Deck 7: Equilibrium in the Flexible-Price M Odel

Question 1

The questions with which Chapter 7 is concerned include each of the following except:

A) In the flexible-price model, what keeps aggregate demand and the level of production equal to potential output?
B) In the flexible-price model, what makes the supply of funds - saving - equal to the demand for funds - . investment - in the financial markets?
C) When saving or investment demand changes, what happens in the flexible-price model to the real interest rate, and why?
D) As government policies, the international economic environment, or other features of policy change or the economic environment change, what happens in the fixed-price model to consumption, investment, government, and net export spending?

Answer 1

As government policies, the international economic environment, or other features of policy change or the economic environment change, what happens in the fixed-price model to consumption, investment, government, and net export spending?

Question 2

The questions with which Chapter 7 is concerned include each of the following except:

A) In the flexible-price model, what keeps aggregate demand and the level of production equal to potential output?
B) In the flexible-price model, what makes the supply of funds - saving - equal to the demand for funds - . consumption - in the financial markets?
C) When saving or investment demand changes, what happens in the flexible-price model to the real interest rate, and why?
D) As government policies, the international economic environment, or other features of policy change or the economic environment change, what happens in the flexible-price model to consumption, investment, government, and net export spending?

Answer 2

In the flexible-price model, what makes the supply of funds - saving - equal to the demand for funds - . consumption - in the financial markets?

Question 3

The questions with which Chapter 7 is concerned include each of the following except:

A) In the fixed-price model, what keeps aggregate demand and the level of production equal to potential output?
B) In the flexible-price model, what makes the supply of funds - saving - equal to the demand for funds - investment - in the financial markets?
C) When saving or investment demand changes, what happens in the flexible-price model to the real interest rate, and why?
D) As government policies, the international economic environment, or other features of policy change or the economic environment change, what happens in the flexible-price model to consumption, investment, government, and net export spending?

Answer 3

In the fixed-price model, what keeps aggregate demand and the level of production equal to potential output?

Question 4

The questions with which Chapter 7 is concerned include each of the following except:

A) In the flexible-price model, what keeps aggregate demand and the level of production equal to potential output?
B) In the flexible-price model, what makes the supply of funds - saving - equal to the demand for funds - . investment - in the financial markets?
C) When saving or investment demand changes, what happens in the fixed-price model to the real output level, and why?
D) As government policies, the international economic environment, or other features of policy change or the economic environment change, what happens in the flexible-price model to consumption, investment, government, and net export spending?

Question 5

The ___________ ensures equilibrium in a flexible-price economy.

A) real exchange rate
B) nominal interest rate
C) nominal wage rate
D) real interest rate

Question 6

The _________ plays the key balancing role in making sure that the economy reaches and stays at equilibrium at the potential output level.

A) real exchange rate
B) real interest rate
C) real level of spending
D) the production function

Question 7

The flow-of-funds through __________ is key to understanding why the real interest rate brings the economy to equilibrium.

A) labor markets
B) goods and services markets
C) financial markets
D) foreign exchange

Question 8

People lend money because they

A) have no immediate spending use for it.
B) try to find cheap financing for their investment projects.
C) hope to make a profit by using the funds to invest in new plant and equipment.
D) have no immediate investment use for it.

Question 9

Businesses borrow money because they

A) have no immediate spending use for it.
B) try to find expensive financing for their investment projects.
C) hope to make a profit by using the funds to invest in new plant and equipment.
D) have no immediate investment use for it.

Question 10

The market in which the real interest rate functions as the price is called

A) the foreign exchange market.
B) the stock market.
C) the bond market.
D) the market for loanable funds.

Question 11

In the model developed in the text, demand for loanable funds is represented by

A) consumption spending.
B) government spending.
C) investment spending.
D) net exports.

Question 12

The price of loanable funds is

A) the real exchange rate.
B) the real wage.
C) the Consumer Price Index.
D) the real interest rate.

Question 13

If total saving increases,

A) the real interest rate will decrease and investment spending will increase.
B) the real interest rate will decrease and investment spending will decrease.
C) the real interest rate will increase and investment spending will decrease.
D) the real interest rate will increase and investment spending will increase.

