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

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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
3
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?
4
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
13
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.
AS-AD
2 of 20
The positive relationship between the price level and the amount of output means that
the aggregate supply curve is
A. horizontal.
B. upward-sloping.
C. vertical.
D. downward-sloping.
3 of 20
Sticky prices can result from all of the following except
A. setting prices on the basis of costs when wages are sticky.
B. long-term contracts between buyers and sellers.
C. market structure.
D. expansionary monetary policy.
4 of 20
In the sticky-price model, if all firms set their price in advance, then the short-run
aggregate supply curve will be
A. horizontal.
B. upward-sloping.
C. downward-sloping.
D. vertical.
5 of 20
In the sticky-price model, if no firms set their price in advance, then the short-run
aggregate supply curve will be
A. horizontal.
B. upward-sloping.
C. downward-sloping.
D. vertical.
6 of 20
In the imperfect-information model, it is assumed that firms
A. can observe both the price of their output and the overall price level.
B. can observe the price of their output but cannot observe the overall price level.
C. cannot observe the price of their output but can observe the overall price level.
D. cannot observe either the price of their own output or the overall price level.
7 of 20
In the sticky-price model, if the fraction of firms in the economy that set prices in
advance rises, then it would be expected that the aggregate supply curve
A. shifts upward.
B. shifts downward.
C. becomes steeper.
D. becomes flatter.
8 of 20
The sticky-price model of aggregate supply predicts that
A. the slope of the short-run aggregate supply curve will be flatter when the rate of
inflation is higher. See Section 13-1.
B. the slope of the short-run aggregate supply curve will be steeper when the rate of
inflation is higher. See Section 13-1.
C. the slope of the short-run aggregate supply curve should not depend on rate of
inflation. See Section 13-1.
D. the slope of the aggregate demand curve will be flatter when inflation is higher.
See Section 13-1.
9 of 20
Both models of aggregate supply presented in Chapter 13 share the feature that, if the
price level equals the expected price level, then
A. output will be above its natural level.
B. nominal wages will rise.
C. output will be below its natural level.
D. output will equal its natural level.
10 of 20
Both models of aggregate supply presented in Chapter 13 share the feature that, if the
price level is above the expected price level, then
A. nominal wages will fall.
B. nominal wages will rise.
C. output will be below its natural level.
D. output will be above its natural level.
11 of 20
The Phillips curve represents the trade-off between
A. inflation and expected inflation.
B. output and unemployment.
C. inflation and unemployment.
D. output and interest rates.
12 of 20
The modern Phillips curve posits that the inflation rate depends on three forces. On which
of the following does it NOT depend?
A. the level of business inventories.
B. expected inflation
C. cyclical unemployment
D. supply shocks
13 of 20
If expected inflation rises, the Phillips curve
A. shifts upward.
B. shifts downward.
C. becomes steeper.
D. becomes flatter.
14 of 20
The inflation that tends to occur when unemployment is below the natural rate is called
A. expected inflation.
B. wage inflation.
C. demand-pull inflation.
D. cost-push inflation.
15 of 20
The inflation caused by supply shocks is called
A. expected inflation.
B. wage inflation.
C. demand-pull inflation.
D. cost-push inflation.
16 of 20
In the country of Stabilia, the monetary authorities particularly dislike inflation. The
current inflation of 5 percent is considered rampant. If the sacrifice ratio in Stabilia is five,
the percentage of a year’s GDP that has to be forgone to bring inflation down to 1
percent is
A. 0.8 percent.
B. 1.25 percent.
C. 20 percent.
D. 25 percent.
17 of 20
The approach that assumes that people optimally use all the available information to
forecast the future is called
A. the sacrifice ratio.
B. expected inflation.
C. adaptive expectations.
D. rational expectations.
18 of 20
When people believe that policymakers are credibly committed to lowering inflation, the
sacrifice ratio will be
A. lower than when people don’t believe that policymakers are credible.
B. higher than when people don’t believe that policymakers are credible.
C. the same as when people don’t believe that policymakers are credible.
D. either higher or lower than when people don’t believe that policymakers are
credible.
19 of 20
The idea that, in the long run, the economy returns to the levels of output and
unemployment described by the classical model is called
The idea that, in the long run, the economy returns to the levels of output and
unemployment described by the classical model is calledA. the natural-rate hypothesis.
B. hysteresis.
C. rational expectations.
D. coordination failure.
20 of 20
Hysteresis is the long-lasting effect of history on
A. expected inflation.
B. the sacrifice ratio.
C. cyclical inflation.
D. the natural rate of unemployment.
Mankiw Macroeconomics 6e Ch14
1. The inside lag is the
A. time between a shock to the economy and the policy action responding to that
shock.
