Exam 3 Flashcards
Chapters 17, 20, and 21 (162 cards)
1
Q
(TRUE/FALSE) Inflation is more common than deflation.
A
TRUE
2
Q
In the long run, the price level of an economy is proportional to the ___________.
A
money supply
3
Q
Classical Theory of inflation looks at ________________ determinants of price level and inflation.
A
long run
4
Q
Price Level or P = number of dollars needed to buy a ____________ of goods and services.
A
basket
5
Q
Value of money 1/P = the quantity of goods and services that can be bought with one ________.
A
dollar
6
Q
Inflation does ________ make each dollar more valuable.
A
not
7
Q
As the value of money rises……
A
the price level falls.
8
Q
Money Demand = How much people want to hold money in it’s ____________ form.
A
liquid
9
Q
As P increases, the money demand ___________.
A
increases
10
Q
Quantity of money demanded is positively correlated with ___________ and negatively correlated with the _________ of money.
A
P, value
11
Q
Money Supply = Assumed for the model that the Fed precisely controls money supply and is set at a_______ amount.
A
fixed
12
Q
Fed cannot precisely control money supply because there are multiple factors such as ___________ and __________.
A
banks, consumers
13
Q
SRAS- Supply of ______ and ______ in an economy
A
goods,services
14
Q
TRUE or FALSE: changes in the price level shifts the SRAS curve
A
False
15
Q
When firms pay employees they set a price head of time based on Pe, or the price level that firms ___ for the future
A
Expect
16
Q
When Pe>P, revenue was less/more than expected but labor costs remain the same. This causes firms to hire fewer/more people, causing production to be less/more. Is there a positive relationship between P and Y?
A
less, less, less, yes
17
Q
Firms may confuse a rise in P with an increase in _____ for thier products
A
demand
18
Q
When P rises above Pe, firms see higher/lower prices than expected and they produce more/less to match the misperceived demand, lowering/raising production and employment. Is there a postivie relationship between P and Y?
A
Higher, more, rising
19
Q
Assume there is only one good in the economy, corn. The economy has enough labor, capital, and land to produce 1500 bushels of corn. V is constant. IN 2019, the money supply was $3600, and the price of corn was $9/Bushel. What was the velocity of money?
A
3.75
20
Q
What is the SRAS equation?
A
Yn+a(P-Pe)
21
Q
Is the SRAS equation positively or negatively sloping?
A
positive
22
Q
In the long run Pe is equal to?
A
Price
23
Q
In the long run, is the AS curve vertical/horizontal?
A
Vertical
24
Q
In the long run Y is equal to?
A
The natural level of output (Yn)
25
SRAS shifts occur with changes in expected _____,_____ rate and _____ prices
price level, wage, input
26
Price level, wage, and input affect the cost of business, and when business costs are higher, there is a shifter LEFT/RIGHT
Left
27
Real wealth falls, interest rate rises, and the dollar appreciates as the price level_____
A. remains the same
B. rises
C. falls substantially
D. falls slightly
B. rises
28
Most economists believe that real and nominal variables are highly interwoven, and that money can temporarily move real GDP away from its persistent trend in ________.
A. the short run
B. the very long run
C. the medium long run
D. neither the short run or the long run
A .the short run
29
In the short run, a decrease in the costs of production makes_______.
A. Output and prices fall
B. Output fall and prices rise
C. Output and prices rise
D. Output rise and prices fall
D. Output rise and prices fall
30
The vertical axis of the aggregate demand and aggregate supply graph has the ________.
A. real GDP
B. price level
C. output of goods
D. output of services
B. price level
31
Imagine a hypothetical world in which, over the last fifty years, both real GDP and prices have trended downward in most countries. Continuing falls in the level of real GDP and the price level can be explained by __________.
