Q&A Hero

Q: Explain how expansionary and contractionary monetary policies affect aggregate demand through the exchange rate channel.

Q: According to Tobin's q theory, when q is ________, firms will not purchase new investment goods because the market value of firms is ________ relative to the cost of capital. A. low; low B. low; high C. high; low D. high; high

Q: Explain the traditional interest-rate channel for expansionary monetary policy. Explain how a tight monetary policy affects the economy through this channel.

Q: According to Tobin's q theory, ________ policy can affect ________ spending through its effect on the prices of common stock. A. fiscal; consumption B. fiscal; investment C. monetary; consumption D. monetary; investment

Q: The subprime financial crisis caused a recession because of the ________ in adverse selection and moral hazard problems and the ________ in housing prices. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Q: During the Great Depression, Tobin's q A. rose dramatically, as did real interest rates. B. fell to unprecedentedly low levels. C. stayed fairly constant, in contrast to most other economic measures. D. rose only slightly, in spite of Hoover's attempts to prop it up.

Q: According to the household liquidity effect, higher stock prices lead to increased consumption expenditures because consumers A. feel more secure about their financial position. B. want to sell stocks and spend the proceeds before stock prices fall. C. believe that their wages will increase due to increased profitability of firms. D. can now afford more expensive imports.

Q: In the late 1990s, the stock market bubble ________ the value of Tobin's q, and caused ________ in business equipment. A. increased; underinvestment B. increased; overinvestment C. decreased; underinvestment D. decreased; overinvestment

Q: According to the household liquidity effect, an expansionary monetary policy causes a ________ in the value of households' financial assets, causing consumer durable expenditure to ________. A. decline; rise B. rise; rise C. rise; fall D. decline; fall

Q: Tobin's q theory suggests that monetary policy may affect investment spending through its impact on A. stock prices. B. interest rates. C. bond prices. D. cash flow.

Q: Tobin's q is defined as the market value of firms ________ the replacement cost of capital. A. times B. minus C. plus D. divided by

Q: A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar. A. lowering real; decreasing B. lowering real; increasing C. raising nominal; increasing D. raising real; increasing

Q: If the aggregate price level adjusts slowly over time, then an expansionary monetary policy lowers A. only the short-term nominal interest rate. B. only the short-term real interest rate. C. both the short-term nominal and real interest rates. D. the short-term nominal, the short-term real, and the long-term real interest rates.

Q: A contractionary monetary policy raises the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A. appreciate; raising B. appreciate; lowering C. depreciate; raising D. depreciate; lowering

Q: The monetary transmission mechanism that links monetary policy to GDP through real interest rates and investment spending is called the A. traditional interest-rate channel. B. Tobins' q theory. C. wealth effects. D. cash flow channel.

Q: An expansionary monetary policy increases net exports by ________ interest rates and ________ the value of the dollar. A. lowering nominal; decreasing B. lowering real; decreasing C. raising nominal; increasing D. raising real; increasing

Q: An expansionary monetary policy lowers the real interest rate, causing the domestic currency to ________, thereby ________ net exports. A. appreciate; raising B. appreciate; lowering C. depreciate; raising D. depreciate; lowering

Q: According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on A) business fixed investment. B) government expenditure. C) consumer nondurables. D) net exports.

Q: Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior. A. nominal; more; real B. real; less; nominal C. real; more; nominal D. market; more; real

Q: If monetary policy can influence ________ prices and conditions in ________ markets, then it can affect spending through channels other than the traditional interest-rate channel. A. asset; labor B. asset; credit C. commodity; labor D. commodity; credit

Q: To say that inflation is a monetary phenomenon seems to beg the question A. Why does inflationary monetary policy occur? B. Why do politicians seek reelection? C. Why is the Fed independent? D. Why does the U.S. Treasury print so much money?

Q: Complete Milton Friedman's famous proposition: "Inflation is always and everywhere a ________ phenomenon." A. monetary B. political C. policy D. budgetary

Q: The economist who proposed that, "Inflation is always and everywhere a monetary phenomenon" was A. John Maynard Keynes. B. John R. Hicks. C. Milton Friedman. D. Franco Modigliani.

Q: Activists of the policies believe that A. the self-correcting mechanism through wage and price adjustment is very slow. B. wages and prices are sticky. C. the government needs to pursue active policy to eliminate high unemployment when it develops. D. all of the above.

Q: The nonactivists who opposed the recent fiscal stimulus package argue that A. fiscal stimulus would take too long to work because of long implementation lags. B. fiscal stimulus might kick in after the economy had already recovered. C. fiscal stimulus could lead to increased volatility in inflation and economic activity. D. all of the above. E. none of the above.

Q: Nonactivists of the policies believe that A. wages and prices are very flexible. B. the self-correcting mechanism is very rapid. C. government action is unnecessary. D. all of the above.

