Macroeconomics: AD–AS, IS–LM, Open Economy & Unemployment

Fixed money supply: AD slopes downward because at a lower price level, real money balances are ___, generating a ___ quantity of output demanded.

higher; greater

Short-run equilibrium above the natural rate: in the transition to the long run, prices will ___ and output will ___.

increase; decrease

Graph question: economy starts at E (P0, Y-bar). AD shifts from AD0 to AD1 (rightward). Economy moves first to point ___ and then in the long run to point ___.

C; B

Favorable temporary supply shock, starting at A: point ___ is short-run equilibrium and point ___ is long-run equilibrium.

E; A

Drought severely reduces agricultural output for one year, starting at A: point ___ is the short-run equilibrium and point ___ is the long-run equilibrium.

B; A

From long-run equilibrium, a drought pushes up food prices. The Fed could move the economy back to full employment faster by:

Increasing the money supply, but at the cost of permanently higher prices

Keynesian cross: if firms produce at Y3 (above equilibrium), inventories will ___ inducing firms to ___ production.

rise; decrease

Why the IS curve slopes downward: as the interest rate increases, investment ___ and this shifts the expenditure function ___ thereby decreasing income.

decreases; downward

An increase in taxes shifts the IS curve:

downward and to the left

Along an IS curve, all are always true EXCEPT:

The demand for real balances equals the supply of real balances

The IS curve shifts when any of these change EXCEPT:

The interest rate

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of:

Unplanned inventory investment

Keynesian cross: if firms produce at Y1 (below equilibrium), inventories will ___ inducing firms to ___ production.

fall; increase

Keynesian model: one reason to support government spending increases over tax cuts to increase output is that:

The government-spending multiplier is larger than the tax multiplier

An increase in government spending generally shifts the IS curve:

upward and to the right

Liquidity preference model: what adjusts to move the money market to equilibrium following a change in the money supply?

The interest rate

A decrease in the nominal money supply shifts the LM curve:

upward and to the left

With real money supply constant, liquidity preference theory implies a higher income level is consistent with:

A higher interest rate

The interest rate determines ___ in the goods market and money ___ in the money market.

investment spending; demand

Small open economy: if domestic investment exceeds domestic saving, the extra investment will be financed by:

Borrowing from abroad

Small open economy: if domestic saving exceeds domestic investment, the extra saving will be used to:

Make loans to foreigners

If domestic saving exceeds domestic investment, net exports are ___ and net capital outflows are ___.

positive; positive

When exports exceed imports, all are true EXCEPT:

Domestic investment exceeds domestic saving

A U.S. corporation sells a product in Europe and uses the proceeds to buy shares in a European corporation. U.S. net exports ___ and net capital outflows ___.

increase; increase

Small open economy saving/investment graph: if the world interest rate is r3, the economy has:

A trade deficit

Starting from trade balance, if the world interest rate falls (small open economy), domestic investment will ___ and net exports will ___.

increase; decrease

To reduce a trade deficit, a small open economy's government should:

Increase taxes

Small open economy with balanced trade: if large foreign countries increase government purchases, this tends to increase:

Exports by the small open economy

Small open economy with perfect capital mobility: a reduction in the government's budget deficit ___ net exports and the real exchange rate ___.

increases; depreciates

Which panel illustrates the impact of an increase in household saving on the real exchange rate?

Panel (A)

Which panel illustrates the impact of protectionist trade policies on the real exchange rate?

Panel (D)

If a country has a high inflation rate relative to the U.S. (real exchange rate fixed), the dollar will buy:

More of the foreign currency over time

Protectionist policies in a small open economy with a trade deficit have the effect of ___ the trade deficit and ___ the quantity of imports and exports.

not changing; decreasing

Which is an example of frictional unemployment?

Dave searches for a new job after voluntarily moving to San Diego

If wage rigidity holds the real wage above equilibrium, an increase in the supply of labor will ___ the number unemployed.

increase

By paying efficiency wages, firms contribute to higher unemployment because they:

Keep the wage above the equilibrium level

Efficiency-wage theories suggest a firm may pay above market-clearing wages for all of these reasons EXCEPT to:

Reduce the firm's wage bill