exam 4 Flashcards
Which of the following people–none of whom has any financial or housing wealth–is most likely
to be spending all of their current income?
A) a low income person expecting a dramatic rise in income in the future
B) a high income person expecting to retire soon, and live for a long time afterward
C) a low income person expecting continued low income throughout life
D) a high income person expecting continued high income throughout life
E) a high income person expecting a dramatic drop in income in the future
) a low income person expecting a dramatic rise in income in the future
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 price level.
B) the nominal wage.
C) the interest rate.
D) all of the above
E) none of the above
all of the above
If the expected inflation rate rises, then the short-run Phillips curve ________ and the long-run
Phillips curve ________.
A) shifts; does not shift
B) might shift; shifts only if the short-run Phillips curve shifts
C) does not shift; shifts
D) shifts; shifts
E) does not shift; does not shift
shifts; does not shift
Moving along the short-run Phillips curve, a ________ unemployment rate can only be achieved
by paying the cost of ________.
A) lower; a higher expected inflation rate
B) higher; a higher inflation rate
C) lower; a lower inflation rate
D) lower; a higher inflation rate
E) lower; a lower price level
lower; a higher inflation rate
) According to the permanent-income hypothesis, a transitory increase in a personʹs income will
A) increase savings more than consumption.
B) be smoothed out to where the increases in consumption and savings are roughly equal.
C) increase consumption more than savings.
D) have the same effect on consumption as a permanent increase in income.
increase savings more than consumption.
A decrease in the real interest rate acts as ________ for lenders and as ________ for borrowers.
A) a decrease in wealth; a decrease in wealth
B) a decrease in wealth; an increase in wealth
C) an increase in wealth; an increase in wealth
D) an increase in wealth; a decrease in wealth
a decrease in wealth; an increase in wealth
If the ________ curve is relatively more unstable than the ________ curve, a money supply target is
preferred.
A) IS; IS B) IS; LM C) LM; LM D) LM; IS
IS; LM
If the ________ curve is relatively more unstable than the ________ curve, a money supply target is
preferred.
A) IS; IS B) IS; LM C) LM; LM D) LM; IS
IS; IS
The intertemporal budget constraint tells us that
A) household consumption is based on permanent income and not transitory income.
B) consumption smoothing only occurs in years when income is greater than consumption.
C) the present value of lifetime consumption equals the present value of lifetime income.
D) the income earned in a lifetime will be evenly divided between consumption and saving
the present value of lifetime consumption equals the present value of lifetime income.
The long-run rate of unemployment to which an economy always gravitates is the
A) natural rate of unemployment. B) normal rate of unemployment.
C) neutral rate of unemployment. D) inflationary rate of unemployment.
natural rate of unemployment.
Adaptive expectations assumes that individuals
A) can accurately predict the future.
B) base predictions on past observations of the variable being forecast.
C) use all available information in predicting the future.
D) form their predictions of macroeconomic variables randomly.
E) none of the above
base predictions on past observations of the variable being forecast.
The long-run aggregate supply curve is a vertical line passing through
A) the natural-rate price level. B) the actual rate of unemployment.
C) the expected rate of inflation. D) the natural rate of output.
the natural rate of output.
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) increasing. B) greater than potential GDP. C) less than potential GDP. D) decreasing. E) equal to potential GDP.
equal to potential GDP.
Rational expectations assumes that individuals
A) can accurately predict the future.
B) form their predictions of macroeconomic variables randomly.
C) make predictions based on the past behavior of the of the variable of interest only.
D) have perfect foresight.
E) none of the above
none of the above
Consumption is most likely to respond one-for-one with changes in current income when
A) the change in current income is caused by the business cycle.
B) the change in current income results from a one-time bonus
C) people believe the change in their current income is temporary.
D) people are able to borrow as much as they wish, as long as they pay it back.
E) none of the above
none of the above
The long-run aggregate supply curve shifts to the right when there is
A) an increase in the total amount of capital in the economy.
B) an increase in the available technology.
C) a decrease in the natural rate of unemployment..
D) A and B.
E) A, B, and C.
A, B, and C.
According to rational expectations, new information ought not to influence economic
decision-making if ________.
A) that information has already been anticipated.
