Question 1

The housing bubble and bust was partly caused by the Fed's policy of keeping low interest rates.

Accepted Answer

A) True 
 B)False

Question 2

The long-run effect of increased government purchases is that the sum of consumption,investment,and net exports will be lower than it would be in the baseline case.

Accepted Answer

A) True 
 B)False

Question 3

A change in the price of a key commodity such as oil,usually because of a shortage,that causes a shift in the inflation adjustment line is known as a

Accepted Answer

A) commodity shock. 
B) price shock. 
C) price revamping. 
D) disinflation. 
E) None of these 
A) commodity shock. 
B) price shock. 
C) price revamping. 
D) disinflation. 
E) None of these

Question 4

The long run is usually

Accepted Answer

A) ten years or more. 
B) two to three years. 
C) one to two years. 
D) four to five years or more. 
E) one year. 
A) ten years or more. 
B) two to three years. 
C) one to two years. 
D) four to five years or more. 
E) one year.

Question 5

The long-run income effect (the effect of real GDP changes on spending)of decreased government purchases is that consumption

Accepted Answer

A) is higher. 
B) is the same,investment is higher,and net exports are lower. 
C) and net exports are the same. 
D) and net exports are lower. 
E) is higher,and investment is higher. 
A) is higher. 
B) is the same,investment is higher,and net exports are lower. 
C) and net exports are the same. 
D) and net exports are lower. 
E) is higher,and investment is higher.

Question 6

The long-run interest rate effect of decreased government purchases is that

Accepted Answer

A) consumption is lower,and investment is higher. 
B) consumption and net exports are the same,and investment is higher. 
C) investment is higher. 
D) consumption,investment,and net exports are all higher. 
E) consumption and net exports are higher. 
A) consumption is lower,and investment is higher. 
B) consumption and net exports are the same,and investment is higher. 
C) investment is higher. 
D) consumption,investment,and net exports are all higher. 
E) consumption and net exports are higher.

Question 7

The short run is usually

Accepted Answer

A) less than half a year. 
B) one to three years. 
C) two to three years. 
D) one year. 
E) four to five years. 
A) less than half a year. 
B) one to three years. 
C) two to three years. 
D) one year. 
E) four to five years.

Question 8

In the short run,when government purchases decrease,real GDP falls by more than the change in government purchases because

Accepted Answer

A) prices increase. 
B) taxes increase. 
C) consumption decreases. 
D) investment decreases. 
E) taxes decrease. 
A) prices increase. 
B) taxes increase. 
C) consumption decreases. 
D) investment decreases. 
E) taxes decrease.

Question 9

If there is a sharp increase in oil prices,in the short run

Accepted Answer

A) consumption and investment will fall. 
B) consumption will fall,investment will increase,and net exports will fall. 
C) consumption,investment,and net exports will stay constant. 
D) consumption will fall while investment and net exports will stay constant. 
E) consumption will fall,net exports will increase,and investment will stay constant. 
A) consumption and investment will fall. 
B) consumption will fall,investment will increase,and net exports will fall. 
C) consumption,investment,and net exports will stay constant. 
D) consumption will fall while investment and net exports will stay constant. 
E) consumption will fall,net exports will increase,and investment will stay constant.

Question 10

According to the spending allocation model,what happens if there is an increase in the share of GDP allocated to government purchases? What happens to the other spending shares?

According to the economic fluctuations model,what happens if there is an increase in government purchases as a share of GDP? What happens to the other spending shares?

Are the two models the same? What additional insight does the economic fluctuations model introduce?

Accepted Answer

According to the spending allocation mod

Question 11

Exhibit 25-2  
-According to Exhibit 25-2,which point best represents where the U.S.economy was in mid-2007?

Accepted Answer

A) F 
B) C 
C) E 
D) G 
E) B 
A) F 
B) C 
C) E 
D) G 
E) B

Question 12

The long-run effect of a decrease in government purchases is represented by a rightward shift of the aggregate demand curve as interest rates decline and spending increases.

Accepted Answer

A) True 
 B)False

Question 13

Suppose exports increase.According to the shares of spending model from Chapter 19,what would happen to interest rates,consumption,investment,and net exports in the long run? According to this chapter's model,which is made up of the aggregate demand curves and the inflation adjustment line,what will happen to interest rates,consumption,investment,and net exports in the long run?