Q: The time it takes for the policy actually to have an impact on the economy is called A. the data lag. B. the recognition lag. C. the legislative lag. D. the implementation lag. E. the effectiveness lag.

Q: Which of the following statements is CORRECT? A. If most shocks to the economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short run. B. If temporary supply shocks are more common, then a central bank must choose between stabilizing inflation and stabilizing output in the short run. C. Stabilizing economic activity in response to a temporary supply shock results in a larger deviation of inflation from the inflation target rather than a stabilization of inflation. D. all of the above.

Q: The time it takes for policy makers to change policy instruments once they have decided on the new policy is called A. the data lag. B. the recognition lag. C. the legislative lag. D. the implementation lag. E. the effectiveness lag.

Q: When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then A. aggregate demand curve shifts rightward. B. output will be at its potential. C. inflation rate will be higher. D. all of the above. E. both A and B.

Q: The time it takes to pass legislation to implement a particular policy is called A. the data lag. B. the recognition lag. C. the legislative lag. D. the implementation lag. E. the effectiveness lag.

Q: When the economy suffers a temporary negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to A. more stable economic activities. B. a large deviation of output from its potential. C. divine coincidence. D. both B and C.

Q: When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A. aggregate output drops in the short run. B. output will return to potential output over time. C. aggregate output is stabilized. D. all of the above. E. both A and B.

Q: When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will be unchanged. E. both B and D.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will not change. E. both B and C.

Q: When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A. aggregate demand curve shifts leftward. B. output will be unchanged. C. output will be at its potential. D. all of the above. E. both A and C.

Q: When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A. aggregate demand curve shifts leftward. B. aggregate demand curve shifts rightward. C. output will be unchanged. D. both A and C.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will not change. E. both A and B.

Q: If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then A. potential output falls. B. the long-run aggregate supply curve shifts leftward. C. the short-run aggregate supply curve shifts upward. D. all of the above.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be higher. B. output will be at its potential. C. output will be unchanged. D. inflation will be unchanged. E. both A and B.

Q: When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will be unchanged. E. both B and D.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be lower. B. output will be at its potential. C. output will be unchanged. D. inflation will be unchanged.

Q: When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then A. inflation will be lower. B. output will be at its potential. C. output will be lower. D. inflation will not change. E. both A and B.

Q: The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall A) shifted the aggregate demand curve to the right. B) shifted the aggregate demand curve to the left. C) shifted the aggregate supply curve to the right. D) shifted the aggregate supply curve to the left.

Q: Policy makers cannot achieve both price stability and economic activity stability when facing A. temporary supply shocks. B. permanent supply shocks. C. demand shocks. D. all of the above.

Q: To promote an economic expansion and an exit from the deflationary environment that the Japanese had been experiencing for the past fifteen years, the "Abenomics" aims atA. increasing inflation target.B. increasing inflation expectations.C. purchasing long-term bonds.D. all of the above.E. none of the above.

Q: The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply increases. A. easy; rise B. easy; fall C. tight; fall D. tight; rise

Q: With the followings is NOT one of the reasons why quantitative easing in and of itself will not necessarily be stimulative? A. Most of the resulting increase in the monetary base just flows into holdings of excess reserves. B. Banks just add to their holdings of excess reserves instead of making loans. C. The asset purchase program involves only the purchase of short-term government securities. D. The asset purchase program involves only the purchase of long-term government securities.

Q: As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.

Q: With the policy rate set at zero, the rise in expected inflation will lead to a ________ in the real interest rate, which will cause investment spending and aggregate output to ________. A. fall; rise B. fall; fall C. rise; rise D. rise; fall

Q: In the long run, following a combination of a negative demand shock and a temporary negative supply shock, A. both inflation and output return to the original long-run equilibrium values. B. inflation is permanently increased, while output returns to potential output. C. output returns to potential output, while inflation may be higher or lower than its initial value. D. inflation is permanently reduced, while output returns to potential output. E. None of the above.

Q: The Fed's quantitative easing is to purchase ________ to affect credit spreads. A. long-term securities B. short-term securities C. both long-term and short-term securities D. private assets

Q: The price of a barrel of oil doubled between 2007 and the middle of To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the Chinese experience? A. The worldwide decline in demand led to a collapse of Chinese exports. B. Instead of relying solely on the economy's self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly. C. The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S. D. All of the above. E. None of the above.

Q: The price of a barrel of oil doubled between 2007 and the middle of To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the United Kingdom's experience? A. The increase in the price of oil immediately shifted the AS curve to the left. B. The financial crisis did not take hold right away so the AD curve did not immediately shift. C. Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate. D. All of the above. E. None of the above.

Q: The price of a barrel of oil doubled between 2007 and the middle of To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued? A. The increase in the price of oil would have immediately shifted the AS curve to the right. B. The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right. C. Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run. D. All of the above. E. None of the above.

