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.
The short-run Phillips curve shows
A) a tradeoff between the unemployment rate and the inflation rate.
B) a tradeoff between real GDP and unemployment.
C) potential GDP.
D) the expected inflation rate.
E) the natural unemployment rate.
a tradeoff between the unemployment rate and the inflation rate.
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; no relationship
B) a negative relationship; a positive relationship
C) no relationship; a negative relationship
D) a positive relationship; a negative relationship
E) a negative relationship; no relationship
a negative relationship; no relationship
Intertemporal choice theory is more consistent with ________.
A) the permanent income hypothesis than Keynesian theory.
B) Keynesian theory than the permanent income hypothesis of Friedman.
C) Keynesian theory than the life-cycle hypothesis.
D) Keynesian theory than the Gini coefficient theory.
the permanent income hypothesis than Keynesian theory.
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) exceeds; rise; right B) remains below; fall; left
C) exceeds; rise; left D) remains below; rise; right
exceeds; rise; left
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 rises, and there is an increase in the quantity of real GDP supplied.
C) real wage rate rises, and there is a decrease in the quantity of real GDP supplied.
D) real wage rate falls, and there is an increase in the quantity of real GDP supplied.
E) nominal wage rate falls, and there is an increase in the quantity of real GDP supplied.
real wage rate falls, and there is an increase in the quantity of real GDP supplied.
The short-run Phillips curve is another way of looking at
A) potential GDP.
B) the natural rate of unemployment.
C) short-run aggregate supply.
D) aggregate demand.
E) Okunʹs law as applied to aggregate demand.
short-run aggregate supply.
Temporary productivity shocks lead to an intertemporal ___________ effect in which real ________
rates change as households smooth their consumption.
A) income; exchange B) substitution;interest
C) income; wage D) substitution;wage
substitution;interest
An increase in real interest rate will________ current consumption and _________ future
consumption.
A) increase; decrease B) have an unclear effect on; decrease
C) decrease; increase D) decrease; have an unclear effect on
decrease; increase
Suppose the economy is producing at the natural rate of output.An open market sale 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) an increase; an increase B) no change; a decrease
C) a decrease; a decrease D) no change; an increase
a decrease; a decrease
Suppose policy makers underestimate the natural rate of unemployment. In a situation like this,
policy makers might implement a policy that
A) attempts to maintain output below the natural level of output.
B) results in deflation.
C) both A and B
D) results in steadily rising inflation.
results in steadily rising inflation.
The expectations-augmented Phillips curve implies that as expected inflation increases, nominal
wages ________ to prevent real wages from ________.
A) rise; falling B) rise; rising C) fall; falling D) fall; rising
rise; falling
Another name for the natural rate of output is
A) potential GDP B) trend GDP
C) high equilibrium GDP D) natural GDP
potential GDP
A rightward shift in the intertemporal budget line would be caused by ________.
A) a decrease in future income and an increase in wealth.
B) a decrease in future income and wealth.
C) an increase in future income and wealth.
D) an increase in future income and a decrease in wealth.
an increase in future income and wealth.
The argument that econometric policy evaluation is likely to be misleading if policymakers assume
stable economic relationships is known as
A) public choice theory. B) the monetarist revolution.
C) the Lucas critique. D) new Keynesian theory.
the Lucas critique.
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) hedge income risk
C) smooth consumption
D) All of the above
All of the above
In the permanent income hypothesis, income that does not persist for a long period of time is
known as ________.
A) insufficient income. B) current income.
C) transitory income. D) limited income.
transitory income.
Human wealth is a function (i.e., affected by changes in) of which of the following variables? A) future expected taxes B) future expected income C) current interest rates D) all of the above E) none of the above
all of the above
The substitution effect that occurs when real interest rate changes represents
A) a change in the relative prices of consumption in the two periods.
B) a change in the general level of prices.
C) a change in the level of income.
D) a period of increasing productivity.
a change in the relative prices of consumption in the two periods.
) Suppose consumers anticipate that their wealth will grow over time. According to thepermanent
income hypothesis, such optimism should cause current consumption to be ________.
