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ECON 101 – Midterm 2

Short-run fluctuations in output and employment are called:
A) sectoral shifts.
B) the classical dichotomy.
C) business cycles.
D) productivity slowdowns.
c) business cycles
Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.

A) two
B) four
C) six
D) eight

A) two
Over the business cycle, investment spending ______ consumption spending.
A) is inversely correlated with
B) is more volatile than
C) has about the same volatility as
D) is less volatile than
B) is more volatile than
Okun’s law is the ______ relationship between real GDP and the ______.
A) negative; unemployment rate
B) negative; inflation rate
C) positive; unemployment rate
D) positive; inflation rate
A) negative; unemployment
Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.
A) variations in labor-market utilization; technological progress
B) technological progress; variations in labor-market utilization
C) money supply growth rates; changes in velocity
D) changes in velocity; money supply growth rates
B) technological progress; variations in labor-market utilization
Most economists believe that prices are:
A) flexible in the short run but many are sticky in the long run.
B) flexible in the long run but many are sticky in the short run.
C) sticky in both the short and long runs.
D) flexible in both the short and long runs.
B) flexible in the long run but many are sticky in the short run.
Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.
A) real
B) nominal
C) real and nominal
D) neither real nor nominal
A) real
The relationship between the quantity of output demanded and the aggregate price level is called:
A) aggregate demand.
B) aggregate supply.
C) aggregate output.
D) aggregate consumption.
A) aggregate demand
Along an aggregate demand curve, which of the following are held constant?

A) real output and prices
B) nominal output and velocity
C) the money supply and real output
D) the money supply and velocity

D) the money supply and velocity
When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:
A) downward and to the left.
B) downward and to the right.
C) upward and to the left.
D) upward and to the right.
A) downward and to the left
The relationship between the quantity of goods and services supplied and the price level is called:
A) aggregate demand.
B) aggregate supply.
C) aggregate investment.
D) aggregate production.
B) aggregate supply
When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
A) slopes upward and to the right.
B) slopes downward and to the right.
C) is horizontal.
D) is vertical.
D) is vertical
The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:
A) the labor supply.
B) the supply of capital.
C) the money supply.
D) technology.
C) the money supply
If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
A) neither prices nor level of output.
B) both prices and level of output.
C) level of output but not prices.
D) prices but not level of output.
D) prices but not level of output
If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
A) is horizontal.
B) is vertical.
C) slopes upward and to the right.
D) slopes downward and to the right.
A) is horizontal
A favorable supply shock occurs when:
A) environmental protection laws raise costs of production.
B) the Fed increases the money supply.
C) unions push wages up.
D) an oil cartel breaks up and oil prices fall.
D) an oil cartel breaks up and oil prices fall.
According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.
A) aggregate demand; aggregate supply
B) aggregate supply; aggregate demand
C) monetary policy; fiscal policy
D) fiscal policy; monetary policy
B) aggregate supply; aggregate demand
The IS-LM model takes ______ as exogenous.
A) the price level and national income
B) the price level
C) national income
D) the interest rate
B) the price level
The variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:
A) consumption function.
B) interest rate.
C) price level.
D) nominal money supply.
B) the interest rate
The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.
A) national income; goods and services
B) the price level; goods and services
C) national income; money
D) the price level; money
A) national income; goods and services
According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:
A) income falls.
B) planned expenditure falls.
C) unplanned inventory investment is negative.
D) prices rise.
C) unplanned inventory investment is negative
The Keynesian cross shows:
A) determination of equilibrium income and the interest rate in the short run.
B) determination of equilibrium income and the interest rate in the long run.
C) equality of planned expenditure and income in the short run.
D) equality of planned expenditure and income in the long run.
C) equality of planned expenditure and income in the short run
According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount G and the planned expenditure schedule by an equal amount, then equilibrium income rises by:
A) one unit.
B) G.
C) G divided by the quantity one minus the marginal propensity to consume.
D) G multiplied by the quantity one plus the marginal propensity to consume.
C) G divided by the quantity one minus the marginal propensity to consume.
