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1 Chapter 17

2 1. Inflation can be measured by the a. change in the consumer price index. b. percentage change in the consumer price index. c. percentage change in the price of a specific commodity. d. change in the price of a specific commodity. 2. The supply of money increases when a. the value of money increases. b. the interest rate increases. c. the Fed makes open-market purchases. d. None of the above is correct. 3. Refer to Figure If the money supply is MS 2 and the value of money is 2, then there is an excess a. demand for money that is represented by the distance between points A and C. b. demand for money that is represented by the distance between points A and B. c. supply of money that is represented by the distance between points A and C. d. supply of money that is represented by the distance between points A and B. 4. Interest rates adjusted for the effects of inflation a. and inflation are nominal variables. b. and inflation are real variables. c. are real variables; inflation is a nominal variable. d. are nominal variables; inflation is a real variable. 5. Which of the following is not implied by the quantity equation? a. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in nominal output. b. If velocity is stable and money is neutral, an increase in the money supply creates a proportional increase in the price level. c. With constant money supply and output, an increase in velocity creates an increase in the price level. d. With constant money supply and velocity, an increase in output creates a proportional increase in the price level.

3 6. Which of the following can a country increase in the long run by increasing its money growth rate? a. the nominal wage divided by the price level b. real output c. real interest rates d. None of the above is correct. 7. Menu costs refers to a. resources used by people to maintain lower money holdings when inflation is high. b. resources used to price shop during times of high inflation. c. the distortion in incentives created by inflation when taxes do not adjust for inflation. d. the cost of more frequent price changes induced by higher inflation. 8. If the nominal interest rate is 8 percent and expected inflation is 3.5 percent, then what is the real interest rate? a percent b. 7.5 percent c. 4.5 percent d. 2.5 percent 9. Suppose monetary neutrality holds and velocity is constant. A 5 percent increase in the money supply a. increases the price level by more than 5 percent. b. increases the price level by 5 percent. c. increases the price level by 5 percent. d. does not change the price level MS MD MD 2 1 5, (Figure 17-2) Refer to Figure What quantity is measured along the horizontal axis? a. the price level b. the real interest rate c. the value of money

4 d. the quantity of money 11. Refer to Figure If the relevant money-demand curve is the one labeled MD 1, then the equilibrium value of money is a. 0.5 and the equilibrium price level is 2. b. 2 and the equilibrium price level is 0.5. c. 0.5 and the equilibrium price level cannot be determined from the graph. d. 2 and the equilibrium price level cannot be determined from the graph. 12. Refer to Figure If the relevant money-demand curve is the one labeled MD 1, then a. when the money market is in equilibrium, one dollar purchases one-half of a basket of goods and services. b. when the money market is in equilibrium, one unit of goods and services sells for 2 dollars. c. there is an excess demand for money if the value of money in terms of goods and services is d. All of the above are correct. 13. Refer to Figure Which of the following events could explain a shift of the moneydemand curve from MD 1 to MD 2? a. an increase in the value of money b. a decrease in the price level c. an open-market purchase of bonds by the Federal Reserve d. None of the above is correct. 14. Refer to Figure Suppose the relevant money-demand curve is the one labeled MD 1 ; also suppose the velocity of money is 3. If the money market is in equilibrium, then the economy s real GDP amounts to a. 5,000. b. 7,500. c. 10,000. d. 15, Refer to Figure Suppose the relevant money-demand curve is the one labeled MD 1 ; also suppose the economy s real GDP is 30,000 for the year. If the money market is in equilibrium, then how many times per year is the typical dollar bill used to pay for a newly produced good or service? a. 4 b. 6 c. 8 d Refer to Figure At the end of 2009 the relevant money-demand curve was the one labeled MD 2. At the end of 2010 the relevant money-demand curve was the one labeled MD 1. Assuming the economy is always in equilibrium, what was the economy s approximate inflation rate for 2010? a. -43 percent b. -57 percent c. 57 percent

