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Flashcards in Chapter 11 Deck (101):
1

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:

  1. low levels of capital.
  2. an untrained labor force.
  3. inadequate technology.
  4. low aggregate demand.

4

2

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.

  1. aggregate demand; aggregate supply
  2. aggregate supply; aggregate demand
  3. monetary policy; fiscal policy
  4. fiscal policy; monetary policy

2

3

The IS–LM model takes ______ as exogenous.

  1. the price level and national income
  2. the price level
  3. national income
  4. the interest rate

2

4

A variable that links the market for goods and services and the market for real money balances in the IS–LM model is the:

  1. consumption function.
  2. interest rate.
  3. price level.
  4. nominal money supply.

2

5

In the IS–LM model, which two variables are influenced by the interest rate?

  1. supply of nominal money balances and demand for real balances
  2. demand for real money balances and government purchases
  3. supply of nominal money balances and investment spending
  4. demand for real money balances and investment spending

4

6

Two interpretations of the IS–LM model are that the model explains:

  1. the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.
  2. the short-run quantity theory of income, or the short-run Fisher effect.
  3. the determination of investment and saving, or what shifts the liquidity preference schedule.
  4. changes in government spending and taxes, or the determination of the supply of real money balances.

1

7

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

  1. national income; goods and services
  2. the price level; goods and services
  3. national income; money
  4. the price level; money

1

8

For the purposes of the Keynesian cross, planned expenditure consists of:

  1. planned investment.
  2. planned government spending.
  3. planned investment and government spending.
  4. planned investment, government spending, and consumption expenditures.

4

9

In the Keynesian-cross model, actual expenditures equal:

  1. GDP.
  2. the money supply.
  3. the supply of real balances.
  4. unplanned inventory investment.

1

10

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

  1. liquidity preference.
  2. the government-purchases multiplier.
  3. unplanned inventory investment.
  4. real money balances.

3

11

Planned expenditure is a function of:

  1. planned investment.
  2. planned government spending and taxes.
  3. planned investment, government spending, and taxes.
  4. national income and planned investment, government spending, and taxes.

4

12

When planned expenditure is drawn on a graph as a function of income, the slope of the line is:

  1. zero.
  2. between zero and one.
  3. one.
  4. greater than one.

2

13

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:

  1. right with a slope less than one.
  2. right with a slope greater than one.
  3. left with a slope less than one.
  4. left with a slope greater than one.

1

14

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

  1. income equals consumption plus investment plus government spending.
  2. planned expenditure equals consumption plus planned investment plus government spending.
  3. actual expenditure equals planned expenditure.
  4. actual saving equals actual investment.

3

15

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.

  1. right; decumulation
  2. right; accumulation
  3. left; decumulation
  4. left; accumulation

2

16

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

  1. income falls.
  2. planned expenditure falls.
  3. unplanned inventory investment is negative.
  4. prices rise.

3

17

When firms experience unplanned inventory accumulation, they typically:

  1. build new plants.
  2. lay off workers and reduce production.
  3. hire more workers and increase production.
  4. call for more government spending.

2

18

The Keynesian cross shows:

  1. determination of equilibrium income and the interest rate in the short run.
  2. determination of equilibrium income and the interest rate in the long run.
  3. equality of planned expenditure and income in the short run.
  4. equality of planned expenditure and income in the long run.

3

19

In this graph, the equilibrium levels of income and expenditure are:

  1. Y1 and PE1.
  2. Y2 and PE2.
  3. Y3 and PE3.
  4. Y3 and PE4.

Q image thumb

2

20

In this graph, if firms are producing at level Y1, then inventories will ______, inducing firms to ______ production.

  1. rise; increase
  2. rise; decrease
  3. fall; increase
  4. fall; decrease

 

Q image thumb

3

21

In this graph, if firms are producing at level Y3, then inventories will ______, inducing firms to ______ production.

  1. rise; increase
  2. rise; decrease
  3. fall; increase
  4. fall; decrease

Q image thumb

2

22

The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases.

  1. the budget deficit
  2. consumption
  3. income
  4. real balances

3

23

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

  1. $1 billion; more than $1 billion
  2. $0.75 billion; more than $0.75 billion
  3. $0.75 billion; $0.75 billion
  4. $1 billion; $1 billion

1

24

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:

  1. one unit.
  2. Delta-G.
  3. Delta-G divided by the quantity one minus the marginal propensity to consume.
  4. Delta-G multiplied by the quantity one plus the marginal propensity to consume.

3

25

In the Keynesian-cross model, if government purchases increase by 100, then planned expenditures ______ for any given level of income.

  1. increase by 100
  2. increase by more than 100
  3. decrease by 100
  4. increase, but by less than 100

1

26

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

  1. increases by 250.
  2. increases by more than 250.
  3. decreases by 250.
  4. increases, but by less than 250.

