ECON 3312 Macroeconomics Exam 3 Spring 2016 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose there is an increase in expected future taxes. When expectations are rational this will cause which of the following to occur? A) the IS curve to shift right in the current period B) the IS curve to shift left in the current period C) the LM curve to shift up in the current period D) the LM curve to shift down in the current period 1) 2) One implication of adaptive expectations is that the lags in the economyʹs response to shocks will be relative to the full information model. A) much longer B) much shorter C) irrelevant D) about the same 2) 3) Everything else held constant, a change in workersʹ expectations about inflation will cause to change. A) long-run aggregate supply B) aggregate demand C) the production function D) short-run aggregate supply 3) 4) Suppose policy makers underestimate the natural rate of unemployment, i.e. they believe the natural rate is 4% when it is really 6%. In situations like these, policy makers will likely implement policies that result in A) a higher inflation rate than necessary. B) an unemployment rate that is ʺtoo high.ʺ C) more unemployment than necessary. D) a steadily decreasing inflation rate. E) overly contractionary monetary and fiscal policy. 4) 5) Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for an increase in government spending. This increase in government spending will, in the short run, cause an increase in A) the nominal wage. B) the price level. C) the nominal interest rate. D) all of the above E) none of the above 5) 6) According Friedmanʹs restatement of the quantity theory of money, an increase in the money supply the demand for, everything else held constant. A) increases; supply B) decreases; non-durable goods C) increases; durable goods D) decreases; supply 6) 7) Assets that generate high returns when wealth is decreasing are more valuable than those that are poitively correlated with changes in wealth because such assets can be use to. A) equate marginal utilities of consumption over time B) smooth consumption C) hedge income risk D) All of the above 7) 1
8) Assume that the economy is in long-run equilibrium with output equal to potential. A technological improvement will cause the short-run AS to shift and the long-run AS to shift leading to output and inflation. A) left; right; decreased; decreased B) leftt; left; decreased; increased C) right; right; increased; decreased D) right; right; decreased; decreased 8) 9) Adaptive expectations assumes that individuals A) can accurately predict the future. B) form their predictions of macroeconomic variables randomly. C) base predictions on past observations of the variable being forecast. D) use all available information in predicting the future. E) none of the above 9) 10) If the economy is on its short-run Phillips curve at the natural unemployment rate, then in the AS-AD model, real GDP is definitely A) greater than potential GDP. B) less than potential GDP. C) decreasing. D) increasing. E) equal to potential GDP. 10) 11) Moving along the short-run Phillips curve, a unemployment rate can only be achieved by paying the cost of. A) lower; a lower price level B) lower; a higher inflation rate C) lower; a lower inflation rate D) lower; a higher expected inflation rate E) higher; a higher inflation rate 11) 12) According to the permanent-income hypothesis, A) household consumption depends on income that households expect to receive over their lifetime, and financial markets are used to smooth consumption in response to changes in transitory income. B) the income earned in a lifetime will be evenly divided between consumption and saving. C) households use financial markets to to transfer funds from periods when income is high to to periods when income is low. D) the present value of lifetime consumption equals the present value of lifetime income. 12) 13) When the aggregate demand curve shifts rightward, in the hybrid model (i.e., short - and long-run AS) the price level and the unemployment rate, in the short run. A) decreases; decreases B) does not change; does not change C) decreases; increases D) increases; decreases E) increases; increases 13) 14) When the money supply declines by 10%, in the long run, output and the price level. A) is unchanged; falls B) is unchanged; is unchanged C) declines; falls D) declines; is unchanged 14) 2
