Q&A Hero

Q: Lower interest rates which reduce the debt-servicing burden of households, thus increasing their net worth, is best described by the A) bank lending channel. B) money channel. C) financial market channel. D) balance sheet channel.

Q: Monetary policy can have substantial effects on the economy even when nominal interest rates are very low A) since real rates are what affects borrowing and spending decisions. B) by improving borrower and bank balance sheets. C) by reducing transactions costs. D) only when the policy is substantial.

Q: Changes in net worth and liquidity may significantly affect the volume of lending and economic activity according to the A) interest rate channel. B) balance sheet channel. C) money channel. D) bank lending channel.

Q: Increases in interest rates A) reduce borrowers' net worth. B) reduce lenders' net worth. C) increase the present value of borrowers' assets. D) raise the cost to businesses of internal funding.

Q: The balance sheet channel describes ways in which interest rate changes resulting from monetary policy affect A) the portfolio decisions of households. B) the portfolio decisions of businesses. C) borrowers' net worth. D) lenders' net worth.

Q: Analysts have attempted to model the impact of monetary policy on net worth by emphasizing A) the impact of lower interest rates on business spending on fixed investment. B) the impact of lower interest rates on household spending on housing and durable goods. C) the liquidity of balance sheet positions as a determinant of business and household spending. D) the greater variability of business spending compared to household spending.

Q: Which of the following statements is correct? A) Because in practice few borrowers are bank-dependent, the bank lending channel is of little real-world importance. B) In the interest rate channel, an expansionary monetary policy may cause a leftward shift in the AD curve. C) In the bank lending channel, an expansionary monetary policy can increase output in the short run even if it does not result in a decrease in the real interest rate. D) In the interest rate channel, an expansionary monetary policy affects spending but not output.

Q: Which of the following is NOT true of the interest rate channel? A) Bank loans play no special role. B) The Fed changes the real interest rate which affects the components of aggregate expenditures. C) Borrowers are indifferent as to how and from whom they raise funds. D) Alternative sources of funds are not substitutes for each other.

Q: In the bank lending channel, an important reason for output increases in the short run after an expansionary monetary policy is that A) the funds directly available for households and firms to spend will increase. B) prices will increase, making increased production more profitable for firms. C) the increase in government spending from an expansionary monetary policy increases output through the multiplier effect. D) the ability of banks to make loans will increase.

Q: The bank lending channel A) emphasizes the role of interest rates in the money supply process. B) emphasizes the importance of borrowers' net worth to the decision of lenders to grant loans. C) emphasizes the behavior of bank-dependent borrowers. D) is another name for the interest rate channel.

Q: What limited the effectiveness of monetary policy during the Financial Crisis of 2007-2009?

Q: Suppose the stock market crashes resulting in a significant decline in the wealth of consumers. Make use of the IS-MP model to illustrate the impact this has on the economy. How is the Fed likely to respond? Show the impact of the change in monetary policy on the graph of the IS-MP model.

Q: What happened to the risk premium on Baa corporate bonds during the Financial Crisis of 2007-2009? A) it declined slightly B) it rose to about 2% C) it rose to about 4% D) it rose to about 6%

Q: How many times is GDP for a particular quarter estimated? A) once B) twice C) three times D) more than three times

Q: What unusual measures did the Fed take in trying to reduce long-term interest rates during the Financial Crisis of 2007-2009? A) buying mortgage-backed securities issued by Fannie Mae and Freddie Mac B) reducing the federal funds rate multiple times C) issuing its own securities D) eliminating the discount rate on loans to member banks

Q: Which of the following prevented the Fed from reducing long-term real interest rates during the Financial Crisis of 2007-2009? A) an increase in expected inflation B) an increase in the risk premium C) the collapse in the housing market D) the failure of the federal funds rate to respond to monetary policy

Q: Which of the following is the least likely take place if the Fed responds to a negative demand shock by reducing the real interest rate? A) IS shifts to the right B) output gap returns to zero C) inflation returns to its previous rate D) MP shifts down

Q: All of the following are likely results of a negative demand shock EXCEPT A) a negative output gap. B) lower inflation. C) IS shifts to the left. D) Phillips curve shifts to the left.

Q: For the goods market to be in equilibrium in a closed economy, which of the following must be true? A) Y = S + I + G B) S + I = C + G C) S + G = Y + C D) S = I

Q: In a closed economy, national saving equals A) C + I + G. B) Y - C - G. C) Y - C - I. D) Y - G - I.

Q: In a closed economy, if the goods market is in equilibrium, national saving is $2 trillion, national consumption is $7 trillion, and government purchases are $2.5 trillion, then GDP equals A) $7 trillion. B) $9.5 trillion. C) $11.5 trillion. D) Not enough information has been provided to determine the answer.

Q: In a closed economy, the goods market is in equilibrium when A) Y = S + I + G. B) C + S = I + G. C) C + I = S + G. D) Y = C + I + G.

