Question 1

Explain the determinants of aggregate private spending.

Accepted Answer

Aggregate private spending (A) equals consumption (C) plus investment (I). So, A is a function of current income, future expected income, current taxes, future expected taxes, current interest rates, and future expected interest rates.

Question 2

Suppose the central bank implements monetary expansion in the current period and is expected to continue this monetary expansion in the future. Use the IS- LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Accepted Answer

In the current period, the LM curve will shift down causing the current interest rate to fall and current output to rise. The expectation that this will continue will cause individuals to expect lower future rates and higher future output. The lower future rates will raise current consumption and current investment. The higher future output will do the same. So, we will also see a rightward shift in the current IS curve. This will tend to raise current interest rate and current output as well.

Question 3

Assume individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose current government spending increases and that individuals expect future government spending to increase. Given this information, we know with certainty that:

Accepted Answer

A)  future expected output will not change. 
B)  current output and the current interest rate will both increase. 
C)  current output will not change. 
D)  future expected output will decrease. 
E)  the future expected interest rate will decrease. 
A)  future expected output will not change. 
B)  current output and the current interest rate will both increase. 
C)  current output will not change. 
D)  future expected output will decrease. 
E)  the future expected interest rate will decrease. D

Question 4

Adaptive expectations assume that individuals:

Accepted Answer

A)  base predictions on random events (i.e., animal spirits). 
B)  make predictions based on the past behaviour of the economy. 
C)  form their predictions of macroeconomic variables randomly. 
D)  can accurately predict the future. 
E)  use all available information in predicting the future. 
A)  base predictions on random events (i.e., animal spirits). 
B)  make predictions based on the past behaviour of the economy. 
C)  form their predictions of macroeconomic variables randomly. 
D)  can accurately predict the future. 
E)  use all available information in predicting the future.

Question 5

The IS curve becomes steeper when:

Accepted Answer

A)  government spending is relatively small. 
B)  changes in the current real interest rate cause small changes in current demand. 
C)  the income tax rate in the current period is relatively small. 
D)  changes in the current nominal interest rate cause small changes in current demand. 
E)  current changes in the real interest rate cause large changes in current real output. 
A)  government spending is relatively small. 
B)  changes in the current real interest rate cause small changes in current demand. 
C)  the income tax rate in the current period is relatively small. 
D)  changes in the current nominal interest rate cause small changes in current demand. 
E)  current changes in the real interest rate cause large changes in current real output.

Question 6

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect the central bank to pursue monetary expansion in the future. Given this information, we know with certainty that:

Accepted Answer

A)  the current interest rate effects are ambiguous. 
B)  current output will decrease. 
C)  the current output effects are ambiguous. 
D)  current output and the current interest rate will both increase. 
E)  the current interest rate will decrease. 
A)  the current interest rate effects are ambiguous. 
B)  current output will decrease. 
C)  the current output effects are ambiguous. 
D)  current output and the current interest rate will both increase. 
E)  the current interest rate will decrease.

Question 7

"Animal spirits" refers to:

Accepted Answer

A)  the stubborn refusal of many economic decision- makers to use rational expectations. 
B)  the impact of tax- evasion on the budget deficit. 
C)  the often- observed central banks' refusal to cooperate with the government in setting its monetary policy. 
D)  movements in investment that cannot be explained by changes in current variables. 
E)  an exotic alcoholic drink favoured by Wall Street traders. 
A)  the stubborn refusal of many economic decision- makers to use rational expectations. 
B)  the impact of tax- evasion on the budget deficit. 
C)  the often- observed central banks' refusal to cooperate with the government in setting its monetary policy. 
D)  movements in investment that cannot be explained by changes in current variables. 
E)  an exotic alcoholic drink favoured by Wall Street traders.

Question 8

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:

Accepted Answer

A)  an increase in the expected future interest rate and no change in expected future output. 
B)  an increase in the expected future interest rate and an increase in expected future output. 
C)  an increase in the expected future interest rate and a decrease in expected future output. 
D)  an increase in the expected future interest rate and an ambiguous effect on expected future output. 
E)  an increase in the expected future interest rate and a constant expected future output. 
A)  an increase in the expected future interest rate and no change in expected future output. 
B)  an increase in the expected future interest rate and an increase in expected future output. 
C)  an increase in the expected future interest rate and a decrease in expected future output. 
D)  an increase in the expected future interest rate and an ambiguous effect on expected future output. 
E)  an increase in the expected future interest rate and a constant expected future output.