15) An increase in potential GDP aggregate supply and. A) decreases; shifts the AS curve leftward B) has no effect on; does not shift the AS curve C) increases; shifts the AS curve rightward D) decreases; shifts the AS curve rightward E) increases; shifts the AS curve leftward 15) 16) The long-run Phillips curve shows the relationship between A) real GDP and the natural unemployment rate. B) the nominal interest rate and real interest rate. C) real GDP and potential GDP. D) the inflation rate and the unemployment rate. E) the inflation rate and the natural unemployment rate. 16) 17) Inflation that is than what is expected benefits and hurts. A) greater; lenders; borrowers B) greater; lenders; no one C) less; lenders; borrowers D) less; borrowers; lenders 17) 18) If expectations are rational, new information ought not to influence economic decision-making if. A) monetary and/or fiscal policy changes B) that information has already been anticipated. C) consumers rely on rational expectations. D) monetary policy changes. 18) 19) Which of the following people is most likely to be spending all of their current income? A) a high income person expecting continued high income throughout life B) a low income person expecting continued low income throughout life C) a low income person expecting a dramatic rise in income in the future D) a high income person expecting to retire soon, and live for a long time afterward E) a high income person expecting a dramatic drop in income in the future 19) 20) Economic theory suggests that interest rates are important than interest rates in explaining investment behavior. A) nominal; more; real B) real; less; nominal C) real; more; nominal D) market; more; real 20) 21) Which market adjusts most quickly in response to shocks to the economy? A) The labor market B) The goods market C) The financial (asset) market D) The asset, labor, and goods markets adjust at about the same speed to eliminate a disequilibrium in the macroeconomy. 21) 22) Suppose the intersection of the IS and LM curves is to the right of the full employment output, Y*. What would most likely eliminate a disequilibrium among the asset, labor, and goods markets? A) A fall in the price level, shifting the LM curve down and to the right. B) A rise in the price level, shifting the LM curve up and to the left. C) A rise in the price level, shifting the IS curve up and to the right. D) A fall in the price level, shifting the IS curve down and to the left. 22) 3
23) The problem that arises when a policy maker prefers one policy in advance but a different one when the time to implement arrives. Knowing this, others will not find the commitment to the first policy credible. This problem is known as A) the Lucas critique. B) the adjustment costs problem. C) the rational expectations problem. D) the time inconssitency problem. 23) 24) The long-run rate of unemployment to which an economy always gravitates is the A) normal rate of unemployment. B) inflationary rate of unemployment. C) neutral rate of unemployment. D) natural rate of unemployment. 24) 25) A decrease in the real interest rate acts as for lenders and as for borrowers. A) an increase in wealth; a decrease in wealth B) an increase in wealth; an increase in wealth C) a decrease in wealth; an increase in wealth D) a decrease in wealth; a decrease in wealth 25) 26) Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause in real GDP in the short run and in inflation in the short run, everything else held constant. A) no change; an increase B) a decrease; a decrease C) no change; a decrease D) an increase; an increase 26) 27) In the figure above, the natural unemployment rate is A) 6 percent. B) 8 percent. C) 4 percent. D) 0 percent. E) 2 percent. 27) 28) In the figure above, the expected inflation rate is A) 6 percent. B) 0 percent. C) 2 percent. D) 8 percent. E) 4 percent. 28) 29) According to the traditional interest-rate channel, expansionary monetary policy lowers the real interest rate, thereby raising expenditure on A) net exports. B) government expenditure. C) business investment. D) consumer nondurables. 29) 4
30) According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and 1978-1980 had the effect of A) decreasing aggregate output, raising unemployment, and raising the inflation. B) decreasing aggregate output, raising unemployment, and lowering the inflation. C) increasing aggregate output, lowering unemployment, and raising the inflation. D) increasing aggregate output, raising unemployment, and raising the inflation. 30) 31) Moving along the short-run AS curve, when the price level increases, the A) nominal wage rate rises, and there is a decrease in the quantity of real GDP supplied. B) real wage rate falls, and there is an increase in the quantity of real GDP supplied. C) nominal wage rate falls, and there is an increase in the quantity of real GDP supplied. D) real wage rate rises, and there is an increase in the quantity of real GDP supplied. E) real wage rate rises, and there is a decrease in the quantity of real GDP supplied. 31) 32) Consumption is most likely to respond one-for-one with changes in current income when A) people believe the change in their current income is temporary. B) people are able to borrow as much as they wish, as long as they pay it back. C) the change in current income is caused by the business cycle. D) the change in current income results from a one-time bonus E) none of the above 32) 33) Moving upward along the aggregate supply curve, is equivalent to A) shifting the short-run Phillips curve rightward. B) shifting the short-run Phillips curve leftward. C) moving upward along the short-run Phillips curve. D) moving downward along the short-run Phillips curve. E) shifting the short-run Phillips curve upward. 