ECON 410 Assignments 4-5, Final Solution of 2025

According to the quantity theory of money and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase:

2 percent

3 percent

5 percent

6 percent

3 percent

Which of these would be called a hyperinflation?

Price increases averaged 1% percent per day

The inflation rate was 10 percent per year.

Real gross domestic product (GDP) grew at a rate of 12 percent over a year.

A stock market index rose by 1,000 points over a year.

Price increases averaged 1% percent per day.

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's:

desire to increase prices throughout the economy.

need to generate revenue to pay for spending.

responsibility to increase nominal interest rates by increasing expected inflation.

inability to buy government securities through open-market operations.

need to generate revenue to pay for spending.

"Inflation tax" means that:

as the price level rises, taxpayers are pushed into higher tax brackets.

as the price level rises, the real value of money held by the public decreases.

as taxes increase, the rate of inflation also increases.

in a hyperinflation, the chief source of tax revenue is the ability of the government to create money.

as the price level rises, the real value of money held by the public decreases.

The inconvenience associated with reducing money holdings to avoid the inflation tax is called:

menu costs.

shoe leather costs.

variable yardstick costs.

fixed costs.

shoe leather costs.

The right of seigniorage is the right to:

levy taxes on the public.

borrow money from the public.

draft citizens into the armed forces.

create money.

create money.

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent.

1; 5

5; 1

1; 1

5; 5

5; 5

In the long run, according to the quantity theory of money and classical macroeconomic theory, if velocity is constant, then _____ determines real gross domestic product (GDP) and _____ determines nominal GDP.

the productive capability of the economy; the money supply

the money supply; the productive capability of the economy

velocity; the money supply

the money supply; velocity

the productive capability of the economy; the money supply

The concept of monetary neutrality in the classical model means that an increase in the money supply growth rate will increase:

real gross domestic product (GDP).

real interest rates.

nominal interest rates.

both saving and investment by the same amount

nominal interest rates.

A policy that decreases the job separation rate _____ the natural rate of unemployment.

will increase

will decrease

will not change

could either increase or decrease

will decreased

For most U.S. workers covered by the unemployment insurance program, the replacement rate is _____ percent of previous wages and lasts about _____ weeks.

100; 50

50; 26

33; 40

80; 26

50; 26

Wage rigidity:

forces labor demand to equal labor supply.

is caused by sectoral shifts.

prevents labor demand and labor supply from reaching the equilibrium level.

increases the rate of job finding.

prevents labor demand and labor supply from reaching the equilibrium level.

The earned income tax credit:

increases the government's tax revenue.

reduces the incomes of poor working families.

does not raise labor costs.

is not an alternative to raising the minimum wage.

does not raise labor costs.

Which of these policies adopted by the government is NOT aimed at reducing the natural rate of unemployment?

unemployment insurance

government employment agencies

public retraining programs

the Illinois bonus program for unemployment insurance claimants who found jobs quickly

unemployment insurance

Economists call the changes in the composition of demand among industries and regions:

insider-outsider conflicts.

sectoral shifts.

moral hazard.

adverse selection.

sectoral shifts.

When insiders have a much greater impact on the wage-bargaining process than do outsiders, the negotiated wage is likely to be _____ the equilibrium wage.

much greater than

much less than

almost equal to

about one-half of

much greater than

All of these are reasons for frictional unemployment EXCEPT:

workers have different preferences and abilities.

unemployed workers accept the first job offer that they receive.

the flow of information is imperfect.

geographic mobility takes time.

unemployed workers accept the first job offer that they receive.

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

increase the wage bill.

make workers more productive.

keep the wage below the equilibrium level.

keep the wage above the equilibrium level.

keep the wage above the equilibrium level.

When the unemployment rate is at a steady state:

no hiring or firings are occurring.

the number of people being hired equals the number of people losing jobs.

the number of people being hired exceeds the number of people losing jobs.

the number of people losing jobs exceeds the number of people being hired.

the number of people being hired equals the number of people losing jobs.

Data on unemployment in the United States show that:

most spells of unemployment are long.

most weeks of unemployment are attributable to the long-term unemployed.

members of the labor force over age 55 have the highest unemployment rates.

the duration of unemployment falls during recessions.

most weeks of unemployment are attributable to the long-term unemployed.

