Exam 3 Flashcards
(100 cards)
1
Q
Refer to Figure 13-3. Which of the points in the above graph are possible long-run equilibria? A) A and D
B) A and B
C) B and D
D) A and C
A
A and C
2
Q
Suppose we have an initial IS-LM equilibrium at a certain price level. A rise in the price level puts \_\_\_\_\_\_\_\_ pressure on the interest rate as the money market re-equilibrates, which in turn causes commodity market equilibrium to occur at an output level \_\_\_\_\_\_\_\_ the initial one. A) downward, above B) upward, below C) downward, below D) upward, above
A
upward, below
3
Q
In Figure 4-6 above, with IS0 shifting to IS1 against the upward-sloping LM curve, at point 1
A) the demand for output exceeds Y1.
C) there is an excess supply of money.
B) there is an excess demand for money.
D) the demand for output is below Y1.
A
B) there is an excess demand for money.
4
Q
In Figure 4-6 above, with IS0 shifting to IS1 against the upward-sloping LM curve, crowding-out is the result that
A) income stays at YO3.
B) income rises to Y1 instead of staying at YO3.
C) income rises to Y1 instead of to Y2.
D) income rises to Y2 instead of to Y1.
A
income rises to Y2 instead of to Y1.
5
Q
The economy is in short-run equilibrium A) at any point on the LM curve. B) at any point on the IS curve. C) only at a point that is on both the IS and LM curves. D) only at the natural level of GDP.
A
C) only at a point that is on both the IS and LM curves.
6
Q
6) If the unemployment rate is above its natural rate, then ________.
A) there is excess tightness in the labor market
B) output is below its potential level
C) wages and prices will rise more rapidly and the AS curve will shift to the left
D) all of the above
E) none of the above
A
B) output is below its potential level
7
Q
Comparing the short-run Phillips curve and the long-run Phillips curve, we see that there is
A) a tradeoff in both curves.
B) no relationship between the two curves.
C) no tradeoff in either curve.
D) only a short-run tradeoff between inflation and unemployment but not a long-run tradeoff.
E) only a long-run tradeoff between inflation and unemployment but not a short-run tradeoff.
A
only a short-run tradeoff between inflation and unemployment but not a long-run tradeoff.
8
Q
C = 100+0.8(Y-T) I = 500 - 1000r G = T = 500 Md = 100 + Y - 1000r Ms = 3000 What are the equilibrium values for Y and r? A) Y = 2400 and r = 30% B) Y = 2100 and r = 20% C) Y = 3000 and r = 10% D) Cannot be determined from information given.capital goods.
A
Y = 3000 and r = 10%
9
Q
9) The short-run Phillips curve shows ________ between the unemployment rate and the inflation rate and the long-run Phillips curve shows ________ between the unemployment rate and the
inflation rate.
A) no relationship; no relationship
B) a positive relationship; a negative relationship
C) a negative relationship; no relationship
D) no relationship; a negative relationship
E) a negative relationship; a positive relationship
A
a negative relationship; no relationship
10
Q
In Figure 4-5 above, the money market is in equilibrium A) at points A and E. B) at points A, B, E, and C. C) at points B, C, and E. D) at points E and D. E) only at point E.
A
at points B, C, and E.
11
Q
In the long-run ISLM model and with everything else held constant, an increase in the money supply leaves the level of output and interest rates unchanged, an outcome called A) long-run money neutrality. B) long-run crowding out. C) interest rate overshooting. D) the long-run Phillips curve.
A
long-run money neutrality.
12
Q
Suppose the aggregate demand curve shifts rightward against a horizontal short -run aggregate supply curve. Real GDP would \_\_\_\_\_\_\_\_ while the price level \_\_\_\_\_\_\_\_. A) rise, rises B) remain unchanged, rises C) fall, rises D) remain unchanged, falls E) rise, remain unchanged
A
E) rise, remain unchanged
13
Q
A steep LM curve implies that
A) a decrease in taxes will change output by a relatively small amount.
B) an increase in government spending will change output by a relatively small amount.
C) the crowding out effect is large.
D) All of the above.
A
D) All of the above.
