Question 1

If the nominal rate of interest is 4.5%, the rate of inflation is 2%, and the risk premium is 1.5%, the risk-free rate is:

Accepted Answer

A) 3.5%. 
B) 1.5%. 
C) 2.5%. 
D) 1%. 
A) 3.5%. 
B) 1.5%. 
C) 2.5%. 
D) 1%.

Question 2

What is the relationship between lower interest rates and aggregate expenditure?

Accepted Answer

A) Lower interest rates raise consumption and investment but lower government purchases and net exports, and thus they have an indeterminate effect on aggregate expenditure. 
B) Lower interest rates boost aggregate expenditure. 
C) Aggregate expenditure is not affected by changes in real interest rates. 
D) Lower interest rates cause aggregate expenditure to fall. 
A) Lower interest rates raise consumption and investment but lower government purchases and net exports, and thus they have an indeterminate effect on aggregate expenditure. 
B) Lower interest rates boost aggregate expenditure. 
C) Aggregate expenditure is not affected by changes in real interest rates. 
D) Lower interest rates cause aggregate expenditure to fall.

Question 3

If potential GDP is $17.65 trillion and actual GDP is $15.25 trillion, what is the output gap?

Accepted Answer

The answer of If potential GDP is $17.65 trillion and...

Question 4

If Y > AE:

Accepted Answer

A) there will be a build-up of inventories in the economy. 
B) the stock of inventories will fall in the economy. 
C) managers will respond by ramping up production. 
D) the economy has surpassed potential GDP. 
A) there will be a build-up of inventories in the economy. 
B) the stock of inventories will fall in the economy. 
C) managers will respond by ramping up production. 
D) the economy has surpassed potential GDP.

Question 5

For each of the following cases, draw an IS curve to show how each of the factors affects the IS curve.
(a) The United States enters into a new trade agreement to increase exports to partner nations.
(b) The government widens the income tax brackets to effectively lower taxes.
(c) The government institutes a larger exemption from taxes for both single and married taxpayers.

Accepted Answer

The answer of For each of the following cases, draw...

Question 6

Which of the following changes could create a more positive output gap in an economy?
(i) The GDP of an important trading partner falls.
(ii) Defense spending increases.
(iii) Consumer wealth increases.
(iv) The risk premium decreases.

Accepted Answer

A) (i) only 
B) (i), (ii), and (iii) 
C) (iii) and (iv) 
D) (ii), (iii), and (iv) 
A) (i) only 
B) (i), (ii), and (iii) 
C) (iii) and (iv) 
D) (ii), (iii), and (iv)

Question 7

In the IS-MP framework, starting from macroeconomic equilibrium at a 0% output gap:
(a) a fall in the real interest rate will lead to _____ (a recession, economic growth).
(b) a fall in the real interest rate will lead to _____ (a negative output gap, a positive output gap).
(c) a fall in the real interest rate will lead to _____ (lower sales forecasts, higher sales forecasts).

Accepted Answer

The answer of In the IS-MP framework, starting from macroeconomic...

Question 8

The U.S. imposed a tariff on solar panels produced in China. How did this affect China's IS curve?

Accepted Answer

A) Net exports decreased, leading to a left shift of the IS curve. 
B) Net exports increased, leading to a right shift of the IS curve. 
C) Government expenditure decreased, leading to a left shift of the IS curve. 
D) Interest rates fell, leading to a left shift in the IS curve. 
A) Net exports decreased, leading to a left shift of the IS curve. 
B) Net exports increased, leading to a right shift of the IS curve. 
C) Government expenditure decreased, leading to a left shift of the IS curve. 
D) Interest rates fell, leading to a left shift in the IS curve.

Question 9

A fall in the real interest rate causes:

Accepted Answer

A) a right shift of the IS curve. 
B) movement up and to the left along the same IS curve. 
C) movement down and to the right along the same IS curve. 
D) a left shift of the IS curve. 
A) a right shift of the IS curve. 
B) movement up and to the left along the same IS curve. 
C) movement down and to the right along the same IS curve. 
D) a left shift of the IS curve.

Question 10

If potential GDP is $19.04 trillion and actual GDP is $20.07 trillion, the output gap is:

Accepted Answer

A) 1.03%. 
B) 5.13%. 
C) 5.41%. 
D) -1.03%. 
A) 1.03%. 
B) 5.13%. 
C) 5.41%. 
D) -1.03%.

Question 11

Consumption is $151 billion, government expenditure is $70.2 billion, investment is $65.8 billion, and net exports amount to -$21 billion. What is aggregate expenditure in this economy?

Accepted Answer

A) $308 billion 
B) $287 billion 
C) $266 billion 
D) $151 billion 
A) $308 billion 
B) $287 billion 
C) $266 billion 
D) $151 billion

Question 12

The IS curve performs the function of illustrating the relationship between:

Accepted Answer

A) lower interest rates and higher real GDP and thus more positive output gaps. 
B) higher interest rates and higher real GDP and thus more negative output gaps. 
C) lower prices in the economy and higher real GDP. 
D) lower incomes and lower aggregate expenditures in the economy. 
A) lower interest rates and higher real GDP and thus more positive output gaps. 
B) higher interest rates and higher real GDP and thus more negative output gaps. 
C) lower prices in the economy and higher real GDP. 
D) lower incomes and lower aggregate expenditures in the economy.

Question 13

A good proxy for the risk-free interest rate is the interest rate on a:

Accepted Answer

A) loan to the U.S. government. 
B) loan to a member of the public who has a good credit rating. 
C) corporate bond. 
D) junk bond. 
A) loan to the U.S. government. 
B) loan to a member of the public who has a good credit rating. 
C) corporate bond. 
D) junk bond.

