Deck 9: The Economic Fluctuations Model

Question 1

It would be impossible to deduce the long-run neutrality of monetary policy without appealing to

A) the negative correlation between interest rates and the demand for money.
B) the negative correlation between investment and the interest rate.
C) the positive correlation between the price level and the demand for money.
D) the positive multiplier relationship between investment and GDP.
E) all of the above.

Answer 1

all of the above.

Question 2

Suppose that the expectations-augmented Phillips curve were operable with the expected rate of inflation equaling last year's rate; and let each 3-point reduction in GDP below its potential lower inflation by 1 point. Reducing inflation from 10 to 8 percent in one year would then require

A) unemployment to run at around 6 percent for the entire year.
B) unemployment to run at around 7 percent for the entire year.
C) unemployment to run at around 8 percent for the entire year.
D) unemployment to run at around 9 percent for the entire year.
E) unemployment to run in excess of 10 percent for an entire year.

Answer 2

unemployment to run at around 8 percent for the entire year.

Question 3

It is a logical extension of the Phillips curve relationship between inflation and the difference between actual and potential GDP that

A) the inflation rate and the unemployment rate should be positively correlated.
B) the inflation rate and the natural rate of unemployment should be positively correlated.
C) the inflation rate and the unemployment rate should be negatively correlated.
D) the inflation rate and the natural rate of unemployment should be negatively correlated.
E) none of the above.

Answer 3

the inflation rate and the unemployment rate should be negatively correlated.

Question 4

Actual GDP will fall short of potential GDP in the short run if

A) the aggregate supply schedule falls short of actual GDP at the full employment level.
B) existing prices correspond to a level of aggregate demand in excess of potential GDP.
C) existing prices correspond to a level of aggregate demand below potential GDP.
D) the existing capital stock produces aggregate demand that is smaller than the corresponding aggregate supply.
E) none of the above.

Question 5

In forming their expectations about inflation, individuals can be influenced by

A) the current rate of inflation.
B) existing wage settlements.
C) anticipated action by the Federal Reserve System.
D) rates of inflation experienced in the recent past.
E) all of the above.

Question 6

The expectations-augmented Phillips curve identifies several ways to reduce inflation. They include

A) running the economy near its potential.
B) working to lower expected inflation by policy and encouragement.
C) reducing the sensitivity of prices to gaps between actual and potential GDP by rigidly controlling prices and wages.
D) eliminating a government spending surplus whenever actual GDP falls short of potential GDP.
E) none of the above.

Question 7

The price adjustments of a dynamic model are founded on the intuition that

A) upward pressure should be exerted on prices if actual GDP exceeds potential GDP.
B) downward pressure should be exerted on prices if actual GDP falls short of potential GDP.
C) downward pressure should be exerted on prices if unemployment in excess of the natural rate puts downward pressure on wages.
D) upward pressure should be exerted on prices if employment above potential employment portends upward pressure on wages.
E) all of the above.

Question 8

Including expected inflation in the price adjustment model

A) negates the purported long-run neutrality of monetary policy, because expectations are altered by Fed behavior.
B) negates the purported long-run neutrality of fiscal policy, because expectations are altered by the behavior of the president and the Congress.
C) causes the path that displays the neutrality of either fiscal or monetary policy only to cycle rather than converge directly to the status quo.
D) diminishes the importance of outside shocks to the long-run neutrality of fiscal but not monetary policy.
E) none of the above.

Question 9

Consider an expectations-augmented Phillips curve with the expected rate of inflation set equal to last year's rate. One way for inflation to come in below expectations for the current year is for

A) the economy to run above potential, so that greater supply can lower prices.
B) the economy to run at potential, so that planned investment can cause the economy to grow out of the inflation.
C) the economy to run a recession, so that unemployment and output can fall short of potential and put downward pressure on prices.
D) the government to impose strict wage and price controls limiting inflation to 50 percent of last year's rate.
E) c but only if accompanied by d.

Question 10

Fiscal policy is neutral in the long run because

A) the stimulus translates into contractionary monetary policy that dampens investment and negates the policy.
B) the expansion of GDP causes interest rates to climb and thereby lowers investment and cancels the stimulus.
C) increases in government spending always cause higher deficits, public outrage at the debt, and subsequent higher taxes or program rollbacks that cancel the initial stimulus.
D) the political business cycle is manipulated to try to produce recovery from recession during election years.
E) none of the above.

