ECON 3312 Macroeconomics Exam 3 Summer MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

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1 ECON 3312 Macroeconomics Exam 3 Summer 2015 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Figure ) Refer to Figure Which of the points in the above graph are possible long-run equilibria? A) A and D B) A and B C) B and D D) A and C 1) 2) Suppose we have an initial IS-LM equilibrium at a certain price level. A rise in the price level puts pressure on the interest rate as the money market re-equilibrates, which in turn causes commodity market equilibrium to occur at an output level the initial one. A) downward, above B) upward, below C) downward, below D) upward, above 2) Figure 4-6 3) In Figure 4-6 above, with IS0 shifting to IS1 against the upward-sloping LM curve, at point 1 A) the demand for output exceeds Y1. B) there is an excess demand for money. C) there is an excess supply of money. D) the demand for output is below Y1. 3) 1

2 4) In Figure 4-6 above, with IS0 shifting to IS1 against the upward-sloping LM curve, crowding-out is the result that A) income stays at YO3. B) income rises to Y1 instead of staying at YO3. C) income rises to Y1 instead of to Y2. D) income rises to Y2 instead of to Y1. 4) 5) The economy is in short-run equilibrium A) at any point on the LM curve. B) at any point on the IS curve. C) only at a point that is on both the IS and LM curves. D) only at the natural level of GDP. 5) 6) If the unemployment rate is above its natural rate, then. A) there is excess tightness in the labor market B) output is below its potential level C) wages and prices will rise more rapidly and the AS curve will shift to the left D) all of the above 6) 7) Comparing the short-run Phillips curve and the long-run Phillips curve, we see that there is A) a tradeoff in both curves. B) no relationship between the two curves. C) no tradeoff in either curve. D) only a short-run tradeoff between inflation and unemployment but not a long-run tradeoff. E) only a long-run tradeoff between inflation and unemployment but not a short-run tradeoff. 7) 8) C = (Y-T) I = r G = T = 500 Md = Y r Ms = 3000 What are the equilibrium values for Y and r? A) Y = 2400 and r = 30% B) Y = 2100 and r = 20% C) Y = 3000 and r = 10% D) Cannot be determined from information given.capital goods. 8) 9) The short-run Phillips curve shows between the unemployment rate and the inflation rate and the long-run Phillips curve shows between the unemployment rate and the inflation rate. A) no relationship; no relationship B) a positive relationship; a negative relationship C) a negative relationship; no relationship D) no relationship; a negative relationship E) a negative relationship; a positive relationship 9) 2

3 Figure ) In Figure 4-5 above, the money market is in equilibrium A) at points A and E. B) at points A, B, E, and C. C) at points B, C, and E. D) at points E and D. E) only at point E. 10) 11) In the long-run ISLM model and with everything else held constant, an increase in the money supply leaves the level of output and interest rates unchanged, an outcome called A) long-run money neutrality. B) long-run crowding out. C) interest rate overshooting. D) the long-run Phillips curve. 11) 12) Suppose the aggregate demand curve shifts rightward against a horizontal short -run aggregate supply curve. Real GDP would while the price level. A) rise, rises B) remain unchanged, rises C) fall, rises D) remain unchanged, falls E) rise, remain unchanged 12) 13) A steep LM curve implies that A) a decrease in taxes will change output by a relatively small amount. B) an increase in government spending will change output by a relatively small amount. C) the crowding out effect is large. D) All of the above. 13) 14) If the Fedʹs goal is to keep the interest rate fixed, a contractionary fiscal policy must be accompanied by monetary policy that shifts the LM curve to the. A) an expansionary, left B) a contractionary, left C) a contractionary, right D) an expansionary, right 14) 15) In a liquidity trap, which of the following policies would be most effective at stimulating output? A) Reduce government spending. B) Reduce taxes. C) Increase the money supply. D) They are all equally bone-headed. 15) 3

