Deck 15: Inflation: Phillips Curves and Neo-Fisherism

Question 1

In the two-period SOE model with production, suppose that the real interest rate if there were no trade is greater than the world real interest rate. If the economy is initially closed, and then
Becomes open

A)net exports will be negative.
B)net exports will be positive.
C)output will increase.
D)investment will fall.
E)government spending will rise.

Answer 1

A

Question 2

In a two-period model with default, if the market interest rate is low, then

A)the income effect is larger than the substitution effect.
B)there is more inflation.
C)there is no effect on the nation's default decision.
D)default is less likely.
E)default is more likely.

Answer 2

D

Question 3

In the two-period SOE model with production and investment, the total government expenditure multiplier is

A)zero.
B)greater than one.
C)one.
D)less than one.
E)two.

Answer 3

C

Question 4

In the two-period SOE model with production, the destruction of part of the nation's capital stock

A)causes investment to increase.
B)causes output to increase.
C)causes investment to decline.
D)causes the current account surplus to increase.
E)causes the current account surplus to decline.

Question 5

In a two-period SOE model with production, the government expenditure multiplier

A)is larger in an open economy because net exports fall.
B)is larger in an open economy because net exports increase.
C)is smaller in an open economy because net exports increase.
D)is smaller in an open economy because net exports fall.
E)is larger in an open economy because net exports are unaffected.

Question 6

The key effect of the current account surplus is

A)to improve fiscal policy.
B)to smooth consumption for the nation as a whole.
C)to destabilize the economy.
D)to constrain the central bank.
E)to smooth aggregate output.

Question 7

In a two-period SOE model with production, a negative total factor productivity shock abroad

A)increases foreign output and decreases domestic output.
B)decreases foreign output and increases domestic output.
C)increases foreign output and increases domestic output.
D)decreases foreign output and leaves domestic output unchanged.
E)decreases foreign output and decreases domestic output.

Question 8

International trade has increased for which of the following reasons?

A)Governments went against mainstream economic ideas.
B)higher costs of transporting goods between countries
C)the development of more efficient world financial markets
D)better monetary policy
E)more government spending on goods and services

Question 9

In a two-period model, holding everything else constant, an increase in future taxes

A)has no effect on the current account surplus, as long as Ricardian equivalence holds.
B)increases the present value of taxes.
C)unambiguously decreases the current account surplus.
D)unambiguously increases the current account surplus.
E)has an uncertain effect on the current account surplus.

Question 10

In a two-period SOE model with production, an anticipated future increase in domestic total factor productivity

A)has no effect on domestic output and decreases the current account surplus.
B)increases domestic output and increases the current account surplus.
C)has no effect on domestic output and increases the current account surplus.
D)increases domestic output and decreases the current account surplus.
E)increases domestic output with no change in the current account surplus.

Question 11

Suppose that the small open economy (SOE)cannot produce investment goods, but domestic producers can produce consumption goods. If a tariff t is imposed by the SOE on imports of goods
From the rest of the world, and the rest of the world imposes a tariff t on exports from the SOE to
The rest of the world, then

A)exports decrease.
B)net exports increase.
C)imports increase.
D)imports decline.
E)exports increase.

Question 12

Suppose goods produced domestically and abroad are identical. The small open economy (SOE) imposes a tariff t on imported goods, and the rest of the world imposes a tariff t on goods exported
From the SOE. Then

A)trade declines between the SOE and the rest of the world.
B)economic welfare declines.
C)aggregate output stays the same, but domestic demand shifts from imports to domestically produced goods.
D)aggregate output increases, because the SOE wins the trade war.
E)there is no effect, except on prices.

Question 13

In a two-period SOE model, holding everything else constant, an increase in current income

A)unambiguously decreases the current account surplus.
B)must reduce the present value of taxes.
C)has no effect on the current account surplus.
D)unambiguously increases the current account surplus.
E)has an uncertain effect on the current account surplus.

Question 14

GATT is

A)the Government Agreement on Trade with Thailand.
B)the General Authority to Tax and Trade.
C)the Government Agreement on Taxes and Tariffs.
D)the General Agreement on Tariffs and Trade.
E)the Great Authority to Trade and Tax.

Question 15

In the two-period model with default

A)default occurs when consumption is high.
B)default occurs when investment is high.
C)default occurs when the real interest rate is low.
D)default occurs when government spending is high.
E)default occurs when government spending is low.

Question 16

In the two-period SOE model with production and investment, an increase in the capital stock

A)decreases investment.
B)increases output.
C)reduces the current account surplus.
D)increases investment.
E)reduces output.