In the Keynesian-cross model, fiscal policy has a multiplier effect on income because fiscal policy:
A) increases the amount of money in the economy.
B) changes income, which changes consumption, which further changes income.
C) is government spending and, therefore, more powerful than private spending.
D) changes the interest rate.
B) changes income, which changes consumption, which further changes income.
According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of T will:
A) decrease equilibrium income by T.
B) decrease equilibrium income by T/(1 – MPC).
C) decrease equilibrium income by (T)(MPC)/(1 – MPC).
D) not affect equilibrium income at all.
C) decrease equilibrium income by (T)(MPC)/(1 – MPC).
In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier.
A) is larger than
B) equals
C) is smaller than
D) is the inverse of the
A) is larger than
In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.
A) $1 billion; more than $1 billion
B) $.75 billion; more than $.75 billion
C) $.75 billion; $.75 billion
D) $1 billion; $1 billion
B) $.75 billion; more than $.75 billion
The Keynesian-cross analysis assumes that planned investment:
A) is fixed and so does the IS analysis.
B) depends on the interest rate and so does the IS analysis.
C) is fixed, whereas the IS analysis assumes it depends on the interest rate.
D) depends on expenditure and so does the IS analysis.
C) is fixed, whereas the IS analysis assumes it depends on the interest rate.
The simple investment function shows that investment ______ as ______ increases.
A) decreases; the interest rate
B) increases; the interest rate
C) decreases; government spending
D) increases; government spending
A) decreases; the interest rate
An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income.
A) increases; downward
B) increases; upward
C) decreases; upward
D) decreases; downward
D) decreases; downward
When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally:
A) is vertical.
B) is horizontal.
C) slopes upward and to the right.
D) slopes downward and to the right.
D) slopes downward and to the right.
Along any given IS curve:

A) tax rates are fixed, but government spending varies.
B) government spending is fixed, but tax rates vary.
C) both government spending and tax rates vary.
D) both government spending and tax rates are fixed.

D) both government spending and tax rates are fixed.
The IS curve shifts when all of the following economic variables change except:
A) the interest rate.
B) government spending.
C) tax rates.
D) the marginal propensity to consume.
A) the interest rate.
Based on the Keynesian model, one reason to support spending increases over tax cuts as measures to increase output is that:
A) government spending increases the MPC more than tax cuts.
B) the government-spending multiplier is larger than the tax multiplier.
C) government spending increases do not lead to unplanned changes in inventories, but tax cuts do.
D) increases in government spending increase planned spending, but tax cuts reduce planned spending.
B) the government-spending multiplier is larger than the tax multiplier.
One argument in favor of tax cuts over spending on infrastructure to increase production is that:
A) tax cuts increase the MPC by a larger amount than spending on infrastructure.
B) tax cuts increase planned spending, but spending on infrastructure offsets private spending.
C) the tax multiplier is larger than the government spending multiplier.
D) it takes longer to implement spending on infrastructure than to implement tax cuts.
D) it takes longer to implement spending on infrastructure than to implement tax cuts.
Changes in fiscal policy shift the:

A) LM curve.
B) money demand curve.
C) money supply curve.
D) IS curve.

D) IS curve.
According to the theory of liquidity preference, the supply of real money balances:
A) decreases as the interest rate increases.
B) increases as the interest rate increases.
C) increases as income increases.
D) is fixed.
D) is fixed.
If the interest rate is above the equilibrium value, the:
A) demand for real balances exceeds the supply.
B) supply of real balances exceeds the demand.
C) market for real balances clears.
D) demand for real balances increases.
B) supply of real balances exceeds the demand.
In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?
A) planned spending.
B) the interest rate.
C) production.
D) the price level.
B) the interest rate.
An explanation for the slope of the LM curve is that as:
A) the interest rate increases, income becomes higher.
B) the interest rate increases, income becomes lower.
C) income rises, money demand rises, and a higher interest rate is required.
D) income rises, money demand rises, and a lower interest rate is required.
C) income rises, money demand rises, and a higher interest rate is required.
A decrease in the real money supply, other things being equal, will shift the LM curve:
A) downward and to the left.
