AC 310: EXAM 2

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AC 310
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a 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:
in the long run but lead to unemployment in the short run
when the federal reserve reduces the money supply, at a given price level the amount of output demanded is ___ and the aggregate demand curve shifts ____
lower; inward
a short run aggregate supply curve shows fixed ___, and a long run aggregate supply curve shows fixed ___
prices; output
if the short run aggregate supply curve is horizontal, then changes in aggregate demand affect:
the level of output but not prices
if a short run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run, prices will __ and output will ___
increase; decrease
stagflation occurs when prices ___ and output ___
rise; fall
the dilemma facing the federal reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ___ price level, of allow the price level to return to its origina...
higher; lower
in the IS-LM model, which two variables are influenced by the interest rate?
the demand for real money balances and investment spending
in the keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:
unplanned inventory investment
the equilibrium condition in the keynesian-cross analysis in a closed economy is:
actual expenditure equals planned expenditure
in the keynesian cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by __ and increases the equilibrium level of income by ___
$1 billion; more than $1 billion
tax cuts stimulate ___ by improving workers incentive and expand ___ by raising households disposable income
aggregate supply; aggregate demand
the IS curve shifts when any of the following economic variables change except: A) the interest rate B) gov spending C) tax rates D) the marginal propensity to consume
the interest rate
based on the keynesian model, one reason to support spending increases over tax cuts as measures to increase output is that:
the government-spending multiplier is larger than the tax multiplier
the theory of liquidity implies that:
as the interest rate rises, the demand for real balances will fall
An explanation for the slope of the LMcurve is that as:
income rises, money demand rises, and a higher interest rate is required.
Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.
negatively; positively
In the IS-LM model, the impact of anincrease in government purchases in the goods market has ramifications in themoney market, because the increase in income causes a(n) ______ in money______.
increase; demand
According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.
The U.S. recession of 2001 can be explained in part by a declining stock market and terrorist attacks. Both of these shocks can be represented in the IS-LM model by shifting the ______ curve to the ______.
IS; left
Analysis of the short and long runs indicates that the ______ assumptions are most appropriate in ______.
Keynesian; the short run whereas the classical assumptions are most appropriate in the long run
A shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will ______ in the long run, as compared to a short-run equilibrium.
decrease output but increase prices
The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:
investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.
The Mundell-Fleming model is a ______ model for a ______ open economy.
short-run; small
In a small open economy, a decrease in its exchange rate will ______ net exports and shift the _____ curve.
increase; IS
In a small open economy with a floating exchange rate, an effective policy to increase equilibrium output is to:
increase the money supply.
In a short-run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in:
income, the interest rate, and the exchange rate, but a decrease in investment and net exports.
In a short-run model of a large open economy with a floating exchange rate, a monetary expansion causes a decrease in the interest rate and:
the exchange rate, and increases in income, net capital outflow, and net exports.
According to the Mundell-Fleming model for a small open economy with flexible exchange rates, if the Federal Reserve cannot alter domestic interest rates, changes in the money supply could still influence aggregate income through changes in the:
exchange rate.
Each of the two models of short-run aggregate supply is based on some market imperfection. In the sticky-price model, the imperfection is that:
some firms do not adjust their prices instantly to changes in demand.
The imperfect-information model assumes that producers find it difficult to distinguish between changes in:
the overall level of prices and relative prices.
Along a short-run aggregate supply curve, output is related to unexpected movements in the ______. Along a Phillips curve, unemployment is related to unexpected movements in the ______.
price level; inflation rate
The classical dichotomy breaks down for a Phillips curve, which shows the relationship between a nominal variable, ______, and a real variable, ______.
inflation; unemployment
The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by:
basing their opinions on recently observed inflation.
Demand-pull inflation is the result of:
high aggregate demand.
Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation.
increase; higher
The percentage of a year's real GDP that must be foregone to reduce inflation by 1 percentage point is called the:
sacrifice ratio.

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