Wage rigidity:

forces labor demand to equal labor supply.

is caused by sectoral shifts.

prevents labor demand and labor supply from reaching the equilibrium level.

increases the rate of job finding.

prevents labor demand and labor supply from reaching the equilibrium level.

The natural rate of unemployment is:

the average rate of unemployment around which the economy fluctuates.

about 10 percent of the labor force

a rate that never changes.
the transition of individuals between employment and unemployment.

the average rate of unemployment around which the economy fluctuates.

Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of these reasons EXCEPT to:

reduce labor turnover.

improve the quality of the firm's labor force.

increase worker effort.

reduce the firm's wage bill.

reduce the firm's wage bill.

When insiders have a much greater impact on the wage-bargaining process than do outsiders, the negotiated wage is likely to be ___ the equilibrium wage.

much greater than
much less than

almost equal to

about one-half of

much greater than

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

increase the wage bill.

make workers more productive.

keep the wage below the equilibrium level.

keep the wage above the equilibrium level.

keep the wage above the equilibrium level.

All of these are reasons for frictional unemployment EXCEPT:

workers have different preferences and abilities.

unemployed workers accept the first job offer that they receive.

the flow of information is imperfect.

geographic mobility takes time.

unemployed workers accept the first job offer that they receive.

When the unemployment rate is at a steady state:

no hiring or firings are occurring.

the number of people finding jobs equals the number of people losing jobs.

the number of people finding jobs exceeds the number of people losing jobs.

the number of people losing jobs exceeds the number of people finding jobs.

the number of people finding jobs equals the number of people losing jobs.

Any policy aimed at lowering the natural rate of unemployment must either ___ the rate of job separation or ___ the rate of job finding.

reduce; reduce

increase; increase

reduce; increase

increase; reduce

reduce; increase

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change___ in the short run and change ___ in the long run.

only prices; only output

only output; only prices

both prices and output; only prices

both prices and output; both prices and output

only output; only prices

A short-run aggregate supply curve shows fixed ___ , and a long-run aggregate supply curve shows fixed ___.

output; output

prices; prices

prices; output

output; prices

prices; output

The natural level of output is:

affected by aggregate demand.

the level of output at which the unemployment rate is zero.

the level of output at which the unemployment rate is at its natural level.

permanent and unchangeable.

the level of output at which the unemployment rate is at its natural level.

According to the quantity theory of money, when velocity is constant, if output is higher,___ real balances are required, and for fixed M this means ___ P.

higher; lower

lower; higher

higher; higher

lower; lower

higher; lower

A decline in the ISM new orders index is typically an indicator of a future ___ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future ___ in economic production.

increase; slowdown

increase; increase

slowdown; increase

slowdown; slowdown

slowdown; slowdown

A difference between the economic long run and the short run is that:

the classical dichotomy holds in the short run but not in the long run.

monetary and fiscal policy affect output only in the long run.

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

prices and wages are sticky in the long run only.

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

The aggregate demand curve is the ___ relationship between the quantity of output demanded and the ___.

positive; money supply

negative; money supply

positive; price level

negative; price level

negative; price level

Short-run fluctuations in output and employment are called:

sectoral shifts.

the classical dichotomy.

business cycles.

productivity slowdowns.

business cycles.

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

0

100

150

250

100

The tax multiplier indicates how much change(s) in response to a $1 change in taxes.

the budget deficit

consumption

income

real balances

income

The theory of liquidity preference states that the quantity of real money balances demanded is:

negatively related to both the interest rate and income.

positively related to both the interest rate and income.

positively related to the interest rate and negatively related to income.

negatively related to the interest rate and positively related to income.

negatively related to the interest rate and positively related to income.

If the interest rate is above the equilibrium value, the:

demand for real balances exceeds the supply.

supply of real balances exceeds the demand

market for real balances clears.

demand for real balances increases

supply of real balances exceeds the demand.

The IS-LM model is generally used:

only in the short run.

only in the long run.

both in the short run and in the long run.

in determining the price level.

only in the short run.

