PS12

1.The aggregate quantity of goods demanded decreases if

a. real wealth falls.

b. the interest rate rises.
c. the dollar appreciates.
d. All of the above are correct.

2.A decrease in the price level

a. causes real wealth to rise, people to lend more, interest rates to rise, and the dollar to
appreciate.
b. causes real wealth to rise, people to lend more, interest rates to fall, and the dollar to
depreciate.
c. causes real wealth to fall, people to lend less, interest rates to fall, and the dollar to
depreciate.
d. causes real wealth to fall, people to lend less, interest rates to rise, and the dollar to
depreciate.

3.When the dollar depreciates, each dollar

a. buys more foreign currency, and so buys more foreign goods.

b. buys more foreign currency, and so buys fewer foreign goods.
c. buys less foreign currency, and so buys more foreign goods.
d. buys less foreign currency, and so buys fewer foreign goods.

4.Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause
people to

a. increase consumption, which shifts the aggregate demand curve right.

b. increase consumption, which shifts the aggregate demand curve left.
c. decrease consumption, which shifts the aggregate demand curve right.
d. decrease consumption, which shifts the aggregate demand curve left.

5.When taxes increase, consumption decreases

a. as shown by a movement to the left along the aggregate demand curve.

b. shifting aggregate demand to the left.
c. shifting aggregate supply the left.
d. which does none of the above.

6.Aggregate demand shifts right when the government

a. increases taxes.
b. increases military expenditures.
c. increases the money supply.
d. Both b and c are correct.

7.If the dollar appreciates perhaps because of speculation or government policy then U.S.

a. net exports increase and aggregate demand shifts right.

b. net exports increase and aggregate demand shifts left.
 c. net exports decrease and aggregate demand shifts right.
d. net exports decrease and aggregate demand shifts left.

8.Which of the following does not determine the long-run level of real GDP?

a. the price level

b. supplies of labor
c. available natural resources
d. available technology

9.The misperceptions theory of the short-run aggregate supply curve says that if the price level
increases more than people expect, firms believe that the relative price of what they produce has

a. increased, so they increase production.

b. increased, so they decrease production.
c. decreased, so they increase production.
d. decreased, so they decrease production.

10.The sticky wage theory of the short-run aggregate supply curve says that when prices fall
unexpectedly, the real wage

a. rises, so employment rises.

b. rises, so employment falls.
c. falls, so employment rises.
d. falls, so employment falls.

11.The sticky price theory of the short-run aggregate supply curve says that when prices fall
unexpectedly, some firms will have

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.

12.Which of the following shifts short-run aggregate supply left?

a. an increase in the price level

b. an increase in the expected price level
c. an increase in the capital stock
d. All of the above are correct.
13.If the economy starts at A and there is a fall in aggregate demand, the economy moves

a. back to A in the long run.

b. to B in the long run.
c. to C in the long run.
d. to D in the long run.

14.If a change in aggregate demand shifts the economy from A to D, the government might use fiscal
policy to move the economy

a. back to A.
b. to B.
c. to C.
d. to D.

15.Suppose a shift in aggregate demand creates an economic contraction. If policymakers can

respond with sufficient speed and precision, they can offset the initial shift by

a. shifting aggregate demand right.

b. shifting aggregate demand left.
c. shifting aggregate supply right.
d. shifting aggregate supply left.
16.Which of the following are goals of monetary policy?

a. maximizing the value of the dollar relative to other currencies, economic growth, and high
employment
b. price stability, maximizing the value of the dollar relative to other currencies, and high
employment
c. price stability, economic growth, and high employment.
d. price stability, economic growth, and maximizing the value of the dollar relative to other
currencies.

17.Monetary policy refers to the actions the Central Bank takes to manage

a. the money supply and income tax rates to pursue its economic objectives.
b. the money supply and interest rates to pursue its economic objectives.
c. income tax rates and interest rates to pursue its economic objectives.
d. government spending and income tax rates to pursue its economic objectives.

18. Liquidity preference theory is most relevant to the

a. short run and supposes that the price level adjusts to bring money supply and money
demand into balance.
b. short run and supposes that the interest rate adjusts to bring money supply and money
demand into balance.
c. long run and supposes that the price level adjusts to bring money supply and money demand
into balance.
d. long run and supposes that the interest rate adjusts to bring money supply and money
demand into balance.

19. The supply of money is determined by

a. the price level.

b. the Central Bank.
c. the value of money.
d. the demand for money.

20. The supply of money increases when

a. the value of money increases.

b. the interest rate increases.
c. the Central Bank makes open-market purchases.
d. None of the above is correct.

Figure 1
21. Refer to Figure 1. In the figure above, the movement from point A to point B in the money market
would be caused by

a. an increase in the price level.

b. a decrease in real GDP.
c. an open market sale of Treasury securities by the Central Bank.
d. an increase in the required reserve ratio by the Central Bank.