14
Q
If the Fedʹs goal is to keep the interest rate fixed, a contractionary fiscal policy must be accompanied by \_\_\_\_\_\_\_\_ monetary policy that shifts the LM curve to the \_\_\_\_\_\_\_\_. A) an expansionary, left B) a contractionary, left C) a contractionary, right D) an expansionary, right
A
a contractionary, left
15
Q
In a liquidity trap, which of the following policies would be most effective at stimulating output? A) Reduce government spending. C) Increase the money supply. B) Reduce taxes. D) They are all equally bone-headed.
A
Reduce taxes.
16
Q
Suppose the government increases its expenditures by $100 billion and simultaneously reduces the money supply by $100 billion. We definitely know that A) the interest rate will fall. B) equilibrium GDP will rise. C) equilibrium GDP will fall. D) the interest rate will rise.
A
D) the interest rate will rise.
17
Q
Suppose we have an initial equilibrium with curves IS0 and LM0. The price level then rises. At every point on LM0 there is now an excess ________ real balances, which is eliminated at each
income level by a ________ in the interest rate, meaning that the new LM curve is ________ LM 0.
A) supply of, fall, below
B) demand for, fall, above
C) demand for, rise, above
D) supply of, rise, above
E) demand for, fall, below
A
demand for, rise, above
18
Q
The short-run Phillips curve shows
A) a tradeoff between the unemployment rate and the inflation rate.
B) the expected inflation rate.
C) the natural unemployment rate.
D) a tradeoff between real GDP and unemployment.
E) potential GDP.
A
a tradeoff between the unemployment rate and the inflation rate.
19
Q
The natural rate hypothesis concludes that when the inflation rate increases, then in the long run there is
A) a downward movement along the short-run Phillips curve.
B) an upward movement along the short-run Phillips curve.
C) a downward shift of the short-run Phillips curve.
D) an upward shift of the short-run Phillips curve.
E) no change at all in the short-run Phillips curve.
A
an upward shift of the short-run Phillips curve
20
Q
A reasonable dynamic assumption for the IS-LM model is that
A) the money market is quick to adjust, but the bond market adjusts more slowly.
B) adjustment to the new IS-LM equilibrium is instantaneous after an LM shift, but not after an IS shift.
C) the economy is always on both the IS and LM curves.
D) the economy is always on the IS curve, but moves only slowly to the LM curve.
E) the economy is always on the LM curve, but moves only slowly to the IS curve.
A
the economy is always on the LM curve, but moves only slowly to the IS curve.
21
Q
Potential GDP equals $500 billion. The economy is currently producing GDP1 which is equal to $440 billion. If the MPC is 0.8, then how much must taxes change for the economy to move to potential GDP? A) -$15 billion B) $40 billion C) $15 billion D) -$40 billion
A
A) -$15 billion
22
Q
22) In the figure above, the expected inflation rate is A) 4 percent. B) 0 percent. C) 2 percent. D) 8 percent. E) 6 percent.
A
A) 4 percent.
23
Q
From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the money supply falls. At the new IS-LM equilibrium we have some combination of a \_\_\_\_\_\_\_\_ income and a \_\_\_\_\_\_\_\_ interest rate. A) higher, lower B) lower, lower C) lower, higher D) higher, higher
A
C) lower, higher
24
Q
Since business firms will undertake a project whose rate of return exceeds the present level of interest rates, when interest rates
A) rise planned investment does not change.
B) rise planned investment rises, ceteris paribus.
C) rise planned investment falls, ceteris paribus.
D) fall planned investment falls, ceteris paribus.
A
rise planned investment falls, ceteris paribus
25
```
Based on the graph above, a cause of movement from point 1 to point 2 might be ________.
A) a positive price shock
B) an increase in expected inflation
C) government policy that increases AD.
D) an increase in potential output
E) none of the above
```
C) government policy that increases AD.
26
Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the following is true for this economy?
A) The money supply equals money demand. B) Financial markets are in equilibrium.
C) Production equals demand.
D) The quantity supplied of bonds equals the quantity demanded of bonds.
E) all of the above
E) all of the above
27
```
n the figure above, the natural unemployment rate is
A) 6 percent.
B) 2 percent.
C) 0 percent.
D) 8 percent.
E) 4 percent.
```
E) 4 percent.
