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1 Romer Section 1 1. The IS curve represents combinations of Y and r that: a. are consistent with equilibrium in the money market. b. are consistent with equilibrium in the goods market. c. are positively related to each other. d. are consistent with an increasing level of government expenditure. 2. The IS curve is downward sloping because: a. A reduction in the real interest rate leads to more government expenditure and thus to higher Y. b. A reduction in the real interest rate leads to lower taxes and thus to higher Y. c. A reduction in the real interest rate leads to higher investment and possibly consumption spending which lead to higher Y. d. All of the above. 3. Shifts in the IS curve can result from: a. Changes in government expenditure. b. Changes in taxes. c. Changes in the exogenous components of consumption or investment. d. All of the above. 4. Fiscal policy consists of: a. Changes in taxes and government expenditure. b. Changes in the money supply. c. The central bank changing the interest rate. d. All of the above. 5. An increase in government spending is represented as a: a. leftward shift of the IS curve. b. rightward shift of the IS curve. c. leftward shift of the MP curve. d. rightward shift of the MP curve. 6. The MP curve represents combinations of Y and r that: a. show the real interest rate that the CB wishes to set for a given level output and given level of inflation. b. are consistent with equilibrium in the goods market. c. are negatively related to each other. d. are consistent with an increasing level of government expenditure.

2 7. The MP curve is upwarding sloping because: a. A higher interest rate causes a higher level of output. b. Higher output is required for the money market to be in equilibrium at a higher interest rate. c. The central bank sets a higher interest rate at higher levels of output because of concerns that higher output will lead to inflation. d. Government spending is higher at higher levels of r and Y. 8. An upward shift in the MP curve can occur because: a. Inflation has increased. b. Inflation has decreased. c. Taxes have increased. d. The CB wishes to set a lower interest rate for a given level of output. 9. If the Central Bank sets a higher interest rate for a given level of output: a. We represent this as a downward shift of the MP curve. b. We represent this as an upward shift of the MP curve. c. We represent this as a downward shift of the IS curve. d. We represent this as an upward shift of the IS curve. 10. When not concerned with changing the current inflation rate, the Central Bank will normally target the real interest rate that: a. is consistent with the maximum possible output the economy can produce in the short-run. b. is consistent with the natural level of output, given the current state of demand as represented by the IS curve. c. is consistent with a level of output below the natural level of output. d. maximizes investment demand. 11. The Central Bank achieves changes in the real interest rate through: a. Announcing a change in the real interest rate. b. Announcing a change in the nominal interest rate. c. Buying or selling enough government bonds to adjust the nominal interest rate by more than the expected rate of inflation, and thus the real rate in the desired direction. d. Buying or selling enough government bonds to adjust the nominal interest rate by less than the expected rate of inflation, and thus the real rate in the desired direction. 12. To achieve an increase in the real interest rate, the CB must increase the nominal interest rate by: a. the expected rate of inflation. b. more than the expected rate of inflation. c. less than the expected rate of inflation. d. The CB can ignore the expected rate of inflation.

3 13. In the early 1990s, budget deficits were reduced, and the Fed acted to prevent a fall in output. We can represent these actions as: a. A leftward shift of the IS curve and a rightward shift of the MP curve. b. A leftward shift of both the IS and MP curves. c. A rightward shift of the IS curve and a leftward shift of the MP curve. d. A rightward shift of both the IS and MP curves. 14. The actions in Q. 13 above, under the assumption that investment is primarily dependent on the real interest rate, and consumption is primarily dependent on disposable income, would act to: a. increase consumption and decrease investment. b. increase both consumption and investment. c. decrease both consumption and investment. d. decrease consumption and increase investment. 15. A fall in consumer confidence, in the short-run, will result in: a. A rightward shift of the IS curve and a reduction in output. b. A rightward shift of the IS curve and an increase in output. c. A leftward shift of the IS curve and a decrease in output. d. A leftward shift of the IS curve and an increase in output. 16. Equilibrium in the money market occurs when: a. households and firms are happy with their allocation of assets between money and bonds at a given Y and r. b. money demand equals money supply. c. at a given money supply, there is no further tendency to shift from holding bonds to money. d. all of the above. 17. Money market equilibrium is represented by the curve. a. IS b. MP c. LM d. IA 18. Money demand (for real money balances) is: a. positively related to the nominal interest rate and negatively related to income. B. positively related to both the nominal interest rate and income. C. negatively related to both the nominal interest rate and income. D. negatively related to the nominal interest rate and positively related to income. 19. Monetary policy is able to affect the real interest rate, because prices are: a. high b. completely flexible c. not completely flexible d. low