22. The Central Bank can increase the federal funds rate by

a. selling Treasury bills, which increases bank reserves.

b. buying Treasury bills, which increases bank reserves.
c. selling Treasury bills, which decreases bank reserves.
d. buying Treasury bills, which decreases bank reserves.

23.The money demand curve has a negative slope because

a. lower interest rates cause households and firms to switch from money to financial assets.
b. lower interest rates cause households and firms to switch from financial assets to money.
c. lower interest rates cause households and firms to switch from money to stocks.
d. lower interest rates cause households and firms to switch from money to bonds.

24. An increase in real GDP

a. increases the buying and selling of goods and increases the demand for money as a medium
of exchange.
b. increases the buying and selling of goods and decreases the demand for money as a medium
of exchange.
c. decreases the buying and selling of goods and increases the demand for money as a medium
of exchange.
d. decreases the buying and selling of goods and decreases the demand for money as a
medium of exchange.

25. The money demand curve would shift right if

 a. real GDP decreased.
b. the price level increased.
c. the interest rate increased.
d. the Central Bank sold Treasury securities.

26. According to liquidity preference theory, if the quantity of money supplied is greater than the
quantity demanded the interest rate will

a. increase and the quantity of money demanded will decrease.

b. increase and the quantity of money demanded will increase.
c. decrease and the quantity of money demanded will decrease.
d. decrease and the quantity of money demanded will increase.

27.According to liquidity preference theory, an increase in the price level shifts the

a. money demand curve right so the interest rate increases.

b. money demand curve right so the interest rate decreases.
c. money demand curve left so the interest rate decreases.
d. money demand curve left so the interest rate increases.

28. Which of the following properly describes the interest rate effect?

a. A higher price level leads to higher money demand, higher money demand leads to higher
interest rates, a higher interest rate increases the quantity of goods and services demanded.
b. A higher price level leads to higher money demand, higher money demand leads to lower
interest rates, a higher interest rate reduces the quantity of goods and services demanded.
c. A lower price level leads to lower money demand, lower money demand leads to lower
interest rates, a lower interest rate reduces the quantity of goods and services demanded.
d. A lower price level leads to lower money demand, lower money demand leads to lower
interest rates, a lower interest rate increases the quantity of goods and services demanded.

29. If the stock market booms

a. household spending increases. To offset the effects of this on the price level and real GDP,
the Fed would increase the money supply.
b. household spending increases. To offset the effects of this on the price level and real GDP,
the Fed would decrease the money supply.
c. household spending decreases. To offset the effects of this on the price level and real GDP,
the Fed would increase the money supply.
d. household spending decreases. To offset the effects of this on the price level and real GDP,
the Fed would decrease the money supply.

30. Fiscal policy refers to the idea that aggregate demand is changed by changes in

a. the money supply.

b. government spending and taxes.
c. trade policy.
d. All of the above are correct.

31. If the MPC = .85, then the government purchases multiplier is about

a. 1.18.
b. 3.33.
 c. 6.67.
d. 8.5.

32. Which of the following correctly explains the crowding-out effect?

a. An increase in government expenditures decreases the interest rate and so increases

investment spending.
b. An increase in government expenditures increases the interest rate and so reduces
investment spending.
c. A decrease in government expenditures increases the interest rate and so increases
investment spending.
d. A decrease in government expenditures decreases the interest rate and so reduces
investment spending.

33. Assume the multiplier is 5 and that the total crowding-out effect is $20 billion. An increase in
government purchases of $10 billion when the multiplier is 5 will shift the aggregate demand curve

a. right $150 billion.

b. right $70 billion.
c. right $30 billion.
d. None of the above is correct.

Figure 2

34. Refer to Figure 2. In the figure above suppose the economy is initially at point A. The movement
of the economy to point B as shown in the graph illustrates the effect of which of the following policy
actions by the Central Bank?

a. A decrease in income taxes

b. An increase in the required reserve ratio
c. An open market purchase of Treasury bills
d. An open market sale of Treasury bills.

35. Aggregate demand shifts to the left and policymakers want to stabilize output. What can they
do?
 a. repeal an investment tax credit or increase the money supply
b. repeal an investment tax credit or decrease the money supply
c. institute an investment tax credit or increase the money supply
d. institute an investment tax credit or decrease the money supply

36.Critics of stabilization policy argue that

a. there is a lag between the time policy is passed and the time policy has an impact on the
economy.
b. the impact of policy may last longer than the problem it was designed to offset.
c. policy can be a source of, instead of a cure for, economic fluctuations.
d. All of the above are correct.

37. According to the short-run Phillips curve, the unemployment rate and the inflation rate are

a. unrelated.
b. positively related.
c. negatively related.
d. unaffected by monetary policy.

38. If policymakers expand aggregate demand, inflation

a. falls, but unemployment rises.

b. and unemployment fall.
c. and unemployment rise.
d. rises, but unemployment falls.