28
```
In Figure 4-10 above, preferring the ʺeasy fiscal, tight moneyʺ policy mix at a certain income is why we are at
A) point D rather than point B.
B) point B rather than point D.
C) point C rather than point A.
D) point A rather than point C.
```
B) point B rather than point D.
29
The short-run Phillips curve is another way of looking at
A) Okunʹs law as applied to aggregate demand.
B) Keynesian or short-run aggregate supply.
C) the natural rate of unemployment.
D) potential GDP.
E) aggregate demand.
Keynesian or short-run aggregate supply.
30
```
30) In the long run,
A) LRAS and SRAS lie on the same line.
C) GDP > potential GDP.
B) unemployment is at its natural rate.
D) the inflation rate is zero
```
B) unemployment is at its natural rate.
31
The fixed price level that was assumed in the IS-LM model implied that
A) there is always less than full employment.
B) the aggregate supply curve is upward sloping to the left.
C) the aggregate supply curve is horizontal.
D) there is always full employment.
the aggregate supply curve is horizontal.
32
```
On the graph above, an example of a positive demand shock is the movement from point ________ to point ________.
A) F; H
B) F; G C) H; I
D) H; F
E) none of the above
```
B) F; G
33
The long-run Phillips curve indicates that
A) potential GDP can never be achieved.
B) there is no way to control the inflation rate in the long run.
C) any unemployment rate is possible at the natural inflation rate.
D) any inflation rate is possible at the natural unemployment rate.
E) there is a tradeoff between the inflation rate and the unemployment rate in the long-run.
any inflation rate is possible at the natural unemployment rate.
34
34) Moving upward along an LM curve, velocity ________ because ________ remains constant while ________ rises.
A) falls, real balances, real income
B) rises, real balances, real income
C) falls, real income, real balances
D) rises, the interest rate, real balances
E) rises, the interest rate, the price level
B) rises, real balances, real income
35
```
A falling interest rate ________ the number of investment projects having a positive profit rate, and thus ________ the amount of output that firms demand for themselves.
A) increases, raises
C) increases, lowers
B) decreases, raises
D) decreases, lower
```
increases, raises
36
```
f expectations about inflation are adaptive, they are ________.
A) based on past inflation
B) formed by looking at the future
C) likely to change rapidly
D) all of the above
E) none of the above
```
A) based on past inflation
37
```
Monetary policy will have a large effect on income provided the
A) LM curve is steep.
B) IS curve is steep.
C) LM curve is flat.
D) IS curve is flat.
```
IS curve is flat.
38
If firms hire workers until the real wage, W/P, is equal to the marginal product of labor, MPN, then the firm
A) maximizes profits.
C) maximizes employment.
B) minimizes ʺwaste,ʺ such as pollution.
D) maximizes employment and profits.
maximizes profits.
39
A rise in the nominal money supply will
A) shift the LM curve and shift the AD curve rightward.
B) shift the AD curve and raise the equilibrium price level.
C) shift the AD curve and raise the equilibrium level of nominal GDP.
D) All of the above are correct.
D) All of the above are correct.
40
If the expected inflation rate rises, then the short-run Phillips curve ________ and the long-run Phillips curve ________.
A) shifts; does not shift
B) shifts; shifts
C) does not shift; shifts
D) does not shift; does not shift
E) might shift; shifts only if the short-run Phillips curve shifts
A) shifts; does not shift
41
Assume the economy is subjected to random shocks that alter the poisitions of the IS and LM curves. If the Federal Reserve wants to minimize the variability of GDP around its full employment level, what policy target, money supply or interest rate, should it choose?
A) Money supply target if shocks are bigger in the financial sector.
B) Interest rate target if shocks are bigger in the goods sector.
C) It doesnʹt matter, both will work equally well in all situations.
D) Interest target if shocks are bigger in the financial sector.
Interest target if shocks are bigger in the financial sector.
42
Adaptive expectations assumes that individuals
A) base predictions on past observations of the variable being forecast.
B) use all available information in predicting the future.
C) can accurately predict the future.
D) form their predictions of macroeconomic variables randomly.
E) none of the above
A) base predictions on past observations of the variable being forecast.
43
In the long run ________.