4 20. When prices are sticky, an increase in the money supply causes: a. a reduction in the real interest rate and an increase in output. b. an increase in the real interest rate and a decrease in output. c. a reduction in the real interest rate and a decrease in output. d. no effect on the real interest rate or output. Open Economy Lecture 13 Slides 21. a. As of 2010, US exports accounted for about % of GDP a. 10 b c. 15 d b. As of 2010, US imports accounted for about % of GDP a. 5 b. 10 c. 16 d Exports can be greater than 100% of GDP because the value of exports may include imported intermediate goods which are not counted as part of GDP since it is only NX that is included in GDP. 23. The nominal exchange rate is the amount of foreign currency that can be purchased by 1 unit of domestic currency, or, equivalently, the price of domestic currency in terms of foreign currency. 24. The real exchange rate measures how much of one country s goods exchange for a unit of another country s goods and includes relative price levels in the two countries as well as the nominal exchange rate. 25. If 80 Japanese yen trade for $1, the US price level is $1 per good, and the Swiss price level is 100 yen per good, then the real exchange rate between Japanese goods and US goods is Japanese goods per US good. a. 0.5 b. 0.8 c d. 3

5 26. In an open economy: a. Domestic Spending = Domestic Output. b. Saving = Investment. c. Saving is always greater than investment. d. Saving = Investment + Net Capital Outflow. 27. If saving is less than investment: a. The country is a net lender. b. The country is a net borrower. c. The country is a net exporter. d. We cannot tell if the country is a net lender or a net borrower. 28. A country with a trade deficit is also: a. A net borrower. b. A net lender. c. Neither a borrow or a lender. d. A net exporter. Romer Section II 29. Under floating exchange rates, the IS curve is than in a closed economy, because: a. steeper; net capital outflow is a function of the real interest rate. B. steeper; net capital outflow is not a function of the real interest rate. C. flatter; net exports are positively related to the real exchange rate. D. flatter; net capital outflow is negatively related to the real interest rate. 30. The NX curve is downward sloping with respect to the real exchange rate because: a. At a higher exchange rate, our goods are more expensive for foreigners and their goods are cheaper for us, so exports are lower and imports higher. B. At a lower exchange rate, our goods are more expensive for foreigners and their goods are cheaper for us, so exports are lower and imports higher. c. At a higher exchange rate, our goods are less expensive for foreigners and their goods are more expensive for us, so exports are lower and imports higher. 31. Net capital outflow is negatively related to the real interest rate because: a. Financial investors are reluctant to invest if the interest rate is high. b. There is less need for financial investment if the interest rate is high, because firms cannot afford to purchase investment goods. c. Net exports are high if the interest rate is high. d. Financial investors are seeking the highest returns on their investment, so more financial investment will remain in the country if the interest rate is relatively high.

6 32. In the short-run model under floating exchange rates, as we move along the IS curve to the right, the real exchange rate is: a. Fixed. c. Increasing. c. Decreasing. d. Sometimes increasing and sometimes decreasing. 33. In the short-run model under floating exchange rates, a tighter monetary policy resulting in an upward shift of the MP curve, causes a(n) in net capital outflow, a(n) of the exchange rate, and a(n) in net exports. a. Decrease; decrease; decrease. b. Decrease; increase; decrease. c. Increase; decrease; increase. d. Increase; decrease; decrease. 34. In the short-run model under floating exchange rates, the initial impact of contractionary fiscal policy is to cause a(n) in net capital outflow, a(n) of the exchange rate, and a(n) in net exports. a. Decrease; increase; decrease. b. Decrease; decrease; increase. c. Increase; decrease; decrease. d. Increase; decrease; increase. 35. In the short-run model under floating exchange rates, expansionary monetary policy is effective in increasing output than in a closed economy, because : a. More; a given change in r works through the additional channel of net capital outflow in affecting output. b. Less; a given change in r works through the additional channel of net capital outflow in affecting output. c. Just as; the effect of monetary policy is the same in either case. d. Less; the effect on net exports counteracts the effect of the lower interest rate on output. 36. In the short-run model under floating exchange rates, attempting to increase net exports through restricting imports results in: a. An increase in net exports and output, because restricting imports does not affect exports. b. An increase in net exports but not output, because the effect on output is counteracted by the effect on net capital outflow. c. No change in net exports and output, because the increase in net exports at a given exchange rate is exactly offset by an increase in the equilibrium exchange rate causing a reduction in net exports. d a reduction in net exports and output, because other countries will retaliate.