4 16) Suppose the government increases its expenditures by $100 billion and simultaneously reduces the money supply by $100 billion. We definitely know that A) the interest rate will fall. B) equilibrium GDP will rise. C) equilibrium GDP will fall. D) the interest rate will rise. 16) 17) Suppose we have an initial equilibrium with curves IS0 and LM0. The price level then rises. At every point on LM0 there is now an excess real balances, which is eliminated at each income level by a in the interest rate, meaning that the new LM curve is LM 0. A) supply of, fall, below B) demand for, fall, above C) demand for, rise, above D) supply of, rise, above E) demand for, fall, below 17) 18) The short-run Phillips curve shows A) a tradeoff between the unemployment rate and the inflation rate. B) the expected inflation rate. C) the natural unemployment rate. D) a tradeoff between real GDP and unemployment. E) potential GDP. 18) 19) The natural rate hypothesis concludes that when the inflation rate increases, then in the long run there is A) a downward movement along the short-run Phillips curve. B) an upward movement along the short-run Phillips curve. C) a downward shift of the short-run Phillips curve. D) an upward shift of the short-run Phillips curve. E) no change at all in the short-run Phillips curve. 19) 20) A reasonable dynamic assumption for the IS-LM model is that A) the money market is quick to adjust, but the bond market adjusts more slowly. B) adjustment to the new IS-LM equilibrium is instantaneous after an LM shift, but not after an IS shift. C) the economy is always on both the IS and LM curves. D) the economy is always on the IS curve, but moves only slowly to the LM curve. E) the economy is always on the LM curve, but moves only slowly to the IS curve. 20) 4

5 Figure ) Refer to Figure Potential GDP equals $500 billion. The economy is currently producing GDP1 which is equal to $440 billion. If the MPC is 0.8, then how much must taxes change for the economy to move to potential GDP? A) -$15 billion B) $40 billion C) $15 billion D) -$40 billion 21) 22) In the figure above, the expected inflation rate is A) 4 percent. B) 0 percent. C) 2 percent. D) 8 percent. E) 6 percent. 22) 5

6 23) From an initial IS-LM equilibrium with normally-sloped IS and LM curves, the money supply falls. At the new IS-LM equilibrium we have some combination of a income and a interest rate. A) higher, lower B) lower, lower C) lower, higher D) higher, higher 23) 24) Since business firms will undertake a project whose rate of return exceeds the present level of interest rates, when interest rates A) rise planned investment does not change. B) rise planned investment rises, ceteris paribus. C) rise planned investment falls, ceteris paribus. D) fall planned investment falls, ceteris paribus. 24) Aggregate Supply Curves (1) 25) Based on the graph above, a cause of movement from point 1 to point 2 might be. A) a positive price shock B) an increase in expected inflation C) government policy that increases AD. D) an increase in potential output 25) 26) Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the following is true for this economy? A) The money supply equals money demand. B) Financial markets are in equilibrium. C) Production equals demand. D) The quantity supplied of bonds equals the quantity demanded of bonds. E) all of the above 26) 6

7 27) In the figure above, the natural unemployment rate is A) 6 percent. B) 2 percent. C) 0 percent. D) 8 percent. E) 4 percent. 27) Figure ) In Figure 4-10 above, preferring the ʺeasy fiscal, tight moneyʺ policy mix at a certain income is why we are at A) point D rather than point B. B) point B rather than point D. C) point C rather than point A. D) point A rather than point C. 28) 29) The short-run Phillips curve is another way of looking at A) Okunʹs law as applied to aggregate demand. B) Keynesian or short-run aggregate supply. C) the natural rate of unemployment. D) potential GDP. E) aggregate demand. 29) 30) In the long run, A) LRAS and SRAS lie on the same line. B) unemployment is at its natural rate. C) GDP > potential GDP. D) the inflation rate is zero. 30) 7

8 31) The fixed price level that was assumed in the IS-LM model implied that A) there is always less than full employment. B) the aggregate supply curve is upward sloping to the left. C) the aggregate supply curve is horizontal. D) there is always full employment. 31) AD - AS Shocks 32) On the graph above, an example of a positive demand shock is the movement from point to point. A) F; H B) F; G C) H; I D) H; F 32) 33) The long-run Phillips curve indicates that A) potential GDP can never be achieved. B) there is no way to control the inflation rate in the long run. C) any unemployment rate is possible at the natural inflation rate. D) any inflation rate is possible at the natural unemployment rate. E) there is a tradeoff between the inflation rate and the unemployment rate in the long-run. 33) 34) Moving upward along an LM curve, velocity because remains constant while rises. A) falls, real balances, real income B) rises, real balances, real income C) falls, real income, real balances D) rises, the interest rate, real balances E) rises, the interest rate, the price level 34) 35) A falling interest rate the number of investment projects having a positive profit rate, and thus the amount of output that firms demand for themselves. A) increases, raises B) decreases, raises C) increases, lowers D) decreases, lower 35) 8