Figure 3

39. Refer to Figure-3. What should the Federal Reserve do if it wants to move from point A to point B
in the short-run Phillips curve depicted in the figure above?

a. buy treasury bills

b. sell treasury bills c. lower the discount rate
c. increase the money supply
40.In the long run, the Phillips curve is a ________ at ________.

a. horizontal line; 0% inflation

b. negatively sloped line; the intersection of aggregate demand and short-run aggregate supply
c. vertical line; the natural rate of unemployment
d. vertical line; the expected rate of inflation

41. If actual inflation is less than expected inflation, actual real wages will be _________ expected
real wages and unemployment will _______.

a. greater than; rise

b. greater than; fall
c. less than; rise
d. less than; fall

42.Suppose that the money supply increases. In the short run, this increases prices according to

a. both the short-run Phillips curve and the aggregate demand and aggregate supply model.
b. neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
c. the short-run Phillips curve, but not the aggregate demand and aggregate supply model.
d. the aggregate demand and aggregate supply model but not the short-run Phillips curve.

43. The government of Libertina considers two policies. Policy A would shift AD right by 200 units
while policy B would shift AD right by 100 units. According to the short-run Phillips curve policy A will
lead

a. to a lower unemployment rate and a lower inflation rate than policy B.

b. to a lower unemployment rate and a higher inflation rate than policy B.
c. to a higher unemployment rate and lower inflation rate than policy B.
d. to a higher unemployment rate and higher inflation rate than policy B.

Figure 4

44. Refer to Figure 4. Suppose the economy is at point C in the figure above. Which of the following is
true?
 a. The short-run Phillips curve will shift to the right.
b. The short-run Phillips curve will shift to the left.
c. The economy will move from C to A.
d. Workers and firms expect inflation to be 1%.

45. An increase in expected inflation shifts the

a. short-run Phillips curve right.

b. short-run Phillips curve left.
c. long-run Phillips curve right.
d. long-run Phillips curve left.

46. Where does the short-run Phillips curve intersect the long-run Phillips curve?

a. at the point where the rate of inflation and the unemployment rate are equal
b. at the natural rate of inflation
c. at the point where actual inflation is equal to expected inflation
d. There is no intersection between the short- and long-run Phillips curves.

47. What impact does monetary policy have on the long-run Phillips curve?

a. Monetary policy can only shift the long-run Phillips curve to the left.
b. Monetary policy shifts the long-run Phillips curve to the right or left, depending on whether
monetary policy is expansionary or contractionary. Incorrect
c. Monetary policy can only shift the long-run Phillips curve to the right.
d. Monetary policy has no impact on the long-run Phillips curve.

48. Which of the following is correct if there is an adverse supply shock?

a. The short-run aggregate supply curve and the short-run Phillips curve both shift right.
b. The short-run aggregate supply curve and the short-run Phillips curve both shift left.
c. The short-run aggregate supply curve shifts right and the short-run Phillips curve shifts left.
d. The short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right.

49. Contractionary monetary policy would

a. cause disinflation and make the short-run Phillips curve shift right.
b. cause disinflation and make the short-run Phillips curve shift left.
c. not cause disinflation, but make the short-run Phillips curve shift right.
d. not cause disinflation, but make the short-run Phillips curve shift left.

50.If a central bank reduced inflation by 2 percentage points and that made output fall by 6
percentage points for 2 years and the unemployment rate rises from 3 percent to 5 percent for 2
years, the sacrifice ratio is

a. 1.
b. 2.
c. 3.
d. None of the above is correct.

51. If the sacrifice ratio is 2, reducing the inflation rate from 10 percent to 6 percent would require
sacrificing

a. 2 percent of annual output.

 b. 6 percent of annual output.
c. 8 percent of annual output.
d. 12 percent of annual output.

52. A country is likely to have a lower sacrifice ratio if

a. contracts are shorter, and the Central Bank is credible.

b. contracts are shorter, and the Central Bank has a poor reputation.
c. contracts are longer, and the Central Bank is credible.
d. contracts are longer, and the Central Bank has a poor reputation.

53. If the Fed announced a policy to reduce inflation and people found it credible, the short-run
Phillips curve would shift

a. right and the sacrifice ratio would fall.

b. right and the sacrifice ratio would rise.
c. left and the sacrifice ratio would fall.
d. left and the sacrifice ratio would rise.

54. Proponents of rational expectations argued that the sacrifice ratio

a. could be high because it was rational for people not to immediately change their
expectations.
b. could be high because people might adjust their expectations quickly if they found
anti-inflation policy credible.
c. could be low because it was rational for people not to immediately change their
expectations.
d. could be low because people might adjust their expectations quickly if they found
anti-inflation policy credible.

55. Over the long run the Volcker disinflation

a. shifted the short-run and long-run Phillips curves left.

b. shifted the short-run, but not the long-run Phillips curve left.
c. shifted the long-run, but not the short-run Phillips curve left.
d. None of the above is correct.