A) the Phillips curve is vertical at a given level of expected inflation
B) the economy reaches the potential output level consistent with the natural rate of unemployment
C) the aggregate supply is vertical with respect to unemployment
D) all of the above
E) none of the above
the economy reaches the potential output level consistent with the natural rate of unemployment
44
```
Crowding-out is eliminated when the LM curve is ________, so that expansionary fiscal policy ________ the interest rate.
A) horizontal, does not affect
C) vertical, raises
B) horizontal, raises
D) vertical, does not affect
```
horizontal, does not affect
45
The LM curve will shift to the
A) left if the price level is held constant and the quantity of money rises.
B) left if the price level falls and the quantity of money is held constant.
C) right if the price level rises and the quantity of money is held constant.
D) right if the price level falls and/or the quantity of money rises.
right if the price level falls and/or the quantity of money rises.
46
In a ʺliquidity trap,ʺ
A) the demand for money is infinite, i.e. people hold all new money balances instead of buying
bonds.
B) the nominal interest rate on short-term assets is relatively high.
C) money supply changes have a strong impact on interest rates.
D) the LM curve is a vertical line.
the demand for money is infinite, i.e. people hold all new money balances instead of buying
bonds.
47
In Milton Friedmanʹs expectations-augmented Phillips curve, ________.
A) in the long run, expected inflation will reach the NAIRU
B) unemployment will, in the long run, reach the natural rate C) inflation is positively related to the unemployment gap
D) all of the above
E) none of the above
unemployment will, in the long run, reach the natural rate
48
49) An increase in real GDP causes the demand for real money balances to
A) rise, fall, or remain unaffected depending on the interest rate at the time.
B) rise.
C) remain unaffected.
D) fall.
rise
49
In a liquidity trap, the
LM curve is horizontal.
50
```
ʺCrowding-outʺ occurs in the IS-LM model as rising government spending requires a ________ in the interest rate in order to ________ the demand for money at the new equilibrium, thus ________ planned private investment.
A) rise, keep constant, lowering
B) rise, lower, raising
C) fall, raise, lowering
D) rise, raise, lowering
E) fall, keep constant, raising
```
rise, keep constant, lowering
51
```
Everything else held constant, an increase in net taxes will cause the IS curve to shift to the ________ and aggregate demand will ________.
A) left; increase
B) right; decrease
C) right; increase
D) left; decrease
```
left; decrease
52
```
The expectations-augmented Phillips curve implies that as expected inflation increases, nominal wages ________ to prevent real wages from ________.
A) rise; rising
B) fall; rising
C) rise; falling
D) fall; falling
```
rise; falling
53
Which market adjusts the quickest in response to shocks to the economy?
A) The labor market
B) The goods market
C) The asset, labor, and goods markets adjust at about the same speed to eliminate a
disequilibrium in the macroeconomy.
D) The asset market
The asset market
54
Which of the following changes aggregate supply and shifts the AS curve?
i. a change in the price of a major resource
ii. increases in the amount of capital
iii. a change in the money income of consumers
A) i, ii, and iii
B) i and ii
C) iii only
D) ii only
E) i only
i and ii
55
The IS curve shows the combinations of output and the real interest rate for which
A) the financial asset market is in equilibrium.
B) the labor market is in equilibrium.
C) an increase in output will cause the market-clearing interest rate to be bid up.
D) the goods market is in equilibrium.
the goods market is in equilibrium.
56
```
The short-run Phillips curve is another way of looking at
A) aggregate demand.
B) long-run aggregate supply.
C) the natural rate of unemployment.
D) potential GDP.
E) short-run aggregate supply.
```
short-run aggregate supply.
57
The short-run Phillips curve shows ________ between the unemployment rate and the inflation rate and the long-run Phillips curve shows ________ between the unemployment rate
and the inflation rate.
A) no relationship; no relationship
B) a positive relationship; a negative relationship
C) a negative relationship; no relationship
D) a negative relationship; a positive relationship
E) no relationship; a negative relationship
a negative relationship; no relationship
58
You have just read that the Federal Reserve has increased the money supply to avoid a recession. For a given price level, you would expect the LM curve to
A) shift up and to the left as the real money supply falls.