2

27

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

  1. increases the amount of money in the economy.
  2. changes income, which changes consumption, which further changes income.
  3. is government spending and, therefore, more powerful than private spending.
  4. changes the interest rate.

2

28

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will:

  1. decrease equilibrium income by ∆T.
  2. decrease equilibrium income by ∆T/(1 – MPC).
  3. decrease equilibrium income by (∆T)(MPC)/(1 – MPC).
  4. not affect equilibrium income at all.

3

29

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

  1. increase by 100
  2. increase by more than 100
  3. decrease by 100
  4. increase, but by less than 100

4

30

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:

  1. increases by 250.
  2. increases by more than 250.
  3. decreases by 250.
  4. increases, but by less than 250.

2

31

The tax multiplier indicates how much ______ change(s) in response to a $1 change in taxes.

  1. the budget deficit
  2. consumption
  3. income
  4. real balances

3

32

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier.

  1. is larger than
  2. equals
  3. is smaller than
  4. is the inverse of the

1

33

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 ______.

  1. $1 billion; more than $1 billion
  2. $0.75 billion; more than $0.75 billion
  3. $0.75 billion; $0.75 billion
  4. $1 billion; $1 billion

2

34

After the Kennedy tax cut in 1964, real GDP:

  1. fell and unemployment rose.
  2. rose and unemployment fell.
  3. and unemployment both rose.
  4. and unemployment both fell.

2

35

Both Keynesians and supply-siders believe a tax cut will lead to growth:

  1. and both agree it works through incentive effects.
  2. but Keynesians believe it works through incentive effects whereas supply-siders believe it works through aggregate demand.
  3. but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.
  4. and both agree it works through aggregate demand.

3

36

Tax cuts stimulate ______ by improving workers' incentive and expand ______ by raising households' disposable
income.

  1. velocity; demand for loanable funds
  2. demand for loanable funds; velocity
  3. aggregate demand; aggregate supply
  4. aggregate supply; aggregate demand

4

37

In the Keynesian-cross model, the equilibrium level of income is determined by:

  1. the factors of production.
  2. the money supply.
  3. planned spending.
  4. liquidity preference.

3

38

In the Keynesian-cross model, what adjusts to move the economy to equilibrium following a change in exogenous planned spending?

  1. planned spending
  2. the interest rate
  3. production
  4. the price level

3

39

The Keynesian-cross analysis assumes planned investment:

  1. is fixed and so does the IS analysis.
  2. depends on the interest rate and so does the IS analysis.
  3. is fixed, whereas the IS analysis assumes it depends on the interest rate.
  4. depends on expenditure and so does the IS analysis.

3

40

The simple investment function shows that investment ______ as ______ increases.

  1. decreases; the interest rate
  2. increases; the interest rate
  3. decreases; government spending
  4. increases; government spending

1

41

An increase in the interest rate:

  1. reduces planned investment, because the interest rate is the cost of borrowing to finance investment projects.
  2. increases planned investment, because people who make money from interest have more money to invest.
  3. has no effect on investment.
  4. may be caused by a drop in investment demand.

1

42

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.

  1. increases; downward
  2. increases; upward
  3. decreases; upward
  4. decreases; downward

4

43

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

  1. increases; increases
  2. increases; decreases
  3. decreases; decreases
  4. decreases; increases

1

44

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve generally:

  1. is vertical.
  2. is horizontal.
  3. slopes upward and to the right.
  4. slopes downward and to the right.

4

45

Along any given IS curve:

  1. tax rates are fixed, but government spending varies.
  2. government spending is fixed, but tax rates vary.
  3. both government spending and tax rates vary.
  4. both government spending and tax rates are fixed.

4

46

The IS curve shifts when any of the following economic variables change except

  1. the interest rate.
  2. government spending.
  3. tax rates.
  4. the marginal propensity to consume.

1

47

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

  1. downward and to the left.
  2. upward and to the right.
  3. upward and to the left.
  4. downward and to the right.

2

48

An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

  1. downward and to the left.
  2. upward and to the right.
  3. upward and to the left.
  4. downward and to the right.

1

49

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

  1. government spending increases the MPC more than tax cuts.
  2. the government-spending multiplier is larger than the tax multiplier.
  3. government-spending increases do not lead to unplanned changes in inventories, but tax cuts do.
  4. increases in government spending increase planned spending, but tax cuts reduce planned spending.

2

50

Gary Becker's criticism of government spending on infrastructure as part of President Obama's stimulus plan was that:

  1. spending on infrastructure would not increase production in the economy.
  2. there is a conflict between where spending on infrastructure would benefit employment and where infrastructure is most needed.
  3. government spending on infrastructure is less effective in increasing production than an equal amount of private spending on infrastructure.
  4. government spending on infrastructure only increases demand, but tax cuts increase demand and supply.