33) 34) If the curve is relatively more unstable than the curve, a money supply target is preferred. A) IS; IS B) LM; IS C) LM; LM D) IS; LM 34) 35) According to the permanent income hypothesis, the impact of. A) a change in transitory income is felt primarily through changes in the total tax revenue paid to the federal government. B) a change in transitory income on consumption is greater than the impact resulting from a change in permanent income. C) a change in permanent income on consumption is larger than the impact resulting from a change in future income. D) a change in permanent income on consumption is greater than the impact resulting from a change in transitory income. 35) 36) If a person completely smooths consumption over his lifetime, then consumption is best represented by which of the following? A) lifetime wealth / the number of years the person expects to live B) lifetime wealth / the number of years the person expects to work C) current income X the number of years the person expects to live D) current income X the number of years the person expects to work 36) 5
37) The argument that econometric policy evaluation is likely to be misleading if policymakers assume stable economic relationships under rational expectations is known as A) the Lucas critique. B) the monetarist revolution. C) public choice theory. D) new Keynesian theory. 37) 38) Rational expectations means that individuals A) gather information until MC info = MB info B) make no expectations errors. C) can accurately predict the future. D) have perfect foresight. E) none of the above 38) 39) If the expected inflation rate rises, then the short-run Phillips curve and the long-run Phillips curve. A) shifts; does not shift B) does not shift; does not shift C) might shift; shifts only if the short-run Phillips curve shifts D) shifts; shifts E) does not shift; shifts 39) 40) The short-run Phillips curve is another way of looking at A) potential GDP. B) aggregate demand. C) the natural rate of unemployment. D) short-run aggregate supply. E) long-run aggregate supply. 40) 41) The expectations-augmented Phillips curve implies that as expected inflation increases, nominal wages to prevent real wages from. A) fall; rising B) rise; rising C) rise; falling D) fall; falling 41) 42) The long-run aggregate supply curve is a vertical line passing through A) the actual rate of unemployment. B) the natural rate of output. C) the expected rate of inflation. D) the natural-rate price level. 42) 43) The IS curve shows the combinations of output and the real interest rate for which A) the labor market is in equilibrium. B) the goods market is in equilibrium. C) an increase in output will cause the market-clearing interest rate to be bid up. D) the financial asset market is in equilibrium. 43) 44) In the long-run ISLM model and with everything else held constant, as long as the level of output the natural rate level, the price level will continue to, shifting the LM curve to the, until finally output is back at the natural rate level. A) remains below; fall; left B) exceeds; rise; right C) remains below; rise; right D) exceeds; rise; left 44) 6
45) Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of in aggregate is a rise in both inflation and output in the short -run, but in the long-run the only effect is a rise in inflation. A) an increase; demand B) a decrease; supply C) an increase; supply D) a decrease; demand 45) 46) For consumers with a binding borrowing constraint, a decrease in the real interest rate. A) has no impact on consumption B) decreases consumption now, and increases future consumption C) decreases consumption now, and in the future D) increases consumption now, and in the future 46) 47) The short-run Phillips curve shows between the unemployment rate and the inflation rate and the long-run Phillips curve shows between the unemployment rate and the inflation rate. A) no relationship; a negative relationship B) no relationship; no relationship C) a negative relationship; a positive relationship D) a positive relationship; a negative relationship E) a negative relationship; no relationship 47) 48) If the curve is relatively more unstable than the curve, an interest rate target is preferred. A) IS; IS B) LM; IS C) IS; LM D) LM; LM 48) 49) The rate of output at which the price level has no tendency to rise or fall is called the A) efficient level of output. B) natural rate of output. C) potential level of income. D) bliss point. 49) 50) If inflation increases unexpectedly, then A) borrowers pay a higher real interest rate than they expected. B) neither borrowers nor lenders lose. C) lenders receive a lower real interest rate than they expected. D) lenders gain and borrowers gain. 50) 7
Answer Key Testname: ECON3312_EXAM3_SPRING2016 1) B 2) A 3) D 4) A 5) D 6) C 7) D 8) C 9) C 10) E 11) B 12) A 13) D 14) A 15) C 16) E 17) C 18) B 19) C 20) C 21) C 22) B 23) D 24) D 25) C 26) D 27) A 28) E 29) C 30) A 31) B 32) E 33) C 34) D 35) D 36) A 37) A 38) A 39) A 40) D 41) C 42) B 43) B 44) D 45) A 46) A 47) E 48) B 49) B 50) C 8