B) upward and to the left.
C) downward and to the right.
D) upward and to the right.
B) upward and to the left.
A decrease in the nominal money supply, other things being equal, will shift the LM curve:
A) upward and to the right.
B) downward and to the right.
C) downward and to the left.
D) upward and to the left.
D) upward and to the left.
A decrease in the price level, holding nominal money supply constant, will shift the LM curve:
A) upward and to the right.
B) downward and to the right.
C) downward and to the left.
D) upward and to the left.
B) downward and to the right.
Changes in monetary policy shift the:
A) LM curve.
B) planned spending curve.
C) money demand curve.
D) IS curve.
A) LM curve.
The IS and LM curves together generally determine:
A) income only.
B) the interest rate only.
C) both income and the interest rate.
D) income, the interest rate, and the price level.
C) both income and the interest rate.
Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.
A) positively; positively
B) positively; negatively
C) negatively; negatively
D) negatively; positively
D) negatively; positively
According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6, and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:
A) 0.
B) 100.
C) 150.
D) 250.
B) 100.
In the IS-LM model when government spending rises, 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
.B) rises; rises
In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.
A) increase; supply
B) increase; demand
C) decrease; supply
D) decrease; demand
.B) increase; demand
If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by:
A) G/(1 – MPC).
B) more than zero but less than G/(1 – MPC).
C) G.
D) zero.
D) zero.
The increase in income in response to a fiscal expansion in the IS-LM is:
A) always less than in the Keynesian-cross model.
B) less than in the Keynesian-cross model unless the LM curve is vertical.
C) less than in the Keynesian-cross model unless the LM curve is horizontal.
D) less than in the Keynesian-cross model unless the IS curve is vertical.
C) less than in the Keynesian-cross model unless the LM curve is horizontal.
The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:
A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.
B) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion lowers the interest rate and crowds out investment.
C) investment is autonomous whereas in the IS-LM model fiscal expansion encourages higher investment, which raises the interest rate.
D) the price level is fixed whereas in the IS-LM model it is allowed to vary.
A) investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.
In the IS-LM model, changes in taxes initially affect planned expenditures through:
A) consumption.
B) investment.
C) government spending.
D) the interest rate.
A) consumption.
If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.
A) LM; left
B) LM; right
C) IS; left
D) IS; right
B) LM; right
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 ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
A) rises; falls
If the demand for real money balances does not depend on the interest rate, then the LM curve:
A) slopes up to the right.
B) slopes down to the right.
C) is horizontal.
D) is vertical.
D) is vertical.
An increase in consumer saving for any given level of income will shift the:
A) LM curve upward and to the left.
B) LM curve downward and to the right.
C) IS curve downward and to the left.
D) IS curve upward and to the right.
C) IS curve downward and to the left.
In the IS-LM model, a decrease in the interest rate would be the result of a(n):
A) increase in the money supply.
B) increase in government purchases.
C) decrease in taxes.
D) increase in money demand.
A) increase in the money supply.
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
D) IS; left
One policy response to the U.S. economic slowdown of 2001 were tax cuts. This policy response 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
C) IS; right
When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.
A) buy; IS
B) buy; LM
C) sell; IS
D) sell; LM
D) sell; LM
The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.
A) lower; raises; reduces
B) higher; lowers; increases
C) lower; lowers; increases
D) higher; raises; reduces
A) lower; raises; reduces
An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.
A) IS; shifts to the right
B) IS; does not shift
C) LM; shifts to the right
D) LM; does not shift
C) LM; shifts to the right
A change in income in the IS-LM model resulting from a change in the price level is represented by a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a ______ aggregate demand curve.
A) movement along the; shift in the
B) shift in the; movement along the
C) vertical; horizontal
D) horizontal; vertical
A) movement along the; shift in the
Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.
A) classical; both the short and long runs.
B) Keynesian; both the short and long runs.
C) classical; the short run whereas the Keynesian assumptions are most appropriate in the long run.
D) Keynesian; the short run whereas the classical assumptions are most appropriate in the long run.
D) Keynesian; the short run whereas the classical assumptions are most appropriate in the long run.
