Deck 9: From the Short to the Medium Run: the Is-Lm-Pc Model

Question 1

The Phillips curve shows that when the unemployment rate is lower than the natural rate,

A)inflation is higher than expected.
B)inflation is lower than expected.
C)policy rate is higher than expected.
D)policy rate is lower than expected.

Answer 1

inflation is higher than expected.

Question 2

When a government reduces its deficits by increasing taxes,in the medium run,

A)output returns to potential.
B)output increases.
C)interest rate is higher.
D)IS curve shifts inward to the left.

Answer 2

output returns to potential.

Question 3

In the IS-LM-PC model,LM curve is

A)flat.
B)upward sloping.
C)downward sloping.
D)vertical.

Answer 3

flat.

Question 4

The natural rate of interest is not

A)zero.
B)the neutral rate of interest.
C)Wicksellian rate of interest.
D)associated with the natural rate of unemployment.

Question 5

When the policy rate decreases,

A)IS curve does not change.
B)IS curve shifts to the right.
C)IS curve shifts to the left.
D)LM curve shifts upward.
E) LM curve shifts downward.

Question 6

Disposable income equals

A)income minus saving.
B)income minus both saving and taxes.
C)consumption minus taxes.
D)the sum of consumption and saving.
E) none of the above

Question 7

Okun's law shows that when the unemployment rate is below the natural rate,

A)inflation is higher than expected.
B)inflation is lower than expected.
C)output is below potential.
D)output is above potential.

Question 8

Okun's law shows that when the unemployment rate is above the natural rate,

A)inflation is higher than expected.
B)inflation is lower than expected.
C)output is below potential.
D)output is above potential.

Question 9

The zero lower bound refers to the situation that

A)the lowest the central bank can decrease the nominal policy rate is 0%.
B)real interest rate is 0%.
C)inflation rate is 0%.
D)risk premium is 0%.

Question 10

As fiscal consolidation takes place,the central bank should

A)decrease the policy rate.
B)increase the policy rate.
C)increase inflation rate.
D)decrease money supply.

Question 11

The change in the unemployment rate is approximately equal to

A)the negative of the growth rate of output.
B)the negative policy rate.
C)the negative inflation rate.
D)the negative of the growth rate of money supply.

Question 12

Empirically output growth 1% above normal for one year leads to a ________ in the employment rate.

A)0)6%
B)0)7%
C)0)8%
D)0)5%

Question 13

In the IS-LM-PC model,investment does not depend on

A)T)
B)Y)
C)r)
D)x)

Question 14

If the output is too high,to achieve the medium run equilibrium,the central bank will

A)increases policy rate.
B)reduces policy rate.
C)increase money supply.
D)increases inflation rate.

Question 15

When a government reduces its deficits by increasing taxes,in the short run,

A)output returns to potential.
B)output increases.
C)interest rate is higher.
D)IS curve shifts inward to the left.

Question 16

If the output is too low,to achieve the medium run equilibrium,the central bank will

A)increases policy rate.
B)reduces policy rate.
C)increase money supply.
D)increases inflation rate.

Question 17

In the IS-LM-PC model,which of the following is assumed to be exogenous?

A)G
B)C
C)I
D)Y

Question 18

The Phillips curve shows that when the unemployment rate is higher than the natural rate,

A)inflation is higher than expected.
B)inflation is lower than expected.
C)policy rate is higher than expected.
D)policy rate is lower than expected.

Question 19

Use the IS-LM-PC model to illustrate how the economy adjusts to an increase in taxes both in the short run and in the medium run.

Question 20

When the policy rate increases,

A)IS curve does not change.
B)IS curve shifts to the right.
C)IS curve shifts to the left.
D)LM curve shifts upward.
E) LM curve shifts downward.

Question 21

What is the major reason for oil price to go up in the 2000s?

A)formation of the OPEC
B)fast of growth of emerging economies
C)new energy
D)higher demand from the US

Question 22

What is the major reason for oil price to go up in the 1970s?

A)formation of the OPEC
B)fast of growth of emerging economies
C)new energy
D)higher demand from the US

Question 23

An increase in the price of oil will cause which of the following in the medium run?

A)no change in the level of output
B)no change in the price level
C)an increase in the unemployment rate
D)a reduction in the interest rate
E) none of the above

Question 24

The wage setting relation is

A)downward sloping.
B)upward sloping.
C)vertical.
D)horizontal.

Question 25

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 medium run?

A)a reduction in the interest rate
B)a reduction in output and an increase in the aggregate price level
C)a reduction in output and a reduction in the interest rate
D)a reduction in unemployment, an increase in the nominal wage and an increase in the aggregate price level
E) a reduction in the aggregate price level and no change in output

Question 26

In the short run,an increase in the price of oil will cause

A)an increase in output.
B)a reduction in the price level.
C)an increase in the interest rate.
D)all of the above
E) none of the above

Question 27

For this question,assume that the economy is initially operating at the natural level of output.An increase in consumer confidence will cause

A)a reduction in the real wage in the medium run.
B)an increase in the real wage in the medium run.
C)no change in the real wage in the medium run.
D)ambiguous effects on the real wage in the medium run.

Question 28

For this question,assume that the economy is initially operating at the natural level of output.A reduction in consumer confidence will cause

A)an increase in the real wage in the medium run.
B)a reduction in the real wage in the medium run.
C)no change in the real wage in the medium run.
D)ambiguous effects on the real wage in the medium run.

Question 29

In the short run,a reduction in the price of oil will cause

A)a reduction in output.
B)an increase in the price level.
C)a reduction in the interest rate.
D)all of the above
E) none of the above

Question 30

For this question,assume that the economy is initially operating at the natural level of output.A reduction in taxes will cause

A)an increase in the real wage in the medium run.
B)a reduction in the real wage in the medium run.
C)no change in the nominal wage in the medium run.
D)ambiguous effects on the real wage in the medium run.
E) none of the above

Question 31

The price setting relation is

A)horizontal.
B)upward sloping.
C)downward sloping.
D)vertical.

Question 32

For this question,assume that the economy is initially operating at the natural level of output.An increase in unemployment benefits will cause

A)an increase in the real wage in the medium run.
B)a reduction in the real wage in the medium run.
C)no change in the real wage in the medium run.
D)ambiguous effects on the real wage in the medium run.

Question 33

For this question,assume that the economy is initially operating at the natural level of output.A monetary expansion will cause

A)no change in the real wage in the medium run.
B)an increase in investment in the medium run.
C)a reduction in the interest rate in the medium run.
D)no change in the nominal wage in the medium run.

Question 34

From 1970 to the mid-1990s,the relative price of crude petroleum

A)steadily increased.
B)steadily decreased.
C)increased dramatically, then decreased dramatically.
D)decreased dramatically, then increased dramatically.
E) remained more or less the same.