A. continuing decrease in the money supply alone
B. continuing losses in technological ability and a continuing decrease in the money supply
C. Neither technological ability nor changes in the money supply can explain continuing falls in the level of real GDP contraction and the price level
D. Continuing losses in technological ability alone
B. continuing losses in technological ability and a continuing decrease in the money supply
32
If the price level rises, the real value of a dollar _______.
A. rises, so people will want to buy more
B. falls, so people will want to buy less
C. rises, so people will want to buy less
D. falls, so people will want to buy more
B. Falls, buy less
33
If not all prices adjust to changing economic circumstances, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and their higher-than-desired prices depress sales and induce firms to ______ the quantity of goods and services they produce.
A. increase substantially
B. increase slightly
C. reduce
D. Make no changes to
C. reduce
34
Other things being the same, when the government spends less, the initial effect is that _________.
A. The aggregate-demand curve shifts to the right
B. aggregate-supply curve shifts right
C. aggregate-supply curve shifts left
D. aggregate-demand curve shifts left
D. aggregate-demand curve shifts left
35
Which of the following will both make people buy less?
A. Wealth falls and interest rates fall
B. Wealth falls and interest rates rise
C. wealth rises and interest rate falls
D. wealth and interest rate rise
B. Wealth falls and interest rates rise
36
We depart from the assumptions of classical economics when we focus on the relationship between the quantity of output and the _________level.
A. unemployment
B. price
C. real GDP
D. retail sales
B. price
37
A candidate for political office announces the following prices, which, they say, economics clearly demonstrates will lead to higher output in the long run: 1) decrease immigration from abroad 2) make trade more open between the UDS and other countries
A. Policy 1 shifts the long-run aggregate-supply curve to the right, Policy 2 shifts the long-run aggregate-supply curve to the left
B. Policy 1 and 2 both shift the long-run aggregate-supply curve to the right
C. policy 1 shifts long-run aggregate supply curve to the left, policy 2 shifts long-run aggregate supply curve to the right
D. policy 1 and 2 both shift the long-run aggregate-supply curet to the left
C. policy 1 shifts long-run aggregate supply curve to the left, policy 2 shifts long-run aggregate supply curve to the right
38
Suppose that there is a decrease in the costs of production that shifts the short-run aggregate supply curve to the right. If there is no policy response, then eventually_____
A. because unemployment is high, wages will be bid down and short-run aggregate-supply curve will shift right
B. because unemployment is high, wages will be bid up and short run aggregate-supply curve will shift right
C. because unemployment is low, wages will be bid up and short run aggregate-supply curve will shift right
D. because unemployment is low, wages will be bid up and short run aggregate-supply curve will shift left
D. because unemployment is low, wages will be bid up and short run aggregate-supply curve will shift left
39
Which of the following shifts the short-run aggregate supply curve to the right?
A. an increase in the price of oil
B. a decrease in the expected price level
C. a increase in the minimum wage
D. a decrease in immigration from abroad
B. a decrease in the expected price level
40
A vertical long-run aggregate-supply curve represents______
A. both the classical dichotomy and monetary neutrality
B. the classical dichotomy but not the monetary neutrality
C. neither the classical dichotomy or monetary neutrality
D. monetary neutrality but not the classical dichotomy.
A. both the classical dichotomy and monetary neutrality
41
Which of the following would cause prices and real GDP to fall in the short run?
A. The short-run aggregate-supply curve shifts to the left
B. aggregate-demand curve to shift to the left
C. short-run aggregate supply curve shifts to the right
D. Aggregate-demand curve shifts to the right
B. aggregate-demand curve to shift to the left
42
Fluctuations in real GDP are caused by ____________.
A. not all by changes in aggregate demand, nor changes in aggregate supply
B. by changes in aggregate demand and/or changes in aggregate supply
C. only by changes in aggregate demand
D. only by changes in aggreage supply
B. by changes in aggregate demand and/or changes in aggregate supply
43
An increase in natural resources would __________
A. Increase long-run aggregate supply
B. Increase in aggregate demand
C. has no impact on long-run aggregate supply
D. decrease long-run aggregate supply.
A. Increase long-run aggregate supply
44
When output rises, unemployment also rises.
