1. A. B. C. D. If the interest rate were to rise, we expect that autonomous expenditures will rise. the supply of money will fall. the amount of money people want to hold will rise. the amount of money people want to hold will fall. 2. A. B. C. D. Which of the following would shift the LM curve? an increase in the tax rate an increase in the real money supply a reduction in business confidence All of these. 3. Which of the following statements would be true of an economy that can be characterized as being to the left of the IS curve? A. There is an excess demand for commodities at the existing interest rate. B. There will be a tendency for the level of output to decrease. C. There is an excess supply of commodities at the existing interest rate. D. There will be a tendency for interest rates to fall. 4. A. B. C. D. If there is unplanned inventory accumulation there is excess demand for bonds. supply of bonds. demand for commodities. supply of commodities. 5. Since business firms will undertake a project whose rate of return exceeds the present level of interest rates, when interest rates A. rise planned investment rises, ceteris paribus. B. fall planned investment falls, ceteris paribus. C. rise planned investment does not change. D. rise planned investment falls, ceteris paribus. 6. An increase in real GDP causes the demand for real money balances to A. rise. B. fall. C. remain unaffected. D. rise, fall, or remain unaffected depending on the interest rate at the time. 7. Suppose that Y = 4,000 and we are at a point on the money demand schedule where (M/P) = 600. Should Y rise to 4,200, the same quantity of real money balances A. will not be demanded under any conditions. B. will be demanded again provided the interest rate does not change. C. will be demanded again provided the interest rate rises by a certain amount. D. will be demanded again provided the interest rate falls by a certain amount. 8. Suppose the demand for money becomes less sensitive to changes in the interest rate. In moving along an LM curve, an increase in income must be accompanied by a ________ change in the interest rate than before, meaning that the LM curve has become ________. A. greater, steeper B. greater, flatter C. smaller, steeper D. smaller, flatter 9. Suppose the Fed changes the interest rate in an attempt to raise planned investment. But in spite of this, planned investment remains unchanged. The most likely explanation is that A. we have moved downward along an unchanged rate-of-return line. B. we have moved upward along an unchanged rate-of-return line. C. the rate-of-return line has shifted to the left. D. the rate-of-return line has shifted to the right. 10. An increase in the marginal propensity to consume would cause the IS curve to A. B. C. D. E. make a make a rotate rotate rotate parallel shift to parallel shift to to become steeper to become flatter to become flatter the right. the left. from its vertical intercept. from its vertical intercept. from its horizontal intercept. 11. The structural surplus is A. the difference between the actual surplus and the natural employment surplus and it increases whenever income rises. B. identical to the natural employment surplus and it increases whenever tax rates are cut. C. identical to the natural employment surplus and it decreases whenever the natural level of output increases. D. identical to the natural employment surplus and it increases whenever the natural level of output increases. 12. The "crowding-out" effect refers to the fact that A. fiscal policy cannot be used to shift the IS curve. B. rising interest rates tend to accompany an expansionary fiscal policy. C. there may be a liquidity trap. D. All of these. 13. Fully accommodating monetary policy results in A. a constant interest rate. B. the simple fiscal-policy multiplier of Chapter 3. C. an increase in the money supply when there is a rise in government spending. D. All of these. 14. For a given level of equilibrium GDP, a tight-money/easy-fiscal policy mix compared with easy money/tight-fiscal policy mix implies a A. lower interest rate. B. lower level of investment. C. higher level of taxation. D. lower level of government expenditures. 15. We can infer that the government is following a restrictive fiscal policy when A. the actual deficit falls. B. the natural employment deficit falls. C. the actual deficit rises. D. the natural employment deficit rises. 16. The progressive income tax is an automatic stabilizer with respect to the Federal government's budget surplus or deficit because A. individuals must "automatically" pay taxes even when they have a deficit. B. during periods of output growth, a greater percentage of real income "leaks" from the expenditure stream. C. during periods of output growth, the marginal leakage rate increases as taxes decrease. D. None of the above. 