A liquidity trap occurs when:
A) banks have too much currency and close their doors to new customers.
B) the central bank mistakenly prints too much money, generating hyperinflation.
C) interest rates fall so low that monetary policy is no longer effective.
D) dams and locks are built to prevent flooding.
C) interest rates fall so low that monetary policy is no longer effective.
If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.
A) monetary; high
B) monetary; low
C) fiscal; high
D) fiscal; low
B) monetary; low
If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.
A) 4
B) 1
C) 0
D) -2
D) -2
The slope of the IS curve depends on:
A) the interest sensitivity of investment and the amount of government spending.
B) the interest sensitivity of investment and the marginal propensity to consume.
C) the interest sensitivity of investment and the tax rates.
D) tax rates and government spending.
B) the interest sensitivity of investment and the marginal propensity to consume.
If the demand function for money is M/P = 0.5Y – 100r, then the slope of the LM curve is:
A) 0.001.
B) 0.005.
C) 0.01.
D) 0.05.
B) 0.005.
Other things equal, a given change in government spending has a larger effect on demand the:
A) flatter the LM curve.
B) steeper the LM curve.
C) smaller the interest sensitivity of money demand.
D) larger the income sensitivity of money demand.
A) flatter the LM curve.
Those economists who believe that fiscal policy is more potent than monetary policy argue that the:
A) responsiveness of investment to the interest rate is small.
B) responsiveness of investment to the interest rate is large.
C) IS curve is nearly horizontal.
D) LM curve is nearly vertical.
A) responsiveness of investment to the interest rate is small.
The basic aggregate supply equation implies that output exceeds natural output when the price level is:
A) low.
B) high.
C) less than the expected price level.
D) greater than the expected price level.
D) greater than the expected price level.
According to the sticky-price model:
A) all firms announce their prices in advance.
B) all firms set their prices in accord with observed prices and output.
C) some firms set their prices according to the aggregate supply equation.
D) some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.
D) some firms announce their prices in advance, and some firms set their prices in accord with observed prices and output.s
According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase.
A) greater; increase
B) smaller; increase
C) greater; decrease
D) smaller; decrease
A) greater; increase
Each of the two models of short-run aggregate supply is based on some market imperfection. In the sticky-price model, the imperfection is that:
A) some firms do not adjust their prices instantly to changes in demand.
B) expectations are formed adaptively rather than rationally.
C) firms confuse changes in the overall level of prices with changes in relative prices.
D) the real wage adjusts to bring labor supply and labor demand into equilibrium.
A) some firms do not adjust their prices instantly to changes in demand.
The short-run aggregate supply curve is drawn for a given:
A) output level.
B) price level.
C) expected price level.
D) level of aggregate demand.
C) expected price level.
Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to ______ in the short run, and in the long run the expected price level will ______, causing the level of output to return to the natural level.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
C) decrease; decrease
The model of aggregate demand and aggregate supply is consistent with short-run monetary ______ and long-run monetary ______.
A) neutrality; neutrality
B) nonneutrality; nonneutrality
C) neutrality; nonneutrality
D) nonneutrality; neutrality
D) nonneutrality; neutrality
Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:
A) greater than the expected price level.
B) less than the expected price level.
C) equal to the natural price level.
D) stuck at the existing price level.
B) less than the expected price level.
Which of the following will shift the aggregate supply curve up to the left?
A) an increase in the price level.
B) a decrease in the level of output.
C) an increase in the expected price level.
D) a decrease in the price level.
C) an increase in the expected price level.
The Phillips curve expresses a short-run link:
A) among nominal variables.
B) among real variables.
C) among unexpected variables.
D) between nominal and real variables.
D) between nominal and real variables.
Along a short-run aggregate supply curve, output is related to unexpected movements in the ______. Along a Phillips curve, unemployment is related to unexpected movements in the ______.
A) price level; inflation rate
B) inflation rate; price level
C) unemployment rate; price level
D) price level; level of output
A) price level; inflation rate
When adaptive expectations are used to model inflation expectations in the Phillips curve, then the natural rate of unemployment is called the ______ rate of unemployment.