9 36) If expectations about inflation are adaptive, they are. A) based on past inflation B) formed by looking at the future C) likely to change rapidly D) all of the above 36) 37) Monetary policy will have a large effect on income provided the A) LM curve is steep. B) IS curve is steep. C) LM curve is flat. D) IS curve is flat. 37) 38) If firms hire workers until the real wage, W/P, is equal to the marginal product of labor, MPN, then the firm A) maximizes profits. B) minimizes ʺwaste,ʺ such as pollution. C) maximizes employment. D) maximizes employment and profits. 38) 39) A rise in the nominal money supply will A) shift the LM curve and shift the AD curve rightward. B) shift the AD curve and raise the equilibrium price level. C) shift the AD curve and raise the equilibrium level of nominal GDP. D) All of the above are correct. 39) 40) If the expected inflation rate rises, then the short-run Phillips curve and the long-run Phillips curve. A) shifts; does not shift B) shifts; shifts C) does not shift; shifts D) does not shift; does not shift E) might shift; shifts only if the short-run Phillips curve shifts 40) 41) Assume the economy is subjected to random shocks that alter the poisitions of the IS and LM curves. If the Federal Reserve wants to minimize the variability of GDP around its full employment level, what policy target, money supply or interest rate, should it choose? A) Money supply target if shocks are bigger in the financial sector. B) Interest rate target if shocks are bigger in the goods sector. C) It doesnʹt matter, both will work equally well in all situations. D) Interest target if shocks are bigger in the financial sector. 41) 42) Adaptive expectations assumes that individuals A) base predictions on past observations of the variable being forecast. B) use all available information in predicting the future. C) can accurately predict the future. D) form their predictions of macroeconomic variables randomly. 42) 9

10 43) In the long run. A) the Phillips curve is vertical at a given level of expected inflation B) the economy reaches the potential output level consistent with the natural rate of unemployment C) the aggregate supply is vertical with respect to unemployment D) all of the above 43) 44) Crowding-out is eliminated when the LM curve is, so that expansionary fiscal policy the interest rate. A) horizontal, does not affect B) horizontal, raises C) vertical, raises D) vertical, does not affect 44) 45) The LM curve will shift to the A) left if the price level is held constant and the quantity of money rises. B) left if the price level falls and the quantity of money is held constant. C) right if the price level rises and the quantity of money is held constant. D) right if the price level falls and/or the quantity of money rises. 45) 46) In a ʺliquidity trap,ʺ A) the demand for money is infinite, i.e. people hold all new money balances instead of buying bonds. B) the nominal interest rate on short-term assets is relatively high. C) money supply changes have a strong impact on interest rates. D) the LM curve is a vertical line. 46) 47) In Milton Friedmanʹs expectations-augmented Phillips curve,. A) in the long run, expected inflation will reach the NAIRU B) unemployment will, in the long run, reach the natural rate C) inflation is positively related to the unemployment gap D) all of the above 47) 48) In a liquidity trap, the A) LM curve is horizontal. B) LM curve is vertical. C) IS curve is vertical. D) IS curve is horizontal. 48) 49) An increase in real GDP causes the demand for real money balances to A) rise, fall, or remain unaffected depending on the interest rate at the time. B) rise. C) remain unaffected. D) fall. 49) 50) ʺCrowding-outʺ occurs in the IS-LM model as rising government spending requires a in the interest rate in order to the demand for money at the new equilibrium, thus planned private investment. A) rise, keep constant, lowering B) rise, lower, raising C) fall, raise, lowering D) rise, raise, lowering E) fall, keep constant, raising 50) 10

11 Answer Key Testname: ECON3312_EXAM3_SUMMER_2015 1) D 2) B 3) B 4) D 5) C 6) B 7) D 8) C 9) C 10) C 11) A 12) E 13) D 14) B 15) B 16) D 17) C 18) A 19) D 20) E 21) A 22) A 23) C 24) C 25) C 26) E 27) E 28) B 29) B 30) B 31) C 32) B 33) D 34) B 35) A 36) A 37) D 38) A 39) D 40) A 41) D 42) A 43) B 44) A 45) D 46) A 47) B 48) A 49) B 50) A 11