12. According to the imperfect-information model, when the price level rises by the amount
the producer expected it to rise, the producer:
A) increases production.
B) does not change production.
C) decreases production.
D) hires more workers.
13. Each of
Problem set 2 Solutions
1) What happens to the economy if actual investment is greater than planned investment?
1) In general, planned investment is the amount of investment rms plan to undertake during a
year. Actual investment is the amount of investmen
Use the following to answer questions 2-4:
Exhibit: ISLM Fiscal Policy
2. (Exhibit: ISLM Fiscal Policy) Based on the graph, starting from equilibrium at interest
rate r1 and income Y1, a decrease in government spending would generate the new
80. In the ISLM model, a decrease in expected inflation (or an increase in expected
deflation), leads to a(n):
A) increase in both output and the nominal interest rate.
B) decrease in both output and the nominal interest rate.
C) increase in output and a
More Macro Data
Computing real GDP Chapter 6
Computing price indices Chapter 6
Interest rate data not in book
Kinds of unemployment Chapter 7
Costs of inflation Chapter 7
Fixed weight price index, like the CPI:
Quantity weights are fixedthe
86. In the Solow growth model with population growth but no technological progress,
increases in capital have a positive impact on steady-state consumption per worker by
_, but have a negative impact on steady-state consumption per worker by _.
94. In a short-run model of a large open economy, after net capital outflow is substituted for
net exports in the IS curve:
A) the larger the absolute value of the responsiveness of net capital outflow with
respect to the interest rate, the flatter the IS
104. Those economists who believe that fiscal policy is more potent than monetary policy
argue that the:
A) responsiveness of investment to the interest rate is small.
B) responsiveness of investment to the interest rate is large.
C) IS curve is nearly ho
129. The interest rate will increase in Alpha, but remain constant in Beta. The increase in
output will be larger in Beta because the Central Bank of Beta will increase the money
supply to keep the interest rate constant in the face of the tax cut. Thus,
58. In the two-sector endogenous growth model, the fraction of labor in universities (u)
affects the steady-state:
A) level of income.
B) growth rate of income.
C) level of income and growth rate of income.
D) level of income, growth rate of income, and g
Chapter 11: The AS/AD Model
Derivation of AD curve from IS curve and
AS and AD together
Shape of AS curve and the effects on policy
Reduced form equation for AS/AD model
SOLUTION of AS/AD MODEL
Y =C +I +G
= a + b(
Chapter 12: Policy and Cost Effects in
the AS/AD Model
State of economy at the time of the policy
change is important
Effects of exogenous monetary policy (the
What if Fed cares more about inflation than
What if there is
108. Assume that a country's per-worker production is y = k1/2, where y is output per worker
and k is capital per worker. Assume also that 10 percent of capital depreciates per year
a. If the saving rate (s) is 0.4, what are capital per worker,
114. a. You are the chief economic adviser in a small open economy with a floating-exchange-rate
system. Your boss, the president of the country, wishes to increase the level of output in the
short run in order to win reelection. Do you recommend using ex
41. In the ISLM model, a decrease in output would be the result of a(n):
A) decrease in taxes.
B) increase in the money supply.
C) increase in money demand.
D) increase in government purchases.
42. The U.S. recession of 2001 can be explained in part by a
124. Use the ISLM model to illustrate graphically the impact on output and interest rates of
a one-time increase in the price level due to a large increase in oil prices. Be sure to
label: i. the axes; ii. the curves; iii. the initial equilibrium values;
56. If a short-run equilibrium occurs at a level of output below the natural rate, then in the
transition to the long run prices will _ and output will _.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
57. If the s
55. According to the MundellFleming model, in an economy with flexible exchange rates,
expansionary fiscal policy causes the exchange rate to _ and expansionary
monetary policy causes the exchange rate to _.
A) rise; rise
B) rise; fall
C) fall; fall
b. The steady-state growth rate of total output will be higher in Highland because of the higher
rate of technological progress.
c. No, the Solow growth model predicts that the economies will converge to different st
74. Some economists argue that monetary union will not work as well in Europe as it does
in the United States for all of the following reasons except:
A) labor is not as mobile in Europe as it is in the United States.
B) there is no strong central governm
47. An increase in government spending generally shifts the IS curve, drawn with income
along the horizontal axis and the interest rate along the vertical axis:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
b. The equilibrium interest rate falls.
110. a. Tax cuts do not change the money supply, which is controlled by the central bank (Federal
Reserve). Changes in the money supply shift the LM curve.
b. Tax cuts shift the IS curve.
c. The president used the w
Three Markets: Goods, Money, Labor
Three Agents: Households, Firms, Government
Circular Flow Diagram
turf / 77am: Fee: Cyclical Movements in Output Maybe the Economy is not Producing
on the PPF
\f' PPF Sticky Wages Can Lead to Unempl
The level of GDP is usually quoted at an annual rate,
where this is a different use of the phrase annual rate.
It is the amount of output produced in the quarter (after
seasonal adjustment) times 4.
Say that averaged over many years t
The Federal Reserve System: Chapter 15
What is the Federal Reserve System?
The U.S. Money Supplies
Fractional Reserve Banking, the Reserve Ratio, and the Money Multiplier
How the Fed Controls the Money Supply
The Federal Reserve and Systemic Risk
Tutorial 3 Measuring the cost of living (Chapter 25)
To be conducted in Week 4
1. Which is the most accurate statement about the CPI?
a. When the CPI increases, the average family has to spend less to maintain its standard of
b. When the CPI increa
Tutorial 2 Measuring a Nations Income (Chapter 24)
To be conducted in Week 3
1. Davids Microchip Company (DMC) produces microchips for MP3 players, which it sells for $18 million to
John Smith Electronics (JSE). JSEs MP3 players are sold for a total of $2
Week 2 Tutorial 1
24/7/17 3:30 to 4:30pm
What alternatives would you include when determining your opportunity cost of
starting a university degree?
What are some differences between a centrally planned economy and a market