Deck 18: Monetary Theory Ii: the Is-Mp Model

Question 1

The aggregate expenditure line is upward sloping since as GDP increases

A) consumption increases.
B) investment increases.
C) government purchases increase.
D) net exports increase.

Answer 1

consumption increases.

Question 2

In a move up the IS curve

A) investment rises.
B) output falls.
C) the real interest rate falls.
D) saving rises.

Answer 2

output falls.

Question 3

In a simple model of the economy,if the MPC is 0.8,the multiplier will equal

A) 0.2.
B) 0.8.
C) 1.25.
D) 5.

Answer 3

5.

Question 4

An increase in the expected profitability of investment will cause

A) the IS curve to shift right.
B) the IS curve to shift left.
C) the MP curve to shift upward.
D) the MP curve to shift downward.

Question 5

What effect would economic weakness in Europe due to a sovereign debt crisis have on the U.S.economy?

A) The IS curve shifts to the right.
B) The IS curve shifts to the left.
C) Potential GDP increases.
D) Potential GDP decreases.

Question 6

Which of the following statements about potential GDP is FALSE?

A) The Fed's goal is to have equilibrium GDP close to potential GDP.
B) When GDP is at potential, cyclical unemployment is zero.
C) It occurs when firms are producing at their maximum level of output.
D) It occurs when firms are producing with a workforce of normal size working normal hours.

Question 7

An increase in the real interest rate causes

A) the IS curve to shift to the right.
B) the IS curve to shift to the left.
C) a movement up the IS curve.
D) a movement down the IS curve.

Question 8

If AE < Y,which of the following will NOT occur?

A) Inventories will decline.
B) Actual investment will be more than planned investment.
C) Employment will decline.
D) GDP will decline.

Question 9

Which of the following would NOT cause a shift in the IS curve?

A) an increase in the domestic real interest rate
B) an increase in consumer confidence
C) a decrease in the expected future profitability of capital
D) a decrease in government purchases

Question 10

A key reason that FOMC members expected that their target for the federal funds rate in 2016 would be higher than it actually was is that they had expected the growth rate of real GDP to be ________ and the inflation rate to be ________ than they actually were.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 11

The IS curve depicts the relationship between

A) aggregate output and the real interest rate.
B) investment demand and the real interest rate.
C) investment demand and the level of current output.
D) national saving and the level of current output.

Question 12

If a $10 billion increase in investment leads to a $20 billion increase in GDP,the multiplier is

A) 0.5.
B) 2.
C) 10.
D) 30.

Question 13

The level of potential GDP

A) increases as the real rate of interest decreases.
B) increases as the real rate of interest increases.
C) is unaffected by the real rate of interest.
D) is represented on the IS-MP model by a horizontal line at the world real rate of interest.

Question 14

If AE > Y,which of the following will NOT occur?

A) Inventories will decline.
B) Actual investment will be more than planned investment.
C) Employment will increase.
D) GDP will increase.

Question 15

An autonomous expenditure is one that does NOT depend on

A) government policy.
B) the automobile sector.
C) interest rates.
D) GDP.

Question 16

The marginal propensity to consume can best be described as

A) consumption / income.
B) the impact of a change in income on GDP.
C) the change in income divided by the change in consumption.
D) the change in consumption divided by the change in income.

Question 17

Which of the following does NOT lead to an increase in potential GDP?

A) labor force grows
B) technological change takes place
C) new machinery and equipment are installed
D) aggregate expenditures increase

Question 18

The series of induced changes in consumption spending that result from an initial change in autonomous expenditure is called the

A) induced effect.
B) autonomous effect.
C) multiplier effect.
D) consumption effect.

Question 19

The capacity of a firm can best be described as

A) when a firm is producing maximum output.
B) a firm's production when operating normal hours using a normal sized workforce.
C) when a firm makes full use of all the space available in its factory or building.
D) when all of the firm's workers are producing at their maximum potential.

Question 20

Which of the following would NOT cause the IS curve to shift to the left?