2

51

One argument in favor of tax cuts over spending-based fiscal stimulus is that:

  1. tax cuts increase the MPC by a larger amount than government spending.
  2. tax cuts temporarily increase planned spending, but government spending permanently increases private spending.
  3. in theory the tax multiplier is larger than the government spending multiplier.
  4. historically tax cuts have been more successful than spending-based fiscal stimulus.

4

52

Changes in fiscal policy shift the:

  1. LM curve.
  2. money demand curve.
  3. money supply curve.
  4. IS curve.

4

53

Along an IS curve all of the following are always true except

  1. planned expenditures equal actual expenditures.
  2. planned expenditures equal income.
  3. the demand for real balances equals the supply of real balances.
  4. there are no unplanned changes in inventories.

3

54

An IS curve shows combinations of:

  1. taxes and government spending.
  2. nominal money balances and price levels.
  3. interest rates and income that bring equilibrium in the market for real balances.
  4. interest rates and income that bring equilibrium in the market for goods and services.

4

55

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services.

  1. inflation and unemployment
  2. the price level and real output
  3. the interest rate and the level of income
  4. the interest rate and real money balances

3

56

The IS curve generally determines:

  1. income.
  2. the interest rate.
  3. both income and the interest rate.
  4. neither income nor the interest rate.

4

57

When the LM curve is drawn, the quantity that is held fixed is:

  1. the nominal money supply.
  2. the real money supply.
  3. government spending.
  4. the tax rate.

2

58

According to the theory of liquidity preference, the supply of real money balances:

  1. decreases as the interest rate increases.
  2. increases as the interest rate increases.
  3. increases as income increases.
  4. is fixed.

4

59

According to the theory of liquidity preference, the supply of nominal money balances:

  1. is chosen by the central bank.
  2. depends on the interest rate.
  3. varies with the price level.
  4. changes as the level of income changes.

1

60

The theory of liquidity preference implies that:

  1. as the interest rate rises, the demand for real balances will fall.
  2. as the interest rate rises, the demand for real balances will rise.
  3. the interest rate will have no effect on the demand for real balances.
  4. as the interest rate rises, income will rise.

1

61

If the interest rate is above the equilibrium value, the:

  1. demand for real balances exceeds the supply.
  2. supply of real balances exceeds the demand.
  3. market for real balances clears.
  4. demand for real balances increases.

2

62

According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will:

  1. sell interest-earning assets in order to obtain non-interest-bearing money.
  2. purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
  3. purchase more goods and services.
  4. be content with their portfolios.

2

63

According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:

  1. sell interest-earning assets in order to obtain non-interest-bearing money.
  2. purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
  3. purchase fewer goods and services.
  4. be content with their portfolios.

1

64

Based on the graph, the equilibrium levels of interest rates and real money balances are:

  1. r1 and M1/P1
  2. r2 and M2/P2
  3. r3 and M2/P2
  4. r3 and M3/P3

Q image thumb

2

65

Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______.

  1. sell; rise
  2. sell; fall
  3. buy; rise
  4. buy; fall

Q image thumb

4

66

Based on the graph, if the interest rate is r3, then people will ______ bonds and the interest rate will ______.

  1. sell; rise
  2. sell; fall
  3. buy; rise
  4. buy; fall

Q image thumb

1

67

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

  1. lower the interest rate.
  2. raise the interest rate.
  3. have no effect on the interest rate.
  4. first lower and then raise the interest rate.

1

68

When Paul Volcker tightened the money supply:

  1. the inflation rate immediately fell.
  2. nominal interest rates fell in the short run.
  3. nominal interest rates fell in the long run.
  4. real balances rose in the short run.

3

69

According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run.

  1. increase; increase
  2. increase; decrease
  3. decrease; decrease
  4. decrease; increase

2

70

Reducing the money supply ______ nominal interest rates in the short run, and ______ nominal interest rates in the long run.

  1. produces no change in; raises
  2. raises; produces no change in
  3. raises; lowers
  4. lowers; raises

3

71

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?

  1. planned spending
  2. the interest rate
  3. production
  4. the price level

2

72

The theory of liquidity preference implies that the quantity of real money balances demanded is:

  1. negatively related to both the interest rate and income.
  2. positively related to both the interest rate and income.
  3. positively related to the interest rate and negatively related to income.
  4. negatively related to the interest rate and positively related to income.

4

73

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:

  1. no change in the interest rate.
  2. a lower interest rate.
  3. a higher interest rate.
  4. first a lower and then a higher interest rate.

3

74

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate.

  1. increase; increase
  2. increase; decrease
  3. decrease; decrease
  4. decrease; increase

1

75

The LM curve, in the usual case:

  1. is vertical.
  2. is horizontal.
  3. slopes down to the right.
  4. slopes up to the right.

