Homework 4 of ETP Economics

Homework 4 of ETP Economics Winter Term 2014 Due: May 28 1.When the money market is drawn with the value of money on the vertical axis, if the price level is above the equilibrium level, there is an a. excess demand for money, so the price level will rise. b. excess demand for money, so the price level will fall. c. excess supply of money, so the price level will rise. d. excess supply of money, so the price level will fall. 2.According to the classical dichotomy, when the money supply doubles which of the following double? a. the price level and nominal GDP b. the price level and real GDP c. only real GDP d. only the price level 3.The money supply in Tazland is $100 billion. Nominal GDP is $800 billion and real GDP is $200 billion. What are the price level and velocity in Tazland? a. the price level and velocity are both 8 b. the price level is 8 and velocity is 4 c. the price level and velocity are both 4 d. the price level is 4 and velocity is 8 4.Suppose that the United States unexpectedly decided to pay off its debt by printing new money. Which of the following would happen? a. People who held money would feel poorer. b. Prices would rise. c. People who had lent money at a fixed interest rate would feel poorer. d. All of the above are correct. 1

5.If the nominal interest rate is 5 percent and there is a deflation rate of 2 percent, what is the real interest rate? a. 7 percent b. 5 percent c. 3 percent d. 3/5 percent 6.If a country changes its corporate tax laws so that domestic firms build and manage more firms overseas, then this country will a. increase foreign direct investment which increases net capital outflow. b. increase foreign direct investment which decreases net capital outflow. c. increase foreign portfolio investment which increases net capital outflow. d. increase foreign portfolio investment which decreases net capital outflow. 7.When a French vineyard establishes a distribution center in the U.S., U.S. net capital outflow a. increases because the foreign company makes a portfolio investment in the U.S. b. declines because the foreign company makes a portfolio investment in the U.S. c. increases because the foreign company makes a direct investment in capital in the U.S. d. declines because the foreign company makes a direct investment in capital in the U.S. 8.A U.S. firm buys sardines from Morocco and pays for them with U.S. dollars. Other things the same, U.S. net exports a. increase, and U.S. net capital outflow increases. b. increase, and U.S. net capital outflow decreases. c. decrease, and U.S. net capital outflow increases. d. decrease, and U.S. net capital outflow decreases. 2

9.Jill (American) uses some euros (Euro dollars) to purchase a bond issued by a French vineyard. This exchange a. increases U.S. net capital outflow by more than the value of the bond. b. increases U.S. net capital outflow by the value of the bond. c. does not change U.S. net capital outflow. d. decreases U.S. net capital outflow. 10.A country has $60 million of saving and domestic investment of $40 million. Net exports are a. $20 million. b. -$20 million. c. $100 million. d. -$100 million. 11.Other things the same, the real exchange rate between American and British goods would be higher if a. prices of British goods were higher, or the number of pounds a dollar purchased was higher. b. prices of British goods were higher, or the number of pounds a dollar purchased was lower. c. prices of British goods were lower, or the number of pounds a dollar purchased was higher. d. prices of British goods were lower, or the number of pounds a dollar purchased was lower. 3

12.U.S. corporation Well s Petroleum borrows money to build an oil well in Texas and to build another in Venezuela. a. The borrowing for the well in the U.S. and the well in Venezuela both count as part of the demand for loanable funds in the U.S. market. b. Neither the borrowing for the well in the U.S. nor the well in Venezuela count as part of the demand for loanable funds in the U.S. market. c. The borrowing for the well in the U.S. counts as part of the demand for loanable funds in the U.S. The borrowing for the well in Venezuela does not count as part of the demand for loanable funds in the U.S. market. d. The borrowing for the well in Venezuela counts as part of the demand for loanable funds in the U.S. The borrowing for the well in the US. does not counts as part of the demand for loanable funds in the U.S. market. 13.Suppose the U.S. supply of loanable funds shifts left. This will a. increase U.S. net capital outflow and increase the quantity of loanable funds demanded. b. increase U.S. net capital outflow and decrease the quantity of loanable funds demanded. c. decrease U.S. net capital outflow and increase the quantity of loanable funds demanded. d. decrease U.S. net capital outflow and decrease the quantity of loanable funds demanded. 14.In the open-economy macroeconomic model, other things the same, a decrease in the interest rate shifts a. the demand for dollars in the market for foreign-currency exchange to the right. b. the demand for dollars in the market for foreign-currency exchange to the left. c. the supply of dollars in the market for foreign-currency exchange to the right. d. the supply of dollars in the market for foreign-currency exchange to the left. 4

15.The amount of dollars demanded in the market for foreign-currency exchange at a given real exchange rate increases if a. either U.S. imports or exports increase. b. either U.S. imports or exports decrease. c. either U.S. imports increase or U.S. exports decrease. d. either U.S. imports decrease or U.S. exports increase. 16.When a country runs a government budget deficit a. the real exchange rate of its currency and its net exports increase. b. the real exchange rate of its currency and its net exports decrease. c. the real exchange rate of its currency increases and its net exports decrease. d. the real exchange rate of its currency decreases and its net exports increase. 17.Suppose that the U.S. imposes an import quota on automobiles. The quota makes the real exchange rate of U.S. dollars a. appreciate but does not change the real interest rate in the United States. b. appreciate and the real interest rate in the United States increase. c. depreciate and the real interest rate in the United States decrease. d. depreciate but does not change the real interest rate in the United States. 18.Other things the same, a decrease in the price level causes the interest rate to a. increase, the dollar to appreciate, and net exports to increase. b. increase, the dollar to depreciate, and net exports to decrease. c. decrease, the dollar to depreciate, and net exports to increase. d. decrease, the dollar to appreciate, and net exports to decrease. 19.Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to a. decrease consumption, shown as a movement to the left along a given aggregate demand curve. b. increase consumption, shown as a movement to the right along a given aggregate demand curve. c. decrease consumption, shifting the aggregate demand curve to the left. d. increase consumption, shifting the aggregate demand curve to the right. 5