Question 11

An increase in expected inflation would cause a Phillips curve drawn with the inflation rate measured along the vertical axis to

A) shift to the right by an amount equal to the increase.
B) shift to the left by an amount equal to the increase.
C) shift down by an amount equal to the increase.
D) shift up by an amount equal to the increase.
E) shift up and to the right by an amount equal to the increase measured along a 45-degree line from the origin.

Question 12

Let the price adjustment coefficient in an expectations-augmented Phillips curve equal 0.2. If potential GDP in the United States were approximately

A) nothing but the transient effects of a short recession.
B) something in the neighborhood of $1 trillion in foregone GDP.
C) an increase in the unemployment rate of roughly 3.33 points.
D) slower growth as a result of investment expenditure foregone during the recession.
E) all answers but a.

Question 13

One difference between the short run and the long run in macroeconomics is that

A) aggregate supply defines GDP in the short run, whereas aggregate demand, given a price, defines GDP in the long run.
B) prices that can be assumed exogenous in the long run tend to vary wildly in the short run.
C) aggregate demand defines GDP given an exogenous price level in the short run, whereas aggregate supply defines GDP in the long run with flexible prices.
D) people can form expectations about what will happen over the long run but are completely in the dark about the random walk uncertainties of the short run.
E) none of the above.

Question 14

The expectations-augmented Phillips curve suggests, among other things, that

A) an economy that perpetually runs actual GDP near potential GDP will enjoy stable and predictable rates of inflation in the absence of any outside shocks.
B) an economy that perpetually runs actual GDP in excess of potential GDP will suffer year after year of successively higher inflation.
C) an economy that is not willing to suffer recession will have to live with inflation unless it can lower inflationary expectations somehow.
D) all of the above.
E) none of the above.

Question 15

An increase in the money supply can cause an initial reduction in interest
Rates followed by higher rates in the long run because, beginning at long-run equilibrium at potential GDP,

A) the investment stimulus of lower interest rates causes inflation, higher demand for money, and thus higher interest rates.
B) the stimulus of lower rates is canceled by a counterbalancing increase in federal taxes required to finance the monetary policy.
C) the investment stimulus crowds demand for money out of the money market and thereby produces a larger increase in interest rates.
D) the stimulus drives prices up to augment nominal rates that were unaffected by the monetary policy.
E) all of the above.

Question 16

An alternative way of stating the content of the expectations-augmented Phillips curve is to assert that

A) the difference between actual and expected inflation should be positively correlated with the percentage) difference between actual and potential GDP.
B) the difference between actual and expected inflation should be negatively correlated with the difference between actual and potential GDP.
C) the difference between wage and price inflation should be positively correlated with the difference between actual and potential GDP.
D) the difference between wage and price inflation should be zero regardless of the difference between actual and potential GDP.
E) none of the above.

Question 17

Suppose that an economy's price adjustment were described by an expectations-augmented Phillips curve with expected inflation always set equal to last year's inflation. If a foreign oil shortage were to cause inflation to jump suddenly by 5 percent, then the rate of inflation

A) would climb by 5 points in one year but fall back to the original level the next, even without recession, because the price shock was temporary.
B) would jump permanently by 5 points unless a recession or some other mechanism were arranged to lower expectations.
C) would begin an unavoidable period of price acceleration.
D) would fall only in response to some sort of energy rationing.
E) none of the above.

Question 18

Monetary policy is

A) neutral in the short run but can have strong effects in the long run.
B) is neutral in the long run but can provide either expansionary or contractionary pressure in the short run.
C) is neutral in the long run but can provide some expansionary pressure only in the short run.
D) is neutral in the long run but can provide some contractionary pressure only in the short run.
E) none of the above.

Question 19

Since potential GDP defines aggregate supply in the long run, it makes sense that

A) only monetary policy is neutral in the long run, because fiscal policy can influence the determinants of potential GDP in the short run.
B) only fiscal policy is neutral in the long run, because monetary policy can influence the determinants of potential GDP in the short run.
C) both monetary policy and fiscal policy are neutral in the long run, because neither can influence the determinants of potential GDP in the short run.
D) both monetary policy and fiscal policy are effective in the long run, because both can influence the determinants of potential GDP in the short run.
E) none of the above.