A) relatively high
B) rising as individuals near retirement age
C) relatively insensitive to changes in income
D) relatively low
relatively high
) The output gap is
A) the difference between target output and realized output.
B) the difference between forecasted output and past output.
C) the difference between the potential output and actual output.
D) the difference between initial output and final output.
the difference between the potential output and actual output.
The intertemporal budget constraint tells us that
A) the income earned in a lifetime will be evenly divided between consumption and saving.
B) household consumption is based on permanent income and not transitory income.
C) the present value of lifetime consumption equals the present value of lifetime income.
D) consumption smoothing only occurs in years when income is greater than consumption.
the present value of lifetime consumption equals the present value of lifetime income.
The Golden Rule of capital accumulation maximizes the steady-state level of
A) consumption per worker. B) capital per worker.
C) investment per worker. D) output per worker.
consumption per worker.
The idea behind the Phillipscurve is that ________.
A) when the unemployment rate is low wages will decrease
B) when firms raise wages to attract new workers, prices decrease
C) tightness in the labor market puts upward pressures on wages and prices
D) all of the above
E) none of the above
tightness in the labor market puts upward pressures on wages and prices
Suppose the central bank announces that it will permanently increase the inflation rate and there is
central bank credibility. With adaptive expectations, expectations of inflation will adjust ________,
and with rational expectations, expectations of inflation adjust ________.
A) immediately; slowly B) slowly; slowly
C) immediately; immediately D) slowly; immediately
slowly; immediately
) In 1973, the Organization of Petroleum Exporting Countries (OPEC) engineered a quadrupling of
oil prices by restricting oil production. Which of the following is an appropriate description of this
negative supply shock?
A) The AS curve likely shifted to the left and output likely fell because of this adverse shock
B) In the short-run there was a movement out of general equilibrium leading to an increase in
unemployment as a likely result of this adverse shock
C) In the short-run there was a movement out of general equilibrium leading to an increase in
inflation as a likely result of this adverse shock
D) all of the above
E) none of the above
all of the above
On the graph above, suppose the economy is at point F when there is a temporary supply shock.
The new long-run equilibrium is at point ________.
A) H
B) I
C) G
D) F
E) none of the above
f
On the graph above, a movement from point \_\_\_\_\_\_\_\_ to point \_\_\_\_\_\_\_\_ might represent a positive supply shock. A) F; I B) F; G C) H: F D) H: G E) none of the above
H: G
The permanent income hypothesis highlights the phenomenon of ________.
A) consumption smoothing B) autonomous consumption
C) the intertemporal budget constraint D) a binding borrowing constraint
consumption smoothing
Human wealth is
A) the present discounted value of expected future after-tax labor income.
B) financial wealth minus housing wealth.
C) total wealth minus housing wealth.
D) the discounted present value of all financial assets.
E) the sum of financial and housing wealth.
the present discounted value of expected future after-tax labor income.
In the new Keynesian model, the immediate effect on inflation of an anticipated aggregate demand
shock is ________.
A) greater than if that event was unanticipated.
B) the same as would develop if that event was unanticipated.
C) independent of whether or not that event is anticipated or unanticipated.
D) less than if that event was unanticipated.
greater than if that event was unanticipated.
The real business cycle model begins with the assumption that ________.
A) the velocity of money is a constant.
B) wages and prices are completely flexible.
C) wages and prices are sticky.
D) nominal variables are superior to real variables in describing economic activity
wages and prices are completely flexible.
Which of the following individuals is responsible for developing the permanent income theory of
consumption?
A) Friedman B) Keynes C) Modigliani D) Lucas
Friedman
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) hedge income risk
B) equate marginal utilities of consumption over time
C) smooth consumption
D) All of the above
All of the above
If expectations about inflation are adaptive, they are \_\_\_\_\_\_\_\_. A) likely to change rapidly B) formed by looking at the future C) based on past inflation D) all of the above E) none of the above
based on past inflation
Suppose policy makers underestimate the natural rate of unemployment. In a situation like this,
policy makers might implement a policy that
A) attempts to maintain output below the natural level of output.
B) results in deflation.
