Macroeconomics Final Exam Review Multiple Choice Identify the letter of the choice that best completes the statement or answers the question Consider the exhibit below for the following questions Figure 33 1 1 Refer to Figure 33 1 An increase in the money supply would move the economy from C to a B in the short run and the long run b D in the short run and the long run c B in the short run and A in the long run d D in the short run and C in the long run a back to A in the long run b c d to B in the long run to C in the long run to D in the long run 3 If net exports are positive then 2 Refer to Figure 33 1 If the economy starts at A a decrease in the money supply moves the economy a net capital outflow is positive so foreign assets bought by Americans are greater than b net capital outflow is positive so American assets bought by foreigners are greater than c net capital outflow is negative so foreign assets bought by Americans are greater than American assets bought by foreigners foreign assets bought by Americans American assets bought by foreigners foreign assets bought by Americans d net capital outflow is negative so American assets bought by foreigners are greater than 1 Figure 34 2 On the left hand graph MS represents the supply of money and MD represents the demand for money on the right hand graph AD represents aggregate demand The usual quantities are measured along the axes of both graphs 4 Refer to Figure 34 2 If the money supply curve MS on the left hand graph were to shift to the right this represent an action taken by the Federal Reserve would a b shift the AD curve to the left c create until the interest rate adjusted an excess demand for money at the interest rate that equilibrated the money market before the shift d All of the above are correct 5 Refer to Figure 34 2 What does Y represent on the horizontal axis of the right hand graph 6 Refer to Figure 34 2 What is measured along the horizontal axis of the left hand graph the quantity of money the rate of inflation real output a b c d nominal output a nominal output b real output c d the opportunity cost of holding money the quantity of money 7 Refer to Figure 34 2 A decrease in Y from Y1 to Y2 is explained as follows a The Federal Reserve increases the money supply causing the money demand curve to shift from MD1 to MD2 this shift of MD causes r to increase from r1 to r2 and this increase in r causes Y to decrease from Y1 to Y2 b An increase in P from P1 to P2 causes the money demand curve to shift from MD1 to MD2 this shift of MD causes r to increase from r1 to r2 and this increase in r causes Y to decrease from Y1 to Y2 c A decrease in P from P2 to P1 causes the money demand curve to shift from MD1 to MD2 this shift of MD causes r to increase from r1 to r2 and this increase in r causes Y to decrease from Y1 to Y2 2 rr12MSMDMD12PP12ADYY12 d An increase in the price level causes the money demand curve to shift from MD2 to MD1 this shift of MD causes r to decrease from r2 to r1 and this decrease in r causes Y to decrease from Y1 to Y2 8 Refer to Figure 34 2 As we move from one point to another along the money demand curve MD1 a b c d the price level is held fixed at P1 the interest rate is held fixed at r1 the money supply is changing so as to keep the money market in equilibrium the expected inflation rate is changing so as to keep the real interest rate constant 9 The classical dichotomy argues that changes in the money supply a affect both nominal and real variables b affect neither nominal nor real variables c affect nominal variables but not real variables d do not affect nominal variables but do affect real variables 10 When Mexico suffered from capital flight in 1994 the U S real interest rate a rose and the real exchange rate of the dollar appreciated b rose and the real exchange rate of the dollar depreciated c fell and the real exchange rate of the dollar appreciated d fell and the real exchange rate of the dollar depreciated 11 According to the theory of liquidity preference the money supply a and money demand are positively related to the interest rate b and money demand are negatively related to the interest rate c is negatively related to the interest rate while money demand is positively related to the interest rate is independent of the interest rate while money demand is negatively related to the interest rate d 12 If the reserve ratio is 4 percent the money multiplier is 13 Suppose foreigners find U S goods and services more desirable for some reason other than a change in the exchange rate Which policies could be used to offset the resulting change in output a an increase in the money supply and an increase in taxes b an increase in the money supply and a decrease in taxes c a decrease in the money supply and an increase in taxes d a decrease in the money supply and a decrease in taxes 14 The reserves of financial institutions a Are the largest liability in a financial institution s balance sheet b Are assets that financial institutions try to maximize c Are assets that financial institution s try to keep at the legal limit d Are made up mainly of government securities and high quality corporate bonds Use the figure below for the following questions Figure 30 1 a 25 b 20 c 4 d 2 3 16 Refer to Figure 30 1 When the money supply curve shifts from MS1 to MS2 the graph shows that 15 Refer to Figure 30 1 When the money supply curve shifts from MS1 to MS2 a b c d the equilibrium value of money decreases the equilibrium price level decreases the supply of money has decreased the demand for goods and services will decrease the demand for goods and services decreases the economy s ability to produce goods and services increases the equilibrium price level increases the equilibrium value of money increases a b c d Figure 35 5 Use the graph below to answer the following questions 4 17 Refer to Figure 35 5 If the economy starts at C and the money supply growth rate increases then in the short run the economy moves to a B b D c F d None of the above is consistent with an increase in the money supply growth rate 18 Refer to Figure 35 5 If the economy starts at C and the money supply growth …
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