Question 20

If an expectations-augmented Phillips curve were to be used to explain the experience of the United States in the 1950s and 1960s, it would have to include

A) expected rates of inflation that were climbing rapidly from year to year.
B) expected rates of inflation that were falling sharply from year to year.
C) expected rates of inflation that were equal to some positive constant over the entire period.
D) expected rates of inflation that were approximately zero over the entire period.
E) none of the above.

Question 21

According to the Phillips curve relationship, a contraction in potential GDP for whatever reason can be expected to

A) cause prices to climb as long-run equilibrium is reachieved.
B) cause prices to fall as long-run equilibrium is reachieved.
C) cause no effect on prices as employment adjusts in the long run.
D) cause no effect on real GDP because price adjustments would reachieve long-run equilibrium.
E) none of the above.

Question 22

In the complete model, the price level is predetermined because

A) consumers usually cannot negotiate prices with retail outlets.
B) in a competitive market environment firms must take prices as given.
C) no one consumer is large enough to influence price.
D) it depends on previous firm and consumer behavior.
E) none of the above.

Question 23

Consider an economy with an expectations-augmented Phillips curve and expectations always set equal to last year's inflation rate. Let the rate of unemployment fall 1 point below the natural rate in 1993 before returning to the natural rate for the rest of the decade. If the coefficient linking the percentage GDP gap and inflation were 0.5, then you would predict

A) a one-shot increase in inflation for 1993 of 1.5 percent.
B) a perpetual increase in inflation for 1993 and beyond of 0.5 percent.
C) a one-shot increase in inflation for 1993 of 0.5 percent.
D) a perpetual increase in inflation for 1993 and beyond of 1.5 percent.
E) none of the above.

Question 24

While the complete model does not formally take account of the behavior of the labor market, the speed of adjustment of the labor market to its long-run equilibrium position is best accounted for by

A) the underlying determinants of potential GDP.
B) fiscal policies that counter recessions.
C) monetary policies that counter recessions.
D) the sensitivity of inflation to the GDP gap.
E) the level of expected inflation.

Question 25

Suppose that aggregate demand were suddenly to shrink by 5 percent because of a crisis affecting exports. You would expect, in the absence of any policy adjustment,

A) that employment would climb above full employment briefly but fall back in the long run as prices rose.
B) a period of increased unemployment in the short run that would be reversed in the long run by a reduction in inflation and prices, for which aggregate demand could again equal potential GDP.
C) no change in employment or prices, because the aggregate demand curve would still intersect aggregate supply above potential GDP.
D) some type of price adjustment in the export market that would cancel the export contraction.
E) none of the above.

Question 26

For a given shock to aggregate demand that moves the economy out of equilibrium in the complete model, the departure of GDP from potential lasts longer

A) the larger are the actual and expected inflation terms initially.
B) the smaller are the actual and expected inflation terms initially.
C) the smaller is the sensitivity of inflation to the GDP gap.
D) the more rapidly the labor market responds to disequilibrium.
E) none of the above.

Question 27

The absence of the expected inflation term, p^e, in the price-adjustment equation generally causes

A) more overshooting to occur.
B) overshooting to be less severe.
C) direct convergence to new equilibrium outcomes.
D) prolonged unemployment.
E) less initial inflation.

Question 28

Consider an economy that perpetually achieves an unemployment rate that is 1 point below the natural rate. Let its Phillips curve relationship have no expectations term and suppose that the coefficient linking the GDP gap with inflation were 0.4. Unless the employment situation changed, you would predict that

A) the inflation rate would increase by 0.4 point each year in the foreseeable future.
B) the inflation rate would equal 0.4 percent each year in the foreseeable future.
C) the inflation rate would increase by 1.2 points each year in the foreseeable future.
D) the inflation rate would equal 1.2 percent each year in the foreseeable future.
E) none of the above.

Question 29

Consider an economy that always managed to keep its unemployment rate

A) inflation to climb by some additional fixed amount in the foreseeable future.
B) inflation to converge to some fixed rate sometime in the foreseeable future.
C) inflation to accelerate without bound as the future proceeds.
D) inflation to be affected only slightly by the slight overemployment of labor.
E) nothing from the insufficient information provided.