7 37. In order to maintain a fixed exchange rate, a Central Bank must: a. be willing to buy or sell domestic currency at the desired exchange rate. b. be willing to buy but not sell domestic currency at the desired exchange rate. c. be willing to sell but not buy domestic currency at the desired exchange rate. d. be willing to reduce the interest rate as much as necessary to achieve potential output. 38. The Reserve Gain is: a. the total foreign currency in a country. b. the difference between the Central Bank s purchases and sales of foreign currency. c. the difference between net exports and private net capital outflow. d. both b and c. 39. With fixed exchange rates, the IS curve is than/as with floating exchange rates because: a. steeper; since the exchange rate is fixed as we move along the IS curve, the added boost to output from increasing net exports is not present. b. steeper; since the exchange rate is fixed as we move along the IS curve, net exports is not included. c. flatter; the effect of the fixed exchange rate is to increase the impact of the interest rate on output. d. the same; the slope of the IS curve is not affected by whether the exchange rate is fixed or floating. 40. If a country is trying to maintain a fixed exchange rate, domestic monetary policy is constrained because: a. too high an interest rate will deplete the Central Bank s foreign currency reserves. b. the Central Bank is not able to set the interest rate below the level that will deplete the foreign currency reserves and still maintain the fixed exchange rate. c. too high an interest rate will attract too much foreign currency. d. the Central Bank must set the interest rate at the level at which the Reserve Gain equals zero. 41. With fixed exchange rates, restricting imports: a. will have no effect on net exports and output. b. will increase net exports but have no effect on output. c. may increase net exports and output, since the exchange rate does not change to offset the increase in NX from the decrease in imports. d. will decrease net exports and output. 42. A devaluation: a. increases demand for a country s exports by making them cheaper relative to other countries goods. b. increases living costs in the country because imports are now relatively more expensive for the country s residents. c. dampens the fall in output resulting from a fall in export demand. d. all of the above. Romer Section III 43. The Romer model assumes that inflation at a point in time is fixed or given.

8 44. If output is above potential output, inflation will increase, and if output is below potential output, inflation will decrease. 45. Aggregate demand in the inflation output space is downward sloping because : a. fiscal policy adjusts when inflation rises, so that output falls. b. as inflation rises, people demand less goods. c. as inflation rises, monetary policy tightens which leads to a lower level of output in the short-run. d. all of the above. 46. The Inflation Adjustment (IA) line is horizontal because we assume inflation is fixed at a point in time. 47. The IA line moves up or down depending on: a. the real interest rate is higher or lower than the natural real interest rate. B. output is higher or lower than potential output. c. the MP curve is moving or stationary. D. the AD is moving or stationary. 48. Shifts of the MP curve that correspond to movement along the AD curve are caused by changes in r for a given Y in response to changes in inflation. 49. Shifts of the MP curve that correspond to shifts of the AD curve are changes in r for a given Y and a given inflation rate. 50. A primary difference between the long-run effects of monetary and fiscal policies is that: a. monetary policy affects only nominal variables in the long-run, while fiscal policy also affects the long-run real interest rate. B. fiscal policy affects only nominal variables in the long-run, while monetary policy also affects the longrun real interest rate. C. monetary policy has no long-run effect on either real or nominal variables, while fiscal policy has longrun effects. D. fiscal policy has no long-run effect on either real or nominal variables, while monetary policy has longrun effects. 51. The best recent example of a recession primarily caused by a deliberate attempt by the Fed to reduce inflation was in: a b c d Contractionary fiscal policy such as an increase in taxes, will lead to lower output and r in the shortrun, and lower r but no effect on output in the longer run.

9 53. An example of an unfavorable inflation shock is a sudden increase in oil prices. 54. A productivity shock is both an inflation shock and a supply shock. 55. A reduction in the natural rate of unemployment due to improved worker-job matching (perhaps because of increased worker training) is an example of : a. a positive supply shock. b. a negative supply shock. c. an inflation shock. d. a demand shock. 56. A positive productivity shock will lead to in the longer run. a. higher inflation. b. higher potential or natural level of output. c. higher real interest rate for a given level of demand. d. lower potential or natural level of output. 57. According to the AD-IA model, a temporary unfavorable inflation shock such as a one-time increase in oil prices results in: a. higher inflation and output in the short-run. B. higher inflation and output in the short-run, but the economy returns to the natural level of output in the long-run. C. higher inflation and lower output in the short-run, as the Central Bank responds to the higher inflation by tightening monetary policy. D. higher inflation in the short-run and the long-run. 58. Credibility of CB announcements can help to reduce the negative impact of tighter monetary policy on output by acting as an inflation shock by directly reducing inflation expectations causing a less tight monetary policy to be needed and thus less of a drop in Y. 59. The concept of anchored expectations says that inflation can get stuck at a higher level than one would expect from the output gap, because people tend to continue to expect inflation at the level the CB has targeted, even when inflation is below that target. 60. Suppose the Central Bank is setting the nominal interest rate according to the following Taylor rule: i = r* + π + 0.5( π π*) + 0.5Y gap. Suppose that r*(the real interest rate associated with full employment output) = 3, π*(the CB s target inflation level) = 2, and initially inflation equaled the target, and Y gap was zero. If Y increased so that Y gap = 2, and at the same time inflation increased by 3 percentage points, what real interest rate will the Central Bank want to target? a. 5 b. 5.5 c. 6.5 d. 8.5 Targeted new real rate = 3 + change in real rate = (change in inflation rate) (change in Ygap) = =5.5.

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