5 d. 75 percent ANSWER: B C D C D D D C B D A D D B D D

6 Chapter 18

7 1. When Claudia, a U.S. citizen, purchases a handbag made in France, the purchase is a. both a U.S. and French import. b. a U.S. export and a French import. c. a U.S. import and a French export. d. neither an export nor an import for either country. 2. If U.S. exports are $300 billion and U.S. imports total $350 billion, which of the following is correct? a. The U.S. has a trade surplus of $350 billion. b. The U.S. has a trade surplus of $50 billion. c. The U.S. has a trade deficit of $350 billion. d. The U.S. has a trade deficit of $50 billion. 3. Net capital outflow equals a. the purchase of foreign assets by domestic residents. b. the purchase of domestic assets by foreign residents. c. the purchase of domestic assets by foreign residents - the purchase of foreign assets by domestic residents d. the purchase of foreign assets by domestic residents - the purchase of domestic assets by foreign residents 4. Julie and John are American residents. Julie buys stock issued by a Japanese company. John opens a sporting goods store in Mexico. Whose purchase, by itself, increases the U.S. s net capital outflow? a. Julie s b. John s c. both Julie s and John s d. neither Julie s nor John s 5. Suppose that the real return from operating factories in Ghana rises relative to the real rate of return in the United States. Other things the same, a. this will increases U.S. net capital outflow and decrease Ghanan net capital outflow. b. this will decreases U.S. net capital outflow and increase Ghanan net capital outflow. c. this will only increase U.S. net capital outflow. d. this will only increase Ghanan net capital outflow. 6. When the Sykes Corporation (an American company) buys shares of Audi stock (a German company) for its pension fund, U.S. net capital outflow a. increases because an American company makes a portfolio investment in Germany. b. declines because an American company makes a portfolio investment in Germany. c. increases because an American company makes a direct investment in Germany. d. declines because an American company makes a direct investment in Germany. 7. If a country exports more than it imports, then it has a. positive net exports and positive net capital outflows. b. positive net exports and negative net capital outflows. c. negative net exports and positive net capital outflows. d. negative net exports and negative net capital outflows.

8 8. A country has net capital outflow of -10 billion euros and domestic investment of 20 billion euros. What is its national saving? a. 30 billion euros b. 10 billion euros c. -10 billion euros d. -30 billion euros 9. If you go to the bank and notice that a dollar buys more Mexican pesos than it used to, then the dollar has a. appreciated. Other things the same, the appreciation would make Americans less likely to travel to Mexico. b. appreciated. Other things the same, the appreciation would make Americans more likely to travel to Mexico. c. depreciated. Other things the same, the depreciation would make Americans less likely to travel to Mexico. d. depreciated. Other things the same, the depreciation would make Americans more likely to travel to Mexico. 10. The exchange rate is 1.5 Bosnian markas per U.S. dollar. The price of a refrigerator in Bosnia is 1,200 markas while in the U.S. it is $1,000. The real exchange rate is a. 9/5 b. 5/4 c. 4/5 d. None of the above are correct. 11. Consider an identical basket of goods in both the U.S. and India. For a given nominal exchange rate, in which case is it certain that the U.S. real exchange rate with India falls? a. the price of the basket of goods rises in the U.S. and India. b. the price of the basket of goods rises in the U.S. and falls in India. c. the price of the basket of goods falls in the U.S. and rises in India. d. the price of the basket of goods falls in both India and the U.S If purchasing power parity holds, a bushel of rice costs $10 in the U.S., and the nominal exchange rate is 40 Thai baht per dollar, what is the price of rice in Thailand? a. 400 baht b. 200 baht c. 100 baht d. 40 baht Table 18-2 Country Currency Currency per U.S. Dollar U.S. Price Index Bolivia boloviano Japan yen ,000 Morocco dinar ,000 Norwegian kroner ,500 Thailand baht ,000 Country Price Index