Question 14

The circular flow principle guarantees that in equilibrium

A) the level of aggregate demand will be greater than output.
B) the level of investment spending will be equal to the level of household saving.
C) the level of aggregate demand will be equal to output.
D) the level of government spending will be equal to tax revenue.

Question 15

The equilibrium condition in the financial markets is

A) household saving equals investment spending.
B) household saving plus government saving minus net exports equals investment spending.
C) household saving plus government saving plus net exports equals investment spending.
D) government spending equals tax revenue.

Question 16

The equilibrium condition in the financial markets is

A) household saving minus investment spending plus tax revenue minus government spending equals net exports.
B) household saving plus government savings plus net exports equals investment spending.
C) tax revenue minus government spending equals net exports.
D) private saving plus investment spending plus tax revenue minus government spending equals net exports.

Question 17

The negative of net exports represents

A) the net flow of purchasing power that domestic spenders channel into domestic financial markets.
B) the net flow of purchasing power that foreigners channel into domestic financial markets.
C) the amount of exports minus depreciation that is channeled into domestic financial markets.
D) the amount of exports after taxes are paid that is channeled into domestic financial markets.

Question 18

If net exports are less than zero,

A) foreigners receive more dollars from us than they need to buy our exports, so they have a shortage of dollars.
B) foreigners receive less dollars from us than they need to buy our exports, so they have a shortage of dollars.
C) foreigners receive more dollars from us than they need to buy our exports, so they have a surplus of dollars.
D) foreigners receive less dollars from us than they need to buy our exports, so they have a surplus of dollars.

Question 19

If foreigners have more dollars than they need to buy our exports

A) they can use them to buy land in the United States.
B) they can use them to buy bonds issued by United States businesses.
C) they can them to buys stocks of United States businesses.
D) all of the above.

Question 20

The terms (Y*-C-T), (T-G), and NX in the flow of funds equation represent

A) investment demand in the economy.
B) total saving in the economy.
C) the level of total spending in the economy.
D) the level of government spending in the economy.

Question 21

The term (Y*-C-T) in the flow of funds equation represents

A) household saving in the economy.
B) public saving in the economy.
C) foreign saving in the economy.
D) total saving in the economy.

Question 22

The term (T-G) in the flow of funds equation represents

A) household saving in the economy.
B) public saving in the economy.
C) foreign saving in the economy.
D) total saving in the economy.

Question 23

The term -NX in the flow of funds equation represents

A) household saving in the economy.
B) public saving in the economy.
C) foreign saving in the economy.
D) total saving in the economy.

Question 24

If there is an excess supply of loanable funds in the financial markets

A) the real interest rate will increase.
B) the real exchange rate will decrease.
C) the real interest rate will decrease.
D) the real wage will increase.

Question 25

If there is an excess demand for loanable funds in the financial markets

A) the real interest rate will increase.
B) the real exchange rate will decrease.
C) the real interest rate will decrease.
D) the real wage will increase.

Question 26

If the real interest rate ________, household saving will _________.

A) decreases; increase
B) decreases; decrease
C) decreases; remain the same
D) increases; increase

Question 27

If the real interest rate ________, household saving will _________.

A) increases; decrease
B) decreases; decrease
C) increases; increase
D) increases; remain the same

Question 28

If the real interest rate ________, foreign saving will _________.

A) increases; decrease
B) decreases; decrease
C) decreases; increase
D) increases; remain the same

Question 29

If the real interest rate ________, foreign saving will _________.

A) increases; decrease
B) increases; remain the same
C) decreases; increase
D) increases; increase

Question 30

If the real interest rate ________, government saving will _________.

A) increases; remain the same
B) decreases; decrease
C) decreases; increase
D) increases; decrease

Question 31

If the real interest rate ________, government saving will _________.

A) increases; increase
B) decreases; increase
C) decreases; remain the same
D) increases; decrease

Question 32

If the real interest rate ________, total saving will _________ because ________.

A) increases; increase; household saving will increase
B) decreases; increase; foreign saving will increase
C) decreases; remain the same; government saving will remain the same
D) increases; increase; foreign saving will increase

Question 33

If the real interest rate ________, total saving will _________ because ________.