B) monetary and/or fiscal policy changes
C) monetary policy changes.
D) consumers rely on rational expectations
that information has already been anticipated.
Which of the following changes aggregate supply and shifts the AS curve?
i. a change in the price of a major resource
ii. increases in the amount of capital
iii. a change in the money income of consumers
A) i only B) i and ii C) i, ii, and iii D) ii only E) iii only
i and ii
Assume that Robinson Crusoe is alone on an island. He has preferences for consumption goods
(bananas, fish, berries, etc.) and leisure. If through his efforts he can catch 1 fish per hour, then
what is the opportunity cost of one hour of leisure?
A) 24 berries
B) three bananas
C) one fish
D) impossible to know from information given
one fish
The long-run Phillips curve shows the relationship between
A) the inflation rate and the natural unemployment rate.
B) the inflation rate and the unemployment rate.
C) real GDP and potential GDP.
D) real GDP and the natural unemployment rate.
E) the nominal interest rate and real interest rate
the inflation rate and the natural unemployment rate.
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) a decrease; supply B) a decrease; demand
C) an increase; demand D) an increase; supply
an increase; demand
Everything else held constant, a change in workersʹexpectations about inflation will cause
________ to change.
A) the production function B) short-run aggregate supply
C) aggregate demand D) long-run aggregate supply
short-run aggregate supply
The rational expectations hypothesis implies that when macroeconomic policy changes,
A) the economy will become highly unstable.
B) people will be slow to catch on to the change.
C) the way expectations are formed will change.
D) people will make systematic mistakes.
the way expectations are formed will change.
According to the permanent income hypothesis, the impact of ________.
A) a change in transitory income on consumption is greater than the impact resulting from a
change in permanent income.
B) a change in permanent income on consumption is greater than the impact resulting from a
change in transitory 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 transitory income is felt primarily through changes in the total tax revenue paid
to the federal government.
a change in permanent income on consumption is greater than the impact resulting from a
change in transitory income.
Friedman demonstrated that contrary to most economitsʹs belief, the money supply during the
Great Depression actually ___________.
A) could not be measured B) decreased
C) never changed D) increased
decreased
According to aggregate demand and supply analysis, the negative supply shocks of 1973 -1975 and
1978-1980 had the effect of
A) increasing aggregate output, lowering unemployment, and raising the inflation.
B) decreasing aggregate output, raising unemployment, and raising the inflation.
C) increasing aggregate output, raising unemployment, and raising the inflation.
D) decreasing aggregate output, raising unemployment, and lowering the inflation.
decreasing aggregate output, raising unemployment, and raising the inflation.
According to the permanent-income hypothesis,
A) household consumption depends on income that households expect to receive each year, 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
household consumption depends on income that households expect to receive each year, and
financial markets are used to smooth consumption in response to changes in transitory
income.
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 work
D) current incomeX the number of years the person expects to live
lifetime wealth / the number of years the person expects to live
Human wealth is
A) financial wealth minus housing wealth.
B) the sum of financial and housing wealth.
C) the discounted present value of all financial assets.
D) total wealth minus housing wealth.
E) the present discounted value of expected future after-tax labor income
the present discounted value of expected future after-tax labor income
Moving upward along the aggregate supply curve, is equivalent to
A) shifting the short-run Phillips curve rightward.
B) moving downward along the short-run Phillips curve.
C) moving upward along the short-run Phillips curve.
D) shifting the short-run Phillips curve upward.
E) shifting the short-run Phillips curve leftward.
moving upward along the short-run Phillips curve.
According to Friedmanʹs restatement of the quatity theory, an increase in the ____________
reduces the return on that asset and leads to a portfolio rebalancing in which__________
spending increases.
A) government deficit; durable goods B) money supply; durable goods
C) interest rates; investment D) money supply; entertainment
money supply; durable goods
For consumers with a binding borrowing constraint, a decrease in the real interest rate ________.
A) decreases consumption now, and increases future consumption
B) decreases consumption now, and in the future
C) has no impact on consumption
D) increases consumption now, and in the future
has no impact on consumption
The impatience of a consumer is captured by the economic concept of
A) time value of money. B) rate of time preference.
C) rate of intertemporal transformation. D) None of the above.
rate of time preference.