Q: In a closed economy, the total quantity of goods demanded equals the sum of A) consumption spending, investment spending, and government spending. B) consumption spending, national saving, and taxes. C) consumption spending, government spending, and taxes. D) investment spending, national saving, and taxes.

Q: A closed economy is one in which A) investment spending is zero. B) government spending is zero. C) there are no imports or exports. D) demand equals supply in every market.

Q: How can the difference between the current unemployment rate and the natural rate of unemployment help explain changes in inflation?

Q: How do expectations of higher inflation become embedded in the economy and affect actual inflation?

Q: According to the Phillips Curve, which of the following may have taken place if both the unemployment rate and inflation have risen? A) a negative supply shock B) an increase in expected inflation C) a severe recession D) a negative demand shock

Q: All of the following tends to occur when unemployment is above the natural rate EXCEPT: A) wage increases will be limited B) inflation will rise C) increases in the cost of production will be limited D) there is slack in the labor market

Q: The gap between the current unemployment rate and the natural rate of unemployment is called: A) frictional unemployment B) structural unemployment C) cyclical unemployment D) full employment

Q: Which of the following is NOT a reason given by economists for the failure of Okun's law to account for the rise in unemployment during the recession of 2007-2009? A) increased willingness among firms to lay off workers during recessions B) a surge in productivity during the recession C) the unusual severity of the recession D) it does not take into account the effect of the stimulus

Q: The relationship between the output gap and the cyclical rate of unemployment is known as A) the Phillips curve. B) the LM curve. C) Murphy's law. D) Okun's law.

Q: Most economists think changes in which type of unemployment affects inflation? A) frictional unemployment B) cyclical unemployment C) structural unemployment D) natural rate of unemployment

Q: Economists who have studied the Phillips curve have concluded that it can shift due to all of the following EXCEPT A) demand shocks. B) supply shocks. C) changes in household expectations of inflation. D) changes in firms' expectations of inflation.

Q: The graph of the short-run relationship between the unemployment rate and inflation is called a(n) A) MP curve. B) LM curve. C) IS curve. D) Phillips curve.

Q: When the Fed reduces the real interest rate, which of the following does NOT increase? A) consumption B) investment C) government purchases D) net exports

Q: In the IS-MP model, when the Fed increases the real interest rate A) the MP curve shifts up resulting in a decline in the output gap. B) the MP curve shifts up resulting in an increase in the output gap. C) the MP curve shifts down resulting in a decline in the output gap. D) the MP curve shifts down resulting in an increase in the output gap.

Q: All of the following help provide the basis for the Fed controlling the real interest rate in the IS-MP model EXCEPT A) the Fed controls the federal funds rate through open market operations. B) if expected future inflation remains stable, changes in nominal interest rates reflect changes in real interest rates. C) short-term and long-term interest rates tend to move together. D) the Fed's increased use of TIPS in conducting monetary policy.

Q: Which interest rates is most relevant in determining aggregate expenditures? A) federal funds rate B) short-term real interest rate C) long-term nominal interest rate D) long-term real interest rate

Q: The MP curve represents A) the Fed's monetary policy actions in setting a target for the federal funds rate. B) the relationship between the money supply and the price level. C) a relationship between the real interest rate and manufacturing production. D) the relationship between real interest rates and potential GDP.

Q: What is the inflation gap? What is the output gap?

Q: Explain how does an increase in real interest rates affect the components of AE.

Q: Use the following data to calculate equilibrium real GDP: C= .75Y, I = $2 trillion, G=$1 trillion and NX = -$0.5 trillion.

Q: What is the multiplier? If MPC =0.75, what is the value of the multiplier in the simple model of the economy?

Q: What is the multiplier effect?

Q: What is the difference between an autonomous change in spending and an induced change in spending?

Q: What is potential GDP? What happens to unemployment when GDP is at its potential?

Q: How does the goods market return to equilibrium if AE is less than production?

Q: How is the economy likely to respond when AE (sales) exceed production?

Q: What three parts of the economy are represented in the IS-MP model?

Q: An autonomous expenditure is one that does not depend on: A) government policy B) the automobile sector C) interest rates D) GDP

Q: The capacity of a firm can best be described as: A) when a firm are producing maximum output B) a firm's production when operating normal hours using a normal sized workforce C) when a firm makes full use of all the space available in his factory or building D) when all of the firm's workers are producing at their maximum potential

Q: The aggregate expenditure line is upward sloping since as GDP increases, A) consumption increases B) investment increases C) government purchases increase D) net exports increase

Q: The marginal propensity to consume can best be described as: A) consumption/income B) the impact of a change in income on GDP C) the change in income divided by the change in consumption D) the change in consumption divided by the change in income

Q: An increase in the real interest rate causes A) the IS curve to shift to the right. B) the IS curve to shift to the left. C) a movement up the IS curve. D) a movement down the IS curve.

Q: What effect would economic weakness in Europe due to a sovereign debt crisis have on the U.S. economy? A) IS shifts to the right B) IS shifts to the left C) potential GDP increases D) potential GDP decreases

Q: An increase in the expected profitability of investment will cause A) IS to shift right. B) IS to shift left. C) MP to shift upward. D) MP to shift downward.

