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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

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

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

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest
rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.

depreciation; 2

With a 10 percent interest rate on dollar deposits, and an expected appreciation of 7 percent over the coming
year, the expected return on dollar deposits in terms of the dollar is

10 percent

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets,
and if the euro is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of
return on peso-denominated assets is

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.

Lower tariffs and quotas cause a country's currency to ________ in the ________ run, everything else held
constant.

depreciate; long

In a liquidity trap, monetary policy has ________ effect on aggregate spending because a change in the
money supply has ________ effect on interest rates.

no; no

In the liquidity trap, the money demand curve...

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

If interest rates do not affect the demand for money, then velocity is _____ likely to be _____.

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.

The Keynesian demand for real balances can be expressed as

Md/P = f(i,Y).

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

procyclical movements in velocity.

If people expect nominal interest rates to be higher in the future, the expected return to bonds _____, and the
demand for money _____.

falls; increases

If the economy is on the IS curve, but is to the left of the LM curve, then the ________ market is in
equilibrium, but the interest rate is ________ the equilibrium level.

goods; above

If the economy is on the LM curve, but is to the left of the IS curve, aggregate output will ________ and the
interest rate will ________.

rise; rise

As aggregate output rises, the demand for money ________ and the interest rate ________, so that money
demanded equals money supplied and the money market is in equilibrium.

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

When the interest rate is ________, ________ investments in physical capital will earn more than the cost of
borrowed funds, so planned investment spending is ________.

high; few; low

If net exports increase by 100 and the mpc is 0.75, equilibrium aggregate output increases by

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.

Everything else held constant, an increase in autonomous planned investment spending will cause the IS
curve to shift to the ________ and aggregate demand will ________.

right; increase

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

aggregate demand to increase.

The aggregate demand curve has the usual downward slope, since a ________ price level ________ the real
money supply, raises interest rates, and lowers the equilibrium level of aggregate output.

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.

In the case of an expansionary ________ policy, the interest rate rises, while in the case of an expansionary
________ policy, the interest rate falls.

fiscal; monetary

In the money market, a condition of excess supply of money can be eliminated by a ________ in aggregate
output or a ________ in the interest rate, everything else held constant.

rise; fall

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

left; output and increasing interest rates

An autonomous increase in money demand, other things equal, shifts the ________ curve to the ________.

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

If workers demand and receive higher real wages (a successful wage push), the cost of production ________
and the short-run aggregate supply curve shifts ________.

rises; leftward

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

increases; supply

The short-run aggregate supply curve is upward sloping because in the short run, costs of many factors that
go into producing goods and services are ________, meaning that the price for a unit of output will ________
relative to input prices and the profit per unit will rise.

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.

Suppose real GDP is equal to $100 trillion, the money supply is equal to $50 trillion and the price level is
equal to 2. In this case, the velocity of money is equal to ________.

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

A bank has excess reserves of $1,000 and demand deposit liabilities of $80,000 when the reserve requirement
is 25 percent. If the reserve requirement is lowered to 20 percent, the bank's excess reserves will be

$5,000.

If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve
requirement is 10 percent, then the bank has actual reserves of

$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.

If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is

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

If the required reserve ratio is one-third, currency in circulation is $300 billion, and checkable deposits are $900 billion, then the monetary base is

$600 billion.

If the required reserve ratio is 10 percent, currency in circulation is $400 billion, checkable deposits are $1000 billion, and excess reserves total $1 billion, then the monetary base is

$501 billion.

If the Fed expects currency holdings to fall, it conducts open market ________ to offset the expected ________ in reserves.

sales; increase

The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities, but these purchases or sales are executed by the Federal Reserve Bank of

New York.

Suppose, at a given federal funds rate, there is an excess supply of reserves in the federal funds market. If the Fed wants the federal funds rate to stay at that level, then it should undertake an open market ________ of bonds, everything else held constant. If the Fed does nothing, however, the federal funds rate will ________.

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

Suppose on any given day the prevailing equilibrium federal funds rate is below the Federal Reserve's federal funds target rate. If the Federal Reserve wishes for the federal funds rate to be at their target level, then the appropriate action for the Federal Reserve to take is a ________ open market ________, everything else held
constant.