Q: Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.

Q: According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Q: The long-run rate of unemployment to which an economy always gravitates is the A. normal rate of unemployment. B. natural rate of unemployment. C. neutral rate of unemployment. D. inflationary rate of unemployment.

Q: According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999 had the effect of A. increasing aggregate output, lowering unemployment, and raising inflation. B. decreasing aggregate output, raising unemployment, and raising inflation. C. increasing aggregate output, lowering unemployment, and lowering inflation. D. decreasing aggregate output, raising unemployment, and lowering inflation.

Q: The aggregate supply curve shows the relationship between A. the level of inputs and aggregate output. B. the inflation rate and the level of inputs. C. the wage rate and the level of employment. D. the inflation rate and the level of aggregate output supplied.

Q: According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and 1978-1980 had the effect of A. increasing aggregate output, lowering unemployment, and raising the inflation. B. decreasing aggregate output, raising unemployment, and raising the inflation. C. increasing aggregate output, raising unemployment, and raising the inflation. D. decreasing aggregate output, raising unemployment, and lowering the inflation.

Q: The aggregate supply curve is the total quantity of A. raw materials offered for sale at different inflation rates. B. final goods and services offered for sale at the current inflation rate. C. final goods and services offered for sale at different inflation rates. D. intermediate and final goods and service offered for sale at different inflation rates.

Q: According to aggregate demand and supply analysis, America's involvement in the Vietnam War had the effect of A. increasing aggregate output, lowering unemployment, and raising the inflation. B. decreasing aggregate output, lowering unemployment, and lowering the inflation. C. increasing aggregate output, raising unemployment, and raising the inflation. D. decreasing aggregate output, raising unemployment, and lowering the inflation.

Q: Explain through the component parts of aggregate demand why the aggregate demand curve slopes down with respect to the inflation rate. Be sure to discuss two channels through which changes in inflation rates affect demand.

Q: Everything else held constant, which of the following does NOT cause aggregate demand to increase? A. an increase in net exports B. an increase in government spending C. an increase in taxes D. an increase in consumer optimism

Q: Everything else held constant, aggregate demand increases when A. net exports decrease. B. taxes increase. C. planned investment spending increases. D. the money supply decreases.

Q: Everything else held constant, aggregate demand increases when A. taxes are cut. B. government spending is reduced. C. animal spirits decrease. D. the money supply is reduced.

Q: The Baumol-Tobin analysis suggests that a decrease in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase

Q: Everything else held constant, a decrease in planned investment expenditure ________ aggregate ________. A. increases; demand B. decreases; demand C. decreases; supply D. increases; supply

Q: The Baumol-Tobin analysis suggests that an increase in the brokerage fee for buying and selling bonds will cause the demand for money to ________ and the demand for bonds to ________. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

Q: Everything else held constant, an increase in planned investment expenditure ________ aggregate ________. A. increases; demand B. decreases; demand C. decreases; supply D. increases; supply

Q: The Baumol-Tobin analysis suggests that A. velocity is relatively constant. B. the transactions component of the demand for money is negatively related to the level of interest rates. C. the speculative motive is nonexistent. D. velocity is unrelated to the transactions motive.

Q: Everything else held constant, a decrease in net exports ________ aggregate ________. A. increases; demand B. decreases; demand C. decreases; supply D. increases; supply

Q: In the Baumol-Tobin model, given that total costs for an individual equals + , where T0 = monthly income, b = brokerage costs, and C = amount raised from each bond transaction, derive the so-called square root rule.

Q: Everything else held constant, an increase in net exports ________ aggregate ________. A. increases; demand B. decreases; demand C. decreases; supply D. increases; supply

Q: Comparing Tobin's model of the speculative demand for money with Keynesian speculative demand A. both models imply that individuals hold only money or only bonds. B. the Keynesian model implies individuals diversify their asset holdings, while the Tobin model predicts that individuals hold only money or only bonds. C. the Tobin model implies individuals diversify their asset holdings, while the Keynesian model predicts that individuals hold only money or only bonds. D. both models imply that individuals diversify their asset holdings.

Q: If there are economies of scale in the transactions demand for money, as income increases, money demand A. increases proportionately. B. increases less than proportionately. C. increases more than proportionately. D. does not change.

Q: The absence of money illusion means that A. as real income doubles, the demand for money doubles. B. as interest rates double, the demand for money doubles. C. as the money supply doubles, the demand for money doubles. D. as the price level doubles, the demand for money doubles.

Q: Describe what the liquidity trap is. Explain how it can be problematic for monetary policymakers.

Q: The Keynesian demand for real balances can be expressed as A. Md = f(i,Y). B. Md/P = f(i). C. Md/P = f(Y). D. Md/P = f(i,Y).