Macroeconomics 7th edition mankiw test bank

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Chapter 10

Description Instructions Add Question Here Multiple Choice

1 points

Question In The General Theory of Employment, Interest, and Money, John Maynard Keynes proposed that the Great Depression was caused by Answer

government budget deficits. low aggregate demand. saving rates that were too low. inept monetary policy.

Correct Feedback

Correct. The answer is B. See the introduction to Chapter 10.

Incorrect Feedback Incorrect. The correct answer is B. See the introduction to Chapter 10.

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1 points

Question Which of the following is NOT exogenous in the IS–LM model?

Answer

the interest rate taxes the price level government expenditure

Correct Feedback

Correct. The answer is A. See the introduction to Chapter 10.

Incorrect Feedback

Incorrect. The correct answer is A. See the introduction to Chapter 10.

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Multiple Choice

1 points

Question In the Keynesian cross model of Chapter 10, if the interest rate is constant and the MPC is 0.7, then the government purchases multiplier is Answer

0.3.

0.7.

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1.4.

3.3.

Correct Feedback

Correct. The answer is D. The multiplier is equal to 1/(1 – MPC).

If the MPC is 0.7, the government purchases multiplier will be 3.3. See Section 10-1. See Section 10-1.

Incorrect Feedback

Incorrect. The correct answer is D. The multiplier is equal to 1/(1 – MPC). If the MPC is 0.7, the government purchases multiplier will be 3.3. See Section 10-1.

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Multiple Choice

1 points

Question In the Keynesian cross model of Chapter 10, if the interest rate is constant, the MPC is 0.6, and taxes are increased by $100, by how much does income change?

Answer

It increases by $150.

It decreases by $150.

It increases by $166.

It decreases by $166.

Correct Feedback

Correct. The answer is B. The tax multiplier is equal to -MPC/(1 – MPC). If the MPC is equal to 0.6, the multiplier is -1.5, which implies that a tax increase of $100 induces a decrease in income of $150. See Section 10-1.

Incorrect Feedback

Incorrect. The correct answer is B. The tax multiplier is equal to -MPC/(1 – MPC). If the MPC is equal to 0.6, the multiplier is -1.5, which implies that a tax increase of $100 induces a decrease in income of $150. See Section 10-1.

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Multiple Choice

1 points

Question The relationship between interest rates and the level of income that arises in the market for goods and services is called the Answer

LM curve.

IS curve. aggregate demand curve. aggregate supply curve.

Correct Feedback

Correct. The answer is B. See Section 10-1.

Incorrect Feedback

Incorrect. The correct answer is B. See Section 10-1.

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Multiple Choice

1 points

Question The investment function and the IS curve slope Answer

upward because higher interest rates induce more investment. upward because higher interest rates induce less investment.

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downward because higher interest rates induce more investment. downward because higher interest rates induce less investment.

Correct Feedback Correct. The answer is D. See Section 10-1.

Incorrect Feedback

Incorrect. The correct answer is D. See Section 10-1.

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Multiple Choice

1 points

Question The slope of the IS curve depends on Answer

the sensitivity of investment to the interest rate. the level of government expenditures. the sensitivity of the demand for real money balances to the interest rate. none of the above.

Correct Feedback

Correct. The answer is A. The slope of the IS curve depends on the sensitivity of investment to the interest rate. See Section 10-1.

Incorrect Feedback

Incorrect. The correct answer is A. The slope of the IS curve depends on the sensitivity of investment to the interest rate.

See Section 10-1.

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Multiple Choice

1 points

Question The IS curve is drawn for a given Answer

fiscal policy monetary policy. interest rate. level of income.

Correct Feedback

Correct. The answer is A. See Section 10-1.

Incorrect Feedback Incorrect. The correct answer is A. See Section 10-1.

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1 points

Question Exogenous increases in the supply of loanable funds shift the Answer

LM curve outward.

LM curve inward.

IS curve outward.

IS curve inward.

Correct Feedback

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Correct. The answer is D. If the supply of loanable funds increases, then at each Y, the r that equilibrates the demand for and supply of loanable funds will be lower. This translates into an inward shift of the IS curve. See Section 10-1.

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Incorrect Feedback

Incorrect. The correct answer is D. If the supply of loanable funds increases, then at each Y, the r that equilibrates the demand for and supply of loanable funds will be lower. This translates into an inward shift of the IS curve. See Section 10-1.

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Multiple Choice

1 points

Question If investment becomes less sensitive to the interest rate, then the Answer

LM curve becomes steeper.

LM curve becomes flatter.

IS curve becomes steeper.

IS curve becomes flatter.

Correct Feedback

Correct. The answer is C. If investment becomes less sensitive to the interest rate, a given increase in Y must be accompanied by a larger increase in r to keep the loanable funds market in equilibrium. This implies a steeper IS curve. See Section 10-1.

