Chapter 9-14 Practice Set

The experience of the Great Depression in the 20th century provided support for the Classical model of the macroeconomy.True/False
True False

If the demand for loanable funds decreases, we would expect the interest rate to fall and the quantity of funds loaned to decrease. True/ false
True False

Suppose that Paul’s income increases from $40,000 per year to $44,000 per year. At the same time, his consumption increases from $36,000 to $39,000 per year. Paul’s marginal propensity to consume is thus 0.75. True / False
True False

Suppose the marginal propensity to consume in an economy is 0.5. The Keynesian multiplier in this economy would be 2.0. True/ False

True

Which one of the following situations is LEAST likely to cause a change in the consumption function in the Keynesian model of the macroeconomy?

This question refers to the following Keynesian cross diagram: In the above Keynesian cross diagram the solid line labeled “A” represents what curve?

According to the Keynesian macroeconomic model, consumption is a function of which three variables?

Classical economists during the Great Depression encouraged the government to decrease interest rates to encourage more business investment. true/ False

Which one of the following statements is TRUE?

According to the Keynesian macroeconomic model, massive unemployment is possible when an economy is in a state of equilibrium. True/ False
True False

If intended business investment declines by $100 the Keynesian multiplier effect implies that total income will decrease by more than $100. True/ false
True False

Okun’s Law posits a relationship between which two variables?

According to the Keynesian macroeconomic model, an increase in the interest rate may increase or decrease savings. true/false
True False

Suppose that Jane’s income increases from $30,000 per year to $35,000. At the same time, her consumption changes from $26,000 per year to $29,000 per year. What is Jane’s marginal propensity to save?

Suppose the marginal propensity to consume in an economy is 0.9. What would be the Keynesian multiplier in this economy?

Suppose the demand for loanable funds increases. According to the classical macroeconomic model, what would happen to the quantity of funds loaned and the interest rate?

According to the classical macroeconomic model discussed in the text, the key variable which adjusts to keep the economy in equilibrium when leakages are not equal to injections is …

According to the text, income (Y) will be equal to aggregate demand (AD) only when …

In the case of insufficient aggregate demand, household savings is greater than …

According to the Keynesian macroeconomic model, the level of intended business investment depends upon the inflation rate.true/false
True False

According to the Keynesian macroeconomic model, the level of intended investment depends upon …

This question refers to the following Keynesian cross diagram: In the above Keynesian cross diagram which one of the following is TRUE at an income level of 300?

Which one of the following statements BEST describes the relationship between interest rates and savings in the Keynesian macroeconomic model?

According to the Keynesian model, injections will be kept equal to leakages through adjustment in the market for loanable funds.true/false

Suppose that Jane’s income increases from $30,000 per year to $35,000. At the same time, her consumption changes from $26,000 per year to $29,000 per year. What is Jane’s marginal propensity to consume?

Okun’s Law posits a relationship between the growth of real GDP and the rate of inflation. true/false
True False

Suppose that autonomous investment increases in the Keynesian macroeconomic model. What will happen to the aggregate demand curve?

In the Keynesian macroeconomic model aggregate demand is equal to the sum of consumption and income. true/false
True False

The Keynesian consumption function depends on autonomous consumption and intended investment.true/false
True False

Which one of the following variables is classified as a leakage in the output-income-spending flow model presented in the text?

According to the classical macroeconomic model discussed in the text, whenever injections are not equal to leakages the wage rate will adjust to keep the macroeconomy in equilibrium. true/false
True False

What is the main difference between classical and Keynesian views about the principal determinant of consumption and saving levels?

The multiplier in the Keynesian macroeconomic model is a function of which variable?

Which one of the following variables is classified as an injection in the output-income-spending flow model presented in the text?

The tax multiplier is always one-half the value of the regular income/spending multiplier. True/ False
True False

This question refers to the following Keynesian cross diagram. Which of the following could cause the shift shown in the above Keynesian cross diagram?

Suppose the government increases taxes by a lump sum of $500 million. If the marginal propensity to consume is 0.8, how much would the equilibrium level of output decrease according to the macroeconomic model presented in the text?