C) both A and B
D) results in steadily rising inflation
results in steadily rising inflation
The saving rate has the following characteristic in Solowʹs growth model
A) it is constant.
B) it increases with output.
C) itfirst decreases, then increases with output.
D) it first increases, then decreases with output.
it is constant.
According to real business cycle theory
A) Federal Reserve actions need to be watched closely.
B) cash-in-advance is necessarily to explain business cycles.
C) monetary policy is driving business cycles.
D) technology shocks have a major role in business cycles
technology shocks have a major role in business cycles
The rate at which a consumer is willing to give up consumption in one period for additional
consumption in another is known as ________.
A) the marginal rate of intertemporal substitution.
B) the marginal propensity to consume.
C) the marginal propensity to save.
D) the average propensity to consume
the marginal rate of intertemporal substitution.
Another name for the natural rate of output is
A) potential GDP B) trend GDP
C) natural GDP D) high equilibrium GDP
potential GDP
When the borrowing constraint is binding, ________.
A) future consumption is lower than current consumption
B) consumption smoothing is not possible
C) current consumption is lower than future consumption
D) wealth is zero
consumption smoothing is not possible
The Keynesian consumption function does not display consumption smoothing, because ________.
A) the average propensity to consume rises with income
B) consumption is not affected by future income
C) the marginal propensity to consume is constant
D) consumption is not affected by the real interest rate
consumption is not affected by future income
According to the permanent-income hypothesis, a transitory increase in a personʹs income will
A) have the same effect on consumption as a permanent increase in income.
B) be smoothed out to where the increases in consumption and savings are roughly equal.
C) increase consumption more than savings.
D) increase savings more than consumption.
increase savings more than consumption.
For this question, assume that the economy is initially operating at the natural level of output. An
increase in the price of oil will cause which of the following in the short run?
A) a reduction in the aggregate price level and no change in output
B) a reduction in unemployment, an increase in the nominal wage and an increase in the
aggregate price level
C) a reduction in the interest rate
D) a reduction in output and a reduction in the interest rate
E) a reduction in output and an increase in the aggregate price level
a reduction in output and an increase in the aggregate price level
Based on your understanding of the AS/AD model, which of the following is an INCORRECT
statement about the short-run adjustment process for the macroeconomy?
A) an increase in demand increases output.
B) an increase in output above the natural level leads to higher nominal wages.
C) output in excess of the natural level leads to higher prices.
D) a reduction in employment leads to lower prices.
E) none of the above
none of the above
Solow residuals are estimates of ________.
A) aggregate productivity B) labor hoarding
C) the natural rate of unemployment D) deadweight loss
aggregate productivity
The Long-Run Phillips Curve is vertical, suggesting that ________.
A) changes in unemployment have no lasting impact on inflation
B) shifts of the short-run Phillips curve impact inflation, but have no effect on unemployment
C) allowing inflation to rise will not succeed in keeping unemployment low
D) all of the above
E) none of the above
allowing inflation to rise will not succeed in keeping unemployment low
Intertemporalindifference curves tend to be convex because ________.
A) consumers dislike large fluctuations in consumption from one period to the next.
B) of the gap between real and nominal interest rates.
C) they are bowed inwards toward the origin.
D) the marginal rate of substitution exceeds the price effect.
consumers dislike large fluctuations in consumption from one period to the next.
A combination of high inflation and recession, usually resulting from a supply shock, is known as
A) stagflation. B) disinflation. C) depression. D) hyperinflation.
stagflation.
Intertemporal choice theory is more consistent with ________.
A) Keynesian theory than the Gini coefficient theory.
B) Keynesian theory than the permanent income hypothesis of Friedman.
C) Keynesian theory than the life-cycle hypothesis.
D) the permanent income hypothesis than Keynesian theory
the permanent income hypothesis than Keynesian theory
A rightward shift in the intertemporal budget line would be caused by ________.
A) a decrease in future income and wealth.
B) a decrease in future income and an increase in wealth.
C) an increase in future income and a decrease in wealth.
D) an increase in future income and wealth.
an increase in future income and wealth.