Incorrect Feedback

Incorrect. The correct answer is C. If investment becomes less sensitive to the interest rate, a given increase in Y must be accompanied by a larger increase in r to keep the loanable funds market in equilibrium. This implies a steeper IS curve. See Section 10-1.

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Multiple Choice

1 points

Question If the marginal propensity to consume is large, then the Answer

LM curve is relatively steep.

LM curve is relatively flat.

IS curve is relatively steep.

IS curve is relatively flat.

Correct Feedback

Correct. The answer is D. A larger marginal propensity to consume means that a given increase in Y will result in a smaller increase in saving. Thus, it must be accompanied by a smaller decrease in r to keep the loanable funds market in equilibrium. This implies a flat IS curve. See Section 10-1.

Incorrect Feedback

Incorrect. The correct answer is D. A larger marginal propensity to consume means that a given increase in Y will result in a smaller increase in saving. Thus, it must be accompanied by a smaller decrease in r to keep the loanable funds market in equilibrium.

This implies a flat IS curve. See Section 10-1.

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Multiple Choice

1 points

Question The LM curve is drawn for a given Answer

real income. nominal income. money supply.

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interest rate.

Correct Feedback

Correct. The answer is C. See Section 10-2.

Incorrect Feedback Incorrect. The correct answer is C. See Section 10-2.

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1 points

Question The quantity of real money balances demanded depends on the Answer

nominal interest rate. rate of inflation. nominal money supply. price level.

Correct Feedback

Correct. The answer is A. See Section 10-2.

Incorrect Feedback Incorrect. The correct answer is A. See Section 10-2.

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1 points

Question The quantity of real money balances demanded depends on Answer

consumption. real income. nominal income. the price level.

Correct Feedback

Correct. The answer is B. See Section 10-2.

Incorrect Feedback Incorrect. The correct answer is B. See Section 10-2.

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1 points

Question The relationship between the interest rate and the level of income that arises in the market for money balances is called the Answer

LM curve.

IS curve. aggregate demand curve. aggregate supply curve.

Correct Feedback

Correct. The answer is A. See Section 10-2.

Incorrect Feedback

Incorrect. The correct answer is A. See Section 10-2.

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Multiple Choice

1 points

Question The theory of liquidity preference assumes that the supply of real money balances, plotted against the interest rate, is Answer upward sloping.

downward sloping. horizontal.

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vertical.

Correct Feedback

Correct. The answer is D. The supply of real balances does not depend on the interest rate. Therefore, it is vertical. See Section 10-2.

Incorrect Feedback

Incorrect. The correct answer is D. The supply of real balances does not depend on the interest rate. Therefore, it is vertical.

See Section 10-2.

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Multiple Choice

1 points

Question The theory of liquidity preference postulates that the demand for real money balances, plotted against the interest rate, is Answer

upward sloping. downward sloping. horizontal. vertical.

Correct Feedback

Correct. The answer is B. Because the interest rate is the cost of holding money, a higher interest rate lowers the quantity of real balances demande This means that the demand curve is downward sloping. See Section 10-2.

Incorrect Feedback

Incorrect. The correct answer is B. Because the interest rate is the cost of holding money, a higher interest rate lowers the quantity of real balances demande This means that the demand curve is downward sloping. See Section 10-2.

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Multiple Choice

1 points

Question

In the early 1980s the Federal Reserve, under Paul Volcker, began a period of tight money aimed at reducing inflation. Under this policy, nominal interest rates were: Answer higher in the short run and higher in the long run. higher in the short run and lower in the long run. lower in the short run and higher in the long run. lower in the short run and lower in the long run.

Correct Correct. The answer is B. Recall that the nominal interest rate is Feedback the sum of the real interest rate and the rate of inflation. The theory of liquidity preference tells us that tight money causes the real interest rate to rise in the short run. Since prices are sticky in the short run, this results in a rise in the nominal interest rate in the short run. In the long run, however, the inflation rate will fall, causing the nominal interest rate to be lower. See Case Study in Section 10-2.

Incorrect Incorrect. The correct answer is B. Recall that the nominal interest Feedback rate is the sum of the real interest rate and the rate of inflation.

The theory of liquidity preference tells us that tight money causes the real interest rate to rise in the short run. Since prices are

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sticky in the short run, this results in a rise in the nominal interest rate in the short run. In the long run, however, the inflation rate will fall, causing the nominal interest rate to be lower. See Case Study in Section 10-2.

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1 points

Question In the quantity theory interpretation of the LM curve, the LM curve slopes up because Answer

a higher inflation rate implies a higher interest rate. velocity depends on the interest rate. when income rises, a lower interest rate is necessary to equilibrate the money market. for a given price level, the supply of money determines the level of income.

