rise

question

In 1995 House Speaker Newt Gingrich threatened to send the United States into default on its debt. During the day of this announcement, U.S. interest rates rose and the real exchange rate of the U.S. dollar depreciated. Which of these changes is consistent with the results of the open-economy macroeconomic model?

answer

the depreciation of the real exchange rate of the U.S. dollar 3. the increase in U.S. interest rates 4. Both a and b are consistent.

question

We depart from the assumptions of classical economics when we focus on the relationship between

answer

the quantity of output and the price level.

question

Which of the following effects provide incentives for consumers to spend less when the price level rises?

answer

the wealth effect and the interest-rate effect

question

Part of the explanation for why the aggregate-demand curve slopes downward is that a decrease in the price level

answer

decreases the interest rate.

question

Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. If nominal wages are sticky, which of the following helps explains the change in output?

answer

real wages rise, so firms choose to produce less

question

An economic contraction caused by a shift in aggregate demand causes prices to

answer

fall in the short run, and fall even more in the long run.

question

During recessions unemployment typically rises

answer

substantially. As the recession ends, unemployment declines gradually.

question

Other things the same, if the price level falls, domestic interest rates

answer

fall, so domestic residents will want to hold more foreign bonds.

question

When production costs rise,

answer

the short-run aggregate supply curve shifts to the left.

question

During recessions declines in investment account for about

answer

2/3 of the decline in real GDP.

question

Recession come at

answer

rregular intervals. During recessions investment spending falls relatively more than consumption spending.

question

The long-run aggregate supply curve shifts right if

answer

1. immigration from abroad increases. 2. the capital stock increases. 3. technology advances.

question

Which of the following effects helps to explain the slope of the aggregate-demand curve?

answer

1. the wealth effect 2. All of the above are correct. 100% 3. the interest-rate effect 4. the exchange-rate effect

question

The initial impact of the repeal of an investment tax credit is to shift

answer

aggregate demand left.

question

Which of the following shifts short-run aggregate supply right?

answer

an increase in immigration from abroad

question

Economic expansions in Germany and Japan would cause

answer

the U.S. price level and real GDP to rise.

question

The aggregate-demand curve

answer

shows an inverse relation between the price level and the quantity of all goods and services demanded.

question

The equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents

answer

an upward-sloping short-run aggregate supply curve

question

If the actual price level is 165, but people had been expecting it to be 160, then

answer

the quantity of output supplied rises, but only in the short run.

question

If the dollar appreciates, perhaps because of speculation or government policy, then U.S. net exports

answer

decrease which shifts aggregate demand left.

question

As the price level falls,

answer

the exchange rate falls, so net exports rise.

question

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate." This statement amounts to the assertion that

answer

changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate.

question

In the short run, a decrease in the money supply causes interest rates to

answer

increase, and aggregate demand to shift left.

question

A decrease in government spending

answer

decreases the interest rate and so investment spending increases.

question

While a television news reporter might state that "Today the Fed lowered the federal funds rate from 5.5 percent to 5.25 percent," a more precise account of the Fed's action would be as follows:

answer

"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would decrease to 5.25 percent."

question

When there is an increase in government expenditures, which of the following raises investment spending?

answer

the investment accelerator but not crowding out

question

Which of the following sequences best explains the negative slope of the aggregate-demand curve?

answer

price level ¯ Þ demand for money ¯ Þ equilibrium interest rate ¯ Þ quantity of goods and services demanded

question

According to liquidity preference theory, if there were a shortage of money, then

answer

the interest rate would be below equilibrium and the quantity of money demanded would be too large for equilibrium.

question

Assume the money market is initially in equilibrium. If the price level decreases, then according to liquidity preference theory there is an excess

answer

supply of money until the interest rate decreases.

question

When the Fed decreases the money supply, we expect

answer

interest rates to rise and stock prices to fall.

question

The theory of liquidity preference illustrates the principle that

answer

monetary policy can be described either in terms of the money supply or in terms of the interest rate.

