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54 Cards in this Set

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Falling inflation means


-that the price level is falling from one period to the next.


-that the price level is falling at a decreasing rate.


-that the price level is falling at an increasing rate.


- that the price level is increasing at a decreasing rate.

- that the price level is increasing at a decreasing rate.

Suppose that an economy experiences an increase in the unemployment rate and a decline in the inflation rate simultaneously. This situation would be consistent with a movement along a


-vertical Phillips curve.


- horizontal Phillips curve.


- positively sloped Phillips curve.


-negatively sloped Phillips curve.

-negatively sloped Phillips curve.

In the early 1970s, President Nixon inherited an economy that was operating with an inflationary gap. The Nixon administration rationalized that through a combination of a government spending cuts and a decrease in the money growth rate, it could successfully


-reduce inflation, which would then cause unemployment to fall.


-get the economy to slide down along the Phillips curve, thereby trading off a reduction in inflation for an increase in unemployment.

-get the economy to slide down along the Phillips curve, thereby trading off a reduction in inflation for an increase in unemployment.

True or False?


In the long run, the major cause of inflation is excessive government spending.

False

In the United States, through most of the 1990s, the unemployment rate and the inflation rate generally fell. With which phase of the inflation-unemployment cycle does this conform to?


-Phillips phase


-Growth phase


-Stagflation phase


-Recovery phase

-Recovery phase

Consider the following statement: "President Carter expressed concern about reports of rising inflation but insisted the economy is on the right course. He pointed to recent reductions in unemployment as evidence that his economic policies are working." Which of the following could have caused this phenomenon?


-Increase in government spending that shifted the aggregate demand curve to the right.


-Increase in money supply which lowered interest rates and shifted the short-run aggregate supply curve to the right.

-Increase in government spending that shifted the aggregate demand curve to the right.

True or False? In the 1960s and early 70s, economists believed that the Phillips curve indicated that policymakers could choose the mix of inflation and unemployment they were willing to accept and achieved this with appropriate fiscal and monetary policies.

True

True or False? Sustained inflation over many years is most likely due to increases in the money supply in excess of increases in potential output.

True

True or False? The Phillips curve implies a positive relationship between inflation and unemployment.

False

Using the equation of exchange, the rate of money growth can be expressed as


%△M %△V = (%△P %△Y) ÷ %△V


%△M = (%△P + %△Y) ÷ %△V


%△M = %△P + %△Y - %△V


M x V = P x Y

%△M = %△P + %△Y - %△V

True or False?


The lowest wage that a worker would accept if offered a job is called the subsistence wage.

False

True or False? In the short run and in the long run, there is a tradeoff between inflation and unemployment.

False

The recovery phase of the inflation-unemployment cycle emerges if


-prices and wages are flexible.


-nominal wages and prices rise.


-resource prices are higher.


-policymakers respond to a recessionary gap by increasing aggregate demand.

-policymakers respond to a recessionary gap by increasing aggregate demand.

Which of the following will shift the investment demand curve to the right?


-the imposition of government regulations that reduce the incentive to produce, for example, more stringent environmental regulation


-a decrease in the capacity utilization rate of capital


-a decrease in the cost of labor


-an increase in GDP

-an increase in GDP

To eliminate the output gap, policy makers could conduct


-an open market sale to raise interest rates and reduce investment spending which will shift the aggregate demand curve to the left.


-an open market purchase to lower interest rates and stimulate investment spending which will shift the short-run aggregate supply curve to the left.

-an open market purchase to lower interest rates and stimulate investment spending which will shift the short-run aggregate supply curve to the left.

True or False? Net investment adds to the nation's capital stock.

True

True or False? Suppose real estate analysts expect that 100,000 homes will be needed in a particular community by 2010. If the current number of homes in the community is only 50,000, we can expect to see a significant increase in the demand for investment.

True

True or False? Higher interest rates increase the opportunity cost of using funds for investment.

True

Which of the following will shift the investment demand curve to the right?


-an increase in the capital gains tax rate


-a decrease in the market interest rate


-an increase in the capacity utilization rate of capital


-the government repeals investment tax credits

-an increase in the capacity utilization rate of capital

Which of the following is considered investment?