TRUE or FALSE
False
45
When the price level rises less than expected, a firm with a sticky price will sell its output at a price that is _______.
A. more than the firm desires and decrease its production
B. more than the firm desires and increases its production
C. less than the firm desires and decrease its production
D. less than the firm desires and increases its production
A. more than the firm desires and decrease its production
46
When prices and unemployment rise, such an event is sometimes called _______
A. depreciation
B. inflation
C. stagflation
D. expansion
C. stagflations
47
Quantity Theory of Money Equation
MV=PY
48
M ?
money supply
49
V ?
velocity of circulation
50
P ?
price level (comes from CPI)
51
Y ?
GDP/output (real)
52
Classical Dichotomy: Theoretical separation of __________ and ___________ variables.
nominal, real
53
Monetary Neutrality: Proposition that changes in the money supply does not affect _________ variables.
real
54
Which of the following describes the meaning of the demand for money?
Wealth that people want to hold in liquid form.
55
Financial Assets could be anything such as the following:
stocks, bonds, and rare paintings
56
Suppose P is the price level (the GDP deflator), Y is the quantity of output (real GDP), V is velocity, M is the quantity of money if M=600, V=5, and Y=1000. What is the price level?
3
57
Which of the following describes monetary neutrality?
Changes in the supply of money affect nominal variables but not real ones.
58
Which of the following describes the relationship between the value of money and the price level?
As the price level falls, the value of money rises.
59
Which of the following describes how inflation is usually measured?
Percentage change in the consumer price index; can use GDP Deflator, but usually CPI
60
Inflation Tax: Revenue the government makes by __________ money, tax on everyone who __________ money.
printing, demands
61
(True/False) Holding money is bad when inflation is high.
True because the dollar loses value throughout this time.
62
(True/False) Holding and Investing are different.
True
63
Shoe leather Tax: Resources wasted when inflation encourages people to ___________ their money holdings.
reduce
64
Fisher Effect: printing more money affects________ variables but does not affect _________ variables
nominal, real
65
What does shoe leather taxes can you think of?
gas to bank, transaction cost, and opportunity cost of your time
66
Menu Costs: Costs of ______________ prices.
changing
67
Inflation ____________ menu costs that firms must bear.
increases; ex: menu prices, online price changes, cost of losing customers
68
Misallocation of resources resulting from price changes caused by __________.
inflation
69
Inflation makes income grow through inflation but real do ___________.
not
70
Real income is ____________.
never changing
71
What is the effect of this?
Government taxes you based on percentage.
72
Which of the following is true about inflation and relative prices?
(A) Higher inflation increases price variability distorting relative-price variability (misallocation of resource allocation)
73
Bertha took out a 5 year fixed interest rate loan. She anticipated the inflation rate of 3 percent but it actually turned out to be only 2 percent. What happens to Bertha's real interest rate and the real value of the loan?
(B) Her real interest rate was higher than expected, and the real value of the loan is higher than expected.
74
Which of the following theories explains the long-run determinants of the price-level and inflation rate?
The Quantity Theory of Money
75
Which of the following is true about inflation tax in the United States?
(D) It falls most heavily on those who hold a lot of currency but accounts for a small share of U.S. government revenue.
76
The principle of monetary neutrality implies that _________.
(C) an increase in the money supply will increase price level, but not real GDP.
77
Which of the following is an example of menu costs?
(B) Stores advertising new prices
78
Which of the following describes the effect of a decrease in the money supply?
(B) The money supply curve shifts to the left, the price level decreases causing the value of money to increase.
79
The inflation tax is not exactly like other taxes because _____________.
(D) no one receives a bill from the government for the tax
80
Suppose the CPI has increased from 105 to 107. What is the new inflation rate?
1.9%
81
Bertha lends $1000 to Danko for 2 years and charges an animal interest rate of 6%. Bertha anticipated an inflation rate, but was actually 2.5% as a result of the higher-than expected inflation _____________.