Correct Feedback

Correct. The answer is B. See Section 10-2.

Incorrect Feedback

Incorrect. The correct answer is B. See Section 10-2.

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Multiple Choice

1 points

Question If the central bank increased the supply of real money balances, then the LM curve would Answer

become steeper. become flatter. shift inward. shift outward.

Correct Feedback

Correct. The answer is D. If the supply of real balances increases, then the interest rate at every level of output must be lower to equilibrate the market for real balances. This means the LM curve shifts outwar See Section 10-2.

Incorrect Feedback

Incorrect. The correct answer is D. If the supply of real balances increases, then the interest rate at every level of output must be lower to equilibrate the market for real balances. This means the LM curve shifts outwar See Section 10-2.

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Multiple Choice

1 points

Question If money demand became more sensitive to the level of income, the LM curve would Answer

become steeper. become flatter. shift inward. shift outward.

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Correct Feedback

Correct. The answer is A. If money demand became more sensitive to the level of income, a given increase in income would necessitate a larger increase in the real interest rate to keep the money market in equilibrium. This means that the LM curve would get steeper. See Section 10-2.

Incorrect Feedback

Incorrect. The correct answer is A. If money demand became more sensitive to the level of income, a given increase in income would necessitate a larger increase in the real interest rate to keep the money market in equilibrium. This means that the LM curve would get steeper. See Section 10-2.

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Multiple Choice

1 points

Question The “money hypothesis” explaining the Great Depression stipulates that the Depression was caused by a contractionary shift in the LM curve.

Which of the following facts supports this hypothesis?

Answer

The stock market crash of 1929 reduced real wealth The interest rate did not rise The nominal money supply contracted and the price level fell dramatically Real balances did not fall

Correct Feedback

Correct. The answer is C. See Section 11-3.

Incorrect Feedback Incorrect. The correct answer is C. See Section 11-3.

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1 points

Question The ¿spending hypothesis¿ explaining the Great Depression stipulates that the main cause of the Great Depression was a decline in spending. Which of the following does not support this hypothesis?

Answer

Investment in housing declined.

Widespread bank failures occurred.

Government purchases rose during 1929¿1932.

The stock market crash of 1929 reduced real wealth.

Correct Feedback

Correct. The answer is C. If government purchases rose during the Great Depression, this would have increased spending. See Section 11-3.

Incorrect Feedback

Incorrect. The correct answer is C. If government purchases rose during the Great Depression, this would have increased spending. See Section 11-3.

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Multiple Choice

1 points

Question The Pigou effect stipulates

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Answer

falling prices expand income. falling prices depress income. expanding income leads to a higher price level. falling income leads to a lower price level.

Correct Feedback

Correct. The answer is A. See Section 11-3.

Incorrect Feedback Incorrect. The correct answer is A. See Section 11-3.

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1 points

Question Debt-deflation leads to lower income because Answer

falling prices redistribute income from creditors to debtors, which leads to a decline in the APC. falling prices redistribute income from debtors to creditors, which leads to a decline in the APC. a rise in the saving rate leads to a lower amount of real debt in the economy, depressing consumption and therefore income. a fall in the saving rate leads to higher interest rates and lower income.

Correct Feedback

Correct. The answer is B. See Section 11-3.

Incorrect Feedback

Incorrect. The correct answer is B. See Section 11-3.

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Multiple Choice

1 points

Question Most economists believe that the Great Depression is unlikely to be repeated in the future. Which of the following is NOT a legitimate reason to believe this?

Answer

The Fed will not let the money supply fall by a large amount.

More effort is made today to balance the government budget.

Widespread bank failures are less likely to occur.

The income tax provides an automatic stabilizer today.

Correct Feedback

Correct. The answer is B. The attempt to balance the budget at the beginning of the Great Depression made matters worse by contracting aggregate demand. Since the Great Depression, less of an effort has been made to balance the federal government budget. See Section 11-3.

Incorrect Feedback

Incorrect. The correct answer is B. The attempt to balance the budget at the beginning of the Great Depression made matters worse by contracting aggregate demand. Since the Great Depression, less of an effort has been made to balance the federal government budget. See Section 11-3.

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1 points

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Question Some economists believe that a liquidity trap may occur when Answer

the real interest rate is negative. the unemployment rate exceeds 10 percent. the nominal interest rate is close to zero. output growth exceeds its long-run potential rate.

Correct Feedback

Correct. The answer is A liquidity trap is a situation where the nominal interest rate cannot be lowered below zero, so monetary policy may be unable to expand aggregate demand in the economy. See Section 11-3.

Incorrect Feedback

Incorrect. The correct answer is A liquidity trap is a situation where the nominal interest rate cannot be lowered below zero, so monetary policy may be unable to expand aggregate demand in the economy. See Section 11-3.

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