Assignment
1. John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:
A) low levels of capital.
B) an untrained labor force.
C) inadequate technology.
D) low aggregate demand.
2. According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.
A) aggregate demand; aggregate supply
B) aggregate supply; aggregate demand
C) monetary policy; fiscal policy
D) fiscal policy; monetary policy
3. In the IS-LM model, which two variables are influenced by the interest rate?
A) supply of nominal money balances and demand for real balances
B) demand for real balances and government purchases
C) supply of nominal money balances and investment spending
D) demand for real money balances and investment spending
4. For the purposes of the Keynesian cross, planned expenditure consists of:
A) planned investment.
B) planned government spending.
C) planned investment and government spending.
D) planned investment, government spending, and consumption expenditures.
5. When drawn on a graph with Y along the horizontal axis and E along the vertical axis, the line showing planned expenditures rises to the:
A) right with a slope less than one.
B) right with a slope greater than one.
C) left with a slope less than one.
D) left with a slope greater than one.
6. According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:
A) income falls.
B) planned expenditure falls.
C) unplanned inventory investment is negative.
D) prices rise.
7. The Keynesian cross shows:
A) determination of equilibrium income and the interest rate in the short run.
B) determination of equilibrium income and the interest rate in the long run.
C) equality of planned expenditure and income in the short run.
D) equality of planned expenditure and income in the long run.
8. (Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______ inducing firms to ______ production.
A) rise; increase
B) rise; decrease
C) fall; increase
D) fall; decrease
9. In the Keynesian-cross model, if the MPC equals .75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.
A) $1 billion; more than $1 billion
B) $.75 billion; more than $.75 billion
C) $.75 billion; $.75 billion
D) $1 billion; $1 billion
10. According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of DT will:
A) decrease equilibrium income by DT.
B) decrease equilibrium income by DT/(1 - MPC).
C) decrease equilibrium income by (DT)(MPC)/(1 - MPC).
D) not affect equilibrium income at all.
11. In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier.
A) is larger than
B) equals
C) is smaller than
D) is the inverse of the
12. Tax cuts stimulate ______ by improving worker's incentive and expand ______ by raising households' disposable income.
A) velocity; demand for loanable funds
B) demand for loanable funds; velocity
C) aggregate demand; aggregate supply
D) aggregate supply; aggregate demand
13. In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
14. Along any given IS curve:
A) tax rates are fixed, but government spending varies.
B) government spending is fixed, but tax rates vary.
C) both government spending and tax rates vary.
D) both government spending and tax rates are fixed.
15. The IS curve shifts when all of the following economic variables change except:
A) the interest rate.
B) government spending.
C) tax rates.
D) the marginal propensity to consume.
16. 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:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.
17. An IS curve shows combinations of:
A) taxes and government spending.
B) nominal money balances and price levels.
C) interest rates and income that bring equilibrium in the market for real balances.
D) interest rates and income that bring equilibrium in the market for goods and services.
18. The theory of liquidity preference implies that:
A) as the interest rate rises, the demand for real balances will fall.
B) as the interest rate rises, the demand for real balances will rise.
C) the interest rate will have no effect on the demand for real balances.
D) as the interest rate rises, income will rise.
19. According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will:
A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
C) purchase more goods and services.
D) be content with their portfolios.
20. (Exhibit: Market for Real Money Balances) Based on the graph, if the interest rate is r1, then people will ______ bonds and the interest rate will ______.
A) sell; rise
B) sell; fall
C) buy; rise
D) buy; fall
21. An increase in income raises money ______ and ______ the equilibrium interest rate.
A) demand; raises
B) demand; lowers
C) supply; raises
D) supply; lowers
22. The LM curve shows combinations of ______ that are consistent with equilibrium in the market for real money balances:
A) inflation and unemployment
B) the price level and real output
C) the interest rate and the level of income
D) the interest rate and real money balances
23. A decrease in the real money supply, other things being equal, will shift the LM curve:
A) downward and to the left.
B) upward and to the left.
C) downward and to the right.
D) upward and to the right.
24. A decrease in the price level, holding nominal money supply constant, will shift the LM curve:
A) upward and to the right.
B) downward and to the right.
C) downward and to the left.
D) upward and to the left.
25. The intersection of the IS and LM curves determines the values of:
A) r, Y, and P, given G, T, and M.
B) r, Y, and M, given G, T, and P.
C) r and Y, given G, T, M, and P.
D) p and Y, given G, T, and M.
26. An increase in investment demand for any given level of income and interest rates-due, for example, to more optimistic "animal spirits"-will, within the IS-LM framework, ______ output and ______ interest rates.
A) increase; lower
B) increase; raise
C) lower; lower
D) lower; raise
27. In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.
A) rises; falls
B) rises; rises
C) falls; rises
D) falls; falls
28. In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.
A) increase; supply
B) increase; demand
C) decrease; supply
D) decrease; demand
29. The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:
A) directly.
B) by lowering the interest rate so that investment spending increases.
C) by raising the interest rate so that investment spending increases.
D) by increasing government spending on goods and services.
30. When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.
A) buy; IS
B) buy; LM
C) sell; IS
D) sell; LM
31. The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______.
A) LM; right
B) LM; left
C) IS; right
D) IS; left
32. One policy response to the U.S. economic slowdown of 2001 were tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.
