Module 5 Homework/Quiz

1. In a large open economy with a oating exchange rate, such as in the United
States, in the short run a monetary contraction:

A. raises the interest rate, lowers investment and income, but does not a ect the
exchange rate.
B. raises the exchange rate, lowers net exports and income, but does not a ect
the interest rate.
C. initially raises the exchange rate, causing arbitrageurs to sell dollars and
return the money supply to its initial level.
D. raises the interest rate and lowers investment and income, but also raises the
exchange rate and lowers net exports.

2. In a short-run model of a large open economy with a oating exchange rate,

net capital out ow ______ as the domestic interest rate increases and is just
equal to the ______ in net exports:

A. decreases; increase
B. decreases; decrease
C. increases; increase
D. increases; decrease

3. In a short-run model of a large open economy, after net capital out ow is

substituted for net exports in the IS curve:

A. the larger the absolute value of the responsiveness of net capital out ow with
respect to the interest rate, the atter the IS curve.
B. the larger the absolute value of the responsiveness of net capital out ow with
respect to the interest rate, the steeper the IS curve.
C. if both domestic investment and net capital out ow are very responsive to the
interest rate, they will tend to cancel each other out.
D. the slope of the IS curve depends only on the interest responsiveness of
investment and the marginal propensity to consume.

4. In a short-run model of a large open economy with a oating exchange rate:

A. net exports determine the exchange rate, which in turn determines net capital
out ow.
B. net exports determine net capital out ow, which determines the interest rate.
C. the interest rate is determined in the IS–LM framework, and this value
determines net capital out ow; then the exchange rate adjusts to make net
exports equal net capital out ow.
D. the interest rate determines investment and net capital out ow, which are
equal within the IS–LM framework; the exchange rate then determines net
exports.
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 5. In a short-run model of a large open economy with a oating exchange rate, a
scal expansion causes an increase in:

A. the exchange rate and a fall in net exports but has no e ect on income.
B. the money supply and an increase in income but has no e ect on the
exchange rate.
C. income, the interest rate, and net exports but a decrease in investment and in
the exchange rate.
D. income, the interest rate, and the exchange rate but a decrease in investment
and net exports.

6. Both models of aggregate supply discussed in Chapter 14 imply that if the

price level is higher than expected, then output ______ natural rate of output.

A. exceeds the
B. falls below the
C. equals the
D. moves to a di erent

7. Starting from the natural level of output, an unexpected monetary contraction

will cause output and the price level to ______ in the short run; and in the long
run the expected price level will ______, causing the level of output to return to
the natural level.

A. increase; increase
B. increase; decrease
C. decrease; decrease
D. decrease; increase

8. In a short-run model of a large open economy with a oating exchange rate, if

business expectations become pessimistic, this leads to a fall in:

A. the exchange rate and a fall in net exports but has no e ect on income.
B. the money supply and an increase in income but has no e ect on the
exchange rate.
C. income, the interest rate, and net exports but a decrease in investment and in
the exchange rate.
D. income, the interest rate, and the exchange rate but an increase in net
exports.
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 9. A fall in consumer con dence about the future, which induces consumers to
spend less and save more, will, according to the large open economy model
with oating exchange rates, lead to:

A. decrease in interest rates, decrease in output, appreciation of the exchange

rate, and a decrease in net exports.
B. no change in consumption or income.
C. decrease in interest rates, decrease in output, depreciation of the exchange
rate, and increase in net exports.
D. no change in income or net exports.In the large open economy model with a
oating exchange rate, a rise in interest rates in

10. In the large open economy model with a oating exchange rate, a rise in
interest rates in Europe will lead U.S. income:

A. and net exports both to fall.

B. to rise and net exports to fall.
C. to fall and net exports to rise.
D. and net exports both to rise.

11. In the large open economy model with a oating exchange rate, a
contractionary scal policy in Europe will lead U.S. income:

A. and net exports both to fall.

B. to rise and net exports to fall.

C. to fall and net exports to rise.

D. and net exports both to rise.

12. The goods produced in U.S. industries may be made more competitive in
world markets by:

A. appreciating the U.S. currency.

B. depreciating the U.S. currency.

C. keeping the exchange rate xed.

D. expanding the money supply.

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13. Which of the following will shift the aggregate supply curve up to the left?

