Agec217 Quiz 2 And 3

Front 1

International trade can increase world output because

Back 1

it allows nations to devote their resources to their most efficient industries

Front 2

If a country fixes its exchange rate and follows an independent stabilization policy, then it must

Back 2

equilibrate the exchange market by restricting the free flow of capital

Front 3

comparative advantage in trade implies that

Back 3

world output will be increased if nations try to specialize in their relatively most efficient industries

Front 4

the closing of the gold window in 1971 represented

Back 4

the end of the era of fixed exchange rates

Front 5

Under the Bretton Woods system, countries were expected to maintain fixed exchange rates. If traders tried to sell more of a country’s currency than others wanted to buy,

Back 5

the country could receive a loan of reserves from the International Monetary Fund, but would have to adopt contractionary fiscal and monetary policies.

Front 6

Three ways to equilibrate the exchange market are

Back 6

adjustments in fiscal and monetary policy, capital controls, and flexible exchange rates.

Front 7

When two nations agree to reduce their import tariffs, in the goods market

Back 7

both imports and exports increase, causing no change in aggregate demand, but lower input prices and shifts in output to more productive industries cause an increase in aggregate supply.

Front 8

In the above graph the exchange market is out of equilibrium at the fixed exchange rate. Under the Bretton Woods system the United States would be required to “defend” the fixed exchange rate. This could be done by

Back 8

using capital controls to restrict the quantity of dollars supplied, to the amount at point 1.

Front 9

Under the Bretton Woods system, countries were expected to maintain fixed exchange rates. If traders tried to sell more of a country’s currency than others wanted to buy,

Back 9

the country could receive a loan of reserves from the International Monetary Fund, but would have to adopt contractionary fiscal and monetary policies.

Front 10

The above graph could represent the exchange market for the Thailand baht in the 1990’s (“b” stands for baht). Which of the following statements is best?

Back 10

When Thailand’s central bank ran short of foreign currency reserves, it could no longer support the fixed exchange rate, so the value of the baht fell to equilibrium at 3.

Front 11

If a country allows its exchange rate to fluctuate with the demand and supply of its currency, then it can

Back 11

allow the free flow of capital and use independent stabilization policies

Front 12

After the Smoot-Hawley tariff was imposed,

Back 12

U.S. imports decreased, but other countries retaliated with tariffs of their own, reducing U.S. exports, and the volume of world trade declined.

Front 13

The “interest equalization tax” imposed by the Johnson administration in the 1960’s was an attempt to

Back 13

reduce the supply of the dollar in exchange markets, by taxing away additional profits Americans earned from lending at higher interest rates in foreign countries

Front 14

In his economic speech on August 15, 1971, President Richard Nixon said that “if you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less.” This was because

Back 14

devaluation meant a fall in the exchange value of the dollar, which would increase the prices of foreign goods and foreign travel to Americans.

Front 15

Why did the Fed raise the discount rate in response to the gold drain in 1931?

Back 15

Higher interest rates would cause international investors to keep their wealth in the U.S.

Front 16

The 1968 income tax surcharge did not bring down aggregate demand growth because

Back 16

consumers base their spending on their expectations of permanent income, which a temporary tax surcharge did not change.

Front 17

The sudden rise in oil prices in 1973 caused

Back 17

a decrease in aggregate supply.

Front 18

The Wall Street Journal described monetary policy in 1979 as “a world turned upside-down.” They wrote this because

Back 18

the President’s administration wanted interest rates higher than the Federal Reserve wanted them.

Front 19

Which of the above goods market diagrams represents the same idea as the above Phillips Curve?

Back 19

Aggregate Demand goes up, Aggregate Supply goes down

Front 20

Suppose the Federal Reserve responds to an oil shock with expansionary monetary policy. Which pair of graphs best represents this option?

Back 20

aggregate supply went down, aggregate demand went up. This caused the money supply to go up.

Front 21

Economist James Tobin thought that the Kennedy administration should

Back 21

run a budget surplus and encourage the Fed to reduce interest rates. This would increase investment spending and increase potential output in the long run.

Front 22

OPEC

Back 22

is the Organization of Petroleum Exporting Counties, a cartel of oil producers

Front 23

The expansionary monetary policy of 1972 wrecked the strategy behind the Nixon administration’s wage and price controls, because

Back 23

as prices rose to their ceilings people began to expect inflation once the controls were removed

Front 24

Which of the following stopped the Great Inflation of the 1960’s and 1970’s?

Back 24

The Great Recession of 1981-82.

