# Econ 330 FINAL EXAM

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### Suppose that the latest Consumer Price Index (CPI) release shows a higher inflation rate in the U.S. than was expected. Everything else held constant, the release of the CPI report would immediately cause the demand for U.S. assets to ________ and the U.S. dollar would ________.

decrease; depreciate

left; depreciate

### ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

A decrease; increase

### Everything else held constant, when the current value of the domestic exchange rate increases, the ________ of domestic assets ________.

quantity supplied; does not change

depreciation; 2

10 percent

11 percent.

### When Americans or foreigners expect the return on ________ assets to be high relative to the return on ________ assets, there is a ________ demand for dollar assets, everything else held constant.

dollar; foreign; higher

### The condition that states that the domestic interest rate equals the foreign interest rate minus the expected appreciation of the domestic currency is called

the interest parity condition.

depreciate; long

no; no

is horizontal.

### The evidence on the interest sensitivity of the demand for money suggests that the demand for money is ________ to interest rates, and there is ________ evidence that a liquidity trap exists.

sensitive; little

more; stable

### In Friedman's modern quantity theory, velocity is procyclical because

money demand depends on permanent income, which is more stable than actual income.

### According to Milton Friedman, the demand for money is insensitive to interest rates because

competition among banks keeps the opportunity cost of holding money relatively constant.

### The speculative demand for money may not exist because

there are alternative riskless assets paying higher returns than the return on money.

Md/P = f(i,Y).

### Keynes's theory of the demand for money is consistent with

procyclical movements in velocity.

falls; increases

goods; above

rise; rise

increases; rises

### The money market is in equilibrium

at any point on the LM curve.

### A decrease in interest rates

reduces the value of the dollar, increasing net exports and equilibrium output.

### When interest rates rise in the United States (with the price level fixed), the value of the dollar ________, domestic goods become ________ expensive, and net exports ________.

rises; more; fall

high; few; low

400.

### Keynes believed that changes in autonomous spending were dominated by changes in

investment spending.

### The ratio of the change in aggregate output to a change in planned investment spending is called

the expenditure multiplier.

right; increase

### Expansionary monetary policies, all else remaining the same, will cause

aggregate demand to increase.

higher; reduces

### In the long-run the ISLM model predicts that

neither monetary nor fiscal policy can change real output.

### The long-run neutrality of money refers to the fact that in the long run, monetary policy

has no effect on either real output or the real interest rate.

fiscal; monetary

rise; fall

### A contractionary monetary policy shifts the LM curve to the ________, reducing ________, everything else held constant.

left; output and increasing interest rates

LM; left

### When the central bank ________ the money supply, the LM curve shifts to the right, interest rates ________, and equilibrium aggregate output ________, everything else held constant.

increases; fall; increases

rises; leftward

### Everything else held constant, a decrease in the cost of production ________ aggregate ________.

increases; supply

fixed; rise

### A decrease in government spending, other things equal, ________ aggregate ________.

decreases; demand

### By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because

a lower price level, holding the nominal quantity of money constant, leads to a larger quantity of money
in real terms, causes the interest rate to fall, and stimulates planned investment spending.

4

### The quantity theory of money concludes that changes in aggregate spending are primarily determined by changes in

the money supply.

### The total quantity of an economy's final goods and services demanded at different price levels is

the aggregate demand curve.

### According to the quantity theory of money, changes in the money supply are

the primary source of changes in aggregate spending.

### Everything else held constant, a balanced budget increase in government spending (that is, an increase in government spending that is matched by an identical increase in net taxes) will

increase aggregate demand, but not by as much if just government spending increases.

### Decisions by depositors to increase their holdings of ________, or of banks to hold excess reserves will result in a ________ expansion of deposits than the simple model predicts.

currency; smaller

\$5,000.

\$14,000.

### In the simple deposit expansion model, an expansion in checkable deposits of \$1,000 when the required reserve ratio is equal to 10 percent implies that the Fed

purchased \$100 in government bonds.