-the individual who is innovative, takes risks, raises capital and organizes production


-$200 million of financial capital owned by Bethlehem Steel


-a brand new robot purchased for use on an automobile assembly line

-a brand new robot purchased for use on an automobile assembly line

Which of the following will shift a firm's investment demand curve to the left?


-There is an excess demand in the market for skilled labor.


-The firm experiences a decrease in the capacity utilization rate of capital.


-Its current capital stock is way below its desired level.

-The firm experiences a decrease in the capacity utilization rate of capital.

True or False?


Changes in the corporate profits tax rate will shift the investment demand curve.

True

An increase in the interest rate will


-shift the investment demand curve to the right.


-shift the investment demand curve to the left.


-not shift the investment demand curve.


-increase the amount of investment undertaken by businesses.

-not shift the investment demand curve.

decrease in investment demand would most likely be caused by a(n)


-decrease in the market interest rate.


-decrease in corporate income tax rates.


-increase in the cost of new capital goods.


-increase in the expected demand for output.

-increase in the cost of new capital goods.

Which of the following causes a movement along the investment demand?


-a change in producers' expectations about profitability


-a change in the interest rate


-a change in the general price level


-a stock market crash that reduces household wealth

-a change in the interest rate

An increase in investment demand would most likely be caused by a(n)


-increase in the market interest rate.


-increase in the level of economic activity.


-increase in the cost of new capital goods.


-decrease in the expected demand for output.

-increase in the level of economic activity.

Which of the following is a reason why monetary policy can be effectively used to stimulate aggregate demand in the short run?


-Monetary policy stimulates aggregate demand by working through the positive relationship between the price level and the quantity of investment demanded.


-Monetary policy stimulates aggregate demand by working through the negative relationship between the interest rates and the quantity of investment demanded.

-Monetary policy stimulates aggregate demand by working through the negative relationship between the interest rates and the quantity of investment demanded.

True or False? The purchase of a bond is an addition to the capital stock.

False

Suppose your firm is considering an investment project that will generate an expected return of 15%. The project costs $200,000. Suppose further that your firm has $200,000 of retained earnings. If the market interest rate is 10%, your firm should


-loan the retained earnings out at 5%.


-loan the retained earnings out at 10%.


-loan the retained earnings out at 15%.


-invest the $100,000 of retained earnings in the project and borrow the remaining $100,000 at the interest rate of 10%.

-invest the $100,000 of retained earnings in the project and borrow the remaining $100,000 at the interest rate of 10%.

The reduction of a firm's tax liability by a fraction of its investment during a period is a(n)


-investment tax credit.


-balanced budget amendment.


-capital gains tax.


-real estate tax.

-investment tax credit.

Which of the following is not a component of gross private investment spending?


-an increase in business inventories


-the extensive renovation of an old factory building


-a consumer's purchase of a brand new condominium


-the purchase of stock in the General Electric Company

-the purchase of stock in the General Electric Company

Which of the following will shift the investment demand curve to the right?


-an increase in the rate of new technological innovations.


-an increase in the cost of new capital goods


-a decrease in the market interest rate

-an increase in the rate of new technological innovations.

True or False? Higher interest rates encourage investment.

False

Which of the following will shift the investment demand curve to the left?


-an expectation of increased profitability


-an increase in the rate of new technological innovations


-an increase in the market interest rate


-the government repeals investment tax credits

-the government repeals investment tax credits

Fixed exchange rates are determined by the


-policies of the domestic government.


-forces of demand and supply in the developed countries.


-forces of demand and supply in the foreign exchange market.


- forces of demand and supply in the domestic money market.

-policies of the domestic government.

Which of the following is an example of a tariff?


-a limit on the total number of Hondas that can be imported from Japan.


-a regulation specifying that each imported Honda must meet certain emission exhaust guidelines


-a tax of $500 on each Honda imported from Japan


-a tax of 10% of the value of each Honda purchased in Japan

-a tax of $500 on each Honda imported from Japan

The international trade effect results in


-a shift to the right in the aggregate demand curve.


-a shift to the left in the aggregate demand curve.


-a movement along the aggregate demand curve.


-a shift in the aggregate demand curve equal to the change in net exports times the multiplier.

-a movement along the aggregate demand curve.

A current account deficit


-arises when imports exceed exports.


-arises when the purchase of foreign assets by a nation's citizens exceed the purchase of domestic assets by a nation's citizens.


-is necessary for a long run economic growth.