20.The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change a. in the price level and real GDP. b. in the price level, but not real GDP. c. in real GDP, but not the price level. d. in neither the price level nor real GDP. 21.Which of the following would cause prices and real GDP to rise in the short run? a. an increase in the expected price level b. an increase in the money supply c. a decrease in the capital stock d. None of the above is correct. 22.An economic contraction caused by a shift in aggregate demand causes prices to a. rise in the short run, and rise even more in the long run. b. rise in the short run, and fall back to their original level in the long run. c. fall in the short run, and fall even more in the long run. d. fall in the short run, and rise back to their original level in the long run. 23.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. d. is independent of the interest rate, while money demand is negatively related to the interest rate. 24.People will want to hold more money if the price level a. or the interest rate increases. b. or the interest rate decreases. c. increases or the interest rate decreases. d. decreases or the interest rate increases. 6

25.If the Federal Reserve decided to lower interest rates, it could a. buy bonds to lower the money supply. b. buy bonds to raise the money supply. c. sell bonds to lower the money supply. d. sell bonds to raise the money supply. 26.The economy is in long-run equilibrium. Suppose that automatic teller machines become cheaper and more convenient to use, and as a result the demand for money falls. Other things equal, we would expect that in the short run, a. the price level and real GDP would rise, but in the long run they would both be unaffected. b. the price level and real GDP would rise, but in the long run the price level would rise and real GDP would be unaffected. c. the price level and real GDP would fall, but in the long run they would both be unaffected. d. the price level and real GDP would fall, but in the long run the price level would fall and real GDP would be unaffected. 27.If the MPC = 3/5, then the government purchases multiplier is a. 5/3. b. 5/2. c. 5. d. 15. 28.To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could a. increase the money supply by buying bonds. b. increase the money supply by selling bonds. c. decrease the money supply by buying bonds. d. increase the money supply by selling bonds. 7

29.Assume that the MPC is 0.75. Assume that there is a multiplier effect and that the total crowding-out effect is $6 billion. An increase in government purchases of $10 billion will shift aggregate demand a. left by $24 billion. b. left by $36 billion. c. right by $34 billion. d. right by $36 billion. 30.Suppose that businesses and consumers get much more optimistic about the future of the economy. To stabilize output the Federal Reserve could a. buy bonds to raise interest rates. b. buy bonds to lower interest rates. c. sell bonds to raise interest rates. d. sell bonds to lower interest rates. 31.Other things the same, automatic stabilizers tend to a. raise expenditures during expansions and recessions. b. lower expenditures during expansions and recessions. c. raise expenditures during recessions and lower expenditures during expansions. d. raise expenditures during expansions and lower expenditures during recessions. 32.The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do? a. increase government expenditures or increase the money supply b. increase government expenditures or decrease the money supply c. decrease government expenditures or increase the money supply d. decrease government expenditures or decrease the money supply 33.If policymakers decrease aggregate demand, then in the long run a. prices will be lower and unemployment will be higher. b. prices will be lower and unemployment will be unchanged. c. inflation and unemployment will be unchanged. d. None of the above is correct. 8

34.Suppose the central bank pursues an expansionary monetary policy. In the short-run the effects of this are shown by a. moving to the left along the short-run Phillips curve. b. moving to the right along the short-run Phillips curve. c. shifting the short run Phillips curve right. d. shifting the short run Phillips curve left. 35.If inflation expectations rise, the short-run Phillips curve shifts a. right, so that at any inflation rate unemployment is higher in the short run than before. b. left, so that at any inflation rate unemployment is higher in the short run than before. c. right, so that at any inflation rate unemployment is lower in the short run than before. d. left, so that at any inflation rate unemployment is lower in the short run than before. 36.The analysis of Friedman and Phelps can be summarized in the following equation where a is positive number: a. Unemployment Rate = Natural Rate of Unemployment - a(actual Inflation - Expected Inflation). b. Unemployment Rate = Natural Rate of Unemployment - a(expected Inflation - Actual Inflation). c. Unemployment Rate = Expected Rate of Inflation - a(actual Inflation - Expected Inflation). d. Unemployment Rate = Actual Rate of Inflation - a(actual Unemployment - Expected Unemployment). 37.In the long run, a decrease in the money supply growth rate a. increases inflation and shifts the short-run Phillips curve right. b. increases inflation and shifts the short-run Phillips curve left. c. decreases inflation and shifts the short-run Philips curve right. d. decreases inflation and shifts the short-run Phillips curve left. 9

38.Which of the following is correct if there is an adverse supply shock? a. The short-run aggregate supply curve and the short-run Phillips curve both shift right. b. The short-run aggregate supply curve and the short-run Phillips curve both shift left. c. The short-run aggregate supply curve shifts right and the short-run Phillips curve shifts left. d. The short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right. 39.If in response to an adverse aggregate supply shock the Fed increased the money supply, a. unemployment and inflation would both rise. b. unemployment and inflation would both fall. c. unemployment would rise and inflation would fall. d. unemployment would fall and inflation would rise. 40.Proponents of rational expectations argued that the sacrifice ratio a. could be high because it was rational for people not to immediately change their expectations. b. could be high because people might adjust their expectations quickly if they found anti-inflation policy credible. c. could be low because it was rational for people not to immediately change their expectations. d. could be low because people might adjust their expectations quickly if they found anti-inflation policy credible. 10