Exam 3 Review
1. Classical economists believed that the Depression in the 1930s lasted so long because:
a. wage-levels were rigid.
b. wages were too low.
c. people were unwilling to work.
d. inflation was too low.
2. According to Keynes, if a large portion of people in the economy decided to save more and
consume less, aggregate income would:
a. decline and remain there.
b. rise but then decline.
c. decline, but rise in the future.
d. rise and remain there.
3. The money wealth effect, the interest rate effect, and the international effect cause the AD
curve to:
a. shift to the right.
b. shift to the left.
c. slope downward.
d. slope upward.
4. For some time now, the U.S. has been pressuring Japan to institute policies to shore up its ailing
economy. Policies that lead to increased Japanese growth would increase U.S. exports and:
a. cause the U.S. to move up its aggregate demand curve.
b. cause the U.S. to move down its aggregate demand curve.
c. shift the U.S. aggregate demand curve leftward.
d. shift the U.S. aggregate demand curve rightward.
5. If the Federal Reserve Bank increases the money supply, the AD curve would:
a. shift to the left.
b. shift to the right.
c. become flatter.
d. become steeper.
6. Assuming markups are constant, prices in quantity-adjusting markets:
a. change whenever production changes.
b. change whenever aggregate demand changes.
c. change whenever production costs change.
d. never change.
7. The short-run aggregate supply curve is most likely to shift up (left) if:
a. oil prices fall.
b. wages increase.
c. sales taxes decrease.
d. the foreign currency depreciates in value.
8. The long-run aggregate supply curve is:
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a. vertical because it shows that in the long run a higher price level will not bring about
higher output.
b. vertical because it shows that in the long run a higher price level will bring about higher
output.
c. horizontal because it shows that in the long run a higher price level will not bring about
higher output.
d. horizontal because it shows that in the long run a higher price level will bring about
higher output.
A doubling of prices:
a. doubles potential output.
b. more than doubles potential output.
c. increases potential output but by less than double.
d. does not affect potential output.
Suppose an economy is in both long- and short-run equilibrium and foreign income declines.
What best describes what will happen to the economy?
a. Total output and the price level will rise in the short run. In the long run, potential
output will rise, bringing the economy back to a long-run equilibrium at a higher level of
output.
b. Total output and the price level will decline in the short run. In the long run, potential
output will decline, bringing the economy back to a long-run equilibrium at a lower level
of output.
c. Total output and the price level will rise in the short run. In the long run, the economy
will return to its original potential output.
d. Total output and the price level will decline in the short run. In the long run, input prices
will fall, causing the price level to fall more, and the economy to return to its original
potential output.
Which model and its associated precepts came about as a response to the Great Depression?
a. The Classical model.
b. The New Classical model.
c. The Keynesian model.
d. The DSGE model.
Which of the following is an assumption of the Keynesian model that economists eventually
came to question?
a. The economy has various sectors, like a monetary sector, a labor market sector, etc.
b. Individuals form rational expectations.
c. Consumption is based on current income only.
d. Consumption is based on lifetime income.
What does it mean for a model to be "dynamic"?
a. The model takes time explicitly into account.
b. Events in the model occur with a certain probability that can be expressed
mathematically.
c. The model involves many markets, all of which clear simultaneously.
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d. The model involves immortal consumers.
What does it mean for a model to be "stochastic"?
a. The model takes time explicitly into account.
b. Events in the model occur with a certain probability that can be expressed
mathematically.
c. The model involves many markets, all of which clear simultaneously.
d. The model involves immortal consumers.
What is the Ricardian equivalence problem?
a. The problem that government actions to impact the economy will be offset by actions
by private individuals as they optimize over the future.
b. The problem that the best government from today's point of view will always be optimal
in the future, and individuals can predict this and never expect changes in government
policy.
c. The problem that the potential for government to change its policy in the future causes
individuals to be unconvinced that policy won't change.
d. The problem that historical data leading to government policies does not reflect how
those polices may change behaviors, and alter the relationships discovered in the
historical data.
What is the Lucas Critique problem?
a. The problem that government actions to impact the economy will be offset by actions
by private individuals as they optimize over the future.
b. The problem that the best government from today's point of view may not be optimal in
the future, and individuals can predict this and expect changes in government policy.
c. The problem that the potential for government to change its policy in the future causes
individuals to be unconvinced that policy won't change.
d. The problem that historical data leading to government policies do not reflect how
those polices may change behaviors, and may alter the relationships discovered in the
historical data.
Unlike the DSGE model, the standard model incorporates:
a. dynamic feedback effects.
b. traditional microeconomic foundations.
c. aerodynamic flutter.
d. rational expectations.
Which description of expectations is most consistent with the complex systems approach to
macro?
a. Historically-based expectations.
b. Expectations formed by less-than-fully rational individuals through learning procedures.
c. "Dumb" expectations such as the expectations that a variable will always take on the
same value in the next period that it had in the previous period.
d. Rational expectations.
To "herd" is to:
a. copy other people's behavior.
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b. congregate in dense urban areas.
c. repeat the same decision in successive time periods.
d. employ learning procedures in forming expectations.
Economists who use ___________ models create virtual computer macroeconomies of rational
agents with less-than-perfect information and then observe their simulated interactions.
a. "complex systems"
b. "ACE"
c. "behavioral"
d. "DSGE"
Money can take any form as long as it:
a. does not serve as a store of value.
b. is backed by real assets such as gold.
c. is widely accepted in exchange for goods and services.
d. does not supersede barter as the primary form of exchange.
Money is a good store of wealth when:
a. prices are rising predictably.
b. prices are rising unpredictably.
c. prices are stable.
d. severe inflation occurs.
The narrowest measure of the money supply developed by the Federal Reserve Bank in the
United States is:
a. M1.
b. M2.
c. cash.
d. certificates of deposit.
Commercial banks create money by:
a. issuing currency.
b. making loans.
c. accepting deposits.
d. holding reserves.
As the reserve ratio increases, a given amount of deposits will support:
a. more loans.
b. the same amount of loans.
c. fewer loans.
d. more specific information is required to answer this question.
Reserves held by banks beyond what they are required to hold are called:
a. the reserve ratio.
b. excess reserves.
c. required reserves.
d. the currency to reserve ratio.
As the reserve ratio goes down, the simple money multiplier goes:
a. up, and more money will be created.
b. down, and less money will be created.
c. up, and less money will be created.
d. down, and more money will be created.
28. If the cash-to-deposit ratio is 0.25 and the reserve ratio is 0.25, then the amount of money
created per dollar deposited in the banking system is:
a. $1.25.
b. $2.50.
c. $3.75.
d. $12.75.
29. The transactions motive for holding money is the need to hold money for:
a. spending.
b. emergencies.
c. impulses.
d. speculation.
30. In the money market, the supply of money curve is:
a. horizontal.
b. vertical.
c. downward sloping.
d. upward sloping.