Which of the following is NOT true about the U.S. federal debt?

Which one of the following impacts is LEAST likely to occur as a result of expansionary fiscal policy?

The automatic stabilization effect of fiscal policy refers to the fact that …

In a macroeconomic model with all three injections and all three leakages present, the economy is always in equilibrium. True/ False
True False

The United States federal debt is currently a larger percentage of the national economy than it was during World War II. True/ False
True False

What are the two main sources of inflows of funds to the federal government in the United States?

Suppose government spending increases by $50 million and the marginal propensity to consume is 0.9. According to the Keynesian macroeconomic model, this will cause equilibrium output to increase by $500 million. True/ False
True False

As described in the text, what is the primary belief behind supply-side economics?

Suppose the marginal propensity to consume is 0.8. According to the model in the text, how much would equilibrium output go up if the government increased spending by $500 million (assuming all other factors are held constant)?

Suppose the government increases spending by $200 million but at the same time increases taxes by $200 million. According to the macroeconomic model presented in the text, by how much would equilibrium output change?

Which one of the following statements is TRUE about the federal government surplus or deficit, expressed as a percentage of GDP, in the United States over the last few decades?

According to the text, the largest source of federal outlays in the United States is national defense. True/ False
True False

The presence of international trade will tend to increase multiplier effects. True/False
True False

The three leakages in the macroeconomic model presented in the text are savings, taxes, and imports. True/False
True False

Expansionary fiscal policy would be a potential means to counteract a high inflation rate. True/False
True False

Which one of the following statements is TRUE?

Suppose an economy experiences a lump-sum increase in exports of $20 million. If the multiplier is 4.0, then according to the macroeconomic model presented in the text what will be the change in the equilibrium level of output?

What is the equation for the tax multiplier for a lump sum tax?

Which one of the following statements is FALSE?

Suppose government spending increases by $1 million. The multiplier effect implies that income (Y) will increase by less than $1 million. True/ False
True False

In 2006 (the most recent year discussed in your textbook), about how large was the federal debt in the United States as a percentage of GDP?

According to the logic of supply-side economics, a tax cut may actually lead to an increase in government revenues. True/ False
True False

Supply-side economics uses increases in government spending to increase to supply of goods and services in the economy. True/ False
True False

Which one of the following statements is TRUE?

Suppose that the marginal propensity to consume is 0.9. What is the tax multiplier for a lump sum tax in this case?

The time it takes Congress to debate and agree upon a tax policy change is referred to as …

Decreasing taxes is an example of expansionary fiscal policy. True/ False
True False

The data from the United States demonstrates that economic growth is always higher when the government is running a budget surplus. True/ False
True False

The most likely economic situation in which a government would implement contractionary fiscal policy is …

Disposable income is the income available after people have paid for necessary items like food and shelter. True/ False
True False

Which one of the following statements is TRUE?

Suppose that in an economy real GDP is $100, the price level index is 4, and the money supply is $50. What would the velocity of money be in this economy?

The federal funds rate is the rate the Fed charges banks for short-term loans. True/ False
True False

What tends to be the relationship between the prime rate and the federal funds rate in the United States?

The discount rate is the interest rate determined in the private market for overnight loans of reserves among banks. True./ False
True False

What is the main policy recommendation of monetarists?

With output held constant, hyperinflation is likely to occur under which of the following conditions?

Which one of the following statements is FALSE?

Money neutrality implies that …

The theory of monetarism states that the money supply should grow at a constant rate. True/False
True False

Which one of the following statements best summarizes the Federal Reserve’s monetary policy over the years 2000-2006?

Money neutrality means that changes in the money supply won’t change the rate of inflation. True/ False
True False

When the Federal Reserve buys government bonds from a private bank, the private bank’s reserves at the Federal Reserve will increase. True/ False
True False

Which one of the following is NOT likely to be a result of a high rate of inflation?

The United States data from 2000-2003 indicate that as the Fed lowered the federal funds rate, business investment increased. True/False
True False

Suppose the federal funds rate is currently at its target level. Then suppose the demand for federal funds increases. Which one of the following statements is TRUE?

