Econ 305 Exam 3 Study Guide Boise State Chris Loucks

exam 3
1 according to the is lm closed economy model if congress raise taxes but the fed wants to hold income constant then the fed must
increase the money supply

2 if the short run is lm closed economy equilibrium occurs at a level of income above the natural rate of output in the long run _ will _ in orer to return to the natural rate.
price level increase

3 all the following events are consistent with the spending hypothesis as contributing to the great depression except
25% reduction in the money supply

4 the slope of the closed economy is curve depends on

5 the closed economy lm curve is steeper the _ the interest senstitivtiy of money demand and the _ effect of income on money demand smaller greater |

6 other things being equal in a closed economy model a given change in government spending has a large effect on demand the flatter the lm curve

7 in a closed economy short run model if the government wants to raise investment but keep output constant it should tight contractionary loose expansionary adopt a loose monetary policy and a tight fiscal policy.

8 in the mundell fleming model the exogenous variables are the price level, world interest rate, monetary policy, and fiscal policy

9 in a small open economy with a floating exchange rate the exchange rate will appreciate if the money supply is decreased

10 in a small open economy with a floating exchange rate if the government increase the money supply then in the new short run equilibrium income rises and the exchange rate falls

11 under a fixed exchange rate system the central bank of a small open economy must Allow the money supply to adjust to whatever level will ensure that the equilibrium exchange rate equals the announced exchange rate.

12 in a small open economy with a fixed exchange rate if the central bank tries to increase the money supply then in the new short run equilibrium income remains constant.

13 according to the mundell fleming model under floating exchange rates a fiscal expansion lowers the exchange rate but monetary expansion raises it

14 one argument favoring a floating exchange rate system is that it allows monetary policy to be used for other purposes.

15 in the mundell fleming model if the price level falls then the equilibrium income level

16 introduction of a stylish new line of toyotas which makes some consumers prefer foreign cars over domestic will according to the mundell fleming model with fixed exchange rate lead to a fall in income and net exports

17 the introduction of automatic teller machines which reduces the demand for money will according to the mundell fleming model with floating exchange rates lead to a rise in both income and net exports

18 an interpretation of why the is curve slopes downward and to the right in a closed economy model is that as income increase national savings rise and this increase drives the interest rate

19 an lm curve in a closed economy shows combination of interest rates and income goods market

20 the intersection of the is and lem curves in a closed economy model determines the values of r and y given g t and m

21 the reason that the income response to a fiscal expansion is generally less in the closed economy IS/LM model that it is in the keynesion cross model is that the keynesion cos model assumes that investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment

22 in a closed economy model if congress passed a tax increase at the request of the president, to reduce the budget deficit, but the fed held the money supply constant the two policies together would generally lead to lower income lower interest rate

23 in a closed economy model the aggregate demand curves generally slopes downward and to the right because for any given money supply M a higher price level P cause a _ real money supply M/P this _ the interest rate and _ spending lower raises reduces

24 according to the closed economy IS LM model when government increase taxes and government purchases by equal amounts income and the interest rate rise, whereas consumption and investment fall.

25 in the closed economy model if investment does not depend on the interest rate, the _ curve is _ then the IS curve is vertical

26 in the closed economy model if investment does not depend on the interest rate _ fiscal/monetary policy is not an effective stabilization tool

27 if the is curve is given by y = 1700 – 100r the money demand function by M/P d = Y – 100r the money supply is 1000 and the price level is 2 then the equilibrium interest rate is _ and the equilibrium level of income is _

28 given the information in question 27 if the money supply is increased to 1200 equilibrium income rises by

29 according to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.

30 in the keynesian cross analysis if the consumption function given by c = .6(y-t) and planned investment is 100 g is 1— and t is 100 then equilibrium income is _

et2
1 most economists believe that the classical dichotomy holds approximately in the long run but not at all in the short run.

2 the classical aggregate demand curve tells us possible combinations of p and y for given value of m

3 in the classical world what the only factors that shirt ad curve

4 in the long run the level of output is determined by the amounts of capital and labor and the available technology.

5 assume that the economy begins in long run equilibrium then the fed reduces the money supply in the short run output decreases and prices are unchanged; fall

6 if fed a cares only about keeping the price level stable fed b cares only about keeping the output at its natural level then in response to a n exogenous increase in the price of oil both Central Bank A and Central Bank B should increase the quantity of money.

7 making use of oakum’s law it may be computed that if the fed reduces the money supply 5 percent and the quantity theory of money is true, then unemployment rate will rise about

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