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ECON 520 Practice Exam Chapters 10-12

Over the course of a business cycle, investment spending is ______ than consumption spending.
more volatile than
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.
slowdown;slowdown
When the Fed reduces the money supply, at a given price level, the amount of output demanded ______ and the AD curve shifts ______.
lowers; left
A short run AS curve shows fixed ______, and the long run AS curve shows fixed ______.
prices; output
If the long run AS curve is vertical, then changes in AD affect:
prices but not the level of output
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.
below
If the short run AS curve is horizontal, then changes in AD affect:
level of output but not prices
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.
only output; only prices
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 _____.
increase; decrease
If the short run AS curve is horizontal and the Fed increases the money supply, then:
output and employment will increase in the short run
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.
output; prices
Stabilization policy:
aims at keeping output and employment at their natural rates
Starting from long run equilibrium, an increase in AD increases ____ in the short run, but only increases ____ in the long run.
output; prices
A supply shock occurs when:
-oil prices rise
-unions push wages up
-a drought destroys crops
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.
higher; lower
In the short run, a positive supply shock will cause:
prices to fall and output to rise
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.
higher; lower
If the Fed accommodates an adverse supply shock output falls ___ and prices rise ___.
less; more
Starting from long run equilibrium, without policy interventions, the long run impact of an adverse supply shock is that prices will:
return to the old level and output will be restored to the natural rate
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:
Fed A should keep the quantity of money stable, whereas Fed B should increase it.
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?

-output would decrease with little change in prices
-unemployment will increase
-output will return to the natural rate at a lower price level
The IS curve shifts when all of the following economic variables change except:
the interest rate
An increase in government spending generally shifts the IS curve:
upward and to the right
An increase in taxes shifts the IS curve:
downward and to the lef
Changes in fiscal policy shift the:
IS curve
A decrease in the price level, holding nominal money supply constant, will shift the LM
curve:
downward and to the right
In the IS-LM model when government spending rises, in short-run equilibrium, the interest
rate ______ and output ______.
rises; rises
In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______
and output ______.
falls; falls
In the IS-LM model, an increase in government spending increases the interest rate and
crowds out:
investment
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.
less than
If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the
______.
LM; right
In the IS-LM model when M/P rises, in short-run equilibrium, the interest rate ______ and
output ______.
falls; rises
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 ______.
falls; rises
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 ______.
rises; falls
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.
lower; lower
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.
decrease
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.
increase
If taxes are raised, but the Fed prevents income from falling by raising the money supply,
then:
investment rises and consumption falls
According to the IS-LM model, when the government increases taxes and government
purchases by equal amounts:
income and the interest rate rise, whereas consumption and investment fall.
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:
Y = 1,600 – 3T – 100r + 4G.
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:
Y = 1,100, r = 6 percent.
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:

50 and the interest rate falls by 0.5 percent.
If the government wants to raise investment but keep output constant, it should:
adopt a loose monetary policy and a tight fiscal policy.

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