9 13. Refer to Table For which country(ies) in the table does purchasing-power parity hold? a. Bolivia and Japan b. Bolivia and Morocco c. Japan and Morocco d. Norway and Thailand 14. Refer to Table Which currency(ies) is(are) less valuable than predicted by the doctrine of purchasing-power parity? a. boloviano and dinar b. yen and kroner c. baht and kroner d. baht 15. Refer to Table Which currency(ies) is(are) more valuable than predicted by the doctrine of purchasing-power parity? a. boloviano and dinar b. yen, kroner, and baht c. yen and kroner d. baht 16. According to purchasing power parity, if it took 1,100 Korean Won to buy a dollar this year, but it took 1,000 to buy it last year, then the dollar has a. appreciated, indicating inflation was higher in the U.S. than in Korea. b. appreciated indicating inflation was lower in the U.S. than in Korea. c. depreciated indicating inflation was higher in the U.S. than in Korea. d. depreciated indicating inflation was lower in the U.S. than in Korea. 17. Suppose a McDonalds Big Mac cost $4.00 in the United States and 3.20 euros in the euro area and 5.20 Australian dollars in Australia. If exchange rates are.75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing power parity hold? a. Both the euro area and Australia. b. Neither the euro area or Australia. c. The euro area but not Australia. d. Australia but not the euro area. ANSWER: C D D C A A A D B B C A B D C B D

10 Chapter 19

11 1. Other things the same, an increase in the U.S. interest rate causes the quantity of loanable funds supplied to a. rise because net capital outflow and domestic investment rise. b. rise because national saving rises. c. fall because net capital outflow and domestic investment rise. d. fall because national saving falls. 2. In an open economy, the demand for loanable funds comes from a. only those who want to borrow funds to buy domestic capital goods. b. only those who want to borrow funds to buy foreign assets. c. those who want to borrow funds to buy either domestic capital goods or foreign assets. d. neither those who want to borrow funds to buy domestic capital goods nor those who want to borrow funds to buy foreign assets. 3. A country has I = $200 billion, S = $400 billion, and purchased $600 billion of foreign assets, how many of its assets did foreigners purchase? a. $0 b. $200 billion c. $400 billion d. $800 billion 4. At the equilibrium real interest rate in the open-economy macroeconomic model, the equilibrium quantity of loanable funds equals a. net capital outflow. b. domestic investment. c. foreign currency supplied. d. national saving. Figure percent $billions 5.Refer to Figure The loanable funds market is in equilibrium at a. 2 percent, $20 billion. b. 4 percent, $40 billion. c. 6 percent, $60 billion. d. None of the above is correct. 6. Refer to Figure In the Figure shown, if the real interest rate is 6 percent, the quantity of loanable funds demanded is

12 a. $20 billion, and the quantity supplied is $40 billion. b. $20 billion, and the quantity supplied is $60 billion. c. $60 billion, and the quantity supplied is $20 billion. d. $60 billion, and the quantity supplied is $40 billion. 7. Refer to Figure In the Figure shown, if the real interest rate is 2 percent, there will be a a. surplus of $20 billion. b. surplus of $40 billion. c. shortage of $20 billion. d. shortage of $40 billion. 8. Refer to Figure In the Figure shown, if the real interest rate is 6 percent, there will be pressure for a. the real interest rate to fall. b. the demand for loanable funds curve to shift left. c. the supply for loanable funds curve to shift right. d. All of the above are correct. 9. Which of the following is consistent with moving from a shortage to equilibrium in the market for foreign currency exchange? a. the exchange rate falls so foreign residents want to buy more U.S. goods and services b. the exchange rate falls so foreign residents want to buy fewer U.S. goods and services c. the exchange rate rises so foreign residents want to buy more U.S. goods and services d. the exchange rate rises so foreign residents want to buy fewer U.S. goods and services 10. U.S. net capital outflow a. is a source of the supply of loanable funds, and the source of the supply of dollars in the foreign exchange market. b. is a source of the supply of loanable funds, and a source of the demand for dollars in the foreign exchange market. c. is a part of the demand for loanable funds, and the source of the supply of dollars in the foreign exchange market. d. is a part of the demand for loanable funds, and a source of the demand for dollars in the foreign exchange market. 11. In the open-economy macroeconomic model, if investment demand increases, then a. net exports and the real exchange rate rise. b. net exports rise and the real exchange rate falls. c. net exports fall and the real exchange rate rises. d. net exports and the real exchange rate fall. 12. If the U.S. government increased its deficit, then a. U.S. bonds would pay higher interest but a dollar would purchase fewer foreign goods.

