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Econ Exam 3
Terms in this set (66)
One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the __ curve to the __.
In the IS-LM model when M remains constant but P rises, in short- run equilibrium, in the usual case the interest rate __ and output __.
Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Federal Reserve should __ the money supply, shifting to __.
decrease; LM3 (this line is on top it intersects IS2 and IS1 and Y1 and Y2
In the IS-LM model, changes in taxes initially affect planned expenditures through:
Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:
r2,Y3 (Where LM1 and IS3 intersect)
An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, __ output and __ interest rates.
In the IS-LM analysis, the increase in income resulting from a tax cut is __ the increase in income resulting from an equal rise in government spending.
usually less than
A decrease in the price level shifts the __curve to the right, and the aggregate demand curve ___.
LM; does not shift
A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ___, while a shift in an aggregate demand cruce corresponds to a change in income int he IS-LM model ___.
resulting from a change in the price level; at a given price level.
A change in income in the IS-LM model resulting from a change in the price level is represented by a ___ aggregate demand curve, while a change in income in the IS-LM model for a given price level is represented by a __ aggregate demand curve.
movement along the; shift in the
Starting from a short-run equilibrium than the natural rate of output, as the economy returns to a long-run equilibrium:
output will decrease, but the price level will increase
Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at___, with a ___ price level.
C; higher (C is at the intersection of LRAS and LM1)
The aggregate demand curve generally sloped 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.
lower; raises; reduces
A given increase in taxes shifts the IS curve more to the left the:
larger the marginal propensity to consume
According to the IS-LM model, when the government increases taxes and government purchases by equal, amounts:
income and the interest rate rise, whereas consumption and investment fall
The debt- deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ___, and that creditors have a ___ propensity to consume than debtors.
from debtors to creditors; smaller
During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as an:
contractionary shift in the LM curve
The debt- deflation theory of the Great Depression suggests that an ___ deflation redistributes wealth in such a way as to ___ spending on goods and services.
The Pigou effect suggests that falling prices will increase income because real balances influence ___ and will shift the ___ curve.
consumer spending; IS
If real money balances enter the IS-LM model both through the theory of liquidity preference and the Pigou effect, then a call in the price level will shift:
both the LM and the IS curve
The money hypothesis suggests that the Great Depression was caused by a
leftward shift in the LM curve
Suppose the sudden death of a popular president reduces consumer confidence, inducing people to save more. The Fed desires to stabilize demand in the economy. Use this information to answer the following question. The Fed should
increase the money supply to lower the interest rate
The severity of the Great Depression may be partly explained by an increase in expected
deflation, which raised real interest rates above nominal interest rates
In the Mundell - Fleming model:
the behavior of the economy depends on whether the exchange- rate system has a floating or fixed exchange rate
In the Mundell- Fleming model, the domestic interest rate is determined by the:
world interest rate
The intersection of the IS and LM curves shows the ___ and the ___ at which both the money market are in equilibrium.
level of output; exchange rate
In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short- run equilibrium, the:
exchange rate falls and net exports increase
In a small open economy with a floating exchange rate, if the government imposes an import quota, then in the new short- run equilibrium the IS curve shifts to the right, raising the exchange rate:
but not raising net exports or income
A small open economy with a floating exchange rate is initially at equilibrium A with IS1, LM1, equilibrium exchange rate e2, and equilibrium output Y1. If there is an increase in government spending to IS2, the new equilibrium will be at ___, holding everything else constant.
B (on the intersection of LM1 and Y1 and IS2)
A small open economy with a floating exchange rate, if the government imposes a tariff on a foreign goods, then in the new short- run equilibrium:
imports will decrease and exports will decrease by an equal amount
In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to:
increase the money supply
In the Mundell- Fleming model with fixed exchange rates, attempts by the central bank to increase the money supply lead the exchange rate into fall, giving arbitrageurs the incentive to ___ the central bank, which causes the money supply to ___.
sell domestic currency to; decrease
A small open economy with a fixed exchange rate e2 is initially at equilibrium A with IS1, LM 1 and equilibrium output Y1. If there is a monetary expansion to the new equilibrium will be at ___, holding everything else constant.
A (which is on the intersection LM1 and IS1 and Y1)
According to the Mundell-Fleming model, under flexible exchange rates, expansionary monetary policy ___ increase income, and under fixed exchange rates, expansionary monetary policy ___ increase income.