Question 30

Suppose that an economy were based in part on a Phillips curve relationship that did not include an expectations term. Suppose that the unemployment rate in 1993 were to fall 1 point below the natural rate before returning to the natural rate for the rest of the decade. If the coefficient relating the percentage GDP gap and inflation were 0.4, then you would predict

A) a perpetual increase in the rate of inflation equal to 1.2 points.
B) a one-shot increase in the rate of inflation for the year 1993 equal to 1.2 points.
C) a perpetual increase in the rate of inflation equal to 0.4 point.
D) a one-shot increase in the rate of inflation for the year 1993 equal to 0.4 point.
E) none of the above.

Question 31

Measured as a percentage of potential GDP, the largest negative gap

A) 1971
B) 1973
C) 1977
D) 1982
E) 1983

Question 32

An economy tends to overshoot potential GDP in its recovery from recession when expectations depend on last year's inflation in part, because

A) recently rehired workers work extra overtime to recoup their lost earnings.
B) the reduction in the rate of inflation required to promote recovery is always dampened by last year's higher rate of inflation.
C) the required stimulative fiscal and monetary policies are reluctantly applied because of policy makers' fears of distorting expectations.
D) last year's inflation rate must have already been too low.
E) none of the above.

Question 33

Consider an economy that perpetually achieves an unemployment rate 1 point below its natural rate. Let its Phillips curve relationship be augmented by inflationary expectations equaling 0.5 of last year's inflation rate and let the coefficient linking the GDP gap with the inflation rate be 0.6. Unless there were a change in the employment picture, you would predict

A) inflation to climb an additional 1.8 points in the foreseeable future.
B) inflation to climb an additional 2.7 points in the foreseeable future.
C) inflation to climb an additional 0.9 point in the foreseeable future.
D) the future to suffer accelerating inflation until it climbed an additional 3.6 points.
E) none of the above.

Question 34

Suppose that a permanent reduction in export demand were matched exactly in its first year only by increasing government spending. Compared with the long-term outcome that you would expect in the absence of this policy adjustment, you would now expect to see

A) the same downward price adjustment to accommodate lower demand postponed by one year.
B) the same downward price adjustment to accommodate lower demand operating along the same time schedule that was unaffected by neutral fiscal policy.
C) the same upward price adjustment to accommodate lower demand postponed one year.
D) the same upward price adjustment operating along the same time schedule.
E) none of the above.

Question 35

Increases decreases) in the money supply or government spending result in

A) leftward rightward) shifts of the aggregate demand curve.
B) increases decreases) in the price level.
C) rightward leftward) shifts of the aggregate demand curve.
D) always c and sometimes b.
E) a and b.

Question 36

Running tight monetary policy against expansionary fiscal policy can be expected to

A) accelerate the contraction of private investment in the face of higher interest rates, caused by the stimulus itself.
B) diminish the likelihood that inflation will be required to reachieve long- run equilibrium at potential GDP.
C) reduce the role of inflationary expectations in the convergence to long- run equilibrium.
D) diminish the ability of the tight money to lower inflation by causing a recession.
E) all of the above.

Question 37

According to the real business cycle theory, macroeconomies are always operating where aggregate supply equals aggregate demand. According to this theory, the business cycle is

A) nonetheless explained by shifts in aggregate demand.
B) caused by negative correlations between the interest rate and work effort.
C) caused by random shifts in the aggregate production function.
D) nonetheless explained by the severe inelasticity of aggregate supply.
E) almost completely explained by the near-perfect elasticity of both aggregate supply and aggregate demand.

Question 38

In setting prices, firms pay particular attention to

A) the behavior of wages.
B) the level of unemployment.
C) pressures on input prices.
D) labor market conditions.
E) all of the above.

Question 39

Measured as a percentage of potential GDP, the largest positive gap between actual GDP and potential GDP occurred in which of the following years?

A) 1961
B) 1970
C) 1978
D) 1988
E) 2000

Question 40

When determining algebraically the current level of aggregate output from an equation for aggregate demand such as Y = 3401 + 2.887M/P, you must know

A) last period's money supply.
B) last period's price level.
C) this period's price level.
D) last period's inflation rate.
E) this period's inflation rate.

Question 41

Suppose the demand for money were to climb with no accommodation by the Fed. The aggregate demand curve shifts to the left to reflect this change because

A) the resulting reduction in interest rates causes investment and consumption to climb.
B) a decline in inflationary expectations causes consumption expenditure to fall.
C) the resulting increase in interest rates causes investment and consumption to fall.
D) the resulting reduction in GDP causes consumption and investment to fall.
E) none of the above.