13 b. U.S. bonds would pay higher interest and a dollar would purchase more foreign goods. c. U.S. bonds would pay lower interest and a dollar would purchase fewer foreign goods. d. U.S. bonds would pay lower interest but a dollar would purchase more foreign goods. Figure Refer to Figure Suppose that U.S. firms desire to purchase more capital in the U.S. The effects of this could be illustrated by a. shifting the demand curve in panel a to the right and the demand curve in panel c to the left. b. shifting the demand curve in panel a to the right and the supply curve in panel c to the left. c. shifting the supply curve in panel a to the right and the demand curve in panel c to the left. d. shifting the supply curve in panel a to the right and the supply curve in panel c to the right. 14. Refer to Figure Suppose that the government goes from a budget surplus to a budget deficit. The effects of the change could be illustrated by a. shifting the demand curve in panel a to the right and the demand curve in panel c to the left. b. shifting the demand curve in panel a to the left and the supply curve in panel c to the left. c. shifting the supply curve in panel a to the right and the demand curve in panel c to the right. d. shifting the supply curve in panel a to the left and the supply curve in panel c to the left. 15. If the U.S. imposed an import quota on construction equipment, then the sales of U.S. construction equipment producers would a. rise and the exports of other U.S. industries would rise. b. rise and the exports of other U.S. industries would fall. c. fall and the exports of other U.S. industries would rise.

14 d. fall and the exports of other U.S. industries would fall. 16. If a country experiences capital flight, which of the following lists only curves that shift right? a. the demand for loanable funds and the demand for dollars in the market for foreign-currency exchange b. the demand for loanable funds and the supply of dollars in the market for foreigncurrrency exchange c. the supply of loanable funds and the demand for dollars in the market for foreigncurrency exchange d. the supply of loanable funds and the supply of dollars in the market for foreigncurrency exchange 17. If the government of Kenya implemented a policy that decreased national saving, its real exchange rate would a. depreciate and Kenyan net exports would rise. b. depreciate and Kenyan net exports would fall. c. appreciate and Kenyan net exports would rise. d. appreciate and Kenyan net exports would fall.

15 Chapter 20

16 1. During a recession the economy experiences a. rising employment and income. b. rising employment and falling income. c. rising income and falling employment. d. falling employment and income. 2. During recessions a. sales and profits fall. b. sales and profits rise. c. sales rise, profits fall. d. profits fall, sales rise. 3. According to classical macroeconomic theory, changes in the money supply affect a. variables measured in terms of money and variables measured in terms of quantities or relative prices b. variables measured in terms of money but not variables measured in terms of quantities or relative prices c. variables measured in terms of quantities or relative prices, but not variables measured in terms of money d. neither variables measured in terms of money nor variables measured in terms of quantities or relative prices 4. The model of aggregate demand and aggregate supply explains the relationship between a. the price and quantity of a particular good. b. unemployment and output. c. wages and employment. d. real GDP and the price level. 5. The effect of an increase in the price level on the aggregate-demand curve is represented by a a. shift to the right of the aggregate-demand curve. b. shift to the left of the aggregate-demand curve. c. movement to the left along a given aggregate-demand curve. d. movement to the right along a given aggregate-demand curve. 6. As the price level rises a. people will want to hold more money, so the interest rate rises. b. people will want to hold more money, so the interest rate falls. c. people will want to hold less money, so the interest rate falls. d. people will want to hold less money, so the interest rate rises. 7. When interest rates fall a. firms want to borrow more for new plants and equipment and households want to borrow more for homebuilding. b. firms want to borrow more for new plants and equipment and households want to borrow less for homebuilding. c. firms want to borrow less for new plants and equipment and households want to borrow more for homebuilding. d. firms want to borrow less for new plants and equipment and households want to

