Exam

Question 1

The IS curve (interest rate on the vertical axis, output on the horizontal axis)

a. slopes upward.

b. is vertical.

c. is horizontal.

d. slopes downward.

Answer 1

d. slopes downward.

Question 2

In the ISLM model, when i>0, an increase in the supply of money will

a. lower interest rates and raise output.

b. raise prices and lower output.

c. lower interest rates and lower output.

d. raise interest rates and raise output.

Answer 2

a. lower interest rates and raise output.

Question 3

The AD curve (price level on the vertical axis, output on the horizontal axis, and when i>0) —–

a. slopes upward.

b. is vertical in the short-run.

c. is horizontal.

d. slopes downward.

Answer 3

d. slopes downward.

Question 4

In the ISLM model, when i>0, an increase in expected inflation causes output to (i) —– and the real interest rate to (ii) —–

a. (i) fall; (ii) rise

b. (i) rise; (ii) rise

c. (i) remain unchanged; (ii) rise

d. (i) rise; (ii) fall

Answer 4

d. (i) rise; (ii) fall

Question 5

A liquidity trap is a situation in which —–

a. inflation is caused by excess demand for goods.

b. the economy is at full employment.

c. the nominal interest rate is at or near zero.

d. the Keynes effect dominates.

Answer 5

c. the nominal interest rate is at or near zero.

Question 6

In the ISLM model, standard monetary policy does not affect output in a liquidity trap because —–

a. the nominal interest rate is at zero.

b. money demand is independent of output.

c. an increase in the money supply will lower investment.

d. output is already at `full employment’.

Answer 6

a. the nominal interest rate is at zero.

Question 7

The expectations-augmented Phillips curve in lectures, in (p, y) space, is upward sloped, because —–

a. firms suffer from money illusion, reducing the value of nominal wage offers in booms, thereby boosting output.

b. nominal prices are sticky and firms supply more output in a boom.

c. workers tend to demand higher real wages and then supply more labor.

d. when the nominal wage is fixed, an unexpected rise in prices lowers the real wage, which raises labor demand.

Answer 7

d. when the nominal wage is fixed, an unexpected rise in prices lowers the real wage, which raises labor demand.

Question 8

Consider the expectations-augmented Phillips curve, in (p,y) space.

a. An increase in the expected price will shift the Phillips curve right (a south-east direction).

b. An increase in the natural rate of output will have no effect on the Phillips curve.

c. An increase in the natural rate of output will shift the Phillips curve left (a north-west direction).

d. An increase in the expected price will shift the Phillips curve left (a north-west direction).

Answer 8

d. An increase in the expected price will shift the Phillips curve left (a north-west direction).

Question 9

Consider the ADAS model. With static expectations, —–

a. a fall in the (systematic component of the) money supply will cause output to rise.

b. a fall in the money supply will cause output to fall.

c. a fall in the money supply will have no effect on output.

d. a fall in the (unexpected component of the) money supply will cause output to rise.

Answer 9

b. a fall in the money supply will cause output to fall.

Question 10

A Property of Rational Expectations is that —–

a. agents can use past errors to eliminate future errors.

b. agents forecast the current price using the previous periods price.

c. agents do not make systematic mistakes.

d. the variance of the forecast error is time-varying.

Answer 10

c. agents do not make systematic mistakes.

Question 11

Consider the ADAS model. With Rational Expectations expectations, a fall in —–

a. the (unexpected component of the) money supply will cause output to fall.

b. the money supply will cause output to rise.

c. the money supply will have no effect on output.

d. the (systematic component of the) money supply will cause output to fall.

Answer 11

a. the (unexpected component of the) money supply will cause output to fall.

Question 12

Consider the overlapping wage contract model.

Select one:

a. If agents are equally forward and backward-looking there will be no persistence in output.

b. If agents are relatively backward-looking there will be low persistence in output.

c. If agents are relatively forward-looking there will be high persistence in output.

d. If agents are relatively forward-looking there will be low persistence in output.

Answer 12

d. If agents are relatively forward-looking there will be low persistence in output.

Question 13

In the Barro-Gordon Model, —–

a. the only credible policy is a commitment to zero inflation.

b. the only rational expectations equilibrium is the discretionary equilibrium.

c. the government wants to raise inflation to reduce the national debt.

d. the government is able to take advantage of the Phillips curve to boost short-run output.

Answer 13

b. the only rational expectations equilibrium is the discretionary equilibrium.

Question 14

In the Barro-Gordon Model, —–

a. inflation in the cheating equilibrium is higher than the in discretionary equilibrium.

b. inflation in the discretionary equilibrium is the same as in the commitment equilibrium.

c. output in the discretionary equilibrium is higher than in the cheating equilibrium.

d. output in the discretionary equilibrium is the same as in the commitment equilibrium.

Answer 14

d. output in the discretionary equilibrium is the same as in the commitment equilibrium.

Question 15

The Taylor rule shows combinations of (i) ____ and (ii) ____ which characterize (iii) _____ of the central bank.

a. (i) interest rates; (ii) the real money stock; (iii) monetary targeting

b. (i) output; (ii) interest rates; (iii) the monetary policy

c. (i) inflation; (ii) interest rates; (iii) inflation targeting

d. (i) inflation; (ii) output; (iii) the interest rate policy

Answer 15

d. (i) inflation; (ii) output; (iii) the interest rate policy

Question 16

Milton Friedman’s Constant Money Growth rule implies that —

a. monetary policy is procyclical.

b. the nominal interest rate should be zero.

c. the rate of money growth should be adjusted to influence short-run output.

d. the nominal interest rate and output have a positive relationship.

Answer 16

d. the nominal interest rate and output have a positive relationship.

Question 17

The Taylor principle states that —–

a. overlapping wage contracts will lead to persistence in output when there are shocks to the money supply.

b. an increase in inflation by one percentage point should prompt the central bank to raise the nominal interest rate by more than one percentage point.

c. the central bank should adopt a constant rate of money growth.

d. an increase in inflation by one percentage point should prompt the central bank to cut the real interest rate by more than one percentage point.

Answer 17

b. an increase in inflation by one percentage point should prompt the central bank to raise the nominal interest rate by more than one percentage point.

Question 18

Consider a small open economy which trades in financial assets and a homogeneous good (an endowment economy). The consumption Euler equation shows —–

a. that the ratio of the marginal utility of consumption in different periods will depend on the real interest rate.

b. that the ratio of output in different periods will depend on the real interest rate.

c. that when the interest rate rises the path of income will fall.

d. what the interest will be in each period.

Answer 18

a. that the ratio of the marginal utility of consumption in different periods will depend on the real interest rate.

Question 19

Consider a small open economy which trades in financial assets and a homogeneous good (an endowment economy). An increase in period 2 output implies —–

a. a current account deficit.

b. a fall in period 1 consumption.

c. a rise in the real interest rate.

d. a current account surplus.

Answer 19

a. a current account deficit.

Question 20

Consider a small open economy which trades in financial assets and a homogeneous good (an endowment economy).

a. Running a current account surplus reduces welfare because citizens are investing too much money in another country.

b. Running a current account deficit reduces welfare because there is too much borrowing.

c. It is welfare-enhancing to restrict international borrowing and lending.

d. It is better, in welfare terms, for a country to be free to borrow and lend internationally.

Answer 20

d. It is better, in welfare terms, for a country to be free to borrow and lend internationally.