A) structural
B) cyclical
C) short-run aggregate supply
D) nonaccelerating inflation
D) nonaccelerating inflation
If the equation for a country’s Phillips curve is = .02 – .8(u – .05), where is the rate of inflation and u is the unemployment rate, what is the short-run inflation rate when unemployment is 4 percent (.04)?
A) above 2 percent (.02)
B) below 2 percent (.02)
C) 2 percent (.02)
D) -2 percent (-.02)
A) above 2 percent (.02)
Inflation inertia refers to the idea that inflation:
A) is always present in economies.
B) keeps on going unless something acts to stop it.
C) cannot be reduced unless unemployment is increased.
D) can be generated by either demand-pull or cost-push forces.
B) keeps on going unless something acts to stop it.
Demand-pull inflation is the result of:
A) high aggregate demand.
B) low aggregate demand.
C) favorable supply shocks.
D) adverse supply shocks.
A) high aggregate demand.
Cost-push inflation is the result of:
A) high aggregate demand.
B) low aggregate demand.
C) favorable supply shocks.
D) adverse supply shocks.
D) adverse supply shocks.
In the case of cost-push inflation, other things being equal:
A) both the inflation rate and the unemployment rate rise at the same time.
B) the unemployment rate rises but the inflation rate falls.
C) the inflation rate rises but the unemployment rate falls.
D) both the inflation rate and the unemployment rate fall.
A) both the inflation rate and the unemployment rate rise at the same time
The sacrifice ratio measures the:
A) number of percentage points of the money supply that must be reduced to reduce inflation by 1 percentage point.
B) extra taxes that must be paid to balance the budget.
C) number of months of real gross domestic product (GDP) that must be foregone to reduce the inflation rate by 1 percentage point.
D) percentage of a year’s real gross domestic product (GDP) that must be foregone to reduce inflation by 1 percentage point.
D) percentage of a year’s real gross domestic product (GDP) that must be foregone to reduce inflation by 1 percentage point.
Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year’s GDP.
A) 4
B) 5
C) 20
D) 40
C) 20
The assumption of rational expectations for inflation means that people will form their expectations of inflation by:
A) optimally using all available information, including information about current policies, to forecast the future.
B) asking the opinions of the best experts.
C) subscribing to the forecasting service that uses the best econometric model.
D) basing their opinions on recently observed inflation.
A) optimally using all available information, including information about current policies, to forecast the future.
The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately:
A) 5.
B) 2.8.
C) 1.
D) 0.
D) 0.
Advocates of the rational expectations approach predict that a credible policy to lower inflation will ______ the sacrifice ratio.
A) raise
B) lower
C) not change
D) sometimes raise and sometimes lower
B) lower
The hypothesis that hysteresis may play an important role in macroeconomics implies, among other things, that:
A) the history of economic thought is important to macroeconomics.
B) workers get hysterical during long depressions.
C) hysteresis lowers the sacrifice ratio.
D) the natural rate of unemployment may increase if unemployment is high for a long period of time.
D) the natural rate of unemployment may increase if unemployment is high for a long period of time.
According to the natural-rate hypothesis, output will be at the natural rate:
A) if inflation exceeds expected inflation.
B) if inflation falls below expected inflation.
C) in the long run.
D) if aggregate demand affects output in the long run.
C) in the long run
The idea that the natural rate of unemployment is increased following extended periods of unemployment is called:
A) Okun’s law.
B) the cold-turkey approach.
C) the natural-rate hypothesis.
D) hysteresis.
D) hysteresis.
According to the natural-rate hypothesis, the levels of output and unemployment depend on:
A) aggregate demand in the short run, but not in the long run.
B) aggregate demand in the long run, but not in the short run.
C) the natural rate of unemployment in the short run, but the natural rate of inflation in the long run.
D) the natural rate of inflation in the short run, but the natural rate of unemployment in the long run.
A) aggregate demand in the short run, but not in the long run.
In the sticky-price model, if no firms have flexible prices, the short-run aggregate supply schedule will:
A) be vertical.
B) be steeper than it would be if some firms had flexible prices.
C) slope upward to the right.