Accepted Answer

According to the model in Chapter 19,an

Question 14

Discuss why the Fed may in some cases need to cause a small recession to reduce inflation in the economy.Hint: Think about how firms set their prices.

Accepted Answer

Firms make pricing decisions based on th

Question 15

Exhibit 25-3  
-PART I Use the data from Exhibit 25-3 to graph the aggregate demand curve:
(A)Suppose the current inflation rate is 3.5 percent and potential GDP is $6,900 billion.Draw the inflation adjustment line.What is the current deviation of real GDP from potential?
(B)In the long run,what will the inflation rate be if there is no change in economic policy? Explain how this adjustment will take place.
PART II
Suppose that after the long-run adjustment back to potential,the Fed changes its policy rule so the inflation target is 3.5 percent and potential GDP remains at $6,900 billion.Use the data to show the shift in the aggregate demand/inflation curve.
(A)What type of monetary policy is the Fed undertaking?
(B)How does the Fed accomplish this goal? What is the response of investment and net exports?
(C)In the short run,what is the deviation from potential GDP?
(D)How will the inflation adjustment line adjust in the medium and long run? Explain how this occurs.

Accepted Answer

@#LAT-DLM&
(A)The gap between real and potential G

Question 16

Which of the following best depicts the short-run effect of a price shock due to a large increase in oil prices?

Accepted Answer

A) The IA line shifts up,causing interest rates to rise,which causes the AD curve to shift to the right. 
B) The IA line shifts up,causing interest rates to rise,which causes a leftward movement along the AD curve. 
C) The AD curve shifts to the left,causing interest rates to rise,which causes the IA line to shift down. 
D) The IA line shifts down,causing interest rates to rise,which causes a leftward movement along the AD curve. 
E) The IA line shifts up,causing interest rates to rise,which causes the AD curve to shift to the left. 
A) The IA line shifts up,causing interest rates to rise,which causes the AD curve to shift to the right. 
B) The IA line shifts up,causing interest rates to rise,which causes a leftward movement along the AD curve. 
C) The AD curve shifts to the left,causing interest rates to rise,which causes the IA line to shift down. 
D) The IA line shifts down,causing interest rates to rise,which causes a leftward movement along the AD curve. 
E) The IA line shifts up,causing interest rates to rise,which causes the AD curve to shift to the left.

Question 17

When government purchases decrease,the short-run effect can be described as the period of time when

Accepted Answer

A) there is no spending balance. 
B) inflation is constant. 
C) real GDP and inflation are adjusting to their new long-run levels. 
D) real GDP is below potential GDP. 
E) the inflation adjustment line has not reached the new intersection of aggregate demand at the level of potential GDP. 
A) there is no spending balance. 
B) inflation is constant. 
C) real GDP and inflation are adjusting to their new long-run levels. 
D) real GDP is below potential GDP. 
E) the inflation adjustment line has not reached the new intersection of aggregate demand at the level of potential GDP.

Exam 25: Using the Economic Fluctuations Model

The housing bubble and bust was partly caused by the Fed's policy of keeping low interest rates.

The long-run effect of increased government purchases is that the sum of consumption,investment,and net exports will be lower than it would be in the baseline case.

A change in the price of a key commodity such as oil,usually because of a shortage,that causes a shift in the inflation adjustment line is known as a

The long run is usually

The long-run income effect (the effect of real GDP changes on spending)of decreased government purchases is that consumption

The long-run interest rate effect of decreased government purchases is that

The short run is usually

In the short run,when government purchases decrease,real GDP falls by more than the change in government purchases because

If there is a sharp increase in oil prices,in the short run

Exhibit 25-2 -According to Exhibit 25-2,which point best represents where the U.S.economy was in mid-2007?

The long-run effect of a decrease in government purchases is represented by a rightward shift of the aggregate demand curve as interest rates decline and spending increases.

Discuss why the Fed may in some cases need to cause a small recession to reduce inflation in the economy.Hint: Think about how firms set their prices.

Which of the following best depicts the short-run effect of a price shock due to a large increase in oil prices?

When government purchases decrease,the short-run effect can be described as the period of time when

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors,price Ceilings,and Elasticity

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Interaction of People in Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, transfers, and Income Distribution

Public Goods, externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

The Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth and Globalization

International Trade

International Finance

Reading,understanding,and Creating Graphs

Consumer Theory With Indifference Curves

Producer Theory With Isoquants

Present Discounted Value

The Miracle of Compound Growth

Deriving the Growth Accounting Formula

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

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