A) a decrease in government purchases
B) an increase in consumer confidence
C) a decrease in foreign demand for domestic products
D) a decrease in the expected future profitability of capital

Question 21

Economists who have studied the Phillips curve have concluded that it can shift due to all of the following EXCEPT

A) demand shocks.
B) supply shocks.
C) changes in household expectations of inflation.
D) changes in firms' expectations of inflation.

Question 22

Most economists think changes in which type of unemployment affects inflation?

A) frictional unemployment
B) cyclical unemployment
C) structural unemployment
D) natural rate of unemployment

Question 23

The MP curve represents

A) the Fed's monetary policy actions in setting a target for the federal funds rate.
B) the relationship between the money supply and the price level.
C) a relationship between the real interest rate and manufacturing production.
D) the relationship between real interest rates and potential GDP.

Question 24

All of the following help provide the basis for the Fed controlling the real interest rate in the IS-MP model EXCEPT

A) the Fed controls the federal funds rate through open market operations.
B) if expected future inflation remains stable, changes in nominal interest rates reflect changes in real interest rates.
C) short-term and long-term interest rates tend to move together.
D) the Fed's increased use of TIPS in conducting monetary policy.

Question 25

Use the following data to calculate equilibrium real GDP: C = 0.75Y,I = $2 trillion,G = $1 trillion and NX = -$0.5 trillion.

Question 26

Explain how an increase in real interest rates affects the components of aggregate expenditure.

Question 27

What is potential GDP? What happens to unemployment when GDP is at its potential?

Question 28

When the Fed reduces the real interest rate,which of the following does NOT increase?

A) consumption
B) investment
C) government purchases
D) net exports

Question 29

Which interest rate is most relevant in determining aggregate expenditures?

A) federal funds rate
B) short-term real interest rate
C) long-term nominal interest rate
D) long-term real interest rate

Question 30

Which of the following is NOT a reason given by economists for the failure of Okun's law to account for the rise in unemployment during the recession of 2007-2009?

A) increased willingness among firms to lay off workers during recessions
B) a surge in productivity during the recession
C) the unusual severity of the recession
D) It does not take into account the effect of the stimulus.

Question 31

How is the economy likely to respond when AE (sales)exceeds production?

Question 32

The relationship between the output gap and the cyclical rate of unemployment is known as

A) the Phillips curve.
B) the LM curve.
C) Murphy's law.
D) Okun's law.

Question 33

What is the inflation gap? What is the output gap?

Question 34

In the IS-MP model,when the Fed increases the real interest rate

A) the MP curve shifts up resulting in a decline in the output gap.
B) the MP curve shifts up resulting in an increase in the output gap.
C) the MP curve shifts down resulting in a decline in the output gap.
D) the MP curve shifts down resulting in an increase in the output gap.

Question 35

What is the multiplier effect?

Question 36

What three parts of the economy are represented in the IS-MP model?

Question 37

What is the difference between an autonomous change in spending and an induced change in spending?

Question 38

How does the goods market return to equilibrium if AE is less than production?

Question 39

What is the multiplier? If MPC = 0.75,what is the value of the multiplier in the simple model of the economy?

Question 40

The graph of the short-run relationship between the unemployment rate and inflation is called a(n)

A) MP curve.
B) LM curve.
C) IS curve.
D) Phillips curve.

Question 41

In a closed economy,the total quantity of goods demanded equals the sum of

A) consumption spending, investment spending, and government spending.
B) consumption spending, national saving, and taxes.
C) consumption spending, government spending, and taxes.
D) investment spending, national saving, and taxes.

Question 42

According to the Phillips Curve,which of the following may have taken place if both the unemployment rate and inflation have risen?

A) a negative supply shock
B) an increase in expected inflation
C) a severe recession
D) a negative demand shock

Question 43

What unusual measures did the Fed take in trying to reduce long-term interest rates during the financial crisis of 2007-2009?

A) buying mortgage-backed securities issued by Fannie Mae and Freddie Mac
B) reducing the federal funds rate multiple times
C) issuing its own securities
D) eliminating the discount rate on loans to member banks

Question 44

How can the difference between the current unemployment rate and the natural rate of unemployment help explain changes in inflation?

Question 45

Which of the following prevented the Fed from reducing long-term real interest rates during the financial crisis of 2007-2009?