question

If it were not for the automatic stabilizers in the U.S. economy,

answer

output and employment would probably be more volatile than they are now.

question

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

answer

the interest rate.

question

According to liquidity preference theory, an increase in the price level shifts the

answer

money demand curve rightward, so the interest rate increases.

question

If taxes

answer

increase, then consumption decreases, and aggregate demand shifts leftward.

question

Which of the effects listed below increases the quantity of goods and services demanded when the price level falls and decreases the quantity of goods and services demanded when the price level rises?

answer

1. the interest-rate effect 2. the wealth effect 3. All of the above are correct. 100% 4. the exchange-rate effect

question

In the graph of the money market, the money supply curve is

answer

vertical. It shifts rightward if the Fed buys bonds.

question

People will want to hold less money if the price level

answer

decreases or if the interest rate increases

question

Keynes argued that

answer

irrational waves of pessimism cause decreases in aggregate demand and increases in unemployment.

question

Economists who are skeptical about the relevance of "liquidity traps" argue that

answer

a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.

question

During the economic downturn of 2008-2009, the Federal Reserve

answer

took the unusual step of using open-market operations to purchase mortgages and corporate debt.

question

Disinflation is like

answer

slowing a car down, whereas deflation is like putting the car into reverse gear.

question

A favorable supply shock will cause

answer

unemployment to fall and the short-run Phillips curve to shift left.

question

If a central bank reduced inflation by 2 percentage points and that made output fall by 1 percentage points for 2 years and the unemployment rate rise from 3 percent to 5 percent for 2 years, the sacrifice ratio is

answer

1

question

If policymakers decrease aggregate demand, then in the long run

answer

prices will be lower and unemployment will be unchanged.

question

If policymakers accommodate an adverse supply shock, then in the short run the unemployment rate

answer

falls and the inflation rate rises.

question

Which of the following results in higher inflation and higher unemployment in the short run?

answer

an adverse supply shock such as an increase in the price of oil

question

Highland has had inflation of 15% for many years. Highland establishes a new central bank, the Bank of Highland, with the hopes of reducing the inflation rate.The Bank of Highland reduced inflation to its announced goal of 5%. However, people were expecting inflation to fall to 7% and there was a favorable supply shock. In the short run which of the following made unemployment lower than otherwise?

answer

only the favorable supply shock

question

When aggregate demand shifts right along the short-run aggregate supply curve, unemployment

answer

falls, so there are upward pressures on wages and prices.

question

Prime Minister Emma Bigshot urges passage of a bill to reduce unemployment benefits from very generous levels in her country. She also urges her country's central bank to raise the rate at which the money supply is increasing. In the long run which, if either, of these policies will reduce the unemployment rate?

answer

reducing the generosity of unemployment benefits but not raising the rate at which the money supply is increasing

question

Samuelson and Solow argued that a combination of low unemployment and low inflation

answer

was impossible given the historical data as summarized by the Phillips curve.

question

In responding to the Phillips curve hypothesis, Friedman argued that the Fed can peg the

answer

inflation rate.

question

The experience of the Volcker disinflation of the early 1980s

answer

generally decreased estimates of the sacrifice ratio.

question

Proponents of rational expectations argued that the sacrifice ratio

answer

could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

question

Friedman and Phelps concluded that

answer

in the long run the Phillips curve is vertical, which is consistent with classical theory.

question

There is a

answer

short-run tradeoff between inflation and unemployment.

question

The long-run Phillips curve would shift left if

answer

the minimum wage was reduced but not if the money supply increased.

question

A movement to the right along a given short-run Phillips curve could be caused by

answer

contractionary monetary policy, but not an increase in the natural rate of unemployment.

question

The natural rate of unemployment

answer

is the unemployment rate that the economy tends to move to in the long run.

question

Oceania buys $40 of wine from Escudia and Escudia buys $100 of wool from Oceania. Supposing this is the only trade that these countries do. What are the net exports of Oceania and Escudia in that order?

