Download Name 1 In The General Theory of Employment, Interest, and Money

Name _________________
In The General Theory of Employment, Interest, and Money, John Maynard Keynes
proposed that the Great Depression was caused by
1
A. government budget deficits.
B. low aggregate demand.
C. saving rates that were too low.
D. inept monetary policy.
2
Which of the following is NOT exogenous in the IS–LM model?
A. the interest rate
B. taxes
C. the price level
D. government expenditure
In the Keynesian cross model if the interest rate is constant and the MPC is 0.7, then
the government purchases multiplier is
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A. 0.3.
B. 0.7.
C. 1.4.
D. 3.3.
In the Keynesian cross model of Chapter 10, if the interest rate is constant, the MPC
is 0.6, and taxes are increased by $100, by how much does income change?
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A. It increases by $150.
B. It decreases by $150.
C. It increases by $166.
D. It decreases by $166.
The relationship between interest rates and the level of income that arises in the
market for goods and services is called the
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A. LM curve.
B. IS curve.
C. aggregate demand curve.
D. aggregate supply curve.
The investment function and the IS curve slope
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A. upward because higher interest rates induce more investment.
B. upward because higher interest rates induce less investment.
C. downward because higher interest rates induce more investment.
D. downward because higher interest rates induce less investment.
The slope of the IS curve depends on
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A. the sensitivity of investment to the interest rate.
B. the level of government expenditures.
C. the sensitivity of the demand for real money balances to the interest rate.
D. none of the above.
The IS curve is drawn for a given
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A. fiscal policy
B. monetary policy.
C. interest rate.
D. level of income.
9
If investment becomes less sensitive to the interest rate, then the
A. LM curve becomes steeper.
B. LM curve becomes flatter.
C. IS curve becomes steeper.
D. IS curve becomes flatter.
10
If the marginal propensity to consume is large, then the
A. LM curve is relatively steep.
B. LM curve is relatively flat.
C. IS curve is relatively steep.
D. IS curve is relatively flat.
12
The LM curve is drawn for a given
A. real income.
B. nominal income.
C. money supply.
D. interest rate.
The relationship between the interest rate and the level of income that arises in the
market for money balances is called the
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A. LM curve.
B. IS curve.
C. aggregate demand curve.
D. aggregate supply curve.
14 in the early 1980s the Federal Reserve, under Paul Volcker, began a period of tight
money aimed at reducing inflation. Under this policy, nominal interest rates were:
A. higher in the short run and higher in the long run.
B. higher in the short run and lower in the long run.
C. lower in the short run and higher in the long run.
D. lower in the short run and lower in the long run.
15 In the quantity theory interpretation of the LM curve, the LM curve slopes up
because
A. a higher inflation rate implies a higher interest rate.
B. velocity depends on the interest rate.
C. when income rises, a lower interest rate is necessary to equilibrate the money
market.
D. for a given price level, the supply of money determines the level of income.
16 If the central bank increased the supply of real money balances, then the LM curve
would
A. become steeper.
B. become flatter.
C. shift inward.
D. shift outward.
17 If money demand became more sensitive to the level of income, the LM curve would
A. become steeper.
B. become flatter.
C. shift inward.
D. shift outward.
18 The “money hypothesis” explaining the Great Depression stipulates that the
Depression was caused by a contractionary shift in the LM curve. Which of the following
facts supports this hypothesis?
A. The stock market crash of 1929 reduced real wealth
B. The interest rate did not rise
C. The nominal money supply contracted and the price level fell dramatically
D. Real balances did not fall
19 The “spending hypothesis” explaining the Great Depression stipulates that the main
cause of the Great Depression was a decline in spending. Which of the following does not
support this hypothesis?
A. Investment in housing declined.
B. Widespread bank failures occurred.
C. Government purchases rose during 1929–1932.
D. The stock market crash of 1929 reduced real wealth.
20 The Pigou effect stipulates
A. falling prices expand income.
B. falling prices depress income.
C. expanding income leads to a higher price level.
D. falling income leads to a lower price level.
21
Debt-deflation leads to lower income because
A. falling prices redistribute income from creditors to debtors, which leads to a
decline in the APC.
B. falling prices redistribute income from debtors to creditors, which leads to a
decline in the APC.
C. a rise in the saving rate leads to a lower amount of real debt in the economy,
depressing consumption and therefore income.
D. a fall in the saving rate leads to higher interest rates and lower income.
22 Most economists believe that the Great Depression is unlikely to be repeated in the
future. Which of the following is NOT a legitimate reason to believe this?
A. The Fed will not let the money supply fall by a large amount.
B. More effort is made today to balance the government budget.
C. Widespread bank failures are less likely to occur.
D. The income tax provides an automatic stabilizer today.
23 Some economists believe that a liquidity trap may occur when
A. the real interest rate is negative.
B. the unemployment rate exceeds 10 percent.
C. the nominal interest rate is close to zero.
D. output growth exceeds its long-run potential rate.
MUNDELL FLEMING
1 of 21
The key difference between the IS-LM model and the Mundell–Fleming model is that the
A. Mundell–Fleming model does not take the price level as fixed.
B. Mundell–Fleming model assumes a small open economy.
C. Mundell–Fleming model stresses the interaction between markets different from
those in the IS-LM model.