Question 9

Assume individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:

Accepted Answer

A)  an increase in the expected future interest rate and an increase in expected future output. 
B)  an increase in the expected future interest rate and a reduction in expected future output. 
C)  an increase in the expected future interest rate and no change in expected future output. 
D)  an increase in the expected future interest rate and an ambiguous effect on expected future output. 
E)  an increase in the expected future interest rate and a constant expected future output. 
A)  an increase in the expected future interest rate and an increase in expected future output. 
B)  an increase in the expected future interest rate and a reduction in expected future output. 
C)  an increase in the expected future interest rate and no change in expected future output. 
D)  an increase in the expected future interest rate and an ambiguous effect on expected future output. 
E)  an increase in the expected future interest rate and a constant expected future output.

Question 10

Compare the following three ways to model expectations: animal spirits, adaptive expectations, and rational expectations.

Accepted Answer

Animal spirits assumed that expectations

Question 11

Which of the following will cause a rightward shift of the IS curve?

Accepted Answer

A)  A decrease in expected future output. 
B)  An increase in current taxes. 
C)  An increase in expected future real interest rates. 
D)  A decrease in expected future taxes. 
E)  A decrease in government spending. 
A)  A decrease in expected future output. 
B)  An increase in current taxes. 
C)  An increase in expected future real interest rates. 
D)  A decrease in expected future taxes. 
E)  A decrease in government spending.

Question 12

A decrease in the expected future interest rate will cause:

Accepted Answer

A)  a rightward shift of the IS curve. 
B)  an upward shift of the LM curve. 
C)  the LM curve to become steeper. 
D)  a downward shift of the LM curve. 
E)  the IS curve to become flatter. 
A)  a rightward shift of the IS curve. 
B)  an upward shift of the LM curve. 
C)  the LM curve to become steeper. 
D)  a downward shift of the LM curve. 
E)  the IS curve to become flatter.

Question 13

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. A permanent decrease in the interest rate, with no other policy change implemented or anticipated, will most likely cause:

Accepted Answer

A)  an increase in future output and an increase in the future interest rate. 
B)  an increase in the current interest rate. 
C)  an unknown effect on the current interest rate. 
D)  Both A and B. 
E)  Both B and C. 
A)  an increase in future output and an increase in the future interest rate. 
B)  an increase in the current interest rate. 
C)  an unknown effect on the current interest rate. 
D)  Both A and B. 
E)  Both B and C.

Question 14

Suppose individuals expect that interest rates will fall in the future. Also assume that the RBA wants to prevent any change in current output. Given this goal of the RBA, the RBA should implement a policy in the current period that:

Accepted Answer

A)  shifts the IS curve leftward. 
B)  shifts the IS curve leftward and the LM curve upward. 
C)  shifts the LM curve downward. 
D)  shifts the IS curve rightward. 
E)  shifts the LM curve upward. 
A)  shifts the IS curve leftward. 
B)  shifts the IS curve leftward and the LM curve upward. 
C)  shifts the LM curve downward. 
D)  shifts the IS curve rightward. 
E)  shifts the LM curve upward.

Question 15

Suppose there is a decrease in the expected future interest rate. This will cause which of the following to occur?

Accepted Answer

A)  The IS curve to shift left in the current period. 
B)  The IS curve to shift right in the current period. 
C)  The LM curve to shift up in the current period. 
D)  The LM curve to shift down in the current period. 
E)  Both the IS and LM curves to shift right in the current period. 
A)  The IS curve to shift left in the current period. 
B)  The IS curve to shift right in the current period. 
C)  The LM curve to shift up in the current period. 
D)  The LM curve to shift down in the current period. 
E)  Both the IS and LM curves to shift right in the current period.

Question 16

What is quantitative easing?