D) be horizontal.
D) be horizontal.
Assume that an economy has the Phillips curve = -1 – 0.5(u – 0.06). Then the natural rate of unemployment is:
A) 0.5.
B) 0.12.
C) 0.06.
D) 0.03.
C) 0.06.
Assume that an economy has the Phillips curve = -1 – 0.5(u – 0.06). How many percentage point-years of cyclical unemployment are needed to reduce inflation by 5 percentage points?
A) 20
B) 10
C) 5
D) 2.5
B) 10
The nominal exchange rate between the U.S. dollar and the Japanese yen is the:
A) number of yen you can get for lending one dollar in Japan for one year.
B) number of yen you can get for one dollar.
C) price of U.S. goods divided by the price of Japanese goods.
D) price of Japanese goods divided by the price of U.S. goods.
B) number of yen you can get for one dollar.
Net capital outflow is equal to the amount that:
A) foreign investors lend here.
B) domestic investors lend abroad.
C) foreign investors lend here minus the amount domestic investors lend abroad.
D) domestic investors lend abroad minus the amount that foreign investors lend here.
D) domestic investors lend abroad minus the amount that foreign investors lend here.
If domestic saving is less than domestic investment, then net exports are ______ and net capital outflows are ______ .
A) positive; positive
B) positive; negative
C) negative; negative
D) negative; positive
C) negative; negative
In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:
A) -$25 billion.
B) -$10 billion.
C) $10 billion.
D) $25 billion.
B) -$10 billion.
In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:
A) borrowing from abroad.
B) lending from abroad.
C) the domestic government.
D) the World Bank.
A) borrowing from abroad.
In a small open economy, starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade ______ and ______ net capital outflow.
A) deficit; negative
B) surplus; positive
C) deficit; positive
D) surplus; negative
A) deficit; negative
Holding other factors constant, legislation to cut taxes in an open economy will:
A) increase national saving and lead to a trade surplus.
B) increase national saving and lead to a trade deficit.
C) reduce national saving and lead to a trade surplus.
D) reduce national saving and lead to a trade deficit.
D) reduce national saving and lead to a trade deficit
The real exchange rate:
A) measures how many Japanese yen one really gets for a U.S. dollar.
B) is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.
C) is equal to the nominal exchange rate multiplied by the foreign price level divided by the domestic price level.
D) the price of a domestic car divided by the price of a foreign car.
B) is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.
When the real exchange rate rises:
A) exports will decrease but imports will be unaffected.
B) imports will decrease but exports will be unaffected.
C) exports will increase and imports will decrease.
D) exports will decrease and imports will increase.
D) exports will decrease and imports will increase.
The real exchange rate is determined by the equality of:
A) saving and the demand for net exports.
B) investment and the demand for net exports.
C) net capital outflow and the demand for net exports.
D) the negative value of net capital outflow and the demand for net exports.
C) net capital outflow and the demand for net exports.
In a small, open economy, if the world interest rate falls, then domestic investment will _____ and the real exchange rate will _____, holding all else constant.
A) decrease; decrease
B) decrease; increase
C) increase; decrease
D) increase; increase
D) increase; increase
In a large open economy, the interest rate adjusts so that domestic saving equals:
A) domestic investment.
B) net exports.
C) net capital outflow.
D) domestic investment plus net capital outflow.
D) domestic investment plus net capital outflow.
In a large open economy, if political instability abroad lowers the net capital outflow function, then the real interest rate:
A) rises, while the real exchange rate rises and net exports fall.
B) rises, while the real exchange rate falls and net exports rise.
C) falls, while the real exchange rate rises and net exports rise.
D) falls, while the real exchange rate rises and net exports fall.
D) falls, while the real exchange rate rises and net exports fall.
Expansionary fiscal policy in a large open economy ______ the real interest rate and ______ the real exchange rate.
A) does not change; increases
B) increases; increases
C) increases; decreases
D) decreases; increases
B) increases; increases
In a small open economy, if consumers shift their preferences toward Japanese cars, then net exports:
A) fall and the real exchange rate falls.
B) fall but the real exchange rate remains unchanged.