17. A steep LM curve implies that A. an increase in government spending will change output by a relatively small amount. B. a decrease in taxes will change output by a relatively small amount. C. changes in government spending and taxes will have a large multiple effect on output. D. Both A and B. 18. Monetary policy will have a large income effect provided the A. sensitivity of autonomous spending to interest rates is high. B. sensitivity of autonomous spending to interest rates is low. C. sensitivity of output changes to interest rates is small. D. None of the above. 19. The relation S + (T - G) = I + NX describing the equilibrium of an economy explicitly demonstrates A. deficit spending by the government reduces either investment and/or net foreign investment. B. deficit spending reduces private saving (assuming net foreign investment remains unchanged). C. as private saving increases net foreign investment must decrease, exports decline. D. as private saving increases the deficit must decline if investment decreases. 20. The practice of "monetizing the debt" is traditionally feared because it is thought to cause A. unemployment. B. inflation. C. a falling price level. D. a liquidity trap. 21. A government budget surplus A. decreases a country's ability investment. B. increases a country's ability investment. C. increases a country's ability decreases its ability to finance foreign investment. D. decreases a country's ability increases its ability to finance foreign investment. to finance domestic and foreign to finance domestic and foreign to finance domestic investment and to finance domestic investment and 22. The clearest indicator of a switch to a less expansionary fiscal policy is a A. rise in the actual surplus. B. fall in the actual surplus. C. rise in the natural employment surplus. D. fall in the natural employment surplus. 23. A vertical IS curve comes from the assumption that changes in the interest rate do not affect A. money demand. B. the money supply. C. autonomous planned spending. D. the LM curve. 24. If S = 300, T = 800, G = 1100, and I = 150, this makes net foreign investment A. 150. B. -150. C. 450. D. 750. E. -450. 25. International crowding out in the U.S. economy occurs when A. relatively high U.S. interest rates weaken the dollar, ceteris paribus. B. relatively high U.S. interest rates strengthen the yen, ceteris paribus. C. relatively high U.S. interest rates strengthen the dollar, ceteris paribus. D. None of the above. 26. The purchasing power parity theory "predicts" that if the price of semiconductors in the U.S. is $3 and the price in Japan is 210 yen for a comparable semiconductor, the exchange rate would be (assume only 1 good is traded, there is no government intervention, and transportation costs are negligible). A. 180 yen/$. B. 140 yen/$. C. 70 yen/$ D. $/yen 1.45. 27. A stronger dollar implies that foreigners will find U.S. exports ________ and U.S. citizens will find imports ________. A. less expensive; more expensive B. less expensive; less expensive C. more expensive; more expensive D. more expensive; less expensive 28. Following the use of expansionary fiscal policy in the U.S., which of the following events will NOT take place? A. increase in U.S. interest rate B. appreciation of the dollar C. increase in U.S. net exports D. increase in exports of foreign countries to the U.S. 29. With flexible exchange rates the fiscal policy multiplier becomes A. larger because exports leak out of the economy. B. smaller because the increase in interest rate lowers the exchange rate. C. smaller because the increase in interest rate raises the exchange rate. D. larger because the increase in interest rate raises the exchange rate. 30. A U.S. balance of payments deficit puts ________ pressure on the foreign price of the dollar, which, under a flexible exchange rate system, tends to ________ that deficit. A. upward, worsen B. upward, eliminate C. downward, worsen D. downward, eliminate 31. If the dollar depreciates against the yen, this tends to ________ our imports of Japanese goods and ________ our exports of goods to Japan, so that our net exports ________. A. increase, increase, increase B. increase, decrease, are unchanged C. decrease, decrease, decrease D. decrease, increase, increase E. decrease, increase, are unchanged 32. The central bank is forced to accommodate fiscal policy under ________ exchange rates, which makes fiscal policy a ________ influence on equilibrium income. A. fixed, powerful B. fixed, powerless C. flexible, powerful D. flexible, powerless 33. Switching the U.S. policy mix to an easier fiscal and tighter monetary policy ________ the U.S. interest rate, leading to ________ of the dollar, which puts ________ long-run pressure on the U.S. foreign trade surplus. A. raises, depreciation, upward B. raises, depreciation, downward C. raises, appreciation, downward D. lowers, depreciation, upward E. lowers, appreciation, upward 34. Suppose the price of the dollar falls from 150 to 120 yen. As a result, Japanese purchases of $35,000 Cadillacs rise from 2,000 to 2,100 per year. This is the kind of event underlying the reason for drawing A. a downward-sloping demand curve for dollars. B. a downward-sloping supply curve of dollars. C. an upward-sloping demand curve for dollars. D. an upward-sloping supply curve of dollars. 