A) an increase in expected inflation
B) an increase in the risk premium
C) the collapse in the housing market
D) the failure of the federal funds rate to respond to monetary policy

Question 46

In a closed economy,national saving equals

A) C + I + G.
B) Y - C - G.
C) Y - C - I.
D) Y - G - I.

Question 47

By the early 1990s,Fannie Mae,Freddie Mac,and other federal agencies held

A) over 85% of residential mortgages.
B) less than 15% of residential mortgages.
C) a majority of residential mortgages.
D) virtually no residential mortgages.

Question 48

What happened to the risk premium on Baa corporate bonds during the financial crisis of 2007-2009?

A) It declined slightly.
B) It rose to about 2%.
C) It rose to about 4%.
D) It rose to about 6%.

Question 49

Most investors believed that Congress would never allow Fannie Mae and Freddie Mac to fail,which enabled Fannie and Freddie to sell bonds with

A) high interest rates because investors saw the bonds as having very low default risk.
B) low interest rates because investors saw the bonds as having very low default risk.
C) high interest rates because investors saw the bonds as having zero default risk.
D) low interest rates because investors saw the bonds as having very high default risk.

Question 50

How do expectations of higher inflation become embedded in the economy and affect actual inflation?

Question 51

Which of the following is the least likely to take place if the Fed responds to a negative demand shock by reducing the real interest rate?

A) The IS curve shifts to the right.
B) Output gap returns to zero.
C) Inflation returns to its previous rate.
D) The MP curve shifts down.

Question 52

The gap between the current unemployment rate and the natural rate of unemployment is called

A) frictional unemployment.
B) structural unemployment.
C) cyclical unemployment.
D) full employment.

Question 53

The Fed's large purchases of mortgage-backed securities have ________ their prices and ________ mortgage interest rates.

A) increased; raised
B) increased; lowered
C) decreased; raised
D) decreased; lowered

Question 54

All of the following tend to occur when unemployment is above the natural rate EXCEPT

A) wage increases will be limited.
B) inflation will rise.
C) increases in the cost of production will be limited.
D) there is slack in the labor market.

Question 55

In a closed economy,if the goods market is in equilibrium,national saving is $2 trillion,national consumption is $7 trillion,and government purchases are $2.5 trillion,then GDP equals

A) $7 trillion.
B) $9.5 trillion.
C) $11.5 trillion.
D) Not enough information has been provided to determine the answer.

Question 56

As of the end of 2016,Fannie Mae and Freddie Mac

A) were still under the control of the Federal Housing Finance Agency, and no definite plans for privatizing them were in place.
B) were still under the control of the Federal Housing Finance Agency, with Congress set to privatize them by the end of 2017.
C) had again become private.
D) were no longer in existence.

Question 57

In a closed economy,the goods market is in equilibrium when

A) Y = S + I + G.
B) C + S = I + G.
C) C + I = S + G.
D) Y = C + I + G.

Question 58

For the goods market to be in equilibrium in a closed economy,which of the following must be TRUE?

A) Y = S + I + G
B) S + I = C + G
C) S + G = Y + C
D) S = I

Question 59

All of the following are likely results of a negative demand shock EXCEPT

A) a negative output gap.
B) lower inflation.
C) the IS curve shifts to the left.
D) the Phillips curve shifts to the left.

Question 60

A closed economy is one in which

A) investment spending is zero.
B) government spending is zero.
C) there are no imports or exports.
D) demand equals supply in every market.

Question 61

The bank lending channel

A) emphasizes the role of interest rates in the money supply process.
B) emphasizes the importance of borrowers' net worth to the decision of lenders to grant loans.
C) emphasizes the behavior of bank-dependent borrowers.
D) is another name for the interest rate channel.

Question 62

Suppose the stock market crashes resulting in a significant decline in the wealth of consumers.Make use of the IS-MP model to illustrate the impact this has on the economy.How is the Fed likely to respond? Show the impact of the change in monetary policy on the graph of the IS-MP model.

Question 63

Lowering the target for the federal funds rate is unlikely to be effective in fighting a recession when a(n)________ in the risk premium demanded by investors causes a ________ in interest rates.