B. time between a policy action and its influence on the economy.
C. time between a shock to the economy and the influence on the economy of a
policy action.
D. difference between the time it takes to implement monetary policy and the time it
takes to implement fiscal policy.
2. The outside lag is the
A. time between a shock to the economy and the policy action responding to that
shock.
B. time between a policy action and its influence on the economy.
C. time between a shock to the economy and the influence on the economy of a
policy action.
D. difference between the time it takes to implement monetary policy and the time it
takes to implement fiscal policy.
3. Suppose that the index of leading indicators leads the business cycle by twelve months.
If the inside lag of monetary policy is three months, then the maximum outside lag that
makes monetary policy effective is
A. three months.
B. six months.
C. nine months.
D. twelve months.
4. Automatic stabilizers largely eliminate
A. the business cycle.
B. active policy.
C. the outside lag.
D. the inside lag.
5. All of the following can definitely be considered an automatic stabilizer, EXCEPT a(n)
A. income tax.
B. investment tax credit.
C. sales tax.
D. corporate tax.
6. A fall in the index of leading indicators is supposed to predict that
A. a downturn in the business cycle is likely in the near future.
B. fiscal policy is getting less contractionary.
C. monetary policy is getting less contractionary.
D. inflation is likely to fall in the near future.
7. The Lucas critique is based on
A. the inside lag of economic policy.
B. the Phillips curve.
C. automatic stabilizers.
D. the fact that people's expectations are rational.
8. Suppose you are president and your advisors
A. the Lucas critique.
B. time inconsistency.
C. discretionary policy.
D. a political business cycle.
9. A monetary policy that SPECIFIES IN ADVANCE different levels of monetary growth
corresponding to different economic conditions is called a(n)
A. active discretionary monetary policy.
B. passive discretionary monetary policy.
C. active monetary rule.
D. passive monetary rule.
10. Suppose that the government has been conducting policy according to the following
equation for some time now Money Growth = 3% + (Unemployment Rate - 6%) This
kind of policy is called a(n)
A. passive rule policy.
B. passive discretionary policy.
C. active rule policy.
D. active discretionary policy.
11. A political business cycle is said to exist when
A. the economy is managed by Congress.
B. politicians manipulate the economy for electoral gain.
C. economic policy is guided by the interests of the corporate sector.
D. business people go into politics and affect the way economic policy is conducted.
12. Suppose that a professor announces that an exam will be given in one particular
week. When the date for the exam comes, the professor is tempted not to give the exam,
reasoning that the students have already studied and now she can teach an extra day.
This is an example of
A. rational expectations.
B. adaptive expectations.
C. discretionary policy.
D. time inconsistency.
13. Which of the following would have the strongest
A. History of consistent low-inflation policies
B. Law prescribing a low-inflation policy
C. Constitutional amendment dictating a low-inflation policy
D. Change in administration
14. The monetary-policy rule that monetarists advocate is
A. an unemployment target rule.
B. a steady rate of growth of the money supply.
C. nominal GDP targeting.
D. price level targeting.
15. Economists usually advocate targeting nominal rather than real variables because:
A. nominal variables have larger effects on the economy.
B. it is difficult to determine the exact level of real variables.
C. real variables vary more than nominal ones.
D. policy instruments do not affect real variables.
16. Which of the following is an example of discretionary policy?
A. A balanced-budget amendment
B. A law specifying that the money supply grow at 3% every year
C. A law specifying that the money supply grow at 3% + (unemployment rate - 6%)
every year
D. A capital gains tax cut during a recession
17. Which of the following patterns of economic activity is most likely to occur when
there is a political business cycle?
A. High output growth after an election
B. High inflation after an election
C. High unemployment before an election
D. High output growth before an election
18. Most monetarists believe that
A. changes in the money supply have no effect on output.
B. money supply growth should vary over the business cycle.
C. money supply fluctuations cause most large fluctuations inthe economy.
D. active monetary policy can help stabilize aggregate demand.
19. Taylor's rule for the federal funds rate implies that the central bank is concerned with
A. only the GDP gap.
B. only inflation.
C. both GDP gap and inflation.
D. neither the GDP gap or inflation.
20. According to John Taylor's (and Alan Greenspan's?) monetary rule, the nominal
federal funds rate should increase if inflation is
A. below 2 percent and GDP is at its natural rate.
B. at 2 percent and GDP is below its natural rate.
C. above 2 percent and GDP is above its natural rate.
D. below 2 percent and GDP is below its natural rate.
21. Relatively more independent central banks are associated with
A. lower inflation and lower unemployment.
B. lower inflation and higher unemployment.
C. lower inflation.
D. higher real GDP growth.