Accepted Answer

A)  The central bank decreasing money supply when interest rates are negative. 
B)  The central bank decreasing money supply at the zero interest rate bound. 
C)  The central bank increasing money supply at the zero interest rate bound. 
D)  The central bank increasing money supply when interest rates are negative. 
E)  The central bank increasing interest rates at the zero money supply bound. 
A)  The central bank decreasing money supply when interest rates are negative. 
B)  The central bank decreasing money supply at the zero interest rate bound. 
C)  The central bank increasing money supply at the zero interest rate bound. 
D)  The central bank increasing money supply when interest rates are negative. 
E)  The central bank increasing interest rates at the zero money supply bound.

Question 17

Suppose there is an increase in expected future taxes. This will cause which of the following to occur?

Accepted Answer

A)  The IS curve to shift left in the current period. 
B)  The IS curve to shift right in the current period. 
C)  The LM curve to shift up in the current period. 
D)  The LM curve to shift down in the current period. 
E)  Both the IS and LM curves shift left in the current period. 
A)  The IS curve to shift left in the current period. 
B)  The IS curve to shift right in the current period. 
C)  The LM curve to shift up in the current period. 
D)  The LM curve to shift down in the current period. 
E)  Both the IS and LM curves shift left in the current period.

Question 18

Changes in future expected interest rates can affect current consumption. Suppose individuals expect future interest rates to increase. Consumption will change as a result of this expectation when which of the following change?

Accepted Answer

A)  Human wealth. 
B)  The value of bonds. 
C)  The value of stocks. 
D)  All of the above. 
E)  None of the above. 
A)  Human wealth. 
B)  The value of bonds. 
C)  The value of stocks. 
D)  All of the above. 
E)  None of the above.

Question 19

Explain whether a policy that results in a larger budget deficit in the current period can lead to a reduction in current output.

Accepted Answer

In the short run, an increase in budget

Question 20

Explain what effect an increase in future expected output will have on the IS curve and LM curve in the current period.

Accepted Answer

An increase in future expected output (Y

Exam 17: Expectations, Output and Policy

Explain the determinants of aggregate private spending.

Suppose the central bank implements monetary expansion in the current period and is expected to continue this monetary expansion in the future. Use the IS- LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Adaptive expectations assume that individuals:

The IS curve becomes steeper when:

"Animal spirits" refers to:

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:

Assume individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:

Compare the following three ways to model expectations: animal spirits, adaptive expectations, and rational expectations.

Which of the following will cause a rightward shift of the IS curve?

A decrease in the expected future interest rate will cause:

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. A permanent decrease in the interest rate, with no other policy change implemented or anticipated, will most likely cause:

Suppose individuals expect that interest rates will fall in the future. Also assume that the RBA wants to prevent any change in current output. Given this goal of the RBA, the RBA should implement a policy in the current period that:

Suppose there is a decrease in the expected future interest rate. This will cause which of the following to occur?

What is quantitative easing?

Suppose there is an increase in expected future taxes. This will cause which of the following to occur?

Changes in future expected interest rates can affect current consumption. Suppose individuals expect future interest rates to increase. Consumption will change as a result of this expectation when which of the following change?

Explain whether a policy that results in a larger budget deficit in the current period can lead to a reduction in current output.

Explain what effect an increase in future expected output will have on the IS curve and LM curve in the current period.

A Tour of the World

A Tour of the Book

The Goods Market

Financial Markets

Goods and Financial Markets: the Islm Model

The Labour Market

Putting All Markets Together: the Asad Model

The Phillips Curve, the Natural Rate of Unemployment and Inflation

The Crisis

The Facts of Growth

Saving, Capital Accumulation and Output

Technological Progress and Growth

Technological Progress: the Short, the Medium and the Long Run

Expectations: the Basic Tools

Financial Markets and Expectations

Expectations, Consumption and Investment

Openness in Goods and Financial Markets

The Goods Market

Output, the Interest Rate and the Exchange Rate

Exchange Rate Regimes

Should Policy-Makers Be Restrained

Fiscal Policy: a Summing up

Monetary Policy: a Summing up

Epilogue: the Story of Macroeconomics

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