ECON 520 Practice Exam Chapters 10-12

question

Over the course of a business cycle, investment spending is ______ than consumption spending.
answer

more volatile than
question

A decline in the Index of Supplier Deliveries is typically an indicator of 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.
answer

slowdown;slowdown
question

When the Fed reduces the money supply, at a given price level, the amount of output demanded ______ and the AD curve shifts ______.
answer

lowers; left
question

A short run AS curve shows fixed ______, and the long run AS curve shows fixed ______.
answer

prices; output
question

If the long run AS curve is vertical, then changes in AD affect:
answer

prices but not the level of output
question

If the price level decreases and the amount of output increases in the transition from the short run to the long run when the short run equilibrium is _____ the natural rate of output in the short run.
answer

below
question

If the short run AS curve is horizontal, then changes in AD affect:
answer

level of output but not prices
question

If the short run AS curve is horizontal, then a change in money supply will change _____ in the short run and change _____ in the long run.
answer

only output; only prices
question

If a short run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run, prices will _____ and output will _____.
answer

increase; decrease
question

If the short run AS curve is horizontal and the Fed increases the money supply, then:
answer

output and employment will increase in the short run
question

Assume that the economy starts from long run equilibrium. if the Fed increases the money supply then ____ increases in the short run and ____ increases in the long run.
answer

output; prices
question

Stabilization policy:
answer

aims at keeping output and employment at their natural rates
question

Starting from long run equilibrium, an increase in AD increases ____ in the short run, but only increases ____ in the long run.
answer

output; prices
question

A supply shock occurs when:
answer

-oil prices rise -unions push wages up -a drought destroys crops
question

If the short run AS curve is horizontal, an increase in union aggresiveness that pushes wages and prices up will result in ____ prices and ____ output in the short run.
answer

higher; lower
question

In the short run, a positive supply shock will cause:
answer

prices to fall and output to rise
question

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.
answer

higher; lower
question

If the Fed accommodates an adverse supply shock output falls ___ and prices rise ___.
answer

less; more
question

Starting from long run equilibrium, without policy interventions, the long run impact of an adverse supply shock is that prices will:
answer

return to the old level and output will be restored to the natural rate
question

If Fed A only cares about keeping the price level stable, and Fed B only cares about keeping output level at its natural level, then in response to an exogenous increase in the price of oil:
answer

Fed A should keep the quantity of money stable, whereas Fed B should increase it.
question

A central bank reduces money supply in an economy initially in long run equilibrium. What will happen to output and prices in the short run? What will happen to unemployment in the short run? What will happen to output and prices in the long run?
answer

-output would decrease with little change in prices -unemployment will increase -output will return to the natural rate at a lower price level
question

The IS curve shifts when all of the following economic variables change except:
answer

the interest rate
question

An increase in government spending generally shifts the IS curve:
answer

upward and to the right
question

An increase in taxes shifts the IS curve:
answer

downward and to the lef
question

Changes in fiscal policy shift the:
answer

IS curve
question

A decrease in the price level, holding nominal money supply constant, will shift the LM curve:
answer

downward and to the right
question

In the IS-LM model when government spending rises, in short-run equilibrium, the interest rate ______ and output ______.
answer

rises; rises
question

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.
answer

falls; falls
question

In the IS-LM model, an increase in government spending increases the interest rate and crowds out:
answer

investment
question

n the IS-LM analysis, the increase in income resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending.
answer

less than
question

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.
answer

LM; right
question

In the IS-LM model when M/P rises, in short-run equilibrium, the interest rate ______ and output ______.
answer

falls; rises
question

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 ______.
answer

falls; rises
question

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.
answer

rises; falls
question

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.
answer

lower; lower
question

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.
answer

decrease
question

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.
answer

increase
question

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:
answer

investment rises and consumption falls
question

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:
answer

income and the interest rate rise, whereas consumption and investment fall.
question

If consumption is given by C = 200 + 0.75(Y – T) and investment is given by I = 200 – 25r, then the formula for the IS curve is:
answer

Y = 1,600 – 3T – 100r + 4G.
question

If the IS curve is given by Y = 1,700 – 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:
answer

Y = 1,100, r = 6 percent.
question

If the IS curve is given by Y = 1,700 – 100r, the money demand function is given by (M/P) d = Y – 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by:
answer

50 and the interest rate falls by 0.5 percent.
question

If the government wants to raise investment but keep output constant, it should:
answer

adopt a loose monetary policy and a tight fiscal policy.

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