A. an increase in the price level

B. a decrease in the level of output

C. an increase in the expected price level

D. a decrease in the price level

14. In the short run, with and upward sloping aggregate supply curve, if the price
level is greater than the expected price level, then in the long run the
aggregate:

A. demand curve will shift leftward.

B. demand curve will shift rightward.

C. supply curve will shift leftward.

D. supply curve will shift rightward.

15. The Phillips curve shows a ______ relationship between in ation and
unemployment, and the short-run aggregate supply curve shows a ______
relationship between the price level and output.

A. positive; positive

B. positive; negative

C. negative; negative

D. negative; positive
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 16. According to the Phillips curve, other things being equal, in ation depends
positively on:

A. expected in ation.

B. the unemployment rate.

C. the rate of technological change.

D. the quantities of capital and labor.

17. If the equation for a country's Phillips curve is π = 0.02 – 0.8(u – 0.05), where π
is the rate of in ation and u is the unemployment rate, what is the short-run
in ation rate when unemployment is 4 percent (0.04)?

A. above 2 percent (0.02)

B. below 2 percent (0.02)

C. 2 percent (0.02)

D. –2 percent (–0.02)

18. In the case of demand-pull in ation, other things being equal:

A. both the in ation rate and the unemployment rate rise at the same time.

B. the unemployment rate rises but the in ation rate falls.

C. the in ation rate rises but the unemployment rate falls.

D. both the in ation rate and the unemployment rate fall.

19. In the case of cost-push in ation, other things being equal:

A. both the in ation rate and the unemployment rate rise at the same time.

B. the unemployment rate rises but the in ation rate falls.

C. the in ation rate rises but the unemployment rate falls.

D. both the in ation rate and the unemployment rate fall.

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 20. The Phillips curve analysis described in Chapter 14 implies that there is a
negative tradeo between in ation & unemployment in:
A. both the short run and the long run.

B. the short run only.

C. the long run only.

D. neither the short run nor the long run.

21. Assume that the sacri ce ratio for an economy is 4. If the central bank wishes
to reduce in ation from 10 percent to 5 percent, this will cost the economy
______ percent of one year's GDP.

A. 4

B. 5

C. 20

D. 40

22. If only unanticipated changes in the money supply a ect real GDP, the public
has rational expectations, & everyone has the same information about the
state of the economy, then:
A. monetary policy can be used to systematically stabilize output.

B. monetary policy cannot be used to systematically stabilize output.

C. a policy of keeping the money supply constant is optimal.

D. a policy of adjusting the money supply in response to the state of the

economy is optimal.

23. The government can lower in ation with a low sacri ce ratio if the:
A. money supply is reduced slowly.

B. public has adaptive expectations.

C. short-run aggregate supply schedule is relatively at.

D. public rationally believe that policymakers are committed to reducing

in ation.
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24. Exhibit: Short-Run Phillips Curve

As the short-run Phillips curve shifts from A to B to C to D:

A. the expected rate of in ation is unchanged at every level of unemployment.

B. there is a lower-than-expected rate of in ation at every level of

unemployment.

C. there is a higher-than-expected rate of in ation for every level of

unemployment.

D. the natural rate of unemployment increases.

25. The introduction of automatic teller machines, which reduces the demand for
money, will, according to the large open economy model with oating
exchange rates, lead to:

A. no change in income and net exports.

B. no change in income but a rise in net exports.

C. a rise in income but no change in net exports.

D. a rise in both income and net exports.

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