Question 17

In the two-period SOE model, a decrease in current income

A)reduces the current account surplus.
B)leaves C + G unchanged.
C)increases C + G.
D)increases the current account surplus.
E)results in no change in the current account surplus.

Question 18

In the two-period model with default, default can be prevented because

A)collateral can be seized.
B)the government makes it illegal.
C)no one will lend of a country that might default.
D)default can be too costly, so a country does not choose it.
E)a country does not want to reveal itself to be a bad borrower.

Question 19

Suppose that the small open economy (SOE)cannot produce consumption goods, but domestic producers can produce investment goods. If a tariff t is imposed by the SOE on imports of goods
From the rest of the world, and the rest of the world imposes a tariff t on exports from the SOE to
The rest of the world, then

A)exports increase
B)output increases.
C)trade increases.
D)firms will not produce anything.
E)investment increases.

Question 20

In the two-period model with default

A)there is always default.
B)there is no default in equilibrium.
C)private sector economic agents can default, but the nation never defaults as a whole.
D)there is never default in the future period.
E)the government commits to never default.

Question 21

In a two-period model, as long as wealth effects are small, an increase in the world real interest rate

A)decreases consumption and increases the current account surplus.
B)increases consumption and decreases the current account surplus.
C)increases consumption and increases the current account surplus.
D)increases investment.
E)decreases consumption and decreases the current account surplus.

Question 22

For Canada

A)trade with the rest of the world is negligible.
B)a small open economy assumption is realistic.
C)trade with the rest of the world has fallen since the 1950s.
D)a small open economy assumption is not realistic.
E)small open economy models are irrelevant.

Question 23

Current account deficits may not be undesirable for the domestic economy as it

A)helps domestic consumers to smooth consumption over time.
B)leads to lower interest rates.
C)causes the domestic currency to appreciate.
D)leads to more government spending.
E)leads to lower taxes.

Question 24

In a two-period SOE model, holding everything else constant, an increase in current-period income

A)unambiguously decreases the current account surplus.
B)has an uncertain effect on the current account surplus.
C)is engineered by the government.
D)has no effect on the current account surplus.
E)unambiguously increases the current account surplus.

Question 25

In a two-period model with default, the nation defaults on its debt in the current period if

A)the government does not act in the interest of consumers.
B)the market interest rate is low, the cost of defaulting is low, and national debt is high.
C)the market interest rate is high, the cost of defaulting is low, and national debt is high.
D)the market interest rate is high, the cost of defaulting is high, and national debt is low.
E)the market interest rate is low, the cost of defaulting is high, and national debt is low.

Question 26

In the two-period SOE model with production and investment, a decrease in the world real interest rate

A)increases employment.
B)increases output.
C)reduces output.
D)reduces investment.
E)increases the current account surplus.

Question 27

In the two-period SOE model, equal increases in current and future income imply that

A)C + G decreases.
B)we can't say what happens to the current account surplus.
C)the current account surplus decreases.
D)there is no change in the current account surplus.
E)the current account surplus increases.

Question 28

In a small open economy model

A)the domestic government takes account of the behaviour of foreign governments.
B)domestic producers have monopoly power.
C)the government cannot affect economic outcomes.
D)real interest rates are set by central banks.
E)domestic economic agents cannot affect world real interest rates.

Question 29

In the two-period model with default, if the nation defaults on its debts in the future period

A)it bears a cost v.
B)the central bank must bail out the government.
C)collateral is seized.
D)there are no consequences.
E)it faces a higher interest rate.

Question 30

In the two-period SOE model, if future income decreases

A)C + G stays the same.
B)the current account surplus stays the same.
C)the current account surplus increases.
D)the current account surplus decreases.
E)C + G decreases.

Question 31

In a two-period SOE model with production, an increase in the capital stock

A)decreases domestic output and increases the current account surplus.
B)can eliminate the current account deficit in the long run.
C)increases domestic output and decreases consumption.
D)has no impact on domestic consumption.
E)decreases domestic output and decreases the current account surplus.

Question 32

The following are all trade agreements

A)GATT, EU, and BU.
B)EU, NAFTA, and GATT.
C)ECB, Fed, and GM.
D)UK, US, and EU.
E)NAFTA, DNC, and EU.

Question 33

If current taxes increase, then

A)there is no effect on the current account surplus.
B)government spending must fall.
C)the current account surplus rises.
D)the current account surplus falls.
E)government spending must rise.

Question 34

Absorption refers to

A)the quantity of aggregate output that is absorbed into the domestic economy.
B)the quantity of imports that is absorbed into the domestic economy.
C)the amount of transfer payments from the federal government that is absorbed into the domestic economy.
D)the amount of current period income that is used to purchase domestic aggregate output.
E)the amount of government spending that is absorbed into the domestic economy.