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.

Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be

1 percent.

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

the federal funds rate.

Which of the following is not a requirement in selecting an intermediate target?

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.

Money neutrality means that in the long run the domestic interest rate remains unchanged from an increase in the money supply, implying that the fall in the exchange rate is greater in the ________ run than in the
________ run, a phenomenon called exchange rate overshooting.

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

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected ________ of the foreign currency must be ________ percent.

depreciation; 2

If the interest rate is 7 percent on euro-denominated assets and 5 percent on dollar-denominated assets, and if the dollar is expected to appreciate at a 4 percent rate, for Francois the Frenchman the expected rate of return
on dollar-denominated assets is

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

The ________ describes the combinations of interest rates and aggregate output for which the quantity of money demanded equals the quantity of money supplied.

LM curve

Everything else held constant, if aggregate output is to the left of the IS curve, then there is an excess
________ of goods which will cause aggregate output to ________.

demand; fall

The negative relation between investment spending and the interest rate is what gives the ________ curve its ________ slope.

IS; downward

If the income multiplier is 4, the value of the marginal propensity to consume is

0.75.

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

equilibrium output; autonomous expenditure.

Everything else held constant, an appreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will ________.

left; decrease

The aggregate demand curve has the usual downward slope, since a ________ price level ________ the real money supply, raises interest rates, and lowers the equilibrium level of aggregate output.

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

If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________.

rises; leftward

The short-run aggregate supply curve is upward sloping because in the short run, costs of many factors that go into producing goods and services are ________, meaning that the price for a unit of output will ________ relative to input prices and the profit per unit will rise.

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.

Everything else held constant, if aggregate output is to the right of the LM curve, then there is an excess ________ of money which will cause the interest rate to __________

demand; rise

Everything else held constant, a decrease in autonomous planned investment spending will cause the IS curve to shift to the _________ and aggregate demand will __________

left; decrease

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

the natural rate of output.

Assume that disposable income equals $1000 and the mpc equals 0.6. If total consumption equal $800, then autonomous consumption is equal to...

$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

Everything else held constant, an increase in autonomous consumer spending will cause the IS curve to shift to the ______ and aggregate demand will ________

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.

If the money supply is $2 trillion and velocity is 5, then nominal GDP is

$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

As the relative expected return on dollar assets increases, foreigners will want to hold more _______ assets and less ______ assets, everything else held constant.

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.

If the money supply is $600 and nominal income is $3,000, the velocity of money is

5

According to Milton Friedman, income declines relative to permanent income during a business cycle contraction, causing the demand for money relative to actual income to increase, thereby causing velocity to

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

Everything else held constant, if total consumption increases from $600
to $800 because of an increase of disposable income of $400, then the mpc is equal to

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.

Keynes hypothesized that the speculative component of money demand was primarily determined by the level of

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

Everything else held constant, when a country's currency appreciates, the country's goods abroad become ________ expensive and foreign goods in that country become _________ expensive.

more; less

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

money demand; left

If the interest rate on euro-denominated assets is 13 percent and it is 15 percent on peso-denominated assets, and if the euro is expected to appreciate at a 4 percent rate, for Manuel the Mexican the expected rate
of return on euro-denominated assets is

17 percent.

If the economy is on the LM curve, but is to the left of the IS curve, aggregate output will __________ and the interest rate will _________

rise; rise

A decline in the money _________ shifts the LM curve to the, ________, causing the interest rate to rise and output to fall, everything else held constant

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

Everything else held constant, if aggregate output is to the __________ of the LM curve, then there is an excess _________ of money which will cause the interest rate to rise.

right; demand

An autonomous decrease in money demand, other things equal, shifts the __________ curve to the _________

LM; right

According to the interest parity condition, if the domestic interest rate is 10 percent and the foreign interest rate is 12 percent, then the expected _________ of the foreign currency must be ________ percent

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

Everything else held constant, a depreciation of the domestic currency will cause the IS curve to shift to the ________ and aggregate demand will _________

right; increase

The negative relation between investment spending and the interest rate is what gives the ________ curve its _______ slope.

IS; downward

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