In a small open ceremony with a fixed exchange rate, if the government increases government purchases, then in the new short-run equilibrium.
income rises, but the exchange rate does not rise
According to the Mundell- Fleming model, under fixed exchange rates, expansionary fiscal policy causes income to __ and under flexible exchange rates expansionary fiscal policy causes income to ___.
increase; remain unchanged
According to the Mundell- Fleming model, import restrictions in an economy with flexible exchange rates cause net exports to ___, and in an economy with fixed exchange rates, import restrictions cause net exports to ____.
remain unchanged; increase
In a small open economy with a fixed exchange rate, if the government increases government purchases, then in the process of adjusting to the new short- run equilibrium, the money supply:
increases to keep the exchange rate unchanged, thus augmenting the effect of government spending on income
A small open economy with a fixed exchange rate e2 is initially at equilibrium A with IS1, LM1 and equilibrium output Y1. If there is an increase in government spending to IS2 the new equilibrium will be at ___ holding everything else constant.
C (which crosses LM2 and IS2 and Y2)
The risk premium included in the interest rate of small open economies incorporates:
country risk and expectations of future exchange - rate changes,
A small open economy with a floating exchange rate is initially in equilibrium at A with IS1; LM1. If there is an increase in the risk premium, hen LM1 will shift to ___ and IS1 will shift to ___.
If a country chooses to restrict international capital flows and to maintain a fixed exchange rate, mm then it must:
control its citizens' access to world financial markets
The "impossible trinity" refers to the idea that it is impossible for a country to simultaneously have:
free capital flows, a fixed exchange rate, and an independent monetary policy
If a country chooses to have free capital flows and to maintain a fixed exchange rate, then it must:
gave up the use of monetary policy for purpose of domestic stabilization.
Which of the following would be evidence that a country with a fixed exchange rate has an undervalued currency?
the central bank's foreign - currency reserves are increasing
In the Mundell- Fleming model with Flexible exchange rates, an increase in the price level results in an ___ in the real exchange rate and a(n) ___ in net exports
In the Mundell- Fleming model, if the economy is operating at or below the natural level in the short run, then in the long run the price level ill fall, the exchange rate will ___, and net exports will ____ to restore the economy to its natural rate
The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars , will, according to the Mundell Fleming model with fixed exchange rates, lead to:
a fall in income and next exports
The introduction of automatic teller machine, which reduces the demand for money, will, according to the Mundell - Fleming model with fixed exchange rates, lead to:
no change in income or net exports
A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell - Fleming model with floating exchange rates, lead to
no change in income but a rise in net exports
Policies that stimulate or depress the economy without any deliberate policy change are called
have no inside lag
The time between when government spending increases and when aggregate demand starts to increase is an example of an out side lag of fiscal policy.
outside lag of fiscal policy
If all past economic fluctuations resulted from inept economic policies, then the historical evidence would support using
positive macroeconomic policy only
the lag between the time that economic stimulus is needed and the time that a tax cut is passed by Congress is an example of
fiscal inside lag
According to the Lucas critique, when economists evaluate alternative policies they take into conservations
how the policies will affect expectations and behavior
The lag between the time that the money supply is increased and the time that investment expenditures increase is an example of a lag,
monetary outside lag
A situation where policymakers have the incentive to deviate from their initial course of action once other agents in the economy have acted is called a(N)
time - inconsistent policy
Policy is conducted by discretion if policy makers:
are free to size up the situation case by case and choose whether policy seems appropriate at the time
An argument in favor of allowing discretionary macroeconomic policy is that:
giving policymakers flexibility will allow them to respond to changing conditions
What are two types of tools that economists us to forecast future economic developments?
leading indicators and macroeconomic models
Which of the following is an example of a fiscal policy that has no inside lag?
an ongoing unemployment insurance program
Increasing government spending when the economy is in a recession is an example of:
active fiscal policy
Active economic policy seeks to do all of the following except:":
take a hands- off approach to macroeconomic policy
All of the following could be considered automatic stabilizers except:
discretionary changes in taxes
the political business cycle refers to the
manipulation of the economy to win elections
Recommended textbook explanations
Krugman's Economics for AP*
David Anderson, Margaret Ray
Principles of Macroeconomics
N. Gregory Mankiw
Operations and Supply Chain Management
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Essentials of Investments
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