B) shift up and to the left as the real money supply rises.
C) shift down and to the right as the real money supply falls.
D) shift down and to the right as the real money supply rises.
shift down and to the right as the real money supply rises.
59
hich of the following people is most likely to be spending all of their current income?
A) a high income person expecting a dramatic drop in income in the future
B) a low income person expecting continued low income throughout life
C) a low income person expecting a dramatic rise in income in the future
D) a high income person expecting to retire soon, and live for a long time afterward
E) a high income person expecting continued high income throughout life
a low income person expecting a dramatic rise in income in the future
60
```
The long-run aggregate supply curve is a vertical line passing through
A) the actual rate of unemployment.
B) the natural rate of output.
C) the natural-rate price level.
D) the expected rate of inflation.
```
the natural rate of output.
61
In the long-run ISLM model and with everything else held constant, as long as the level of output ________ the natural rate level, the price level will continue to ________, shifting the
LM curve to the ________, until finally output is back at the natural rate level.
A) remains below; rise; right
B) exceeds; rise; left
C) exceeds; rise; right
D) remains below; fall; left
exceeds; rise; left
62
```
If the economy is on its short-run Phillips curve at the natural unemployment rate, then in the AS-AD model, real GDP is definitely
A) increasing.
B) less than potential GDP.
C) greater than potential GDP.
D) decreasing.
E) equal to potential GDP.
```
E) equal to potential GDP.
63
```
According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on
A) consumer nondurables.
C) government expenditure.
B) business fixed investment.
D) net exports.
```
B) business fixed investment.
64
Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation in
the short run, everything else held constant.
A) no change; a decrease
B) an increase; an increase
C) no change; an increase
D) a decrease; a decrease
D) a decrease; a decrease
65
According to the permanent income hypothesis, the impact of ________.
A) a change in permanent income on consumption is greater than the impact resulting from
a change in transitory income.
B) a change in transitory income is felt primarily through changes in the total tax revenue
paid to the federal government.
C) a change in permanent income on consumption is larger than the impact resulting from a
change in future income.
D) a change in transitory income on consumption is greater than the impact resulting from a
change in permanent income.
A) a change in permanent income on consumption is greater than the impact resulting from
a change in transitory income.
66
Adaptive expectations assumes that individuals
A) base predictions on past observations of the variable being forecast.
B) can accurately predict the future.
C) form their predictions of macroeconomic variables randomly.
D) use all available information in predicting the future.
E) none of the above
A) base predictions on past observations of the variable being forecast.
67
According to the permanent-income hypothesis,
A) the income earned in a lifetime will be evenly divided between consumption and saving.
B) household consumption depends on income that households expect to receive each year,
and financial markets are used to smooth consumption in response to changes in
transitory income.
C) households use financial markets to to transfer funds from periods when income is high
to to periods when income is low.
D) the present value of lifetime consumption equals the present value of lifetime income.
household consumption depends on income that households expect to receive each year,
and financial markets are used to smooth consumption in response to changes in
transitory income.
68
A decrease in the real interest rate acts as ________ for lenders and as ________ for borrowers.
A) a decrease in wealth; an increase in wealth
B) an increase in wealth; an increase in wealth
C) a decrease in wealth; a decrease in wealth
D) an increase in wealth; a decrease in wealth
a decrease in wealth; an increase in wealth
69
The short-run Phillips curve shows
A) potential GDP.
B) a tradeoff between real GDP and unemployment.
C) a tradeoff between the unemployment rate and the inflation rate.
D) the natural unemployment rate.
E) the expected inflation rate.
a tradeoff between the unemployment rate and the inflation rate.
70
```
If the ________ curve is relatively more unstable than the ________ curve, a money supply
target is preferred.
A) IS; LM
B) IS; IS
C) LM; LM
D) LM; IS
```
IS; LM
71
Moving along the short-run AS curve, when the price level increases, the
A) nominal wage rate rises, and there is a decrease in the quantity of real GDP supplied.
B) real wage rate rises, and there is a decrease in the quantity of real GDP supplied.
C) nominal wage rate falls, and there is an increase in the quantity of real GDP supplied.
D) real wage rate falls, and there is an increase in the quantity of real GDP supplied.