A) increase; rise
B) increase; fall
C) decrease; rise
D) decrease; fall

Question 64

The ways in which monetary policy affect output and prices are known as

A) channels.
B) stations.
C) vehicles.
D) means.

Question 65

Monetary policy can have substantial effects on the economy even when nominal interest rates are very low

A) since real rates are what affect borrowing and spending decisions.
B) by improving borrower and bank balance sheets.
C) by reducing transactions costs.
D) only when the policy is substantial.

Question 66

Which of the following is NOT true of the interest rate channel?

A) Bank loans play no special role.
B) The Fed changes the real interest rate which affects the components of aggregate expenditure.
C) Borrowers are indifferent as to how and from whom they raise funds.
D) Alternative sources of funds are not substitutes for each other.

Question 67

Increases in interest rates

A) reduce borrowers' net worth.
B) reduce lenders' net worth.
C) increase the present value of borrowers' assets.
D) raise the cost to businesses of internal funding.

Question 68

Analysts have attempted to model the impact of monetary policy on net worth by emphasizing

A) the impact of lower interest rates on business spending on fixed investment.
B) the impact of lower interest rates on household spending on housing and durable goods.
C) the liquidity of balance sheet positions as a determinant of business and household spending.
D) the greater variability of business spending compared to household spending.

Question 69

Lower interest rates which reduce the debt-servicing burden of households,thus increasing their net worth,is best described by the

A) bank lending channel.
B) money channel.
C) financial market channel.
D) balance sheet channel.

Question 70

What limited the effectiveness of monetary policy during the financial crisis of 2007-2009?

Question 71

If the Fed is able to permanently reduce the inflation rate,households will eventually lower their expectation of the inflation rate.Once that happens,the Phillips curve will shift ________,and the Fed can return output to potential GDP by ________ the real interest rate.

A) up; raising
B) up; lowering
C) down; raising
D) down; lowering

Question 72

In the bank lending channel,an important reason for output increases in the short run after an expansionary monetary policy is that

A) the funds directly available for households and firms to spend will increase.
B) prices will increase, making increased production more profitable for firms.
C) the increase in government spending from an expansionary monetary policy increases output through the multiplier effect.
D) the ability of banks to make loans will increase.

Question 73

The effect of the shadow bank lending channel is to make expansionary monetary policy ________ when the expansionary policy takes the form of very low interest rates.

A) somewhat more effective
B) somewhat less effective
C) totally effective
D) completely ineffective

Question 74

To permanently reduce the inflation rate,the Fed can cause a(n)________ in real GDP by ________ the real interest rate.

A) increase; raising
B) increase; lowering
C) decline; raising
D) decline; lowering

Question 75

Mortgage interest rates are likely to ________ if the mortgage market becomes privatized,and they are likely to ________ if the Fed reduces its holdings of mortgage-backed securities over time.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 76

Which monetary policy channel focuses on the ability of money market mutual funds to purchase commercial paper issued by firms?

A) interest rate channel
B) commercial bank lending channel
C) shadow bank lending channel
D) balance sheet channel

Question 77

Which of the following is NOT generally recognized as a channel for monetary policy?

A) interest rate channel
B) balance sheet channel
C) financial market channel
D) bank lending channel

Question 78

The balance sheet channel describes ways in which interest rate changes resulting from monetary policy affect

A) the portfolio decisions of households.
B) the portfolio decisions of businesses.
C) borrowers' net worth.
D) lenders' net worth.

Question 79

Changes in net worth and liquidity may significantly affect the volume of lending and economic activity according to the

A) interest rate channel.
B) balance sheet channel.
C) money channel.
D) bank lending channel.

Question 80

Which of the following statements is correct?

A) Because in practice few borrowers are bank-dependent, the bank lending channel is of little real-world importance.
B) In the interest rate channel, an expansionary monetary policy may cause a leftward shift in the AD curve.
C) In the bank lending channel, an expansionary monetary policy can increase output in the short run even if it does not result in a decrease in the real interest rate.
D) In the interest rate channel, an expansionary monetary policy affects spending but not output.