0.20

### Recognizing the distinction between borrowed reserves and the nonborrowed monetary base, the money supply model is specified as

M = m × (MBn + BR).

### The money multiplier is

negatively related to the required reserve ratio.

### Assuming initially that r = 10%, c = 40%, and e = 0, an increase in r to 15% causes the M1 money multiplier to _____, everything else held constant.

Decrease from 2.8 to 2.55

\$600 billion.

\$501 billion.

sales; increase

New York.

sale; decrease

### In the market for reserves, an increase in the reserve requirement ________ the demand for reserves, ________ the federal funds rate, everything else held constant.

Increases; raising

dynamic; sale

### Suppose on any given day there is an excess demand of reserves in the federal funds market. If the Federal Reserve wishes to keep the federal funds rate at its current level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held constant.

defensive; purchase

### The opportunity cost of holding excess reserves is

The federal funds rate.

### The Fed uses three policy tools to manipulate the money supply: open market operations, which affect the ________; changes in borrowed reserves, which affect the ________; and changes in reserve requirements, which affect the ________.

Monetary base; monetary base; money multiplier

### The rate of inflation increases when

the unemployment rate is less than the NAIRU.

1 percent.

### If the desired intermediate target is an interest rate, the preferred policy instrument would be

the federal funds rate.

Flexibility

Correct:
Measurability
Flexibility
Predictability

### If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent,

fluctuations of nonborrowed reserves will be large.

### The goal for high employment should seek a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the

natural rate level of unemployment.

### Monetary policy is considered time-inconsistent because

policymakers are tempted to pursue discretionary policy that is more expansionary in the short run.

short; long

### In the long run, a one-time percentage increase in the money supply is matched by the same one-time percentage rise in the price level, leaving unchanged the real money supply and ________. This proposition is called money ________.

other economic variables such as interest rates; neutrality

### ________ in the expected future domestic exchange rate causes the demand for domestic assets to ________ and the domestic currency to depreciate, everything else held constant.

A decrease; decrease

### ________ in the foreign interest rate causes the demand for domestic assets to ________ and the domestic currency to appreciate, everything else held constant.

A decrease; increase

depreciation; 2

9 percent.

### According to the purchasing power parity theory, a rise in the United States price level of 5 percent, and a rise in the Mexican price level of 6 percent cause

the dollar to appreciate 1 percent relative to the peso.

### When the IS and LM curves are combined in the same diagram, the intersection of the two curves determines the equilibrium level of ________ as well as the ________.

aggregate output; interest rate

LM curve

demand; fall

IS; downward

0.75.

### The expenditure multiplier is the ratio of the change in ________ to a change in the ________.

equilibrium output; autonomous expenditure.

left; decrease

higher; reduces

### In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous fall in consumption expenditure is to

not affect real output and reduce the interest rate.

### 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

exceeds; rise; left

### Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP and ________ in the aggregate price level in the long run, everything else held constant.

no change; an increase

rises; leftward

fixed; rise

### By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because

a lower price level, holding the nominal quantity of money constant, leads to a larger quantity of money
in real terms, causes the interest rate to fall, and stimulates planned investment spending.

### An expansionary monetary policy increases net exports by

lowering real interest rates and decreasing the value of the dollar.

### In a study published in 1963, Milton Friedman and Anna Schwartz found that in every business cycle they studied over nearly a hundred-year period,

the growth rate of the money supply decreased before output decreased.

### The monetarist-Keynesian debate on the importance of monetary policy is unresolved because monetarists and Keynesians focus on two different types of evidence that generate conflicting conclusions. Monetarists tend to focus on

reduced-form evidence, while Keynesians focus on structural-model evidence.

demand; rise

left; decrease

### The long-run aggregate supply curve is a vertical line passing through

the natural rate of output.

\$200

### If the particular channels through which changes m the money supply affect aggregate income are diverse and continually changing the best evidence of monetary policy's effect is likely to come from

reduced-form models.

### In the long-run ELM 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.

remains below; fall; right

right; increase

### According to Milton Friedman, the demand for money is insensitive to interest rates because

competition among banks keeps the opportunity cost of holding money relatively constant.