In the Keynesian-cross model, if the MPC is greater than 0.5 and taxes are reduced by 250, then the equilibrium level of income:

increases by 250.

increases by more than 250.

decreases by 250.

increases, but by less than 250.

increases by more than 250.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

government spending increases the MPC more than tax cuts.

the government-spending multiplier is larger than the tax multiplier.

government-spending increases do not lead to unplanned changes in inventories, but tax cuts do.

increases in government spending increase planned spending, but tax cuts reduce planned spending.

the government-spending multiplier is larger than the tax multiplier.

The IS and LM curves together generally determine:

income only.

the interest rate only.

both income and the interest rate.

income, the interest rate, and the price level.

both income and the interest rate.

An IS curve shows combinations of:

taxes and government spending.

nominal money balances and price levels.

interest rates and income that bring equilibrium in the market for real balances.

interest rates and income that bring equilibrium in the market for goods and services.

interest rates and income that bring equilibrium in the market for goods and services.

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

income equals consumption plus investment plus government spending.

planned expenditure equals consumption plus planned investment plus government spending

actual expenditure equals planned expenditure.

actual saving equals actual investment

actual expenditure equals planned expenditure.

If consumption is given by C = 200 + 0.75(Y − T ) and investment is given by I = 200 − 25r, then the formula for the IS curve is:

Y = 400 − 0.75T − 25r + G.

Y = 1, 600 − 3T − 100r + 4G.

Y = 400 + 0.75T − 25r − G.

Y = 1, 600 + 3T − 100r − 4G.

Y = 1, 600 − 3T − 100r + 4G.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will __, shifting the __ curve to the right and returning output to the natural level.

increase; IS

decrease; IS

increase; LM

decrease; LM

decrease; LM

In the IS-LM model when the Federal Reserve decreases the money supply, the public ___ bonds, and the interest rate___, leading to a(n)___ in investment and income. This is called the monetary transmission mechanism.

buy; rises; increase

sell; falls; decrease

sell; rises; decrease

buy; rises; decrease

sell; rises; decrease

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting ___ the curve to the ___ .

LM; right

LM; left

IS; right

IS; left

LM; right

A tax cut shifts the ___ curve to the right, and the aggregate demand curve ___ .

IS; shifts to the right

IS; does not shift

LM; shifts to the right

LM; does not shift

IS; shifts to the right

In the IS-LM model, changes in taxes initially affect planned expenditures through:

consumption.

investment.

government spending.

the interest rate.

consumption.

The interaction of the IS curve and the LM curve determines:

the price level and the inflation rate.

the level of output and the price level.

investment and the money supply.

the equilibrium level of the interest rate and output.

the equilibrium level of the interest rate and output.

A given increase in taxes shifts the IS curve more to the left the:

larger the marginal propensity to consume.

smaller the marginal propensity to consume.

larger the government spending.

smaller the government spending.

larger the marginal propensity to consume.

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ___ and output ___ .

rises; falls

rises; rises

falls; rises

falls; falls

rises; falls

If an average job lasts for 3 months, and an average job search takes 2 months, then the natural rate of unemployment is ___.

2/5

3/5

1/6

5/6

2/5

If the Fed holds the interest rate constant in response to an increase in government purchases, the money supply ___, and the impact on income will be ___ than if the money supply were held constant.

increase, larger

increase, smaller

decrease, larger

decrease, smaller

increase, larger

If the LM curve is vertical and government spending rises by ∆G, in the IS-LM analysis, then equilibrium income rises by:

∆G/(1−M P C) .

more than zero but less than ∆G/(1−MPC)

∆G.

zero.

zero.

Although our development of the Keynesian cross assumes that taxes are a fixed amount, in many countries (including the United States) taxes depend on income. Let's represent the tax system by writing tax revenue as T = ¯T + tY, where ¯T and t are parameters of the tax code. The parameter t > 0 is the marginal tax rate: if income rises by $1, taxes rise by t × $1. How does the positive marginal tax rate t affect (absolute value of) the slope of the IS curve?

t increases (absolute value of) the slope of the IS curve.

t decreases (absolute value of) the slope of the IS curve.

t does not affect (absolute value of) the slope of the IS curve.