(D) Danko is better off at the expense of Bertha.
82
Bertha owns a pastry shop and cafe in an economy that is prone to rapid inflation. If Bertha reprints her menu every month ________________.
(C) She bears a high menu cost and the relative price of her pastries is too low.
83
Suppose the price level has increased from 103 to 107. Which of the following is the inflation rate?
3.88%
84
Which of the following theories explains the long-run determinants of price-level and the inflation rate?
(B) The Quantity Theory of Money
85
Which of the following describes the relationship between the value of money and the price level?
(C) As the price level rises, the value of money falls.
86
When inflation turns out to be higher than expected, wealth is redistributed from lenders to borrowers.
True
87
Formula for the Spending Multiplier
Change in Y= (1/1-MPC) Change in G
88
(True/False) The higher the MPC, the higher the spending multiplier.
True
89
Crowding Out Effect: Occurs when expansionary fiscal policy leads to an increase/decrease in the interest rate.
increase
89
The increase/decrease in interest rate causes an increase/decrease in net AD change.
increase, decrease
90
Why does an increase in Y increase money demand?
The money demand is increasing which increases the interest rate; when output is higher there are more things in the market for consumers to buy
91
Active Stabilization: Theory that ____________ should use policy to help reduce economic fluctuations.
government (occurs with governmental help)
92
Automatic Stabilization: Changes in ______________ policy that stimulate AD when economy goes into recession, happens with/without policymakers having to take any deliberate action.
fiscal, without
93
Refer to the figure. On the graph that depicts the theory of liquidity preference, which of the following is not true?
(C) The demand-for-money curve is vertical.
94
Assume the MPC is 0.6. Assume there is a multiplier effect and that the crowding-out effect is $10 billion. An increase in government purchases of $20 billion will shift aggregate demand to the ___________.
right by $40 billion
95
The multiplier for changes in government spending is calculated as __________
(B) 1/(1-MPC)
96
If the Fed conducts open-market purchases, the money supply decreases and aggregate demand shifts right.
False; open market purchase the Fed is giving money to banks and in return they are receiving bonds
97
If the marginal propensity to consume is 2/3, then the government purchases multiplier is __________.
(C) 3
98
Which of the following is not correct?
(B) When real GDP expands, the rate of unemployment rises.
99
Aggregate-demand curve shifts to the left if the money supply decreases.
True (cost of borrowing goes up so demand goes down)
100
Which of the following is an example of crowding out?
(A) A decrease in taxes increases interest rates, causing investment to fall.
101
Which of the following is not correct?
(B) As the interest rate falls, the quantity of money demanded falls.
102
A candidate for political office announces the following policies which, they say, economics clearly demonstrates will lead to higher output in the long run:
1) Decrease immigration from abroad
2) Make trade more open between the U.S. and other countries
(B) Policy 1 shifts long-run aggregate-supply curve to the left, policy 2 shifts long-run aggregate supply curve to the right.
103
One cost of deflation is __________.
(D) the redistribution of wealth toward creditors and away from debtors
104
Most economists believe that real and nominal variables are highly intertwined, and that money can temporarily move real GDP away from its persistent trend in ______________.
(C) the short run (money supply has nothing to do with real output just printing money)
105
(True/False) When inflation turns out to be higher than expected, wealth is redistributed from lenders to borrowers.
True
106
Which of the following would not lead to a decrease in aggregate demand and a leftward shift in the AD curve?
A. all of the above would increase aggregate demand and shift the AD curve leftward.
B. a decrease in housing prices.
C. an increase in domestic price level.
D. an appreciation of the domestic currency.
E. an in increase in interest rate.
B. a decrease in housing prices.
107
Other things the same, when the price level falls, interest rates
fall, so firms increase investment
108
Which of the following shifts both the short-run and long-run aggregate supply right?
an increase in the capital stock
109
Which of the following would lead to a shift in the short-run aggregate supply curve but no change in the long-run aggregate supply curve?
