ECN_340_M3_review.docx

Indicate the answer choice that best completes the statement or answers the question. 1. The equilibrium of the Keynesian cross shows:   a.  determination of equilibrium income and the interest rate in the short run.   b.  determination of equilibrium income and the interest rate in the long run.  ...

Indicate the answer choice that best completes the statement or answers the question. 1. The equilibrium of the Keynesian cross shows:   a.  determination of equilibrium income and the interest rate in the short run.   b.  determination of equilibrium income and the interest rate in the long run.   c.  equality of planned expenditure and income in the short run.   d.  equality of planned expenditure and income in the long run. 2. In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy:   a.  increases the amount of money in the economy.   b.  changes income, which changes consumption, which further changes income.   c.  is government spending and, therefore, more powerful than private spending.   d.  changes the interest rate. 3. According to the theory of liquidity preference, the supply of real money balances:   a.  decreases as the interest rate increases.   b.  increases as the interest rate increases.   c.  increases as income increases.   d.  is fixed by the central bank. 4. In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?   a.  planned spending   b.  the interest rate   c.  production   d.  the price level 5. Assume that the money demand function is (M / P)d = 2,200 – 200r, where r is the interest rate in percent. The money supply M is 2,000, and the price level P is 2. The equilibrium interest rate is _____ percent.   a.  2   b.  4   c.  6   d.  8 6. If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve for any given interest rate shifts to the right by:   a.  100.   b.  200.   c.  300.   d.  400. 7. An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS–LM framework, _____ output and _____ interest rates.   a.  increase; lower   b.  increase; raise   c.  lower; lower   d.  lower; raise 8. The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a _____ real money supply M / P, which _____ the interest rate and _____ spending.   a.  lower; raises; reduces   b.  higher; lowers; increases   c.  lower; lowers; increases   d.  higher; raises; reduces 9. Exhibit: Short Run to Long Run     Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at _____, with a _____ price level.   a.  B; higher   b.  B; lower   c.  C; higher   d.  C; lower 10. A given increase in taxes shifts the IS curve more to the left the:   a.  larger the marginal propensity to consume.   b.  smaller the marginal propensity to consume.   c.  larger the government spending.   d.  smaller the government spending. 11. An increase in the money supply:   a.  increases income and lowers the interest rate in both the short run and in the long run.   b.  increases income in both the short run and in the long run but leaves the interest rate unchanged in the long run.   c.  lowers the interest rate in both the short run and in the long run but leaves income unchanged in the long run.   d.  lowers the interest rate and increases income in the short run but leaves both unchanged in the long run. 12. If there is a fixed-exchange-rate system, then in the long run:   a.  the nominal exchange rate is fixed, but the real exchange rate is free to vary.   b.  the real exchange rate is fixed, but the nominal exchange rate is free to vary.   c.  both the nominal and real exchange rates are fixed.   d.  the nominal and real exchange rates vary by a fixed amount. 13. A devaluation of a currency under a fixed-exchange-rate system occurs when the level at which the currency is fixed is:   a.  increased.   b.  decreased.   c.  allowed to float.   d.  kept fixed within a band. 14. One argument favoring a floating-exchange-rate system is that it:   a.  makes international trade less difficult.   b.  minimizes destabilizing speculation by international investors.   c.  allows monetary policy to be used for other purposes.   d.  helps prevent excessive growth in the money supply. 15. In a short-run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in:   a.  the exchange rate and a fall in net exports but has no effect on income.   b.  the money supply and an increase in income but has no effect on the exchange rate.   c.  income, the interest rate, and net exports but a decrease in investment and in the exchange rate.   d.  income, the interest rate, and the exchange rate but a decrease in investment and net exports. 16. The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell–Fleming model with fixed exchange rates, lead to:   a.  a fall in income and net exports.   b.  no change in income or net exports.   c.  a fall in income but no change in net exports.   d.  no change in income but a fall in net exports. 17. In the Mundell–Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:   a.  and net exports both to fall.   b.  to rise and net exports to fall.   c.  to fall and net exports to rise.   d.  and net exports both to rise. 18. In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then _____ would drive the domestic interest rate back to the level of the world interest rate.   a.  capital inflow   b.  capital outflow   c.  the central bank   d.  a decline in domestic saving 19. In a small open economy with a floating exchange rate, the supply of real money balances is fixed, and a rise in government spending:   a.  raises the interest rate so that income must rise to maintain equilibrium in the money market.   b.  raises the interest rate so that net exports must fall to maintain equilibrium in the goods market.   c.  cannot change the interest rate so that net exports must fall to maintain equilibrium in the goods market.   d.  cannot change the interest rate, so income must rise to maintain equilibrium in the money market. 20. To maintain a fixed-exchange-rate system, if the exchange rate (foreign currency/local currency) moves below the fixed-exchange-rate level, then the central bank must:   a.  buy foreign currency.   b.  sell foreign currency from reserves.   c.  raise taxes.   d.  decrease government spending. Answer Key 1. c 2. b 3. d 4. b 5. c 6. c 7. b 8. a 9. c 10. a 11. d 12. a 13. a 14. c 15. d 16. a 17. d 18. a 19. c 20. b