Which one of the following is NOT included in the M2 measure of money?

Contractionary monetary policy would most likely be implemented when the inflation rate is considered to be too high. True/ False
True False

Suppose the demand for federal funds increases, but the Fed’s target level remains unchanged. Which one of the following statements is MOST LIKELY to be TRUE?

The Fed can increase the supply of money using open market operations by selling government bonds. True/False
True False

How does the Federal Reserve affect the supply of money using open market operations?

The quantity equation states that M/V = P × Y (True/False)
True False

The quantity theory of money assumes that the money supply is directly related to what variable?

Which one of the following statements best describes the chain of events that causes expansionary monetary policy to increase GDP?

If the supply of federal funds decreases and the Fed does nothing in response, the federal funds rate would tend to decrease. True/False
True False

Which one of the following is NOT likely to be a result of deflation?

An increase in the quantity of imports will always lower the rate of inflation. True/ False
True False

The difference between the M1 and M2 measures of money is that M2 includes the value of credit card balances while M1 doesn’t. True/False
True False

The difference between the M1 and M2 measures of money is that M2 includes the value of credit card balances while M1 doesn’t. True/False
True False

The quantity theory of money states that increases in prices must lead to increases in real GDP. True/False
True False

What does Classical monetary theory state will happen with an increase in the money supply?

What is the main difference between M1 and M2 as measures of money?

With GDP and the money supply constant, an increase in the velocity of money will tend to put upward pressure on prices.True/False
True False

The accelerator principle implies that the best predictor of business investment growth is which of the following variables?

The quantity theory of money assumes that the velocity of money (V) is constant. True/ False
True False

Which one of the following statements best describes why the aggregate demand equilibrium (ADE) curve slopes downward?

Which one of the following descriptions BEST describes the chain of events that, according to the “Fed reaction rule,” occurs when the Fed observes a rise in the rate of inflation?

A change in expectations about inflation will shift the ASR curve. True/ False
True False

Which of the following could explain the shifts shown in the graph below?

A supply shock can increase or decrease the maximum capacity output in an economy. True/ False
True False

A change in inflationary expectations will shift the position of the ASR curve.

Suppose an economy is currently in a recession. Assume the government then undertakes expansionary fiscal policy, but not enough to move the economy to the full employment level of output. Based on the ADE/ASR model, what would we expect to be the most likely outcome of this policy in the short run?

What would be the expected effect of expansionary fiscal policy using the Classical ASR curve?

Under what conditions is a wage-price spiral most likely to occur?

Mortality rates tend to rise when the economy is doing well. True/ False
True False

Suppose people’s expectation of inflation goes down over time. Holding everything else constant, how would this change the position of the aggregate supply response (ASR) curve?

Which one of the following statements best describe why the aggregate supply response (ASR) curve slopes upward?

Based on the Classical ASR curve, we would expect that the economy will normally be at the full employment level of output. True/ False
True False

Which of the following could explain the shift shown in the graph below?

The aggregate demand equilibrium (ADE) shows which of the following relationships?

In the Keynesian view of macroeconomics the economy does not automatically return to the full employment level of output. True/False
True False

The ADE/ASR model assumes that the Fed’s two primary goals are to stabilize output and prices. True/False
True False

Based on the ADE/ASR model, in which of the following situations is stagflation most likely to occur?

The government is undertaking contractionary fiscal policy and people have come to expect higher levels of inflation.

The curve on the graph below represents:

Suppose that people lower their expectations about inflation in an economy in a recession. At the same time, the government undertakes expansionary fiscal policy. Based on the ADE/ASR model, what would we expect to be the result of these two changes?

The aggregate demand equilibrium (ADE) curve plots the relationship between interest rates and aggregate demand. True/ False
True False

The Classical aggregate supply curve is horizontal. True/ False
True False

As discussed in the text, what is the Fed Reaction Rule?

Stagflation is a situation of both increasing prices and increasing unemployment. True/ False
True False

The ASR curve is vertical in the full-employment range. True/ False
True False

Suppose the Fed decides to increase the target level of inflation from 3% to 4%. What change would we expect to occur in the ADE/ASR model in the short run as a result of this change in policy?