Q: The level of potential GDP A) increases as the real rate of interest decreases. B) increases as the real rate of interest increases. C) is unaffected by the real rate of interest. D) is represented on the IS-MP model by a horizontal line at the world real rate of interest.

Q: In a simple model of the economy, if the MPC is 0.8, the multiplier will equalA) 0.2B) 0.8C) 1.25D) 5

Q: If a $10 billion increase in investment leads to a $20 billion increase in GDP, the multiplier isA) 0.5B) 2C) 10D) 30

Q: The series of induced changes in consumption spending that result from an initial change in autonomous expenditure is called the A) induced effect. B) autonomous effect. C) multiplier effect. D) consumption effect

Q: Which of the following does NOT lead to an increase in potential GDP? A) labor force grows B) technological change takes place C) new machinery and equipment are installed D) aggregate expenditures increase

Q: Which of the following statements about potential GDP is false? A) The Fed's goal is to have equilibrium GDP close to potential GDP. B) When GDP is at potential, cyclical unemployment is zero. C) It occurs when firms are producing at their maximum level of output. D) It occurs when firms are producing with a workforce of normal size working normal hours.

Q: Which of the following would NOT cause the IS curve to shift to the left? A) a decrease in government purchases B) an increase in consumer confidence C) a decrease in foreign demand for domestic products D) a decrease in the expected future profitability of capital

Q: Which of the following would NOT cause a shift in the IS curve? A) an increase in the domestic real interest rate B) an increase in consumer confidence C) a decrease in the expected future profitability of capital D) a decrease in government purchases

Q: In a move up the IS curve, A) investment rises. B) output falls. C) the real interest rate falls. D) saving rises.

Q: The IS curve depicts the relationship between A) aggregate output and the real interest rate. B) investment demand and the real interest rate. C) investment demand and the level of current output. D) national saving and the level of current output.

Q: If AE < Y, which of the following will NOT occur? A) inventories will decline B) actual investment will be more than planned investment C) employment will decline D) GDP will decline

Q: If AE > Y, which of the following will NOT occur? A) inventories will decline B) actual investment will be more than planned investment C) employment will increase D) GDP will increase

Q: According to the new classical view, aggregate output will differ from full-employment output A) whenever saving does not equal investment. B) only if the actual price level does not equal the expected price level. C) only if the federal government's expenditures are greater than its tax receipts. D) whenever imports exceed exports.

Q: According to the new classical view, when the actual price level is greater than the expected price level A) aggregate output is above the full employment level. B) aggregate output is below the full employment level. C) the aggregate supply curve will slope downward. D) the coefficient a is equal to zero.

Q: If the coefficient a in the new classical expression for short-run aggregate supply were equal to zero, A) aggregate output would always be at its full-employment level. B) the short-run aggregate supply curve would slope down. C) the short-run aggregate supply curve would be a horizontal line. D) aggregate output would only differ from its full-employment level if the actual price level did not equal the expected price level.

Q: What does the coefficient a in the new classical expression for short-run aggregate supply represent? A) the full employment level of output B) the price level in the previous period C) how much output responds when the actual price level differs from the expected price level D) how much the price level responds when the actual level of output differs from the full employment level of output

Q: Which of the following is the correct expression for short-run aggregate supply in the new classical view? A) YP = Y + a(P - ) B) Y = YP+ a(P - ) C) YP = Y + a(P + ) D) Y = YP + a(P + )

Q: According to the new classical approach to the aggregate supply curve, the aggregate supply curve slopes upward because A) increases in the price level result in lower real balances. B) higher current output results in higher desired investment. C) higher prices result in higher levels of spending as consumers attempt to stay ahead of inflation. D) businesses have difficulty in distinguishing relative price increases from general price increases.

Q: The new classical approach to the aggregate supply curve assumes that businesses are A) better informed about the general price level than they are about prices in their own markets. B) better informed about prices in their own markets than they are about the general price level. C) equally well informed about prices in their own markets and the general price level. D) reluctant to engage in investment spending because of a lack of information concerning future prices.

Q: The key concept in the new classical approach to the aggregate supply curve is A) the impact of imperfect information on business decisions. B) the impact of changes in the price level on real balances. C) the inverse relationship between the real interest rate and desired investment spending. D) the crowding out of investment spending by government spending.

Q: The new classical explanation of aggregate supply is also known as A) Monetarism. B) Keynesianism. C) the misperception theory. D) the adaptive expectations theory.

Q: The new classical explanation of aggregate supply in the short run builds on research by A) Irving Fisher. B) John Maynard Keynes. C) Robert Lucas. D) Robert Solow.

Q: Most economists believe that the aggregate supply curve is A) upward-sloping in the short run, but vertical in the long run. B) upward-sloping in the long run, but vertical in the short run. C) upward-sloping in both the short run and in the long run. D) vertical in both the short run and in the long run.

Q: Most economists believe that the short-run aggregate supply curve A) slopes down. B) slopes up. C) is a vertical line. D) is a horizontal line.