Front 25

what best describes why Volcker's recession ended the Great Inflation

Back 25

The long period of unemployed resources slowed the increase in input costs

Front 26

Economist Milton Friedman pointed out that the Phillips Curve is not stable. When the unemployment rate drops below the natural rate, the Phillips Curve

Back 26

shifts outward, towards higher inflation rates at every unemployment rate

Front 27

One cause of the 1980 recession was

Back 27

the unexpectedly large reduction in consumer spending that resulted from the consumer credit controls

Front 28

Monetarism recommends that

Back 28

the Federal Reserve should set the growth rate of the money supply equal to the long-run rate of growth in real GDP

Front 29

Consider these data for the United States economy, 1966-1970. For the years 1967-1969, what would be an appropriate fiscal policy?

Back 29

Increase income taxes

Front 30

Which of the following best describes the Federal Reserve’s policy for bringing down inflation in the early 1980’s?

Back 30

Reduce the money supply to increase interest rates, reducing aggregate demand. Hold output below potential long enough to reduce inflationary expectations, eventually increasing aggregate supply

Front 31

The 1968 income tax surcharge was intended to

Back 31

reduce aggregate demand growth and bring down the inflation rate

Front 32

The supply shock caused by the sudden rise in oil prices in 1973 resulted in

Back 32

a recession and higher inflation

Front 33

In 1979 the Federal Reserve began targeting the quantity of money. As a result

Back 33

interest rates increased

Front 34

Consider these data for the United States economy, 1966-1970. For the years 1967-1969, what would be an appropriate monetary policy?

Back 34

The Fed should sell Treasury bonds

Front 35

Suppose the Federal Reserve responds to a supply shock with no change in policy, depending instead on a recession to reduce input costs over the long run. Which of the above graphs best represents this shock and policy response?

Back 35

Aggregate Supply falls and then returns to equilibrium

Front 36

In the early 1960’s the U.S. balance of payments problem meant that

Back 36

interest rates had to be kept high to support the exchange value of the dollar.

Front 37

When Gerald Ford became President in 1974, the inflation rate was 11%. The new President recommended a tax surcharge and government spending cuts. This was a

Back 37

counter-cyclical fiscal policy

Front 38

Consider the above Phillips Curve data points for 1961 to 1970. Which pair of points best illustrates the effect on aggregate supply of rising inflationary expectations?

Back 38

1969-1970

Front 39

Which of the above diagrams best represents the results of a sudden increase in oil prices?

Back 39

aggregate supply decreases

Front 40

At first, the Nixon administration’s mandatory wage and price controls in 1971 were intended to

Back 40

freeze prices for ninety days in order to bring down inflationary expectations.

Front 41

The Federal Reserve has a policy problem when faced with stagflation. This is because

Back 41

an increase in interest rates attacks inflation but makes unemployment worse, while a decrease in interest rates attacks unemployment but makes inflation worse.

Front 42

In the equation of exchange, if real GDP rises by 5% per year, Monetarism recommends that

Back 42

the money supply be increased by 5% per year, to keep inflation at zero if velocity doesn’t change.

Front 43

The economy was near potential output in 1965. Starting in that year, the Johnson administration increased spending on social programs and escalated the Vietnam War, while maintaining the Kennedy tax cuts. Inflation increased, and eventually inflationary expectations increased too. Which of the above goods market graphs best represents the results of the Johnson administration policies (a) and effects of rising inflationary expectations (b

Back 43

aggregate demand increases and aggregate supply decreases

Front 44

Which of the following was not a cause of the Great Inflation of the 1960’s and 1970’s?

Back 44

the 1968 income tax surcharge

Front 45

Johnson administration economists had hoped to “go down that [Phillips] curve just as you went up that curve.” This proved impossible because

Back 45

the high inflation rates at the end of the 1960’s caused an increase in inflationary expectations.

Front 46

President Ford’s Whip Inflation Now policy was

Back 46

an incomes policy intended to promote a voluntary reduction in inflationary expectations

Front 47

Unions refused to cooperate with the Nixon administration’s Cost of Living Council, because under the wage and price controls,

Back 47

wages were set in Washington, rather than negotiated by unions.

Front 48

The economy was near potential output in 1965. Starting in that year, the Johnson administration increased spending on social programs and escalated the Vietnam War, while maintaining the Kennedy tax cuts. In 1968 the Congress passed an income tax surcharge to try to bring down consumer spending. Which of the above goods market graphs best represents the results of the Johnson administration policies (a) and theintended effects of the tax surcharge

Back 48

aggregate demand rose and then fell

Front 49

In 1979 high inflation caused an increase in money demand, and Paul Volcker’s Federal Reserve used the quantity of money as its policy target. Which of the above graphs shows what happened to interest rates as a result?

Back 49

money demand rose and money supply fell

Front 50

The Johnson administration pledged to raise taxes in early 1967, but the income tax surcharge was not passed until mid-1968. Meanwhile, the Federal Reserve agreed to reverse its contractionary policies in 1967. Which pair of the above graphs represents the policies of 1967?

Back 50

money supply and aggregate demand go up