Question 42

According to the complete model, fiscal and monetary policy can have

A) immediate impact on both GDP and prices.
B) delayed impact on both GDP and prices.
C) immediate impact on prices and delayed impact on GDP.
D) immediate impact on GDP and delayed impact on prices.
E) either delayed or immediate impact on either GDP or prices, depending on circumstance.

Question 43

A sudden influx of dollars from foreign sources can be equivalent to a sudden and unexpected increase in the money supply. The result of such an influx therefore could be

A) no change in the domestic economy because the dollars would still be under the control of foreign nationals.
B) a shift in the aggregate demand curve to the left as consumption and investment expenditure declined.
C) a shift in the aggregate demand curve to the right caused by an increase in the U.S. price level.
D) a sudden reduction in potential GDP that would reduce actual GDP and increase interest rates.
E) a shift in the aggregate demand curve to the right as consumption and investment expenditure increase.

Question 44

Suppose that an economy suffers a doubling in the price it pays for energy in 2006. Let the price shock be accommodated in 2005 and 2007. If the resulting inflation is met with tight monetary policy in 2008 and the expectations-augmented price adjustment set expected inflation equal to last year's inflation, then you would expect 2008 to be a year of

A) inflation and unemployment higher than in 2006.
B) inflation and unemployment lower than in 2006.
C) inflation higher than it was in 2006, accompanied by lower unemployment.
D) inflation lower than it was in 2006, accompanied by higher unemployment.
E) unpredictable inflation and unemployment.

Question 45

Aggregate demand has fallen so that GDP is below its potential. Prices begin to fall. The next step in describing the dynamics of the effect of a reduction in investment is

A) a return of investment to its original level in direct response to the falling prices.
B) a decline in the interest rate to maintain equality of supply and demand in the money market.
C) a decline in the real) supply of money, caused by the falling prices.
D) an increase in the demand for money as people respond to the expectation of lower inflation.
E) none of the above.

Question 46

In the long run, you would expect fiscal expansion to

A) increase real interest rates but leave real GDP and prices unchanged.
B) increase prices but leave real interest rates and real GDP unchanged.
C) reduce real interest rates even as prices and real GDP climb.
D) increase prices, real GDP, and real interest rates to some degree or other depending on circumstance.
E) none of the above.

Question 47

From the perspective of a policy maker, which of the following combinations would make an outside disturbance to an economy most troublesome?

A) A disturbance that is unanticipated and permanent
B) A disturbance that is unanticipated and temporary
C) A disturbance that is anticipated and permanent
D) A disturbance that is anticipated and temporary
E) All of the above equally

Question 48

A shock to aggregate demand can be created

A) only by a shock to some element of the IS curve.
B) only by a shock to some element of the LM curve.
C) by a shock to either the IS curve or the LM curve.
D) by a shock to inflationary expectations that moves the price-adjustment schedule.
E) whenever some endogenous change in government spending policy is observed.

Question 49

The property that asserts that real wages, employment levels, output, the composition of output, and real interest rates are independent of changes in the stock of money is called

A) fiscal neutrality.
B) monetary neutrality.
C) governmental neutrality.
D) the superneutrality of money.
E) none of the above.

Question 50

If the 1979 oil price shock were to be accommodated to maintain employment, then the likely effect would have been

A) the incorporation of the energy-induced inflation into expectations that would be perpetuated.
B) a rate of growth of the money supply in excess of what would have otherwise been experienced.
C) the postponement of political pressure to fight inflation by more- restrictive fiscal and monetary policies.
D) all of the above.
E) none of the above.

Question 51

When determining algebraically the current level of aggregate output from an equation for aggregate demand, such as Y = 3401 + 2.887M/P, you must know

A) last period's output.
B) last period's price level.
C) this period's inflation rate.
D) last period's inflation rate.
E) all of the above.

Question 52

A sudden decline in the international value of the dollar that dramatically increases the demand for American goods is an example of

A) a price shock traceable to a shift in the IS curve.
B) a price shock traceable to a shift in the LM curve.
C) an aggregate demand shock traceable to a shift in the IS curve.
D) an aggregate demand shock traceable to a shift in the LM curve.
E) an exogenous shock that would have no effect on the domestic U.S. economy.