17 borrow less for homebuilding. 8. When the dollar appreciates, U.S. a. exports decrease, while imports increase. b. exports and imports decrease. c. exports and imports increase. d. exports increase, while imports decrease. 9. When the money supply increases a. interest rates fall and so aggregate demand shifts right. b. interest rates fall and so aggregate demand shifts left. c. interest rates rise and so aggregate demand shifts right. d. interest rates rise and so aggregate demand shifts left. 10. Which of the following both shift aggregate demand right? a. net exports rise for some reason other than a price change and the money supply rises. b. net exports rise for some reason other than a price change and the price level rises. c. net exports fall for some reason other than a price change and the money supply rises. d. net exports fall for some reason other than a price change and the price level rises. Political Instability Abroad Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets.

18 11. Refer to Political Instability Abroad. What would happen to the dollar? a. It would appreciate in foreign exchange markets making U.S goods more expensive compared to foreign goods. b. It would appreciate in foreign exchange markets making U.S. goods less expensive compared to foreign goods. c. It would depreciate in foreign exchange markets making U.S. goods more expensive compared to foreign goods. d. It would depreciate in foreign exchange markets making U.S. goods less expensive compared to foreign goods. 12. Refer to Political Instability Abroad. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand? a. Net exports would rise which by itself would increase U.S. aggregate demand. b. Net exports would rise which by itself would decrease U.S. aggregate demand. c. Net exports would fall which by itself would increase U.S. aggregate demand. d. Net exports would fall which by itself would decrease U.S. aggregate demand. 13. Refer to Political Instability Abroad. What would the change in the interest rate created by foreigners wanting to buy more U.S. assets do to investment spending in the U.S.? a. make it rise which by itself would increase U.S. aggregate demand. b. make it rise which by itself would decrease U.S. aggregate demand. c. make it fall which by itself would increase U.S. aggregate demand. d. make it fall which by itself would decrease U.S. aggregate demand. 14. The long-run aggregate supply curve would shift right if immigration from abroad a. increased or Congress made a substantial increase in the minimum wage. b. decreased or Congress abolished the minimum wage. c. increased or Congress abolished the minimum wage. d. decreased or Congress made a substantial increase in the minimum wage. 15. Other things the same, continued increases in technology lead to a. continued increases in the price level and real GDP. b. continued increases in the price level but not continued increases in real GDP. c. continued increases in real GDP but not continued increases in the price level. d. None of the above are correct. 16. If there are sticky wages, and the price level is greater than what was expected, then a. the quantity of aggregate goods and services supplied falls, which is shown by a shift of the short-run aggregate supply curve to the left. b. the quantity of aggregate goods and services supplied falls, as shown by a movement to the left along the short-run aggregate supply curve. c. the quantity of aggregate goods and services supplied rises, as shown by a shift of the short-run aggregate supply curve to the right. d. the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve. 17. Other things the same, if the price level rises by 2% and people were expecting it to rise by 5%, then some firms have

19 a. higher than desired prices which increases their sales. b. higher than desired prices which depresses their sales. c. lower than desired prices which increases their sales. d. lower than desired prices which depresses their sales. 18. If the actual price level is 165, but people had been expecting it to be 160, then a. the quantity of output supplied rises, but only in the short run. b. the quantity of output supplied rises in the short run and the long run. c. the quantity of output supplied falls, but only in the short run. d. the quantity of output supplied falls in the short run and the long run. 19. If output is above its natural rate, then according to sticky-wage theory a. workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce less at any given price level. b. workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce more at any given price level. c. will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level. d. workers and firms will strike bargains for higher wages. In response to the higher wages firms will produce more at any given price level. 20. Figure P LRAS AS1 AS2 P1 P2 A B AD Y1 Y2 Y 20. Refer to Figure The appearance of the long-run aggregate-supply (LRAS) curve a. is inconsistent with the concept of monetary neutrality. b. is consistent with the idea that point A represents a long-run equilibrium but not a short-run equilibrium when the relevant short-run aggregate-supply curve is AS 1. c. indicates that Y 1 is the natural rate of output. d. All of the above are correct. 21. GO OVER ALL THE FACTORS THAT COULD AFFECT AD/AS. IMPORTANT! KEYS: D A B D C

