Unit Six ReviewInflation, Unemployment and Stabilization Policies

Unit Six ReviewInflation, Unemployment and Stabilization Policies

AP MacroeconomicsAP MacroeconomicsMR. GRAHAMMR. GRAHAM

If government spending exceeds tax revenues, which of the following is necessarily true? There is a

I. positive budget balance.II. budget deficit.III. recession.

A. I onlyB. II onlyC. III onlyD. I and II onlyE. I, II and III

Which of the following fiscal policies is expansionary?

Taxes Government SpendingA. Increase by $100 million Increases by $100

millionB. Decrease by $100 million Decreases by $100

millionC. Increase by $100 million Decreases by $100

millionD. Decrease by $100 million Increases by $100

millionE. both (a) and (d)

The cyclically adjusted budget deficit is an estimate of what the budget balance would be if real GDP were

A. greater than potential output.B. equal to nominal GDP.C. equal to potential output.D. falling.E. calculated during a recession.

During a recession in the United States, what happens automatically to tax revenues and government spending?

Taxes Government Spending

A. Increase IncreasesB. Decrease DecreasesC. Increase DecreasesD. Decrease IncreasesE. Decrease No Change

Which of the following is a reason to be concerned about persistent budget deficits?A. crowding outB. government defaultC. the opportunity cost of future interest

paymentsD. higher interest rates leading to decreased

long-run growthE. all of the above

At each meeting of the Federal Open Market Committee, the Federal Reserve sets a target for which of the following?

I. the federal funds rateII. the prime interest rateIII. the market interest rate

A. I onlyB. II onlyC. III onlyD. I and III onlyE. I, II and III

Which of the following actions can the Fed take to decrease the equilibrium interest rate?

A. increase the money supplyB. increase money demandC. decrease the money supplyD. decrease money demandE. both (a) and (d)

Contractionary monetary policy attempts to ________ aggregate demand by ________ interest rates.

A. Decrease IncreasingB. Increase DecreasingC. Decrease DecreasingD. Increase IncreasingE. Increase Maintaining

Which of the following is a goal of monetary policy?A. zero inflationB. deflationC. price stabilityD. increased potential outputE. decreased actual real GDP

When implementing monetary policy, the Federal Reserve attempts to achieveA. an explicit target inflation rate.B. zero inflation.C. a low rate of deflation.D. a low, but positive inflation rate.E. 4–5% inflation.

In the long run, changes in the quantity of money affect which of the following?

I. real aggregate outputII. interest ratesIII. the aggregate price level

A. I onlyB. II onlyC. III onlyD. I and II onlyE. I, II and III

An increase in the money supply will lead to which of the following in the short run?

A. higher interest ratesB. decreased investment spendingC. decreased consumer spendingD. increased aggregate demandE. lower real GDP

A 10% decrease in the money supply will change the aggregate price level in the long run byA. zero.B. less than 10%.C. 10%.D. 20%.E. more than 20%.

Monetary neutrality means that, in the long run, changes in the money supply

A. cannot happen.B. have no effect on the economy.C. have no real effect on the economy.D. increase real GDP.E. change real interest rates

A graph of percentage increases in the money supply and average annual increases in the price level for various countries provides evidence that

A. changes in the two variables are exactly equal.B. the money supply and aggregate price level

are unrelated.C. money neutrality holds only in wealthy

countries.D. monetary policy is ineffective.E. money is neutral in the long run.

The real quantity of money isI. equal to M/P.II. the money supply adjusted for inflation.III. higher in the long run when the Fed buys government securities.

A. I onlyB. II onlyC. III onlyD. I and II onlyE. I, II and III

In the classical model of the price level

A. only the short-run aggregate supply curve is vertical.B. The aggregate supply curve is vertical.C. only the long-run aggregate supply curve is vertical.D. both the short-run aggregate demand and supply

curves are vertical.E. both the long-run aggregate demand and supply

curves are vertical.

The classical model of the price level is most applicable in

A. the United States.B. periods of high inflation.C. periods of low inflation.D. recessions.E. depressions.

An inflation tax is

A. imposed by governments to offset price increases.B. paid directly as a percentage of the sale price on

purchases.C. the result of a decrease in the value of money held

by the public.D. generally levied by states rather than the federal

government.E. higher during periods of low inflation.

Revenue generated by the government’s right to print money is known as

A. seignorage.B. an inflation tax.C. hyperinflation.D. fiat money.E. monetary funds.

The long-run Phillips curve isI. the same as the short-run Phillips curve.II. vertical.III. the short-run Phillips curve plus expected inflation.

A. I onlyB. II onlyC. III onlyD. I and II onlyE. I, II and III

The short-run Phillips curve shows a _________ relationship between ________.

A. SB. SC. SD. SE. S

An increase in expected inflation will shiftA. the short-run Phillips curve downward.B. the short-run Phillips curve upward.C. the long-run Phillips curve upward.D. the long-run Phillips curve downward.E. neither the short-run nor the long-run

Phillips curve.

Bringing down inflation that has become embedded in expectations is called

A. deflation.B. negative inflation.C. anti-inflation.D. unexpected inflation.E. disinflation.

Debt deflation is

A. the effect of deflation in decreasing aggregate demand.

B. an idea proposed by Irving Fisher.C. a contributing factor in causing the Great

Depression.D. due to differences in how borrowers/ lenders

respond to inflation losses/gains.E. all of the above.

Which of the following was an important point emphasized in Keynes’s influential work?

I. In the short run, shifts in aggregate demand affect aggregate output.II. Animal spirits are an important determinant of business cycles.III. In the long run we’re all dead.

A. I onlyB. II onlyC. III onlyD. I and II onlyE. I, II, and III

Which of the following is a central point of monetarism?A. Business cycles are associated with

fluctuations in money demand.B. Activist monetary policy is the best way to

address business cycles.C. Discretionary monetary policy is effective while

discretionary fiscal policy is not.D. The Fed should follow a monetary policy rule.E. All of the above.

The natural rate hypothesis says that the unemployment rate should be

A. below the NAIRU.B. high enough that the actual rate of inflation

equals the expected rate.C. as close to zero as possible.D. 5%.E. left wherever the economy sets it.

The main difference between the classical model of the price level and Keynesian economics is thatA. the classical model assumes a vertical short-run aggregate

supply curve.B. Keynesian economics assumes a vertical short-run

aggregate supply curve.C. the classical model assumes an upward sloping long-run

aggregate supply curve.D. Keynesian economics assumes a vertical long-run

aggregate supply curve.E. the classical model assumes aggregate demand can not

change in the long run.

That fluctuations in total factor productivity growth cause the business cycle is the main tenet of which theory?A. KeynesianB. ClassicalC. rational expectationsD. real business cycleE. natural rate