Question 53

A price shock could be the result of

A) a sudden increase in the cost of securing certain important raw materials.
B) a large and generous wage settlement that sets the precedent for wage settlements in the foreseeable, short-term future.
C) a dramatic increase in the level of inflation expected by the major price setters across an economy.
D) a sudden reduction in the money supply that looks just like an equivalent increase in the price level.
E) all answers but d.

Question 54

In the long run, you would expect contractionary monetary policy to

A) leave real interest rates and real GDP unchanged even as prices fall.
B) reduce real interest rates and real GDP despite constant prices.
C) reduce real interest rates, prices, and real GDP all at the same time.
D) increase real interest rates while prices and real GDP slump.
E) none of the above.

Question 55

Accommodative policies in response to price shocks cause

A) more price instability if expectations augment the Phillips curve than if they do not.
B) less price instability if expectations augment the Phillips curve than if they do not.
C) the same significant degree of price instability regardless of whether or not expectations augment the Phillips curve.
D) a only if expectations are formed at least in part on the basis of last year's experience.
E) b only if expectations are formed at least in part on the basis of last year's experience.

Question 56

An increase in investment activity

A) causes the aggregate demand curve to shift to the right.
B) causes the aggregate demand curve to shift to the left.
C) causes no change in the aggregate demand curve but causes the price- adjustment schedule to climb.
D) causes no change in the aggregate demand curve but causes the price- adjustment schedule to fall.
E) causes a change in the aggregate demand curve that cannot be defined precisely with the information provided.

Question 57

The immediate effect of a positive price shock that is not accommodated in any way by a change in either fiscal or monetary policy is

A) a reduction of GDP below its potential caused by higher interest rates and the need to maintain equilibrium in the money market.
B) an equally sudden reduction in prices that negates the need for a correcting recession.
C) a short boom in which GDP actually climbs above potential to support the inflation caused by the price shock.
D) a contraction in consumption and investment that keeps GDP at its potential even given the higher prices.
E) none of the above.

Question 58

A sudden reduction in intended investment that was accommodated by an increase in the money supply sufficient to cancel those intentions would be best represented by

A) a shift to the right of the aggregate demand curve.
B) a shift to the left of the aggregate demand curve.
C) an upward shift in the price-adjustment schedule.
D) a downward shift in the price-adjustment schedule.
E) no change in either the aggregate demand curve or the price-adjustment schedule.

Question 59

Let prices be perfectly flexible. If the money stock were to increase by 10 percent, then you would expect to see

A) prices increase by 10 percent, real interest rates fall by 10 percent, and real GDP remain unchanged.
B) prices fall by 10 percent, real interest rates climb by 10 percent, and real GDP remain unchanged.
C) prices increase by 10 percent, real interest rates remain unchanged, and real GDP increase by 10 percent.
D) prices, real interest rates, and real GDP all increase by 10 percent.
E) none of the above.

Question 60

An accommodative policy response to a positive price shock would be attempted if it were determined that

A) price stability is more critical to maintain than output stability.
B) output stability is more critical to maintain than price stability.
C) price and output stability are equally critical to maintain.
D) the supply side and not the demand side of the goods and services market is the source of the shock.
E) none of the above.

Question 61

Changes in tax revenue do not necessarily change long-run GDP because

A) long-run GDP is independent of labor supply.
B) changes in government spending typically accompany tax changes.
C) labor supply depends on average tax rates.
D) labor supply depends on marginal tax rates.
E) none of the above.

Question 62

In the long-run model, a tax reduction that increases labor supply accompanied by an increase in the money supply

A) has no effect on GDP.
B) increases investment.
C) increases the price level.
D) increases the interest rate.
E) none of the above.

Question 63

In the long run, when interest rates are set by the spending balance and GDP is set by potential GDP, money is neutral

A) even if inflation reduces the cost of capital through the workings of the tax system.
B) even if inflation makes physical capital more attractive than financial assets.
C) even if inflation creates inefficiency in the monetary system.
D) even if inflation's variability makes business planning difficult at best.
E) only if none of the above apply.

Question 64

A reduction in government purchases

A) has no effect on consumption.
B) drives up interest rates.
C) strengthens the value of the dollar.
D) weakens the value of the dollar.
E) b and c.