A) decreases; increase; government saving will increase
B) decreases; decrease; foreign saving will decrease
C) increases; increase; household saving will increase
D) decreases; remain the same; household saving will remain the same

Question 34

In the flexible-price model, an increase in government purchases will result in

A) an increase in potential output.
B) an increase in the interest rate.
C) an increase in total saving.
D) an increase in investment expenditures.

Question 35

In the flexible-price model, a decrease in government purchases will result in

A) a decrease in potential output.
B) an increase in the interest rate.
C) an increase in investment spending.
D) a decrease in total saving.

Question 36

In the flexible-price model, an increase in the tax rate will result in

A) an increase in the interest rate.
B) an increase in potential output.
C) an increase in household saving.
D) an increase in investment expenditures.

Question 37

In the flexible-price model, a decrease in the tax rate will result in

A) an increase in potential output.
B) an increase in household saving.
C) a increase in investment expenditures.
D) a decrease in the interest rate.

Question 38

In the flexible-price model, a decrease in the tax rate will result in

A) an increase in potential output.
B) a decrease in household saving.
C) an increase in investment expenditures.
D) an increase in the interest rate.

Question 39

In the flexible-price model, a decrease in the household or foreign saving will result in

A) an increase in the interest rate.
B) a increase in investment expenditures.
C) a decrease in the interest rate.
D) an increase in potential output.

Question 40

In the flexible-price model, an increase in the household or foreign saving will result in

A) an increase in the interest rate.
B) a decrease in investment expenditures.
C) a decrease in the interest rate.
D) an increase in potential output.

Question 41

The interest rate __________ in response to ________ in government purchases because

A) increases; an increase; more government purchases means more government savings.
B) increases; an increase; more government purchases means less government savings.
C) decreases; an increase; more government purchases means less government savings.
D) decreases; a decrease; less government purchases means less government savings.

Question 42

The interest rate will ________ if ________ shifts to the _______.

A) increase; the total saving curve; right
B) decrease; the investment demand curve; right
C) increase; the investment demand curve; right
D) decrease; the total saving curve; left

Question 43

The interest rate will ________ if ________ shifts to the _______.

A) increase; the total saving curve; right
B) decrease; the investment demand curve; right
C) decrease; the total saving curve; left
D) decrease; the investment demand curve; left

Question 44

The supply of private savings in the economy is equal to

A) tY* - G
B) Y* - C₀ - C_y(1 - t)Y*.
C) (IM_yY*) - (X_yfY^f) -
D) I₀ - I_r r.

Question 45

The supply of public savings in the economy is equal to

A) tY* - G
B) Y* - C₀ - C_y(1 - t)Y*.
C) (IM_yY*) - (X_yfY^f) -
D) I₀ - I_r r.

Question 46

The supply of international savings in the economy is equal to

A) tY*-G₀.
B) (1-t-(1-t)C_y)Y*-C₀.
C) (IM_yY*) - (X_yfY^f) -
D) I₀ - I_r r.

Question 47

The demand for funds is equal to

A) tY*-G₀.
B) (1-t-(1-t)C_y)Y*-C₀.
C) (IM_yY*) - (X_yfY^f) -
D) I₀ - I_r r.

Question 48

If the change in government purchases is denoted by G, the resulting change in r ( r) would be equal to

A)

B)

C)

D)

Question 49

The change in investment spending ( I) which occurs as a result of a change in government purchases ( G) is equal to

A)

B)

C)

D)

Question 50

The change in investment spending ( I) which occurs as a result of a change in government purchases ( G) is equal to

A) I_r x r
B) -I_r x r
C) -I_r x G
D) I_r x G

Question 51

The change in consumption spending ( C) which occurs as a result of a change in government purchases ( G) is equal to

A) C_y x G
B) -C_y x G
C) -C_y x (1-t) x Y
D) 0

Question 52

The change in net exports ( NX) which occurs as a result of a change in government purchases ( G) is equal to

A)

B)

C)

D)

Question 53

The change in total saving ( S) which occurs as a result of a change in government purchases ( G ) is equal to

A)

B)

C)

D)

Question 54

Suppose there is an increase in government purchases of $300 billion. If C_y = .8; I_r = 9000; X = 600; t = .30; _r = 10,

A) r would equal 2%.
B) r would equal -2%.
C) r would equal .02%.
D) r would equal 3.27%.

