Chap 11

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Suppose this year's inflation rate is 4 percent, which is greater than the 2 percent everyone expected. Which of the following is true?

potential output

Among the reasons firms find it profitable to expand output in the short run when the price level is rising faster than expected is that

prices

Given implicit or explicit resource price agreements, if the actual price level is below the expected price level, the

economy will move leftward

The steepness of the short-run aggregate supply curve depends primarily on

how quickly production

As an expansionary gap is closed in the long run by firms' actions,

output decreases

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is not true?

The aggregate demand curve

A contractionary gap may be closed in the long run by a(n)

rightward shift

In the short run, if the economy is operating below potential output and if the aggregate supply curve shifts outward, then the price level will

decrease and output will increase

Which of the following does not influence the position of the long-run aggregate supply curve?

the actual price level

Which of the following is true in the long run?

The price level

If a contractionary gap exists and resource prices are not flexible downward, the short-run aggregate supply curve will

not shift rightward

During a recession,

contractionary GAPS may persist

The movement shown in Exhibit 11-9 could be caused by

positive net investments

An adverse supply shock would shift the

long-run and short run

All of the following are variables that can be manipulated to affect fiscal policy except one. Which is the exception?

the interest rate

A $200 increase in government purchases has a greater effect on the equilibrium level of real GDP than a $200 decrease in autonomous net taxes would. True or False?

True

If the multiplier for autonomous government purchases equals 4, then it is true that the simple tax multiplier

equals -3

If the MPC equals 0.75 and G increases by $100, real GDP demanded will increase by

$400

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

rise by $200

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will

rise by $600

To close a contractionary gap using fiscal policy, the government can

increase government spending by less

An increase in federal budget deficit

may create

When the government closes an expansionary gap with a change in government spending, the __________ in government spending leads to __________.

decrease; a decrease in both

Suppose that the economy has an expansionary gap of $1,000 and the MPC equals 0.8. With an upward-sloping short-run aggregate supply curve, the government can close the gap if it increases autonomous net taxes by

more than $250

The steeper the short-run aggregate supply curve,

the larger the impact of a shift in aggregate demand on the equilibrium price level

The difference between the classical approach and the Keynesian approach to fiscal policy is

Keynesians believe that it may be necessary

The Classical economists believed in the self-correcting nature of the economic system. They believed that the major adjustment

mechanisms were flexible

Which of the following is not an automatic stabilizer?

new legislation

A progressive income tax ensures that during expansionary periods,

disposable income will increase by less

The reason that fiscal policy was not helpful in the 1970s was that such policy is aimed at

aggregate demand only

If policy makers think the natural rate of unemployment is higher than it really is, then their policies designed to move the economy to the estimated natural rate, if continued over the long run, will

keep

Which of the following is not a weakness of fiscal policy?

Fiscal policy works

The Reagan experiment in supply-side economics resulted in all of the following except

a reduction in the federal debt

The federal government budget is

a plan

If government increased Social Security benefits and decreased the salaries of government workers by the same amount, we would expect the immediate effect to be

no change in the budget deficit because government

Problems with the federal government budget process include

the use

If the government runs a cyclically balanced budget, its revenue will equal its expenditure

over

An annually balanced budget

accentuates

In 1981, policy makers in the Reagan administration predicted a balanced budget for the 1980s because

growth in GDP was expected to be large

The crowding in of private investment is associated with

more

Which of the following steps does not belong in a sequence reflecting the impact on international markets of increased borrowing to finance a large government budget deficit?

The rising

The national debt is

a stock variable measuring

Among the following cases, the opportunity cost of crowding out is the smallest when the government spends $9 billion

on new

Some economists have predicted that parents will act to offset the impact of deficit spending on their children by

saving

Barter is more feasible in primitive societies than in modern societies because

specialization is limited and there are few goods

How does money function as a unit of account?

The prices of all goods

In order for something to be used as money, it must be

generally acceptable

Commitments to make or receive payments in the future are made easier by money's function as a

store of value

Gresham's Law states that people

spend lower-quality money

Goldsmiths are considered to be the forerunners of modern banks because they

created money

Financial intermediaries do all of the following except one. Which is the exception?

print money

The distinction between depository institutions and other financial institutions is that

only depository institutions receive funds

The powers of the Federal Reserve System do not include

the ability to provide

The Federal Reserve System has the power to

buy

The primary purpose of the Federal Open Market Committee (FOMC) is to

buy

The deregulation of U.S. banking in the 1980s led to

many bank failures

Compared to many other countries, the United States has

more commercial banks, with assets more wide

Stores need not accept your check but must accept currency because

currency is legal

All of the following are part of M2 except one. Which is the exception?

large

Which of the following is true of credit cards?

They are a way

Banks minimize the risk of loss to depositors by

making many different loans

If a bank has $1 million in assets and $50,000 in net worth, its liabilities must equal

$950,000

The ready cash kept on hand by a bank to meet the needs of those who want to withdraw funds does not earn interest for the bank.

true

Suppose the required reserve ratio is 0.1 and Linda deposits $4,000 in cash at the College State Bank. If the bank held no excess reserves before Linda's deposit and now increases its reserves by $500, which of the following is true?