4

76

An explanation for the slope of the LM curve is that as:

  1. the interest rate increases, income becomes higher.
  2. the interest rate increases, income becomes lower.
  3. income rises, money demand rises, and a higher interest rate is required.
  4. income rises, money demand rises, and a lower interest rate is required.

3

77

An LM curve shows combinations of:

  1. taxes and government spending.
  2. nominal money balances and price levels.
  3. interest rates and income, which bring equilibrium in the market for real money balances.
  4. interest rates and income, which bring equilibrium in the market for goods and services.

3

78

A decrease in the real money supply, other things being equal, will shift the LM curve:

  1. downward and to the left.
  2. upward and to the left.
  3. downward and to the right.
  4. upward and to the right.

2

79

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

  1. upward and to the right.
  2. downward and to the right.
  3. downward and to the left.
  4. upward and to the left.

4

80

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

  1. upward and to the right.
  2. downward and to the right.
  3. downward and to the left.
  4. upward and to the left.

2

81

An increase in income raises money ______ and ______ the equilibrium interest rate.

  1. demand; raises
  2. demand; lowers
  3. supply; raises
  4. supply; lowers

1

82

At a given interest rate, an increase in the nominal money supply ______ the level of income that is consistent with
equilibrium in the market for real balances.

  1. raises
  2. lowers
  3. does not change
  4. may either raise or lower

1

83

Changes in monetary policy shift the:

  1. LM curve.
  2. planned spending curve.
  3. money demand curve.
  4. IS curve.

1

84

The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances.

  1. inflation and unemployment
  2. the price level and real output
  3. the interest rate and the level of income
  4. the interest rate and real money balances

3

85

For any given interest rate and price level, an increase in the money supply:

  1. lowers income.
  2. raises income.
  3. has no effect on income.
  4. lowers velocity.

2

86

The LM curve generally determines:

  1. income.
  2. the interest rate.
  3. both income and the interest rate.
  4. neither income nor the interest rate.

4

87

The IS and LM curves together generally determine:

  1. income only.
  2. the interest rate only.
  3. both income and the interest rate.
  4. income, the interest rate, and the price level.

3

88

The interest rate determines ______ in the goods market and money ______ in the money market.

  1. government spending; demand
  2. government spending; supply
  3. investment spending; demand
  4. investment spending; supply

3

89

The intersection of the IS and LM curve determines the values of:

  1. r, Y, and P, given G, T, and M.
  2. r, Y, and M, given G, T, and P.
  3. r and Y, given G, T, M, and P.
  4. p and Y, given G, T, and M.

3

90

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.

  1. positively; positively
  2. positively; negatively
  3. negatively; negatively
  4. negatively; positively

4

91

The IS–LM model is generally used:

  1. only in the short run.
  2. only in the long run.
  3. both in the short run and the long run.
  4. in determining the price level.

1

92

The IS curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______, and the LM curve provides combinations of interest rates and income that satisfy equilibrium in the market for ______.

  1. saving and investment; planned spending
  2. real-money balances; loanable funds
  3. goods and services; real money balances
  4. real-money balances; goods and services

3

93

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:

  1. 0.
  2. 100.
  3. 150.
  4. 250.

2

94

In the Keynesian-cross analysis, if the consumption function is given by C = 100 + 0.6(Y – T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is:

  1. 350.
  2. 400.
  3. 600.
  4. 750.

3

95

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y – T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

  1. 200.
  2. 240.
  3. 250.
  4. 260.

4

96

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will:

  1. not change.
  2. be smaller.
  3. be bigger.
  4. be equal to 1.

2

97

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

  1. lower equilibrium income by the decrease in the intercept multiplied by the multiplier.
  2. lower equilibrium income by the decrease in the intercept.
  3. raise equilibrium income by the decrease in the intercept.
  4. raise equilibrium income by the decrease in the intercept multiplied by the multiplier.

1

98

Consider the impact of an increase in thriftiness in the Keynesian-cross analysis. Assume that the marginal propensity to consume is unchanged, but the intercept of the consumption function is made smaller so that at every income level saving is greater. This will:

  1. increase saving by the decrease in the intercept.
  2. lead to no change in saving.
  3. decrease saving by the decrease in the intercept.
  4. lead to an increase in investment.

2

99

Assume that the money demand function is (M/P)d = 2,200 – 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent.

  1. 2
  2. 4
  3. 6
  4. 8

3. [6]

100

Assume that the money demand function is (M/P)d = 2,200 – 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will:

  1. drop by 4 percent.
  2. drop by 2 percent.
  3. drop by 1 percent.
  4. remain unchanged.

2

101

Assume that the money demand function is (M/P)d = 2,200 – 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

  1. 2,000.
  2. 1,800.
  3. 1,600.
  4. 1,400.

3