Expansionary fiscal policy would shift the ADE curve to the right. True/ False
True False

The stagflation of the 1970s most likely occurred because of contractionary fiscal policy combined with increasing expectations about inflation. True/ False
True False

Suppose the ADE curve remains stable but technology increases the productive capacity of an economy at full employment. Based on the ADE/ASR model, what would we expect to be the most likely outcome of this situation?

Which of the following could explain the shifts shown in the graph below?

Suppose the Fed changes its target rate of inflation. Holding everything else constant, how would this, immediately, change the position of the aggregate supply response (ASR) curve?

Based on the ADE/ASR model, if people lower their expectations of inflation but the government undertakes contractionary fiscal policy, it is possible that inflation could increase. True/ False
True False

Based on the ADE/ASR model, stagflation is most likely to occur if the government is undertaking expansionary fiscal policy and people have come to expect higher levels of inflation. True/ False
True False

A loan from the World Bank to a poor nation would be an example of bilateral development assistance. True/ False
True False

What two factors of production are included in the Solow growth model?

According to the Solow growth model, if the growth rate of manufactured capital per worker is 10% per year and the growth rate of total factor productivity is 3% per year, what will be the growth rate of output per worker?

Which one of the following countries experienced the highest average annual growth rate of GDP per capita over the period 1990-2005?

Suppose a country has a growth rate of GDP of 6% annually and a population growth rate of 2% annually. What is the growth rate of GDP per capita in this country?

Which one of the following statements is FALSE?

According to the Solow growth model what are the two main ways to increase per capita income?

Japan’s rapid economic growth was primarily a function of promoting domestic aggregate demand. True / False
True False

Typically, one could add economic growth to the ADE/ASR model by showing:

The Solow growth model is Y = A K0.3 L0.7.(True/False)
True False

Suppose the growth rate of the population of a country is 2% per year. Also, the growth rate of GDP per capita in the country is 3%. Therefore, the growth rate of GDP must be 1%. (True/False)
True False

About how much of the world’s income goes to the richest 20% of households?

Which one of the following is an example of multilateral development assistance?

Economic growth in both Japan and the United States has been characterized by high savings rates. True/ False
True False

Increasing a country’s reliance on imports seems to be a universally successful strategy for economic growth. True/ False
True False

One characteristic of the Industrial Revolution is that England increasingly relied upon colonies as sources of natural resources. True/ False
True False

Which one of the following statements is FALSE?

Countries in Sub-Saharan Africa have generally not seen significant economic growth in the last few decades. True/ False
True False

For most developing countries domestic investment is significantly higher than foreign direct investment. True/ False
True False

The performance of the economies of Sub-Saharan Africa does not support the theory of economic convergence across countries. True/ False
True False

What is the equation for the Solow growth model?

Suppose the growth rate of total factor productivity in an economy is 4% per year. Also, the growth rate of manufactured capital per worker is 2% per year. According to the Solow growth model, the growth rate of output per worker must therefore be 6%. (True/False)
True False

Economic growth is the ADE/ASR model does not necessarily imply a change in the inflation rate. True/ False
True False

Which one of the following variables has grown the most in the last several decades?

In recent years, what is the greatest source of capital flows to developing countries?

About how much of the world’s income goes to the poorest 40% of households?

Suppose a country has a real GDP in Year 1 of $10 trillion and a real GDP in Year 2 of $11 trillion. What is the growth rate of GDP in this country?

Since the late 1990s developing countries have increased their reliance upon workers’ remittances as a source of financial capital. True/False
True False

Conventional economic thinking implies that developing countries should have a competitive advantage in high-technology goods. True/False
True False

About what percentage of GDP do developed nations give to developing countries as official development aid?

Much of the support for economic convergence comes from rapid economic growth in China. True/False
True False

Which one of the following was NOT associated with the Industrial Revolution?

Suppose a country has a real GDP growth rate of 5% per year, and that the growth rate of real GDP per capita is 2% per year. What is the population growth rate in this country?

Bilateral development assistance is defined as …