The bank has excess reserves of $100

A bank manager who wants to increase profitability would likely

reduce the liquidity

If a bank sells a $1,000 security to the Fed and the required reserve ratio is 20 percent,

the bank has $1,000 in additional excess reserves, ALL

The banking system creates money in the sense that it

creates loans from excess reserves

If checking deposits increase by $6,000 after all rounds of the money-creation process when the Fed buys $1,200 worth of U.S. government securities, the maximum value of the required reserve ratio is

0.2

Under which of the following circumstances will the simple money multiplier most overstate the change in checkable deposits arising from a change in excess reserves?

The public withdraws cash and banks hold excess reserves.

Suppose the Fed sells $10 million in government securities to a commercial bank. If the required reserve ratio is 0.2, what is the maximum amount by which checkable deposits in the banking system can change? (Hint: Compare what the banking system might have done if it had loaned at every opportunity; also include the initial transaction with the Fed.)

-$50,000,000

The Fed's most important monetary policy tool today is

conducting

Raising the discount rate is

a contractionary policy on the part of the FED

To increase the money supply, the Fed might

decrease the reserve

The immediate effect of a bank's purchase of U.S. government securities from the Fed is a(n)

decrease in the Fed's assets

People will hold __________ money as the interest rate __________ because they will __________ other financial assets.

more; decreases; sell

Which of the following would cause a downward movement along the money demand curve?

a decrease in the interest rate

Which of the following is not assumed to be constant along the money demand curve?

the interest rate

When people exchange money for financial assets, the interest rate rises. true or false?

False

An increase in the money supply will

lead people to try to exchange money

If the quantity of money supplied exceeds the quantity of money demanded,

the interest rate will fall

In the aggregate demand-aggregate supply model, a decrease in the money supply will cause a short-run

decrease in both

If the Fed sells U.S. government securities to drain reserves from banks, which of the following will probably occur?

The interest rate will rise

If the Fed sells government securities to banks, eventually we expect

planned investment

If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be effective in changing aggregate demand.

responsive; sensitive

In the situation shown in Exhibit 15-1, how could the Fed return the economy to potential output?

decrease the money supply

The economy shown in Exhibit 15-3 is in equilibrium where AD=SRAS. To bring the economy to its potential output level, the Fed could

decrease the money supply and decrease the price

According to the equation of exchange, if nominal GDP equals $6 trillion and the money supply equals $1 trillion, the velocity of money

must be 6

In the long run, an increase in aggregate demand

affects only the price

In an economy in which real output grows at an average rate of 3 percent per year, a 7 percent average rate of growth in the money supply would result in a(n)

inflation rate of 4

The quantity theory of money

states that the quantity of money in circulation determines only the price

Velocity will be higher

the less effective money is

In the United States over the last decade, the velocity of

M2 has been more stable than the velocity of M1... possibly

If the Fed is targeting interest rates and money demand shifts from Dm to Dm' in Exhibit 15-4, the Fed will

increase the money supply to restore its target of i

In the history of monetary policy, the period of October 1979 to October 1982 was notable for

the emphasis placed on controlling the money supply during that period

In the event of a recession, which of the following is the most likely policy stance of those who advocate a passive approach to economic policy?

do nothing

According to the active policy position, eliminating a contractionary gap

should be accomplished

According to those who favor an active approach to policy, how can the economy shown in Exhibit 16-1 attain equilibrium at potential output?

Either the money supply or government spending should be increased.

An economy that self-corrects an expansionary gap will experience stagflation. True or False?

True

The formulation of active policy is

more effective if the natural unemployment rate can do the can can.

Suppose that policy makers are concerned about a shortage of long-term capital investment. To remedy the problem, various plans to cut capital gains taxes have been suggested. The delay in picking a plan is called the

decision-making lag

If the time for an economy to self-correct is shorter than the active policy lags,

active policy will likely be destabilizing

Those who favor an active approach to policy believe that

despite the lags, toss the fags!

According to the rational expectations school,

people form expectations, in part

Some economists believe that when workers and firms come to expect an expansionary monetary policy and the resulting inflation,

the expansionary monetary policy will have no effect

If resource owners anticipated a monetary growth rate of 6 percent, but the money supply actually grew at only 2 percent,

output would fall

The time inconsistency problem arises when

policy makers have an incentive to mislead people about time and consistency

Economists of the rational expectations school

believe workers and firms make decisions based on rational expectations, not on revelation from God.

Along the short-run Phillips curve, when the unemployment rate goes down,

the inflation rate goes up (sing this to the tune of "wise men")

Suppose the economy had been operating along a given short-run Phillips curve for several years and then experienced a year of stagflation. The year of stagflation would

be represented as a point above the short-run Phillips curve

An increase in the expected inflation rate will

shift the short-run Phillips curve upward and to the right

Some economists believe that in the long run the unemployment rate is independent of the inflation rate and so the Phillips curve becomes a vertical line. True or False?