Question 35

In a two-period model, holding everything else constant, an increase in current taxes

A)unambiguously increases the current account surplus.
B)unambiguously decreases the current account surplus.
C)increases the present value of taxes.
D)has no effect on the current account surplus.
E)has an uncertain effect on the current account surplus.

Question 36

Ricardian equivalence suggests that government budget deficits generated by decreases in current taxes

A)increase output.
B)have unpredictable effects on the current account surplus.
C)decrease the current account surplus.
D)increase the current account surplus.
E)have no effect on the current account surplus.

Question 37

In the two period SOE model with production, if there is good news about future total factor productivity

A)the current account surplus decreases.
B)the current account surplus increases.
C)current output declines.
D)current output increases.
E)investment declines.

Question 38

An increase in total factor productivity has different effects in an open economy relative to a closed economy because

A)the real interest rate does not change in the open economy.
B)the real interest rate does not change in the closed economy.
C)it is a positive income effect in the closed economy and a negative one in the open economy.
D)the change in the real interest rate involves a substitution effect only in the open economy.
E)the real interest rate decreases in the open economy and increases in the closed economy.

Question 39

In the two-period SOE model with production and investment, a decrease in the world real interest rate

A)lowers investment.
B)leaves output unchanged.
C)increases output.
D)reduces the current account surplus.
E)increases the current account surplus.

Question 40

When current account deficits are used to finance investment spending, such deficits may be self-correcting because

A)the resulting increase in the capital stock over time shifts the output demand curve to the right.
B)interest rates decline.
C)the resulting increase in national indebtedness increases labour demand.
D)they promote more responsible government policies.
E)the resulting increase in the capital stock over time shifts the output supply curve to the right.

Question 41

In the two-period SOE model, the current account surplus is equal to

A)savings plus investment.
B)output minus consumption plus government spending.
C)output minus consumption minus government spending.
D)output plus consumption plus government spending.
E)output plus consumption minus government spending.

Question 42

In the two-period SOE model

A)the consumption of the government and private consumers is treated as a national choice.
B)Ricardian equivalence does not hold.
C)there is no trade with the outside world.
D)there is no government.
E)government spending is exogenous.

Question 43

An increase in total factor productivity in a closed economy

A)increases labour demand, increases the real wage, increases output and decreases the real interest rate.
B)increases labour demand, increases the real wage, increases output and increases the real interest rate.
C)increases labour demand, decreases the real wage, decreases output and decreases the real interest rate.
D)decreases labour demand, increases the real wage, increases output and decreases the real interest rate.
E)increases labour demand, decreases the real wage, decreases output and increases the real interest rate.

Question 44

In two-period SOE model with production, an increase in the world real interest rate

A)increase aggregate consumption and have no effect on the current account surplus.
B)decreases domestic output and decreases the current account surplus.
C)increases domestic output and decreases the current account surplus.
D)increases domestic output and increases the current account surplus.
E)decreases domestic output and increases the current account surplus.

Question 45

One of the reasons why the growth in world trade has occurred is due to

A)economies have become more materialistic.
B)barriers to trade have been relaxed.
C)the income inequality gap is narrowing among countries.
D)countries are getting more prosperous.
E)more stable political environments.

Question 46

In the two-period SOE model with production, an increase in labour supply

A)causes output to decline.
B)causes investment to increase.
C)causes investment to decline.
D)causes consumption to increase.
E)causes the current account surplus to decline.

Question 47

If consumption increases, and government spending decreases by an equal amount, and investment stays the same

A)the economy is closed.
B)absorption stays the same.
C)the government surplus must go down.
D)absorption goes up.
E)absorption goes down.

Question 48

In the two-period SOE model with production, if the SOE closes off trade with the rest of the world

A)this makes output go up only if the government reduces spending.
B)this makes output go up if the real interest rate goes down.
C)this makes output go up if the real interest rate goes up.
D)this must make output go down.
E)this must make investment go up.

Question 49

The national present-value budget constraint states that

A)the present value of consumption plus the present value of government spending is equal to the present value of total income.
B)savings equals investment.
C)government spending equals taxes in present value terms.
D)the credit market clears.
E)assets equal liabilities for the central bank.

Question 50

A current account deficit is

A)it does not matter.
B)good because it allows to smooth consumption.
C)bad because every country should have a surplus.
D)good because a country wants to own the others.
E)bad because it permits consumption smoothing.