C) remain unchanged but the real exchange rate falls.
D) and the real exchange rate remain unchanged.
C) remain unchanged but the real exchange rate falls.
The key difference between the IS-LM model and the Mundell-Fleming Model is that the
A. Mundell-Fleming model does not take the price level as fixed.
B. Mundell-Fleming model assumes a small open economy.
C. Mundell-Fleming model stresses the interaction between markets different from those in the IS-LM model.
D. Mundell-Fleming model is not used to evaluate monetary and fiscal policy effects.
B. Mundell-Fleming model assumes a small open economy.
According to the Mundell-Fleming model, an appreciation of the exchange rate would
A. decrease both import demand and export demand.
B. increase import demand and decrease export demand.
C. decrease import demand and increase exports demand.
D. increase both import demand and export demand.
B. increase import demand and decrease export demand.
If the IS* curve in the Mundell-Fleming model is expressed by the equation Y = C(Y – T) + I(r*) + G + NX(e) then NX(e) should be interpreted as meaning that
A. net exports depend positively on the exchange rate.
B. exports depend negatively on the exchange rate.
C. imports depend positively on the exchange rate.
D. net exports depend negatively on the exchange rate.
D. net exports depend negatively on the exchange rate.
According to the Mundell-Fleming model, in a small country with a floating exchange rate, a tax cut will cause the exchange rate to
A. rise.
B. rise in the same proportion as inflation.
C. remain constant.
D. fall.
A. rise.
In a small open economy with a floating exchange rate, a monetary expansion
A. increases income.
B. decreases income.
C. leaves income unchanged.
D. could either decrease or increase income, depending on what happens to the exchange rate.
A. increases income
Suppose the United States were a small open economy under floating exchange rates. If the U.S. government imposes a quota on German cars in an effort to reduce the trade deficit, then
A. the exchange rate goes up and the trade deficit goes down.
B. the exchange rate goes up and the trade deficit remains unchanged.
C. the exchange rate goes down and the trade deficit remains unchanged.
D. both the exchange rate and the trade deficit go down.
B. the exchange rate goes up and the trade deficit remains unchanged.
In an open economy with a fixed exchange rate, a fiscal contraction
A. increases both the money supply and income.
B. increases the money supply and decreases income.
C. decreases the money supply and increases income.
D. decreases both the money supply and income.
D. decreases both the money supply and income.
In an open economy with a fixed exchange rate, expansionary monetary policy
A. increases income.
B. decreases income.
C. lowers the interest rate.
D. is impossible.
D. is impossible.
Under a system of fixed exchange rates, an import restriction on foreign goods would cause net exports and the level of income to
A. rise.
B. rise in the same proportion as inflation.
C. remain constant.
D. fall.
A. rise.
Under a system of floating exchange rates in the Mundell-Fleming model of the small open economy:
A. only monetary policy can affect income.
B. only fiscal policy can affect income.
C. both monetary and fiscal policy can affect income.
D. neither monetary nor fiscal policy can affect income.
A. only monetary policy can affect income.
In a short-run model for a large open economy with a floating exchange rate, a reduction in the domestic interest rate:
A. increases net capital outflow and lowers both net exports and the exchange rate.
B. increases net capital outflow and net exports, and reduces the exchange rate.
C. reduces net capital outflow, net exports, and the exchange rate.
D. reduces net capital outflow and net exports, and increases the exchange rate.
B. increases net capital outflow and net exports, and reduces the exchange rate.
Suppose the U.S. one-year interest rate is 3% per year, while a foreign country has a one-year interest rate of 5% per year. Ignoring risk and transaction costs, a U.S. investor should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is
a. less than 5%.
b. greater than 5%.
c. greater than 2%.
d. less than 2%.
e. less than 1%.
d. less than 2%
Assume that the interest rate in a foreign country is 7% and that the foreign currency is expected to depreciate by 3% during the year. For each dollar that a U.S. resident invests in foreign bonds, he/she can expect to get back an approximate total of:
a. $.93
b. $.96.
c. $1.04
d. $1.07.
e. $1.10.
c. $1.04

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