Question 55

Suppose there is an increase in government purchases of $300 billion. If C_y = .8; I_r = 9000; X = 600; t = .30; _r = 10,

A) I would equal $180 billion.
B) I would equal -$180 billion.
C) I would equal $1800 billion.
D) I would equal -$1800 billion.

Question 56

Suppose there is an increase in government purchases of $300 billion. If C_y = .8; I_r = 9000; X = 600; t = .30; _r = 10,

A) C would equal $168 billion.
B) C would equal -$168 billion.
C) C would equal 0.
D) C would equal $180 billion.

Question 57

Suppose there is an increase in government purchases of $300 billion. If C_y = .8; I_r = 9000; X = 600; t = .30; _r = 10,

A) NX would equal $120 billion.
B) NX would equal -$1200 billion.
C) NX would equal -$12 billion.
D) NX would equal -$120 billion.

Question 58

Suppose there is an increase in government purchases of $300 billion. If C_y = .8; I_r = 9000; X = 600; t = .30; _r = 10,

A) S would equal $180 billion.
B) S would equal -$180 billion.
C) S would equal $1800 billion.
D) S would equal -$1800 billion.

Question 59

If domestic businesses become more pessimistic about the future,

A) I_o would increase and r would decrease.
B) I_o would increase and r would increase.
C) I_o would decrease and r would decrease.
D) I_o would decrease and r would increase.

Question 60

If domestic businesses become more optimistic about the future,

A) I_o would increase and r would decrease.
B) I_o would increase and r would increase.
C) I_o would decrease and r would decrease.
D) I_o would decrease and r would increase.

Question 61

If domestic businesses become more pessimistic about the future, r would equal

A) I_o x (I_r + X _r )
B) I_o / (I_r + X _r )
C) I_o x (I_r - X _r )
D) -I_o / (I_r + X _r )

Question 62

If domestic businesses become more optimistic about the future, r would equal

A) I_o x (I_r + X _r )
B) I_o / (I_r + X _r )
C) I_o x (I_r - X _r )
D) -I_o / (I_r + X _r )

Question 63

If there is a change in the foreign interest rate, r would equal

A)

B)

C)

D)

Question 64

If the foreign interest rate increases,

A) consumption spending and the domestic interest rate would increase.
B) the domestic interest rate would increase and investment spending would decrease.
C) the domestic interest rate would decrease and investment spending would increase.
D) net exports would decrease and the exchange rate would increase.

Question 65

If households increase their baseline consumption, r would equal

A)

B)

C)

D)

Question 66

The equilibrium interest rate will ________ if _________.

A) increase; foreign income decreases
B) decrease; foreign income decreases
C) increase; the foreign real interest rate decreases
D) stay the same; the foreign real interest rate increases and foreign income decreases

Question 67

The equilibrium interest rate will ________ if ___________.

A) increase; the foreign real interest rate increases
B) decrease; the foreign real interest rate increases
C) increases; foreign income decreases
D) decrease; foreign income and the foreign real interest rate increase

Question 68

The equilibrium interest rate will ________ if foreign income and the foreign real interest rate increase.

A) decrease
B) remain unchanged
C) increase
D) either increase or decrease, depending which effect dominates.

Question 69

The equilibrium interest rate will ________ if government spending increases and foreign income decreases.

A) decrease
B) remain unchanged
C) increase
D) either increase or decrease, depending which effect dominates.

Question 70

The equilibrium interest rate will ________ if the real foreign interest rate increases and the propensity to import increases.

A) decrease
B) remain unchanged
C) increase
D) either increase or decrease, depending which effect dominates.

Question 71

The equilibrium interest rate will ________ if foreign real income increases and the sensitivity of investment to the interest rate decreases.

A) decrease
B) remain unchanged
C) increase
D) either increase or decrease, depending which effect dominates.