Question 51

In a two-period SOE model with production, an increase in domestic government spending

A)increases domestic output and increases the current account surplus.
B)increases domestic output with no change in the current account surplus.
C)increases domestic output and decreases the current account surplus.
D)decreases domestic output and increases the current account surplus.
E)decreases domestic output and decreases the current account surplus.

Question 52

International trade has increased for which of the following reasons?

A)NAFTA was repealed.
B)The cost of transporting goods has gone down.
C)the Asian crisis
D)the financial crisis
E)Brexit

Question 53

International trade has increased for all of the following reasons EXCEPT

A)the cost of transporting goods has gone down.
B)international trade agreements.
C)better monetary policy.
D)more efficient credit markets.
E)more integrated world financial markets.

Question 54

In the 19th century, Canada had a period of significant current account deficits, which contributed to economic growth. These deficits most notably

A)financed construction of railroads.
B)financed lower taxes.
C)allowed for a substantial increase in government spending's share of GDP.
D)financed the development of land-grant universities.
E)financed consumer spending.

Question 55

Absorption can be defined as

A)GDP/NX.
B)I/GDP.
C)X - M.
D)C + I + G.
E)the quantity of foreign produced goods absorbed through domestic spending.

Question 56

In the two-period SOE model with production, an increase in current taxes

A)reduces the current account surplus.
B)increases future taxes.
C)reduces output.
D)increases the current account surplus.
E)reduces future taxes.

Question 57

In the two-period SOE model with production, a country that wants to reduce its current account surplus should

A)reduce current taxes.
B)increase government spending.
C)increase future taxes.
D)increase current taxes.
E)reduce government spending.

Question 58

In the two-period SOE model, if the real interest rate decreases and the current account is initially in deficit, then

A)the current account deficit falls.
B)the current account surplus stays the same.
C)the current account deficit stays the same.
D)the current account surplus rises.
E)the current account surplus falls.

Question 59

The current account surplus is NOT

A)private saving less government deficit.
B)output less taxes and trade deficit.
C)the excess of national savings over investment.
D)the trade balance.
E)the negative of the current account deficit.

Question 60

When a country runs a current account deficit to finance an increase in domestic investment expenditures, it causes

A)consumption smoothing over time.
B)the real interest rate to increase.
C)a government deficit to occur.
D)taxes to rise.
E)an increase in capital stock and future productive capacity.

Question 61

One of the reasons why the growth in world trade has occurred is due to

A)the cost of transporting goods and services has fallen dramatically.
B)economies have become more materialistic.
C)countries are getting more prosperous.
D)the income inequality gap is narrowing among countries.
E)more stable political environments.

Question 62

In the two-period model with default

A)default occurs because of monetary policy.
B)a country will always default in equilibrium.
C)a country will never default in equilibrium.
D)a country will default on its debts because of asymmetric information.
E)a country has a limited commitment problem.

Question 63

What would be the impact of a persistent increase in total factor productivity on domestic aggregate output,
consumption, investment, and the current account surplus?

Question 64

A tariff is

A)a tax for transporting goods between provinces.
B)a tax on an imported good or goods.
C)an import quota.
D)a value-added tax.
E)an export subsidy.

Question 65

In a two-period SOE model with production, an increase in current domestic total factor productivity

A)increases domestic output and decreases the current account surplus.
B)decreases domestic output and decreases the marginal product of capital.
C)decreases domestic output and decreases the current account surplus.
D)decreases domestic output and increases the current account surplus.
E)increases domestic output and increases the current account surplus.

Question 66

In the two-period SOE model, if the current account surplus is initially positive and the real interest rate decreases, then

A)the current account surplus must fall.
B)the current account deficit must rise.
C)the current account surplus must rise.
D)the current account deficit may rise or fall.
E)the current account deficit must fall.

Question 67

A small open economy is an economy

A)whose firms and consumers are individually, but not collectively price takers.
B)in which both imports and exports are less than 5% of GDP.
C)that is open to ideas.
D)whose firms and consumers are individually and collectively price takers.
E)whose firms and consumers are collectively, but not individually price takers.

Question 68

In the two-period model with default, default will occur when

A)the government debt is larger than the discounted value of the future penalty from defaulting.
B)the government debt is smaller than the discounted value of the future penalty from defaulting.
C)the government surplus is smaller than the discounted value of the future penalty from defaulting.
D)the government surplus is smaller than national income.
E)the government debt is larger than the total taxes.

Question 69

In the two-period SOE model with production, total gross domestic product is equal to

A)the government surplus plus the current account surplus.
B)net exports minus investment plus government spending plus consumption.
C)investment plus taxes plus disposable income plus the current account surplus.
D)consumption minus investment plus government spending plus net exports.
E)net exports plus investment plus government spending plus consumption.