A decrease in the expected price level.
110
Which of the following policy actions shifts the aggregate-demand curve?
an increase in the government spending, an increase in the money supply, an increase in taxes
111
Which of the following would be classified as fiscal policy?
the federal government cuts taxes to stimulate the economy
112
Suppose the expected inflation rate increases from 5% to 8%. According to the Fisher effect
the nominal interest rate increased by 3 percentage points
113
If the economy is producing below the natural rate of output in the short-run, wages and input prices will eventually ____ and ____ will increase, returning the economy to long-run equilibrium.
fall/ short-run aggregate supply
114
Relative-price variability
rises with inflation, leading to misallocation of resources
115
The inflation tax
is like a tax on everyone who holds money, is the revenue created when the gov prints money, is an alternative to income taxes and gov borrowing.
116
An earthquake destroys capital stock in an economy. The result is
a leftward shift in the long-run aggregate supply curve.
117
In the long-run,
A. an increase in the price level increases the aggregate quantity of GDP supplied.
B. an increase in the price level increases the level of potential GDP.
C. an increase in the price level reduces the aggregate quantity of GDP supplied.
D. an increase in the price level has no effect on the aggregate quantity of GDP supplied.
an increase in the price level has no effect on the aggregate quantity of GDP supplied.
118
The Federal Reserve controls _____ and influences ______ with the intention of influencing ____ .
money supply / interest rates / investment
119
This question is equivalent to three questions. Partial credit is awarded. Select the correct answers from the drop-down menu.
Suppose the tax rate on nominal interest income is 20% and does not change over time. Also assume the real interest rate remains constant.
In year 1, the inflation rate is 4% and the nominal interest rate is 10%.
In year 2, the inflation rate is 14%
The real interest rate in both years is 6
The nominal interest rate in year 2 is 20
The after-tax nominal interest rate in year 1 is
[ Select ]
The after-tax nominal interest rate in year 2 is
[ Select ]
The after-tax real interest rate in year 1 is 4
The after-tax real interest rate in year 2 is
6,20,8,16,4,2
120
Which of the following accounts for about two-thirds of the decline in output during a recession?
the decline in investment spending.
121
In the short-run, an increase in aggregate supply leads to _____ price level and _____ in unemployment.
a decrease / a decrease
122
The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,
production is more profitable and employment rises.
123
In order to understand how the economy works in the short run, we need to
study a model in which real and nominal variables interact.
124
Examples of automatic stabilizers include government expenditures that ____ when national income decreases and help explain why deficits are ____ during recessions.
increase / larger
125
A favorable supply shock, like a decrease in the price of oil, would cause
A favorable supply shock, like a decrease in the price of oil, would cause
126
If inflation is higher than what was expected,
creditors receive a lower real interest rate than they had anticipated.
127
Which of the following would lead to a decrease in the multiplier effect of fiscal policy?
Households save a higher fraction of income.
128
Money neutrality suggests that an increase in the money supply leads to _____ in price level and inflation and _____ in real GDP.
an increase / no change
129
Take the following information as given for small, imaginary economy: When income is $10,000, consumption spending is $6,500. When income is $11,000, consumption spending is %7,100. The marginal propensity to consume for this economy is _____________.
(A) 0.60 (change in consumption/change in income C2-C1 and I2-I1)
130
Refer to the figure. Which of the following is true?
(D) If the current interest rate is 2 percent, people will sell more bonds, which drives interest rates up.
131
Which of the following is true about inflation and relative prices?
(C) Higher inflation increases the relative-price variability distorting the resource allocation.
132
The Federal Funds Rate is the interest rate the Fed charges depository institutions for short-term loans.
False (This sentence frame is referring to the Discount Rate not the overnight loans between banks).
133
Suppose that there is a decrease in the costs of production that shifts the short-run aggregate-supply curve right. If there is not policy response, then eventually ______________.
