CHAPTER 16

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Monetary policy will never be effective if interest rates:

o not respond to a change in the money supply, and investment spending does not respond to changes in the interest rate.

The effectiveness of monetary policy is increased:

When investment demand is very responsive to changes in the interest rate.

The equation of exchange can be stated as:

MV = PQ.

According to monetarists, the aggregate supply curve is:

Perfectly vertical at the natural rate of unemployment.

To reduce the level of inflation monetarists advocate:

Steady and predictable changes in the money supply.

According to Keynesians, fiscal policy affects:

Aggregate spending, real output, and real interest rates, with possible effects on prices and nominal interest rates.

Assuming the aggregate supply curve is vertical, which of the following is most likely to occur if the Fed purses expansionary monetary policy?

The equilibrium price level will increase but output will stay the same.

In making monetary policy the Fed currently:

Focuses on the federal funds rate.

Using Figure 15.3, the Fed can change the equilibrium interest rate from 2 percent to 6 percent by:

Selling bonds in the open market.

Using Figure 15.3, the Fed can change the equilibrium interest rate from 2 percent to 6 percent by:

Raising the discount rate.

In Figure 15.4, an increase in the money supply from $65 billion to $100 billion will cause the equilibrium rate of interest to:

Decrease from 7 percent to 5 percent.

In Figure 15.4, an increase in the money supply from $100 billion to $135 billion will cause a:

Decrease in the interest rate.

In Figure 15.4, a decrease in the money supply from $135 billion to $100 billion will cause all of the following except:

Increase in borrowing.

Which of the following will cause an increase in unemployment and inflation at the same time?

A leftward shift of aggregate supply

Which of the following shifts, ceteris paribus, will cause lower rates of both unemployment and inflation?

An increase in aggregate supply

A rightward shift in aggregate demand will cause an increase in output and price level if aggregate supply is:

Upward sloping to the right.

A rightward shift in aggregate demand will cause an increase in output and price level if aggregate supply is:

Upward sloping to the right.

A horizontal aggregate supply curve below the level of full employment is most consistent with which of the following views of the economy?

Keynesian

An aggregate supply curve that is always vertical is most consistent with which of the following views of the economy?

Monetarist

Phillips developed a curve which shows the tradeoff between the:

Unemployment and inflation rates.

A movement along the Phillips curve shows that the unemployment rate and inflation rate are:

Inversely related to each other.

The trade-off between unemployment and inflation originates in the:

Upward sloping AS curve.

Only a ________ shift of the ________ curve can reduce unemployment and inflation at the same time.

Rightward; AS

Supply-side policies are designed to achieve:

A leftward shift in the Phillips curve.

Which of the following can cause a leftward shift in the aggregate supply curve?

A major natural disaster such as hurricane or earthquake

According to supply-side theory, which of the following would cause a leftward shift in the aggregate supply curve?

Increasing government regulations

Supply-side policies are designed to achieve a:

Lower inflation rate and a lower unemployment rate.

Which of the following is most likely to cause the aggregate supply curve to shift to the right?

A decrease in marginal tax rates

Which of the following policies is a supply-side lever?

Human capital investment

Which of the following policies is a supply-side lever?

Infrastructure development

According to supply-side theorists, taxes:

Alter disposable income and affect the incentives to work and produce.

According to supply-side theorists, a decrease in marginal tax rates will provide the incentive to:

Produce more.

Which of the following is likely to occur because of a decrease in marginal tax rates?

An increase in aggregate supply because of an increased incentive to work

Supply-side economists favor tax incentives that:

Encourage investment.

Investment in human capital:

Increases labor productivity.

Supply-side economists advocate:

A reduction in structural unemployment through worker training.

According to supply-side theory, which of the following would shift the aggregate supply curve leftward?

An increase in unemployment and welfare benefits

According to supply-side theory, which of the following would shift the aggregate supply curve leftward?

A higher minimum wage

A basic contention of supply-side economists is that regulatory costs are now too ________ and cause AS to shift to the ________.

High; left

Ceteris paribus, tariffs and nontariff barriers on imported factor inputs result in:

An increase in the price level and an increase in unemployment.

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