Question 14

In 2008, the Federal Reserve committed funds to stabilize the banking system and lower the risk premium in the economy. Which of the following shows the correct effect on the IS-MP framework?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 15

How do interest rates affect government purchases in the economy?

Accepted Answer

A) Higher interest rates cause the government to increase government expenditure. 
B) Higher interest rates increase the government's debt repayments, and so the government has to spend more money to match the debt. 
C) Lower interest rates reduce the government's debt repayments, and this frees up money for government expenditure. 
D) Lower interest rates cause the government to lower government expenditure. 
A) Higher interest rates cause the government to increase government expenditure. 
B) Higher interest rates increase the government's debt repayments, and so the government has to spend more money to match the debt. 
C) Lower interest rates reduce the government's debt repayments, and this frees up money for government expenditure. 
D) Lower interest rates cause the government to lower government expenditure.

Question 16

When the perceived financial risk falls in an economy, the:

Accepted Answer

A) lenders become more risk averse. 
B) TED spread rises. 
C) TED spread falls. 
D) risk premiums rise. 
A) lenders become more risk averse. 
B) TED spread rises. 
C) TED spread falls. 
D) risk premiums rise.

Question 17

In September 2008, the stock market fell sharply and continued to perform poorly due to the financial crisis. How did this change impact GDP in the economy?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 18

Which of the following cause(s) shifts in the MP curve?

Accepted Answer

A) changes in monetary policy 
B) consumer pessimism 
C) business optimism 
D) spending shocks 
A) changes in monetary policy 
B) consumer pessimism 
C) business optimism 
D) spending shocks

Question 19

Assume that your current actual GDP is at potential GDP. Explain how each of the following changes affects the output gap in an economy.
(a) The stock market experiences a decline, which reduces wealth.
(b) Government spending rises.
(c) The U.S. dollar depreciates.

Accepted Answer

The answer of Assume that your current actual GDP is...

Question 20

Refer to the table shown here. What is the level of aggregate expenditure in the economy?
$$\begin{array} { | l | r | } 
\hline \text { Consumption } & \multicolumn{1}{|c|} { \$ 179 \text { billion } } \
\hline \text { Investment } & \$ 113 \text { billion } \
\hline \text { Government spending } & \$ 81 \text { billion } \
\hline \text { Net Exports } & - \$ 36 \text { billion } \
\hline
\end{array}$$

Accepted Answer

A) $409 billion 
B) $337 billion 
C) $373 billion 
D) $179 billion 
A) $409 billion 
B) $337 billion 
C) $373 billion 
D) $179 billion

Exam 30: IS-MP Analysis: Interest Rates and Output

If the nominal rate of interest is 4.5%, the rate of inflation is 2%, and the risk premium is 1.5%, the risk-free rate is:

What is the relationship between lower interest rates and aggregate expenditure?

If potential GDP is $17.65 trillion and actual GDP is $15.25 trillion, what is the output gap?

If Y > AE:

Which of the following changes could create a more positive output gap in an economy? (i) The GDP of an important trading partner falls. (ii) Defense spending increases. (iii) Consumer wealth increases. (iv) The risk premium decreases.

The U.S. imposed a tariff on solar panels produced in China. How did this affect China's IS curve?

A fall in the real interest rate causes:

If potential GDP is $19.04 trillion and actual GDP is $20.07 trillion, the output gap is:

Consumption is $151 billion, government expenditure is $70.2 billion, investment is $65.8 billion, and net exports amount to -$21 billion. What is aggregate expenditure in this economy?

The IS curve performs the function of illustrating the relationship between:

A good proxy for the risk-free interest rate is the interest rate on a:

In 2008, the Federal Reserve committed funds to stabilize the banking system and lower the risk premium in the economy. Which of the following shows the correct effect on the IS-MP framework?

How do interest rates affect government purchases in the economy?

When the perceived financial risk falls in an economy, the:

In September 2008, the stock market fell sharply and continued to perform poorly due to the financial crisis. How did this change impact GDP in the economy?

Which of the following cause(s) shifts in the MP curve?

Assume that your current actual GDP is at potential GDP. Explain how each of the following changes affects the output gap in an economy. (a) The stock market experiences a decline, which reduces wealth. (b) Government spending rises. (c) The U.S. dollar depreciates.

Refer to the table shown here. What is the level of aggregate expenditure in the economy? Consumption \multicolumn 1 |c| \ 179 billion Investment \ 113 billion Government spending \ 81 billion Net Exports -\ 36 billion

The Core Principles of Economics

Demand: Thinking Like a Buyer

Supply: Thinking Like a Seller

Equilibrium: Where Supply Meets Demand

Elasticity: Measuring Responsiveness

When Governments Intervene in Markets

Welfare and Efficiency

Gains From Trade

International Trade

Externalities and Public Goods

Labor Demand and Supply

Wages, Workers, and Management

Inequality, Social Insurance, and Redistribution

Market Structure and Market Power

Entry, Exit, and Long-Run Profitability

Business Strategy

Sophisticated Pricing Strategies

Game Theory and Strategic Choices

Decisions Involving Uncertainty

Decisions With Private Information

Sizing up the Economy Using Gdp

Economic Growth

Unemployment

Inflation and Money

Consumption and Saving

Investment

The Financial Sector

International Finance and the Exchange Rate

Business Cycles

Phillips Curve

The Fed Model: Linking Interest Rates, Output, and Inflation

Aggregate Demand and Aggregate Supply

Monetary Policy

Government Spending, Taxes, and Fiscal Policy

Appendix: Aggregate Expenditure and the Multiplier

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