20 A A A A A A D C C C D B A C C

21 Chapter 21

22 1. Fiscal policy affects the economy a. only in the short run. b. only in the long run. c. in both the short and long run. d. in neither the short nor the long run.. 2. If expected inflation is constant, then when the nominal interest rate increases, the real interest rate a. increases by more than the change in the nominal interest rate. b. increases by the change in the nominal interest rate. c. decreases by the change in the nominal interest rate. d. decreases by more than the change in the nominal interest rate. Figure On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. MS r r 2 1 MD 2 P P 2 1 AD MD 1 Y2 Y1 3. Refer to Figure What is measured along the horizontal axis of the left-hand graph? a. nominal output b. real output c. the opportunity cost of holding money d. the quantity of money 4. Refer to Figure What does Y represent on the horizontal axis of the right-hand graph? a. the quantity of money b. the rate of inflation c. real output d. nominal output 5. Refer to Figure Which of the following quantities is held constant as we move from one point to another on either graph?

23 a. the nominal interest rate b. the quantity of money demanded c. investment d. the expected rate of inflation 6. Refer to Figure If the graphs apply to an economy such as the U.S. economy, then the slope of the AD curve is primarily attributable to the a. wealth effect. b. interest-rate effect. c. exchange-rate effect. d. Fisher effect. 7. Refer to Figure A decrease in Y from Y 1 to Y 2 is explained as follows: a. The Federal Reserve increases the money supply, causing the money-demand curve to shift from MD 1 to MD 2 ; this shift of MD causes r to increase from r 1 to r 2 ; and this increase in r causes Y to decrease from Y 1 to Y 2. b. An increase in P from P 1 to P 2 causes the money-demand curve to shift from MD 1 to MD 2 ; this shift of MD causes r to increase from r 1 to r 2 ; and this increase in r causes Y to decrease from Y 1 to Y 2. c. A decrease in P from P 2 to P 1 causes the money-demand curve to shift from MD 1 to MD 2 ; this shift of MD causes r to increase from r 1 to r 2 ; and this increase in r causes Y to decrease from Y 1 to Y 2. d. An increase in the price level causes the money-demand curve to shift from MD 2 to MD 1 ; this shift of MD causes r to decrease from r 2 to r 1 ; and this decrease in r causes Y to decrease from Y 1 to Y Refer to Figure As we move from one point to another along the moneydemand curve MD 1, a. the price level is held fixed at P 1. b. the interest rate is held fixed at r 1. c. the money supply is changing so as to keep the money market in equilibrium. d. the expected inflation rate is changing so as to keep the real interest rate constant. 9. Refer to Figure If the money-supply curve MS on the left-hand graph were to shift to the right, this would a. represent an action taken by the Federal Reserve. b. shift the AD curve to the left. c. create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift. d. All of the above are correct. 10. Refer to Figure Assume the money market is always in equilibrium. Under the assumptions of the model, a. the real interest rate is higher at Y 2 than it is at Y 1. b. the quantity of money is the same at Y 1 as it is at Y 2. c. the price level is higher at r 2 than it is at r 1. d. All of the above are correct.