answer

$60 and -$60

question

In an open economy, gross domestic product equals $1,650 billion, government expenditure equals $250 billion, and savings equals $550 billion. What is consumption expenditure?

answer

$850 billion

question

If a country has a trade surplus

answer

it has positive net exports and positive net capital outflow.

question

A country has $30 billion of domestic investment and net capital outflows of -$20 billion. What is the country's saving?

answer

$10 billion

question

Net capital outflow equals

answer

the purchase of foreign assets by domestic residents - the purchase of domestic assets by foreign residents

question

If the United States had negative net exports last year, then it

answer

bought more abroad than it sold abroad and had a trade deficit.

question

The nominal exchange rate is .80 euros per dollar and the real exchange rate is 4/3. Which of the following prices for a particular good are consistent with these exchange rates?

answer

$5 in the U.S. and 3 euros in Italy.

question

Other things the same, which of the following would both make Americans more willing to buy Italian goods?

answer

the nominal exchange rate rises, the price of goods in Italy falls

question

According to purchasing power parity, if the same basket of goods costs $100 in the U.S. and 50 pounds in Britain, then what is the nominal exchange rate?

answer

1/2 pound per dollar

question

If a country has negative net capital outflows, then its net exports are

answer

negative and its saving is smaller than its domestic investment.

question

An increase in U.S. sales of movies to other countries raises U.S.

answer

exports and so raises the U.S. trade balance.

question

If a lobster in Maine costs $10 and that the same type of lobster in Massachusetts costs $30, then people could make a profit by

answer

buying lobsters in Maine and selling them in Massachusetts. This action would decrease the price of lobster in Massachusetts.

question

Other things the same, if a country's domestic investment decreases, then

answer

net capital outflow rises, so net exports rise.

question

When Claudia, a U.S. citizen, purchases a handbag made in France, the purchase is

answer

a U.S. import and a French export.

question

In the open-economy macroeconomic model, as the exchange rate rises,

answer

desired net exports fall, so the quantity of dollars demanded falls.

question

Recently Greece ran large deficits and people became worried about the ability of its government to make payments on its debt. Which of the these events reduces a country's real exchange rate?

answer

increased concerns about the ability of the government to pay back its debt, but not an increase in the budget deficit

question

If the U.S. government increased its deficit, then

answer

U.S. bonds would pay higher interest and a dollar would purchase more foreign goods.

question

If the supply of loanable funds shifts left, then

answer

the real interest rate rises and the equilibrium quantity of loanable funds falls.

question

f the real exchange rate for the dollar is below the equilibrium level, the quantity of dollars supplied in the market for foreign-currency exchange is

answer

less than the quantity demanded and the dollar will appreciate.

question

Other things the same, as the real interest rate rises

answer

domestic investment and net capital outflow both fall.

question

Which of the following is included in the demand for dollars in the market for foreign-currency exchange in the open-economy macroeconomic model?

answer

A firm in Canada wants to buy rice from a U.S. company.

question

Because a government budget deficit represents

answer

negative public saving, it decreases national saving.

question

In the open-economy macroeconomic model, a higher U.S. real exchange rate makes

answer

U.S. goods more expensive relative to foreign goods and reduces the quantity of dollars demanded.

question

In an open economy, the demand for loanable funds comes from

answer

those who want to borrow funds to buy either domestic capital goods or foreign assets.

question

At the equilibrium real interest rate in the open-economy macroeconomic model

answer

net capital outflow + domestic investment = saving

question

When Mexico suffered from capital flight in 1994, Mexico's net exports

answer

increased.

question

If at a given real interest rate desired national saving were $50 billion, domestic investment were $40 billion, and net capital outflow were $20 billion, then at that real interest rate in the loanable funds market there would be a

answer

shortage. The real interest rate would rise.

question

If a country raises its budget deficit, then in the market for foreign-currency exchange

answer

supply shifts left.

question

When Mexico suffered from capital flight in 1994, U.S. demand for loanable funds

answer

and U.S. net capital outflow fell.

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