35. Government debt places a burden on future generations if A. B. C. D. the the the All debt is used debt is used debt is used of the above to fund the current consumption of its citizens. to fund the production of investment goods. to fund schools and highways. are correct. 36. A major side-effect of a stimulative fiscal policy is that it will A. discriminate in favor of housing. B. crowd out private expenditures. C. increase the natural rate of unemployment. D. permanently raise the rate of inflation. 37. A true and unambiguous burden on future generations will be created whenever government deficit spending A. increases the ratio of government expenditure to GDP. B. pays for goods that yield no future benefits. C. is used as part of a countercyclical fiscal expansion. D. pays for capital expenditures. 38. During 1996-1999 the government budget A. moved deeper into deficit and caused a substantial increase in borrowing from foreign investors. B. moved into surplus but the beneficial effect was largely offset by a drop in household saving. C. was balanced and the inflow of capital from foreign lenders was finally stopped. D. moved into surplus and resulted in large capital outflows from the U.S. 39. Which of the following contributed to the sharp increase in Federal tax revenues between 1995 and 1998? A. An increase in income tax rates. B. A sustained economic expansion. C. Increased income inequality. D. All of the above. 40. The government deficit does not place a burden on future generations when A. taxes are eventually raised to pay interest on the additional debt. B. the borrowed funds are used for productive government investment. C. borrowing from foreigners offsets the deficit, so that private investment is not crowded-out. D. the borrowed funds are transferred to the purchase of nondurable consumer goods. 41. The "Laffer curve" is the relationship between A. the tax rate and tax revenue. B. the tax rate and the structural budget deficit. C. the interest rate and tax revenue. D. the unemployment rate and the inflation rate. E. the money growth rate and the interest rate. 42. According to Robert Gordon, direct investment in the stock market by the Social Security trust fund A. does not require that new money be brought into the system. B. would be more cost-effective than creating private accounts for each person in the Social Security system. C. would cause the government indirectly to own substantial parts of American companies. D. All of the above. 43. M1 is a definition of money largely confined to which function(s) of money? A. unit of account B. store of value C. medium of exchange D. Both B and C. 44. As a result of financial deregulation A. the IS curve became flatter and the LM curve became steeper, with the result that the interest rate became more volatile B. the IS curve became steeper and the LM curve became flatter, with the result that the interest rate became more volatile C. both the IS curve and the LM curve became steeper, with the result that the interest rate became more volatile D. both the IS curve and the LM curve became flatter, with the result that the interest rate became more volatile 45. If the Fed wishes to increase the money supply it can A. increase reserve requirements B. sell securities to banks and/or the public C. increase the rediscount rate D. None of the above is correct 46. The money-creation multiplier is the A. same as the income-determination multiplier B. amount by which the money supply would rise with a $1 increase in the supply of high-powered money C. amount by which the money supply of high-powered money will increase equilibrium GDP D. amount by which a $1 increase in reserves would raise an individual bank's deposit liabilities 47. Gradually over the last two decades, ________ policy has emerged as the major stabilization policy tool in the U.S. A. monetary B. fiscal C. exchange rates D. deregulatory 48. It is the job of ________ to channel funds from ________. A. the Federal Reserve, borrowers to lenders B. the Federal Reserve, lenders to borrowers C. financial intermediaries, borrowers to lenders D. financial intermediaries, lenders to borrowers 49. The kind of assets banks can hold as reserves are also called the economy's A. checkable deposits. B. money market funds. C. high-powered money. D. bankers' acceptances. 50. The simple accelerator theory suggests that investment will be rising when A. output is rising. B. the growth of output is rising. C. output is high. D. the growth of output is high.