Question 65

In the long run, inflation can develop due to

A) large oil price shocks.
B) increases in the money supply.
C) expansionary fiscal policy.
D) a and b.
E) all of the above.

Question 66

Suppose the federal government permanently balanced its budget. Which outcome would be most likely?

A) Interest rates would rise and trade deficits would fall.
B) Interest rates would rise, as would trade deficits.
C) Interest rates would fall, investment would increase, and trade deficits would rise.
D) Interest rates would fall, investment would increase, and trade deficits would fall.
E) Interest rates would fall, investment would decrease, and trade deficits would fall.

Question 67

In the long-run model, a reduction in government purchases accompanied by an increase in the money supply

A) has no effect on GDP.
B) has an ambiguous effect on the price level.
C) causes an increase in investment.
D) a and c.
E) all of the above.

Question 68

In the long run, increases in the money supply

A) increase GDP by increasing investment.
B) increase inflation.
C) decrease GDP by reducing the real wage and thus labor supply.
D) increase the real wage.
E) b and c.

Question 69

The crowding out of net exports resulting from expansionary fiscal policy in the long run is due in part to

A) the tendency of some government spending to go toward imports.
B) the negative relationship between government purchases and interest rates in a full-employment economy.
C) the inflow of foreign capital that results from high interest rates.
D) the outflow of domestic capital that results from low interest rates.
E) none of the above.

Question 70

The government budget deficit

A) increases with increases in transfer payments.
B) increases with reductions in tax revenue.
C) increases with increases in the level of outstanding debt.
D) a and b.
E) all of the above.

Question 71

In the long run, changes in the share of government purchases

A) lead to an equal and opposite change in the share of investment.
B) change GDP by an equal amount.
C) leave GDP unaffected.
D) lead to an equal and opposite change in the share of other spending components.
E) c and d.

Question 72

In the long-run, expansionary fiscal policy

A) raises interest rates.
B) lowers interest rates.
C) raises GDP.
D) increases investment.
E) b and c.

Question 73

The property of the long-run model known as the classical dichotomy is best described by the statement

A) changes in the money stock do not affect long-run inflation.
B) the determination of real variables in the model requires information about nominal variables.
C) the determination of nominal variables in the model requires information about real variables.
D) the determination of real variables does not require information about nominal variables, although the determination of nominal variables does require information about real variables.
E) the determination of nominal and real variables does not require information about the other.

Question 74

In the long-run model, an increase in government purchases

A) increases GDP and the price level.
B) decreases GDP and the price level.
C) leaves both GDP and the price level unchanged.
D) increases nominal GDP.
E) none of the above.

Question 75

Ceteris paribus, the budget deficit and the trade deficit

A) are unrelated in the long run, since fiscal policy cannot affect GDP.
B) are negatively related in the long run, since fiscal expansion crowds out net exports.
C) are negatively related in the long run, since fiscal expansion drives up the exchange rate.
D) are positively related in the long run, since fiscal expansion crowds out net exports.
E) are positively related in the long run, since fiscal expansion weakens the exchange rate.

Question 76

In the long run, money growth tends to be

A) highest in countries that experienced highest inflation.
B) slightly more than the rate of inflation.
C) slightly less than the rate of inflation.
D) a and b.
E) a and c.

Question 77

In the long run, expansionary fiscal policy

A) increases the trade deficit.
B) strengthens the exchange rate.
C) increases imports.
D) crowds out interest-sensitive spending.
E) all of the above.

Question 78

The impact of large cuts in defense spending in the long-run includes

A) an increase in actual GDP.
B) an increase in potential GDP.
C) a reduction in inflation.
D) no change in GDP.
E) b and c.

Question 79

Suppose that the share of gove rnment spending is incre a s e d. If potential GDP is unch a n ge d, wh i ch of the fo l l owing necessari ly happens in the long ru n ?

A) The share of consumption expenditures falls by the same amount.
B) The share of investment falls by the same amount.
C) The share of net exports falls by the same amount.
D) The share of consumption expenditures and investment falls by the same amount.
E) The share of consumption expenditures, investment, and net exports falls by the same amount.

Question 80

The impact of fiscal policy on interest rates

A) causes consumption to move opposite government purchases.
B) causes investment to move opposite government purchases.
C) causes the dollar to appreciate when government spending increases.
D) all the above.
E) a and b.