Download Week 8 Practice Quiz a Answers

Quiz 6: Macro Fall 2007
Name:
________________________________
Section Registered (Circle One):
Friday
Saturday
For each of the question stems below, circle all the true answers (2 point each). Consider all the
models developed in class so far. We will focus our analysis on the short run (which means Y
can deviate from Y* - in other words, at this time, ignore the supply side of the class - that will
change after today’s lecture). In doing so, unless told otherwise, we will assume prices are
held fixed. Assume all changes are permanent AND unexpected, unless otherwise indicated.
Lastly, assume that all consumers are non-liquidity constrained, non-ricardian PIH unless told
otherwise.
Question 1
Which of the following will shift the LM curve to the right? (8 points total)
This was straight from the last quiz (and we went over these in class). The LM curve only
shifts right when real money supply (M/P) increases (or changes in inflation expectations –
but we have not focused on that). M/P increases only when M increases or P falls. I told
you in the question stem to assume that P is fixed (unless told otherwise). So, basically, the
only true answer would be anything that increases M.
a.
The Fed selling bonds on the open market. False (M falls from this).
b.
An increase in the real money supply. True (M/P is the real money supply curve).
c.
An increase in consumer confidence.
are held fixed).
d.
A fall in real interest rates. False (This is a movement along the LM curve).
False (Shifts IS curve – not LM curve if prices
Question 2
Consider the IS-LM curve modeled in class. Which of the following are true
about the new short run equilibrium? (Hint: your analysis should ONLY be confined to the IS
and LM curves). (8 points total)
Here you need to graph out the corresponding IS-LM analysis. Again, we are assuming prices are
fixed unless told otherwise.
a.
An increase in price level will decrease both interest rates and output.
False. An increase in P shifts in the LM curve. r will rise and Y will fall.
b.
An increase in government spending will increase output and increase interest rates.
True. An increase in G will shift out the IS curve. This will cause both Y and r to increase.
c.
An increase in the nominal money supply will increase output and decrease interest rates.
True. An increase in M will shift the LM curve right causing r to fall and I to rise.
d.
An increase in TFP will cause both output and interest rates to increase.
True. An increase in TFP will shift the IS curve right causing both Y and r to increase.
Question 3
Suppose that TFP increased in the U.S. dramatically. For concreteness, assume
that Y* was increasing by 4% per year. Suppose further that the nominal money supply in this
economy (M) was held constant as TFP increased.
How can an increase in real GDP be sustained with no increase in the nominal money supply?
Your answer should be framed in terms of Friedman’s Quantity Theory of Money. Your
answer should not be more than one sentence (it could even be expressed in terms of a variable
name and an arrow indicating the direction of change). (4 points)
This was pretty easy if we knew the quantity theory of money.
%ΔM + %ΔV = %ΔP + %ΔY
If M is held fixed and Y is increasing, only one of two things can happen: V must increase
or P must fall. Either one of those answers would get you full credit. According to the true
quantity theory of Friedman, V is fixed. So, most people will likely say that P will fall (by
4% per year).
The increase in output, in a world where there is no money changing will put a downward
pressure on prices (demand is not changing but supply is increasing!).