\$10 trillion.

### Evidence that examines whether one variable has an effect on another by simply looking directly at the relationship between the two variables is

reduced-form evidence.

### Keynes believed that changes in autonomous spending were dominated by changes in

investment spending.

### If the economy is characterized by a certain and stable LM curve, then ______ target produces ______ fluctuations in aggregate output.

a money supply; smaller

dollar; foreign

### The less interest-sensitive is money demand,

the more effective is monetary policy relative to fiscal policy.

### When the value of the British pound changes from \$1.50 to \$1.25, then the pound has _______ and the U.S. dollar has ________

depreciated; appreciated

### If net exports decrease by 250 and the mpc is 0.75, equilibrium aggregate output

decreases by 1000.

### In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous increase in investment is to

not affect real output and increase the interest rate.

### The aggregate demand curve slopes down and to the right because

a decrease in the price level raises the real money supply, lowering interest rates.

5

decline.

### Irving Fisher's view that velocity is fairly constant in the short run transforms the equation of exchange into the

quantity theory of money.

### Although foreign exchange market trades are said to involve the buying and selling of currencies, most trades involve the buying and selling of

bank deposits denominated in different currencies

0.5

### By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because

a lower price level, holding the nominal quantity of money constant, leads to a larger quantity of money in real terms, causes the interest rate to fall, and stimulates planned investment spending.

### In the long-run ISLM model and with everything else held constant, the long-run effect of an autonomous fall in comsumption expenditure is to

not affect real output and reduce the interest rate.

### Keynes's model of the demand for money suggests that velocity is _________ related to _________

positively; interest rates

### If the economy is on the LM curve, but is to the right of the IS curve, then the ________ market is in equiliium, but aggregate _______ exceeds aggregate _________

money; output; demand

### By analyzing aggregate demand through its component parts, we can conclude that, everything else held constant, a decline in the price level causes

an inaease in the real money supply, a decline in interest rates, an increase in investment spending, and an increase in aggregate output demand.

interest rates.

### Which of the following statements concerning Keynesian analysis is false?

Keynes's analysis explains how the price level will change when the total quantity of output supplied changes.

### If an economy experiences high interest rates and high unemployment, the ISLM framework predicts that _______ policy has been too ________

monetary; contradionary

more; less

### An autonomous rise in ________ shifts the LM curve to the _________, everything else held constant.

money demand; left

17 percent.

rise; rise

supply; left

### If initially the money supply is \$2 trillion, velocity is 5, the price level is 2 and real GDP is \$5 trillion, a fall in the money supply to \$1 trillion

decreases the price level to 1.

### In the long run, a rise in a country's price level (relative to the foreign price level) causes its currency to ________, while a fall in the country's relative price level causes its currency to __________

depreciate; appreciate

### Reverse causation between money and aggregate output is likely to be a problem when a central bank targets

an interest rate.

### Everything else held constant, an increase in planned investment expenditure _________ aggregate __________

increases; demand

right; demand

LM; right

depreciation;2

### A tax increase _________ disposable income, __________ consumption expenditure, and shifts the IS curve to the _________, everything else held constant.

decreases; decreases; left

### When the exchange rate for the Mexican peso changes from 10 pesos to the US dollar to 9 pesos to the US. dollar, then the Mexican peso has __________ and the US. dollar has ___________

appreciated; depreciated

### The theory of PPP suggests that if one country's price level rises relative to another's, its currency shouId

depreciate in the long run.

### In the ISLM framework a contractionary fiscal policy causes aggregate output to ________ and the interest rate to _________, everything else held constant.

decrease; decrease

### If, in retaliation for "unfair" trade practices, Congress imposes a 30% tariff on Japanese DVD recorders, but at the same time, U.S. demand for Japanese goods increases, then, in the long run, _________, everything else held constant.

the Japanese yen could appreciate, depreciate or remain constant relative to the US. dollar

right; increase

IS; downward

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