The impact of t on (absolute value of) the slope is ambiguous.

t increases (absolute value of) the slope of the IS curve.

In deriving the government spending multiplier, we discussed the following figure. In this figure, government spending increases from G1 to G2. P E1 is the planned expenditure curve when government spending is G1 and P E2 is the planned expenditure curve when government spending is G2. The increase in government spending, ∆G = G2 − G1, is equal to the distance from point A to point B. What is the distance from point E to point F ?

∆G.M P C

∆G.(M P C)^3

∆G.(M P C)^5

∆G.(M P C)^7

∆G.(M P C)^3

In short run, a favorable supple shock causes:

Both prices and output to rise

prices to rise and output to fall

prices to fall and output to rise

both prices and output to fall

prices to fall and output to rise

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

short-run aggregate supply curve

long-run aggregate supply curve

price level in the short run

demand for real balances per unit of output

demand for real balances per unit of output

If the Fed accommodates and adverse supply shock, output fall ___, and prices rise ___.

less; more

less; less

more; less

more; more

less; more

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

output and employment will increase in the short run

output and employment will decease in the short run

prices will increase in the short run

prices will decrease in the short run

output and employment will increase in the short run

Most economists believe that prices are:

flexible in the short run but many are sticky in the long run

flexible in the long run but many are sticky in the short run

stick in both the short and long runs

flexible in both the short and long runs

flexible in the long run but many are sticky in the short run

Leading economic indicators are:

the most popular economic statistics

data that are used to construct the consumer price index and the unemployment rate

variables that tend to fluctuate in advance of the overall economy

standardized statistics compiled by the National Bureau of Economic Research

variables that tend to fluctuate in advance of the overall economy

In the long run, the level of output is determined by the:

interaction of supply and demand

money supply and the levels of government spending and taxation
amounts of capital and labor and the available technology

preferences of the public

amounts of capital and labor and the available technology

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

increases

decreases

does not change
may either increase or decrease

decreases

Monetary neutrality, the irrelevance of the money supply in determining values of ___ variables, is generally thought to be a property of the economy in the long run.

real

nominal

real and nominal

neither real nor nominal

real

Over the business cycle, investment spending ___ consumption spending.

is inversely correlated with

is more volatile than

has about the same volatility as

is less volatile than

is more volatile than

Planned expenditure is a function of:

planned investment

planned government spending and taxes

planned investment, government spending, and taxes

national income and planned investment, government spending, and taxes

national income and planned investment, government spending, and taxes

According to the theory of liquidity preference, the supply of real money balances:

decreases as the interest rate increases

increases as the interest rate increases

increases as income increases

is fixed by the central bank

is fixed by the central bank

In the Keynesian-cross model, is taxes are reduced by 100, then planned expenditures ___ for any given level of income.

increase by 100

increase by more than 100

decrease by 100

increase, but by less than 100

increase, but by less than 100

Along an IS curve, all of these are always true EXCEPT:

planned expenditures equal actual expenditures

planned expenditures equal income

the demand for real balances equals the supply of real balances

there are no unplanned changes in inventories

the demand for real balances equals the supply of real balances

The LM curve shows combinations of ___ that are consistent with equilibrium in the market for real money balances.

inflation and unemployment

the price level and real output

the interest rate and the level of income

the interest rate and real money balances

the interest rate and the level of income

In the Keynesian-cross model, a decrease in the interest rate___ planned investment spending and ___ the equilibrium level of income.

increases; increases

increases; decreases

decreases; decreases

decreases; increases

increases; increases

The tax multiplier indicates how much ___ change(s) in response to a $1 change in taxes.

the budget deficit

consumption

income

real balances

income

The intersection of the IS and LM curves determines the values of:

r, Y, and P, given G, T, and M

r, Y and M, given G, T, and P

r and Y, given G, T, M, and P

p and Y, given G, T, and M

r and Y, given G, T, M, and P

Changes in fiscal policy shift the:

LM curve

money demand curve

money supply curve

IS curve

IS curve

The IS-LM model takes ___ as exogenous.

the price level and national income

the price level

national income

the interest rate

the price level