E) real wage rate rises, and there is an increase in the quantity of real GDP supplied.
real wage rate falls, and there is an increase in the quantity of real GDP supplied.
72
If a person completely smooths consumption over his lifetime, then consumption is best
represented by which of the following?
A) lifetime wealth / the number of years the person expects to work
B) lifetime wealth / the number of years the person expects to live
C) current income X the number of years the person expects to work
D) current income X the number of years the person expects to live
lifetime wealth / the number of years the person expects to live
73
```
When the aggregate demand curve shifts rightward, the price level ________ and the
unemployment rate ________.
A) decreases; decreases
B) does not change; does not change
C) increases; increases
D) increases; decreases
E) decreases; increases
```
increases; decreases
74
```
) In the figure above, the expected inflation rate is
A) 8 percent.
B) 4 percent.
C) 0 percent.
D) 6 percent.
E) 2 percent.
```
4 percent.
75
```
In the figure above, the natural unemployment rate is
A) 6 percent.
B) 8 percent.
C) 2 percent.
D) 4 percent.
E) 0 percent
```
6 percent.
76
Economic theory suggests that ________ interest rates are ________ important than ________
interest rates in explaining investment behavior.
A) real; more; nominal
B) nominal; more; real
C) market; more; real
D) real; less; nominal
real; more; nominal
77
27) The long-run Phillips curve shows the relationship between
A) the nominal interest rate and real interest rate.
B) real GDP and the natural unemployment rate.
C) the inflation rate and the natural unemployment rate.
D) the inflation rate and the unemployment rate.
E) real GDP and potential GDP.
the inflation rate and the natural unemployment rate.
78
If inflation increases unexpectedly, then
A) lenders gain and borrowers gain.
B) neither borrowers nor lenders lose.
C) lenders receive a lower real interest rate than they expected.
D) borrowers pay a higher real interest rate than they expected.
lenders receive a lower real interest rate than they expected.
79
According Friedmanʹs restatement of the quantity theory of money, an increase in the money
supply ________ the demand for ________, everything else held constant.
A) increases; supply
B) decreases; supply
C) decreases; non-durable goods
D) increases; durable goods
increases; durable goods
80
Human wealth is
A) total wealth minus housing wealth.
B) the sum of financial and housing wealth.
C) the discounted present value of all financial assets.
D) financial wealth minus housing wealth.
E) the present discounted value of expected future after-tax labor income.
E) the present discounted value of expected future after-tax labor income.
81
Moving along the short-run Phillips curve, a ________ unemployment rate can only be
achieved by paying the cost of ________.
A) higher; a higher inflation rate
B) lower; a lower price level
C) lower; a higher inflation rate
D) lower; a lower inflation rate
E) lower; a higher expected inflation rate
lower; a higher inflation rate
82
```
The rate of output at which the price level has no tendency to rise or fall is called the
A) efficient level of output.
B) bliss point.
C) potential level of income.
D) natural rate of output.
```
D) natural rate of output.
83
An increase in potential GDP ________ aggregate supply and ________.
A) has no effect on; does not shift the AS curve
B) decreases; shifts the AS curve rightward
C) increases; shifts the AS curve rightward
D) decreases; shifts the AS curve leftward
E) increases; shifts the AS curve leftward
increases; shifts the AS curve rightward
84
Assets that generate high returns when wealth is decreasing are more valuable than those that
are poitively correlated with changes in wealth because such assets can be use to _____.
A) smooth consumption
B) equate marginal utilities of consumption over time
C) hedge income risk
D) All of the above
All of the above
85
For consumers with a binding borrowing constraint, a decrease in the real interest rate
________.
A) decreases consumption now, and increases future consumption
B) has no impact on consumption
C) decreases consumption now, and in the future
D) increases consumption now, and in the future
has no impact on consumption
86
The long-run aggregate supply curve shifts to the right when there is
A) an increase in the total amount of capital in the economy.
B) an increase in the available technology.
C) a decrease in the natural rate of unemployment..
D) A and B.
E) A, B, and C.
A, B, and C.
87
```
Inflation that is ________ than what is expected benefits ________ and hurts ________.