D. Mundell–Fleming model is not used to evaluate monetary and fiscal policy effects.
2 of 21
According to the Mundell–Fleming model, an appreciation of the exchange rate would
A. decrease both import demand and export demand.
B. increase import demand and decrease export demand.
C. decrease import demand and increase export demand.
D. increase both import demand and export demand.
3 of 21
If the IS* curve in the Mundell–Fleming model is expressed by the equation Y = C(Y – T)
+ I(r*) + G + NX(e) then NX(e) should be interpreted as meaning that
A. net exports depend positively on the exchange rate.
B. exports depend negatively on the exchange rate.
C. imports depend positively on the exchange rate.
D. net exports depend negatively on the exchange rate.
4 of 21
The Mundell–Fleming model predicts that, in Y – e space, an appreciation of the
exchange rate will cause the IS* curve to
A. shift to the left.
B. shift to the right.
C. become steeper.
D. remain unchanged.
5 of 21
The Mundell–Fleming model predicts that, in Y – e space, an appreciation of the
exchange rate will cause the LM* curve to
A. shift to the left.
B. shift to the right.
C. become steeper.
D. remain unchanged.
6 of 21
Suppose that the Mundell–Fleming model is depicted in a Y – e graph. The equilibrium
would then occur at the point where the
A. IS* and LM* curves intersect.
B. IS* curve crosses the world interest rate.
C. LM* curve crosses the domestic interest rate.
D. LM* curve crosses the world interest rate.
7 of 21
In a small open economy with a floating exchange rate, a fiscal expansion
A. increases income.
B. decreases income.
C. leaves income unchanged.
D. could increase or decrease income, depending on what happens to the exchange
rate.
8 of 21
According to the Mundell–Fleming model, in a small country with a floating exchange rate,
a tax cut will cause the exchange rate to
A. rise.
B. rise in the same proportion as inflation.
C. remain constant.
D. fall.
9 of 21
In a small open economy with a floating exchange rate, a monetary expansion
A. increases income.
B. decreases income.
C. leaves income unchanged.
D. could either decrease or increase income, depending on what happens to the
exchange rate.
10 of 21
Under a system of floating exchange rates, a monetary contraction by the central bank
would cause the exchange rate to
A. rise.
B. rise in the same proportion as inflation.
C. remain constant.
D. fall.
11 of 21
Suppose the United States were a small open economy under floating exchange rates. If
the U.S. government imposes a quota on German cars in an effort to reduce the trade
deficit, then
A. the exchange rate goes up and the trade deficit goes down.*B. the exchange rate
B. the exchange rate goes up and the trade deficit remains unchanged.
C. the exchange rate goes down and the trade deficit remains unchanged.
D. both the exchange rate and the trade deficit go down.
12 of 21
In an open economy with a fixed exchange rate, a fiscal contraction
A. increases both the money supply and income.
B. increases the money supply and decreases income.
C. decreases the money supply and increases income.
D. decreases both the money supply and income.
13 of 21
In an open economy with a fixed exchange rate, expansionary monetary policy
A. increases income.
B. decreases income.
C. lowers the interest rate.
D. is impossible.
14 of 21
Under a system of fixed exchange rates, an import restriction on foreign goods would
cause net exports and the level of income to
A. rise.
B. rise in the same proportion as inflation.
C. remain constant.
D. fall.
15 of 21
Under a system of fixed exchange rates
A. only monetary policy can affect income.
B. only fiscal policy can affect income.C. both monetary and fiscal policy can affect
income.
C. both monetary and fiscal policy can affect income.
D. neither monetary nor fiscal policy can affect income.
16 of 21
Under a system of floating exchange rates
A. only monetary policy can affect income.
B. only fiscal policy can affect income.
C. both monetary and fiscal policy can affect income.
D. neither monetary nor fiscal policy can affect income.
17 of 21
Suppose country A has a higher risk premium than country B. One can then infer that
country A
A. is more productive than country B.
B. is more politically stable than country B.
C. is less politically stable than country B.
D. has more borrowers than country B.
18 of 21
Many economists favor a system of floating exchange rates because it
A. allows the government to use monetary policy as an output stabilizer.
B. forces the central bank to restrict the money supply.
C. reduces exchange rate uncertainty.
D. allows the government to use trade restrictions to control the current account
balance.
19 of 21
Choose the pair of words that best completes this sentence: In a large open economy,
monetary policy is ____ potent and fiscal policy is ____ potent than in a closed economy.
A. less; more
B. less; less
C. more; more
D. more; less
20 of 21
Which of the following is impossible for a country to choose simultaneously?
A. fixed exchange rate, free capital flows, and an independent monetary policy
B. flexible exchange rate, free capital flows, and an independent monetary policy
C. fixed exchange rate, capital controls, and an independent monetary policy
D. fixed exchange rate, free capital flows, and a monetary policy subject to keeping
the exchange rate unchanged
21 of 21
The aggregate demand curve is downward-sloping in a small open economy because a
decline in the price level raises real money balances and
A. lowers the interest rate, thereby expanding investment.
B. raises wealth, thereby expanding consumer spending.
C. lowers the exchange rate, thereby expanding net exports.
D. increases the exchange rate, thereby expanding net exports.