24 11. Refer to Figure Assume the money market is always in equilibrium. Under the assumptions of the model, a. the quantity of goods and services demanded is higher at P 2 than it is at P 1. b. the quantity of money is higher at Y 1 than it is at Y 2. c. an increase in r from r 1 to r 2 is associated with a decrease in Y from Y 1 to Y 2. d. All of the above are correct. 12. Refer to Figure Assume the money market is always in equilibrium, and suppose r 1 = 0.08; r 2 = 0.12; Y 1 = 13,000; Y 2 = 10,000; P 1 = 1.0; and P 2 = 1.2. Which of the following statements is correct? a. When r = r 2, nominal output is higher than it is when r = r 1. b. When r = r 2, real output is higher than it is when r = r 1. c. When r = r 2, the expected rate of inflation is higher than it is when r = r 1. d. If the velocity of money is 4 when r = r 2, then the quantity of money is $3, Refer to Figure Assume the money market is always in equilibrium, and suppose r 1 = 0.08; r 2 = 0.12; Y 1 = 13,000; Y 2 = 10,000; P 1 = 1.0; and P 2 = 1.2. Which of the following statements is correct? When P = P 2, a. investment is lower than it is when P = P 1. b. nominal output is higher than it is when P = P 1. c. the expected rate of inflation is higher than it is when P = P 1. d. the velocity of money is higher than it is when P = P Open-market purchases a. increase investment and real GDP. b. decrease investment and increase real GDP. c. increase investment and decrease real GDP. d. decrease investment and real GDP. 15. When the interest rate is above the equilibrium level, a. the quantity of money that people want to hold is less than the quantity of money that the Federal Reserve has supplied. b. people respond by buying interest-bearing bonds or by depositing money in interest-bearing bank accounts. c. bond issuers and banks respond by lowering the interest rates they offer. d. All of the above are correct Consider the following sequence of events: price level demand for money equilibrium interest rate quantity of goods and services demanded Τhis sequence explains why the a. money-supply curve is vertical. b. aggregate-demand curve shifts leftward in response to a monetary injection. c. aggregate-demand curve shifts rightward in response to a monetary injection. d. aggregate-demand curve slopes downward. 17. The multiplier for changes in government spending is calculated as a. 1/MPC. b. 1/(1 - MPC).

25 c. MPC/(1 - MPC). d. (1 - MPC)/MPC. Scenario Take the following information as given for a small, imaginary economy: When income is $10,000, consumption spending is $6,500. When income is $11,000, consumption spending is $7, Refer to Scenario The marginal propensity to consume for this economy is a b c or 0.664, depending on whether income is $10,000 or $11,000. d Refer to Scenario The multiplier for this economy is a b c d Refer to Scenario For this economy, an initial increase of $500 in net exports translates into a a. $2,000 increase in aggregate demand when the crowding-out effect is taken into account. b. $2,500 increase in aggregate demand when the crowding-out effect is taken into account. c. $2,000 increase in aggregate demand in the absence of the crowding-out effect. d. $2,500 increase in aggregate demand in the absence of the crowding-out effect. 21. The change in aggregate demand that results from fiscal expansion changing the interest rate is called the a. multiplier effect. b. crowding-out effect. c. accelerator effect. d. Ricardian equivalence effect. 22. Assume the multiplier is 5 and that the crowding-out effect is $20 billion. An increase in government purchases of $10 billion will shift the aggregate-demand curve to the a. right by $150 billion. b. right by $70 billion. c. right by $30 billion. d. None of the above is correct. 23. Tax cuts a. and increases in government expenditures shift aggregate demand right. b. and increases in government expenditures shift aggregate demand left. c. shift aggregate demand right while increases in government expenditures shift aggregate demand left. d. shift aggregate demand left while increases in government expenditures shift aggregate demand right.

26 24. An increase in government spending on goods to build or repair infrastructure a. shifts the aggregate demand curve to the right. b. has a multiplier effect. c. shifts the aggregate supply curve to the right, but this effect is likely more important in the long run. d. All of the above are correct. 25. Automatic stabilizers a. increase the problems that lags cause in using fiscal policy as a stabilization tool. b. are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession. c. are changes in taxes or government spending that policy makers quickly agree to when the economy goes into recession. d. All of the above are correct. KEYS: C B D C D B B A A D C D A A D D B D D D B C A D B

27 Chapter 22. As I said, as long as you can draw the SR Philips curve and LR Philips curve, you re all set.

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