-arises when a country's exchange rate falls.

-arises when imports exceed exports.

Consider a country that has a gold standard exchange rate system. Which of the following occurs if this country expands its money supply to eliminate a surplus in its balance of payments?


-Aggregate demand, the price level, and real GDP all decrease and eventually, net exports will rise in response to the lower price level.


-The price level increases and real GDP increases as producers respond to the higher price level but aggregate demand will fall.


-Aggregate demand, the price level, and real GDP all increase, and eventually, net exports will fall in response to the higher price level.

-Aggregate demand, the price level, and real GDP all increase, and eventually, net exports will fall in response to the higher price level.

The current account is


-an accounting statement that includes all spending flows across a nation's border, including the purchase of assets.


-an accounting statement that includes all spending flows across a nation's border for the purchase of goods and services.


-equal to value of a country's exports.


-equal to value of a country's imports.

-an accounting statement that includes all spending flows across a nation's border for the purchase of goods and services.

Changes in net exports caused by changes in the domestic price


-shift the aggregate demand curve in the same direction as the price change.


-shift the aggregate demand curve in the opposite direction of the price change.


-do not shift the aggregate demand curve.


-will not affect aggregate demand.

-do not shift the aggregate demand curve.

International trade has the potential to


-increase the availability of goods and services to those nations that export more than they import.


-increase the availability of goods and services to those nations that have an absolute advantage in the production of a good or service.


-increase the availability of goods and services to all nations.


-decrease the availability of goods and services to all nations.

-increase the availability of goods and services to all nations.

An increase in net exports, all other things unchanged


-results in a movement downward along the aggregate demand curve.


-increases aggregate demand.


-increases aggregate supply.


-does not change aggregate demand or aggregate supply in the domestic economy.

-increases aggregate demand.

Under a system of free-floating exchange rates, a nation will experience


-persistent surpluses in its balance of payments.


-persistent deficits in its balance of payments.


-a tendency toward equilibrium in its balance of payments.


-persistent surpluses in its balance of trade.

-a tendency toward equilibrium in its balance of payments.

A surplus in the current account implies


-a surplus in the capital account.


-a deficit in the capital account.


-a balanced capital account.


-there is an excess supply in the foreign currency market.

-a deficit in the capital account.

Members of the European Union


-adopt a common currency called the euro.


-float their domestic currency exchange rate with both the euro and the rest of the world.


-can continue to use their own domestic currency but are required to hold a stipulated amount of a common currency.


-cannot hold reserves of the common currency.

-adopt a common currency called the euro.

Under a gold standard exchange rate system, a nation's money supply is regulated by


-world supply of gold.


-world demand for gold.


-the market forces of demand and supply of gold in the gold market.


-the quantity of gold owned by a country.

-the quantity of gold owned by a country.

Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption,IP = Planned Investment, G = Government Purchases. Further, IP and Gare autonomous. If real GDP produced is $4,000,


-consumers and firms would demand more than was produced.


-the economy experiences an inflationary gap.


-firms will experience unplanned inventories accumulation.


-the price level must rise to reduce aggregate expenditures and restore equilibrium.

-firms will experience unplanned inventories accumulation.

True or False? The multiplier effect is triggered by a shift in the aggregate expenditures curve.

True

True or False? If consumption is $80 billion when income is $100, the most likely value for the marginal propensity to consume is 0.8.

False

Planned investment is


-equal to gross private domestic investment, less depreciation.


-equal to gross private domestic investment.


-the level of investment firms intend to make in a period.


-the level of investment government will require firms to make in a period.

-the level of investment firms intend to make in a period.

The smaller the marginal propensity to consume,


-the greater of the multiplier.


-the lower the value of the multiplier.


-the greater the initial change in real GDP.


-the greater the initial change in aggregate expenditures.

-the lower the value of the multiplier.

Suppose the consumption function is C = $500 + 0.8Y. If Y = $1,000, then autonomous consumption is


-$500.


-$800.


-$1,000.


-$1,300.

-$500.

According to the interest-rate effect, higher prices


-increase the value of money holdings which reduces consumption and investment spending.


-decrease the value of money which decreases consumption and investment spending.


-lower the real quantity of money, which causes interest rates to rise and investment to fall.


-lead to higher interest rates which stimulate investment spending.

-lead to higher interest rates which stimulate investment spending.