A) LM; right
B) LM; left
C) IS; right
D) IS; left
33. A change in income in the IS-LM model resulting from a change in the price level represents a ______ aggregate demand curve, while a change in income in the IS-LM model for a given price level represents a ______ aggregate demand curve.
A) movement along the; shift in the
B) shift in the; movement along the
C) vertical; horizontal
D) horizontal; vertical
34. The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending:
A) lower; raises; reduces
B) higher; lowers; increases
C) lower; lowers; increases
D) higher; raises; reduces
35. An economic change that does not shift the aggregate demand curve is a change in:
A) the money supply.
B) the investment function.
C) the price level.
D) taxes.
Part B
1. Business cycles are:
A) regular and predictable.
B) irregular but predictable.
C) regular but unpredictable.
D) irregular and unpredictable.
2. Over the business cycle, investment spending ______ consumption spending.
A) is inversely correlated with
B) is more volatile than
C) has about the same volatility as
D) is less volatile than
3. Most economists believe that prices are:
A) flexible in the short run but many are sticky in the long run.
B) flexible in the long run but many are sticky in the short run.
C) sticky in both the short and long runs.
D) flexible in both the short and long runs.
4. A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:
A) in both the short and long runs.
B) in neither the short nor long run.
C) in the short run but lead to unemployment in the long run.
D) in the long run but lead to unemployment in the short run.
5. A difference between the economic long run and the short run is that:
A) the classical dichotomy holds in the short run but not in the long run.
B) monetary and fiscal policy affect output only in the long run.
C) demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
D) prices and wages are sticky in the long run only.
6. Along an aggregate demand curve, which of the following are held constant?
A) real output and prices
B) nominal output and velocity
C) the money supply and real output
D) the money supply and velocity
7. For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are ______ generating a ______ quantity of output demanded.
A) higher; greater
B) higher; smaller
C) lower; greater
D) lower; smaller
8. When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.
A) greater; inward
B) greater; outward
C) lower; inward
D) lower; outward
9. Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy.
A) the quantity of output and the price level
B) the quantity of output
C) the price level
D) neither the quantity of output nor the price level
10. In the long run, the level of output is determined by the:
A) interaction of supply and demand.
B) money supply and the levels of government spending and taxation.
C) amounts of capital and labor and the available technology.
D) preferences of the public.
11. If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
A) neither prices nor level of output.
B) both prices and level of output.
C) level of output but not prices.
D) prices but not level of output.
12. The long-run aggregate supply curve is vertical at the level of output:
A) determined by aggregate demand.
B) at which unemployment is at its natural rate.
C) at which the inflation rate is zero.
D) at a predetermined price level.
13. If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
A) is horizontal.
B) is vertical.
C) slopes upward and to the right.
D) slopes downward and to the right.
14. In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:
A) aggregate demand equals long-run aggregate supply.
B) aggregate demand equals short-run aggregate supply.
C) aggregate demand equals short-run and long-run aggregate supply.
D) short-run aggregate supply equals long-run aggregate supply.
15. If the short-run aggregate supply curve is horizontal, then the:
A) classical dichotomy is satisfied.
B) money supply cannot affect prices in the short run.
C) money supply cannot affect output in the short run.
D) money supply is irrelevant in the short run.
16. If the short-run aggregate supply curve is horizontal, then a change in the money supply will change ______ in the short run and change ______ in the long run.
A) only prices; only output
B) only output; only prices
C) both prices and output; only prices
D) both prices and output; both prices and output
17. Stabilization policy:
A) aims at keeping output and employment at their natural rates.
B) always succeeds in keeping output and employment at their natural rates.
C) is generally ineffective.
D) does more harm than good.
18. A supply shock does not occur when:
A) a drought destroys crops.
B) unions push wages up.
C) the Fed increases the money supply.
D) an oil cartel increases world oil prices.
19. In the short run, a favorable supply shock causes:
A) both prices and output to rise.
B) prices to rise and output to fall.
C) prices to fall and output to rise.
D) both prices and output to fall.
20. Stagflation occurs when prices ______ and output ______.
A) fall; falls
B) fall; increases
C) rise; falls
D) rise; increases
21. The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher
22. Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:
A) be permanently higher and output will be restored to the natural rate.
B) return to the old level and output will be restored to the natural rate.
C) be permanently higher and output will be permanently lower.
D) return to the old level, but output will be permanently lower.
23. If the demand for money increases, this will:
A) increase velocity.
B) decrease velocity.
C) have no effect on velocity.
D) cause the Fed to increase the money supply.
24. If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will:
A) fall and in the long run prices will remain unchanged.
B) remain unchanged and in the long run prices will fall.
C) remain unchanged and in the long run prices will remain unchanged.
D) fall and in the long run prices will fall.
25. If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and:
A) prices will remain unchanged in the long run.
B) output will fall 5 percent in the long run.
C) prices will fall 5 percent in the long run.
D) output will remain unchanged in the long run.
26. The natural level of output is:
A) affected by aggregate demand.
B) the level of output at which the unemployment rate is zero.
C) the level of output at which the unemployment rate is at its natural level.
D) permanent and unchangeable.
27. If a change in government regulations allows banks to start paying interest on checking accounts this will:
A) increase the demand for money.
B) decrease the demand for money.
C) have no effect on the demand for money.
D) increase the demand for currency but decrease the demand for checking accounts.