(A) because unemployment is low, wages will be bid up and short-run aggregate-supply curve will shift left
134
Refer to the figure. A move by the economy from Z to P3 and Y1 would be consistent with ______________.
(C) stagflation (when prices increase but output decreases)
135
Real wealth falls, interest rates rise, and the dollar appreciates as the price level _________.
(A) rises (interest rates and price level have a positive correlation)
136
Other things the same, if the money supply rises by 5 percent and people were expecting it to rise by 2 percent, then some firms have ________.
(C) lower-than-desired prices, which increases their sales (money supply means inflation)
137
Suppose a change in the stock market makes people feel wealthier, increases consumption, and shifts the aggregate-demand curve right. What must have happened in the stock market?
(A) Stock prices increased
138
Assume the MPC is 0.65. Assuming only the multiplier effect matters, an increase in government purchases of $20 billion will shift the aggregate demand curve to the
right by about $57.1 billion.
139
Monetary policy is determined by
the Federal Reserve and involves changing the money supply.
140
From 2001 to 2005 there was a dramatic rise in the price of houses. If this rise made people feel wealthier, then it would have shifted
aggregate demand right.
141
In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?
the MPC is small and changes in the interest rate have a large effect on investment
142
In the long run, an economy's production of goods and services depends on its supply of
labor, natural resources, capital, and available technology.
143
Liquidity refers to
the ease with which an asset is converted to the medium of exchange.
144
The Central Bank of Wiknam decreases the money supply at the same time the Parliament of Wiknam repeats a new investment tax credit. Which of these policies shifts aggregate-demand curve to the left?
(B) Both the money supply decrease and the investment tax credit repeal. (tax credit can be thought of like a gift card, reduction of taxes and is good for aggregated demand)
145
An increase in natural resources would______.
increase long-run aggregate supply
146
Marta is having a policy debate with their cousin. Their cousin points out that the political process is mostly responsible for the lag in implementing________________.
(A) fiscal policy (monetary policy is controlled by the Fed but fiscal is controlled by congress, president, etc.)
147
Although wages, incomes, and interest rates are most often discussed in real terms, what matters most are their nominal values.
False (everything listed refers to nominal)
148
The recessions associated with the business cycle come at irregular intervals.
True
149
Fluctuations in real GDP are caused by
(B) by changes in aggregate demand and/pr changes in aggregate supply
150
Which of the following describes how inflation can be measured?
(D) Percentage change in the GDP deflator
151
According to classical macroeconomic theory, nominal variables, but not real variables, are affected by changes in the ________________.
(A) money supply
152
If the stock market booms then ______________.
(B) aggregate demand increases, which the Fed could offset by selling government bonds.
153
If businesses in general decide that they have under built and so now have too little capital, their response to this would initially shift ________.
(A) aggregate-demand curve to the right (talking about their response and what they would need to do to fix this problem)
154
Which of the following would decrease the price level?
(C) A decrease in the money supply
155
Which of the following both shift aggregate-demand curve to the right?
(C) A decrease in taxes and at a given level consumers feel more wealthy
156
Sometimes during times of heightened national security, government expenditures are larger than normal. What could the Fed do to reduce the effects this spending creates on interest rates?
(D) increase the money supply by buying bonds
157
Which of the following is an example of menu costs?
(C) Stores advertising new prices
158
The separation of real and nominal variables is referred to as the classical _________.
(B) dichotomy
159
Which of the following shifts aggregate demand to the left?
(A) A decrease in the money supply
160
When the interest rate increases, the opportunity cost of holding money decreases, so the quantity of money demanded decreases.
False
161
Refer to the figure. You can explain a decrease in Y from Y1 to Y2 in the following way: A decrease in P in P2 to P1 causes the money-demand curve to shift from MD1 tp MD2: this shift of MD causes r to increase from r1 to r2: and this increase in r causes Y to decrease from Y1 to Y2
False (when price level is decreasing, money demand should also be decreasing)