A) less; lenders; borrowers
B) less; borrowers; lenders
C) greater; lenders; borrowers
D) greater; lenders; no one
```
less; lenders; borrowers
88
According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975
and 1978-1980 had the effect of
A) decreasing aggregate output, raising unemployment, and lowering the inflation.
B) increasing aggregate output, raising unemployment, and raising the inflation.
C) decreasing aggregate output, raising unemployment, and raising the inflation.
D) increasing aggregate output, lowering unemployment, and raising the inflation.
decreasing aggregate output, raising unemployment, and raising the inflation.
89
```
The long-run rate of unemployment to which an economy always gravitates is the
A) natural rate of unemployment.
B) neutral rate of unemployment.
C) normal rate of unemployment.
D) inflationary rate of unemployment.
```
natural rate of unemployment.
90
Suppose there is an increase in expected future taxes. This will cause which of the following to
occur?
A) the LM curve to shift up in the current period
B) the LM curve to shift down in the current period
C) the IS curve to shift right in the current period
D) the IS curve to shift left in the current period
the IS curve to shift left in the current period
91
Consumption is most likely to respond one-for-one with changes in current income when
A) the change in current income results from a one-time bonus
B) people believe the change in their current income is temporary.
C) the change in current income is caused by the business cycle.
D) people are able to borrow as much as they wish, as long as they pay it back.
E) none of the above
none of the above
92
Moving upward along the aggregate supply curve, is equivalent to
A) shifting the short-run Phillips curve leftward.
B) moving upward along the short-run Phillips curve.
C) moving downward along the short-run Phillips curve.
D) shifting the short-run Phillips curve rightward.
E) shifting the short-run Phillips curve upward.
moving upward along the short-run Phillips curve.
93
If the expected inflation rate rises, then the short-run Phillips curve ________ and the long-run
Phillips curve ________.
A) shifts; does not shift
B) shifts; shifts
C) does not shift; does not shift
D) does not shift; shifts
E) might shift; shifts only if the short-run Phillips curve shifts
shifts; does not shift
94
Suppose policy makers underestimate the natural rate of unemployment, i.e. they believe the
natural rate is 4% when it is really 6%. In situations like these, policy makers will likely
implement policies that result in
A) a steadily decreasing inflation rate.
B) more unemployment than necessary.
C) a higher inflation rate than necessary.
D) an unemployment rate that is ʺtoo high.ʺ
E) overly contractionary monetary and fiscal policy
a higher inflation rate than necessary.
95
Assuming the economy is starting at the natural rate of output and everything else held
constant, the effect of ________ in aggregate ________ is a rise in both inflation and output in
the short-run, but in the long-run the only effect is a rise in inflation.
A) a decrease; demand B) a decrease; supply
C) an increase; demand D) an increase; supply
an increase; demand
96
When the money supply declines by 10%, in the long run, output ________ and the price level
________.
A) is unchanged; is unchanged B) declines; falls
C) is unchanged; falls D) declines; is unchanged
is unchanged; is unchanged B) declines; falls
97
Suppose the intersection of the IS and LM curves is to the right of the full employment output,
Y*. What would most likely eliminate a disequilibrium among the asset, labor, and goods
markets?
A) A rise in the price level, shifting the LM curve up and to the left.
B) A rise in the price level, shifting the IS curve up and to the right.
C) A fall in the price level, shifting the IS curve down and to the left.
D) A fall in the price level, shifting the LM curve down and to the right.
A fall in the price level, shifting the IS curve down and to the left.
98
Everything else held constant, a change in workersʹ expectations about inflation will cause
________ to change.
A) aggregate demand B) the production function
C) short-run aggregate supply D) long-run aggregate supply
short-run aggregate supply
99
Assume the economy is initially operating at the natural level of output. Now suppose a
budget is passed that calls for an increase in government spending. This increase in
government spending will, in the short run, cause an increase in
A) the nominal wage.
B) the price level.
C) the nominal interest rate.
D) all of the above
E) none of the above
all of the above
100
Everything else held constant, an autonomous tightening of monetary policy will cause
A) the quantity of aggregate demand to increase.
B) aggregate demand to increase.
C) the quantity of aggregate demand to decrease.
D) aggregate demand to decrease.
) aggregate demand to decrease.