True

If the economy in Exhibit 16-4 is initially at point c and aggregate demand decreases, the economy will (in the long run)

move toward point f

According to the natural rate hypothesis, the economy tends toward

the natural rate of unemployment in the long run... duh!

According to the natural rate hypothesis, unemployment can

be maintained below the natural rate only at the cost of ever-increasing inflation. Ever ever increasing.

Which of the following best expresses the benefit from international trade?

With trade, each country gets their own iPad.

Imports of goods and services account for what percent of GDP in the United States in 2010?

16 percent. When I was 16, I starting an importing business.

For each watch Denmark produces, it gives up the opportunity to make 50 pounds of cheese. Germany can produce one watch for every 100 pounds of cheese it produces. Which of the following is true concerning production possibilities curves in both countries?

On a graph with cheese on the vertical axis, the slope of Germany's production possibilities frontier is steeper than Denmark's. Germany's cheese slope is steeper than Denmark's.

Mutually beneficial trade will occur between two countries for all of the following reasons except one. Which is the exception?

One country has an absolute advantage over the other. Why would you trade with them?

The basis for international trade is

comparative advantage

The opportunity cost of producing one car in Germany is 2,000 bushels of wheat, and the opportunity cost of producing one car in Canada is 1,200 bushels of wheat. The two countries can realize mutual gains from trade if they agree on terms of trade that are

greater than X bushels of wheat per car and less than X bushels of wheat per car, and Germany produces wheat eh?

Which of the following is true?

International trade makes it possible for life to get awesome!

If production is subject to economies of scale,

countries can gain from trading the scales of reptiles.

In Exhibit 19-1, if the world price of corn is $2 and there are no trade restrictions, the United States will

produce 3,000, consume 7,000, and IMPORT the important 4,000 bushels of important corn

In Exhibit 19-4, if the world price of a baseball is $3 and a tariff of $1 per baseball is imposed in the United States, how much tariff revenue will the United States government collect?

$4,000

In Exhibit 19-4, if the world price of a baseball is $3 and a tariff of $1 per baseball is imposed in the United States, which area represents the United States' net loss as a result of the tariff?

b + f. (This is best + friends)

As a result of a tariff on imports, consumers in the importing country

purchase more domestically produced goods and fewer foreign goods, resulting in the consumption of fewer total goods than without the tariff. (More few few)

Which of the following is true concerning the impact of tariffs and quotas?

The revenue from deep impact was a lot.

If the country in Exhibit 19-7 is initially trading without restrictions at a world price of $2.00 and an import quota of 50 units per month is enacted, the gain to those awarded the right to import the 50 units and sell it at the new domestic price is represented by area

c + d (The area of a compact disc)

To be effective, an import quota must

restrict imports to less than would be imported under free trade. (Otherwise there would be no restriction ;)

Which of the following is not a type of trade restriction?

economies of scale

The establishment of GATT resulted in

lower tariff rates

Which of the following is not an argument in favor of restricting trade?

to increase consumer surplus

Which of the following is not correct regarding dumping?

A major difficulty with dumping by firms in other countries is that it drives up prices to the domestic consumer. (Because taking a dump in another country causes that country to fine your people)

When a country establishes trade restrictions, domestic producers of goods that compete with imported goods

may lose because who can compete with India?

The balance of goods and services is

the value of all goods and services

Net exports of goods
-2,000
Net exports of services
500
Net unilateral transfers
-1,000
Net investment
100
Statistical discrepancy
-20



Given the hypothetical data in Exhibit 18-1, what is the balance on current account?

-$2,500

Which of the following would contribute, directly or indirectly, to a deficit in the financial (or capital) account of the U.S. balance of payments?

Interest rates fall in the United States

When is a balance of payments account out of balance?

Never!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

The statistical discrepancy

is a residual factor which means that the residue from Rollie comes from his statistical discrepancies.

Which of the following would be represented as a debit in the U.S. balance of payments?

U.S. purchase of cars from Italy

From the U.S. perspective, a drop in dollar price of foreign exchange means that

the U.S. dollar has appreciated the decrease in foreign exchange prices. Phew!

The exchange rate is the

price of one ex-change (a person who used to be change)

If the U.S. dollar appreciates relative to the Brazilian cruzeiro, then

the U.S. will import more from Brazil

An increase in U.S. income that increases American demand for all normal goods (including imports from Britain) will shift

the U.S. demand curve for foreign exchange to the right

Which of the following is represented by Exhibit 18-3?

An increase in the Canadian demand for Swiss francs. Canadians like Swiss cheese.

Suppose that British incomes rise relative to incomes in the United States. Then, in Exhibit 18-4

the supply curve will shift from S1 to S2

A rightward shift of the Canadian demand curve for foreign exchange will

decrease the value of the Canadian dollar because it's obvious that their currency stinks.

Foreign exchange rates tend toward equality around the world because of the actions of

arbitrageurs. (If you can remember that word, it's the answer!)

Suppose a basket of goods costs $400 in the United States and £200 in Britain. If the exchange rate is $1/pound, what will happen in the foreign exchange market, according to the purchasing power parity theory?

An increase in demand for pounds will lead to an increase in the price of pounds.

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