EC 302 MSU Final

When is monetary policy in the IS-LM model more effective?

a) When the LM is flat.

b) When the IS is steep

c) When the LM is steep

d) Both b and c

When LM (Liquidity/Money Supply) is steep

When is Fiscal policy in the IS-LM model more effective?

a) When the LM is flat.

b) When the IS is steep

c) When the LM is steep

d) Both a and b

When LM (Liquidity/Money Supply) is flat and IS ( Investment/Savings) is steep

When is monetary policy more effective in the AD-AS model?

a) When the AS is flat

b) When the AS is steep

c) I don't know

When the AS (Aggregate Supply) is flat

All else equal a reduction in wages in the AD-AS model

a) increase production

b) reduces production

c) increases prices

Increase production

For a given G the fiscal multiplier is....

a) Bigger in the IS-LM model than the AD-AS model

b) Smaller

c) The same

Bigger in the IS-LM model than the AD-AS model

Which country allegedly suffered from a liquidity trap problem in the 1990s?

a) U.S

b) U.K.

c) Japan

d) Mexico

Japan

If money demand in the money market is horizontal, then

a) The IS is horizontal

b) the IS is vertical

c) the LM is horizontal

d) the LM is vertical

The LM (Liquidity/Money Supply) is horizontal

A reduction of one unit of the tax rate in the IS-LM model has a... effect as in the AS-AD model

a) Smaller

b) larger

c) The same

Smaller

In which consumption theory does an increase in future income increase current consumption?

Options:

1. Keynesian

2. Modigliani

3. Both one and two

4. Neither

Modigliani

Suppose the capital depreciation rate (delta) goes up then,

Options:

1. Consumption increases

2. Investment increases

3. Investment decreases

4. both one and two

Investment Decreases

In 2024 nominal GDP rises faster than real GDP then,

Options:

1. Prices are constant

2. Inflation is positive

3. Inflation is negative

4. Inflation is zero

Inflation is positive

Consider the quantity of money you know that in 2024 M doubles and the price level P triples (inflation), (assume Y is constant) then,

Options:

1. Velocity of money is unchanged

2. Velocity of money increases,

3. Velocity of money decreases

Velocity of money increases

A problem of the individual demand for money in Keynes is that investors are,

Options:

1. Diversifiers

2. Myopic

3. Plungers

4. Crazy

Plungers

An increase in the price of capital (PK) _______ The Tobin's Q

Options:

1. Increases

2. Decreases

3. Leaves unchanged

4. Reduces to 1

Decreases

In the Modigliani consumption theory if a temporary shock reduces a consumer's current income by 50,000 dollars, then,

Options:

1. Consumption will drop by 60,000 dollars

2. Consumption will drop by 50,000 dollars

3. Consumption will increase

4. Consumption will drop by less than 50,000 dollars

Consumption will drop by less than 50,000 dollars

An increase in production will create a ________ in interest rate

Increase

Tobin's Q

Tobin's Q

Modigliani Consumption Theory

This theory suggests that people try to spread their consumption evenly across their lifetime by adjusting their savings and borrowing behavior based on their income and age.

Keynesian Consumption Theory

Keynesian theory emphasizes short-term consumption behavior's impact on aggregate demand and economic fluctuations.

What are the x and y axis on the ISLM model?

What are the x and y axis on the ADAS model?

What is the New Classical Macroeconomics Theory?

This theory emphasizes the role of rational expectations and market-clearing mechanisms in understanding economic phenomena.

What is the Real Business Cycle Theory?

Economic theory that attributes economic fluctuations primarily to real shocks in the economy, such as changes in technology, productivity, or resource availability, rather than to nominal factors like changes in money supply or government policies.

What is a type of friction in product markets according to the new Keynesian economics?

1) Efficiency wages

2) Trade unions

3) Menu costs

4) Insider outsider conflicts

Menu Costs

What is the conceptual problem in menu costs?

1) They are big

2) They are volatile

3) They are risky

4) They are small

They are small

Why do menu costs in the New Keynesian model matter even though they are small?

1) Because firms do not like risks

2) Because firms face efficiency wages

3) Because profits are insensitive to prices

4) Because sales are volatile

Because profits are insensitive to prices

What is the primary source of business cycles according to the two schools of economic thought studied in our course?

1) Are primarily driven by aggregate demand both according to new Keynesian economics and new classical economics

2) Are primarily driven by aggregate demand only according to new classical economics

3) Only driven by aggregate supply according to new classical economics

Only driven by aggregate supply according to new classical economics

What is the main point of contention between new Keynesian and new classical economics?

1) The speed of adjustment of the aggregate supply

2) The speed of adjustment of the aggregate demand

3) The rigidity of the market

The speed of adjustment of the aggregate supply

Who believes in the use of fiscal and monetary policy to correct a recession?

1) New Keynesian economic theorists

2) New classical economic theorists

New Keynesian economic theorists

The loss of value in which of the following assets triggers of financial crisis in countries

1) Real estate

2) stock prices

3) currencies

4) All of the above

All of the above

An increase in the power of trade unions can

1. Shift the AD to the right

2. Shift the AD to the left

3. Shift the AS to the left

4. Shift the AS to the right

Shift the AS to the left