c

According to the Phillips curve, other things being equal, inflation depends positively on all of
the following except:



 
 
 

A. expected inflation
B. the unemployment rate
C. the natural unemployment rate
D. a supply shock, if one occurs
Score: 10/10



According to the sticky-wage model, workers and employers make an explicit or implicit
agreement
that covers:



 
 
 

A. nominal wages
B. real wages
C. both nominal wages and quantity of employment
D. both real wages and quantity of employment
Score: 10/10



In the sticky-price model:



 
 
 

A. all firms adjust prices instantly in response to changes in demand
B. no firms adjust prices instantly in response to changes in demand
C. some firms adjust prices instantly in response to changes in demand
while others do not
D. output is constant
Score: 0/10

]

The sticky-price model can explain why countries with variable aggregate demand have short-
run
aggregate supply curves that are:



 
 
 

A. flat
B. steep
C. horizontal
D. vertical
Score: 10/10



The Phillips curve immediately shifts upward whenever:



 
 
 

A. inflation rises
B. unemployment falls
C. an adverse supply shock, such as an oil price increase, occurs
D. all of the above.
Score: 0/10



According to the sticky-wage model, when the price level is less than the expected price level,
workers get a ________ real wage than expected, and _______ workers are hired than
expected.



 
 
 

A. lower; more
 B. lower; fewer
C. higher; more
D. higher; fewer
Score: 10/10

w

A typical estimate of the sacrifice ratio is about 5. Thus, if the inflation rate were to be lowered
by 2 percentage points, the amount of one years GDP we must give up is:



 
 
 

A. 2 percent
B. 2.5 percent
C. 5 percent
D. 10 percent
Score: 0/10



According to the imperfect-information model, when the price level rises and the producer
expects the
price level to rise, the producer:



 
 
 

A. increases production
B. does not change production
C. decreases production
D. hires more workers
Score: 10/10



The imperfect-information model bases the difference in the short-run and long-run aggregate
supply
curve on:



 
 
 

A. sticky wages
B. sticky prices
C. temporary misperception about prices
D. procyclical real wages
Score: 10/10

c

In response to a drop in output experienced by a sticky-price firm employment is ________

and
the real wage______.



 
 
 

A. increased; decreases
B. increased; increases
C. decreased; decreases
D. decreased; increases
Score: 0/10

c

A small open economy is one in which the:



 
 
 

A. level of output is fixed
B. price level is fixed
C. domestic interest rate equals the world interest rate
D. domestic saving is less than domestic investment
Score: 8.3/8.3


Starting from a small open economy with balanced trade, if large foreign countries increase
their domestic government purchases, this policy will tend to increase:



 
 
 

A. investment in the small open economy
B. saving in the small open economy
C. exports by the small open economy
D. imports by the small open economy
Score: 0/8.3



An increase in the trade deficit of a small open economy could be the result of:



 
 
 

A. an increase in taxes
B. an increase in government spending
C. a decrease in the world interest rate
D. the expiration of an investment tax-credit provision
Score: 8.3/8.3

]

In a small open economy, if the government encourages investment, say through an investment
tax credit, investment:



 
 
 

A. increases and is financed through an increase in national saving
B. increases and is financed through an increase in exports
C. increases and is financed through an inflow of foreign capital
D. does not increase; the interest rate rises instead
Score: 8.3/8.3


In the small open economy in equilibrium:



 
 
 

A. saving is fixed and investment is determined by the investment
function and the world interest rate
B. investment is fixed and saving is determined by the saving function
and the world interest rate
C. saving is fixed and investment is determined by the trade balance
D. investment is fixed and saving is determined by the trade balance
Score: 8.3/8.3



In a small open economy, starting from a position of balanced trade, if the government
increases the income tax, this produces a tendency toward a trade ______ and ______ net
capital outflow.



 
 
 

A. deficit; negative
B. surplus; positive
C. deficit; positive
D. surplus; negative
Score: 8.3/8.3

w

In a small open economy, if domestic saving equals $50 billion and domestic investment
equals $50 billion, then there is _________ and net capital outflows equals_______.



 
 
 

A. a trade deficit; $100 billion
 B. balanced trade; $0
C. a trade surplus; $100 billion
D. balanced trade; $100 billion
Score: 8.3/8.3



In a small open economy, if domestic investment exceeds domestic saving, then the extra
investment will be financed by:



 
 
 

A. borrowing from abroad
B. lending from abroad
C. the domestic government
D. the World Bank
Score: 8.3/8.3



The adoption of an investment tax credit in a small open economy is likely to lead to:



 
 
 

A. no change in either domestic investment or domestic saving in the
small open economy
B. an increase in both domestic investment and domestic saving in the
small open economy
C. an increase in domestic saving but no change in domestic investment
in the small open economy
D. an increase in domestic investment but no change in domestic saving
in the small open economy
Score: 8.3/8.3

c

In a small open economy with perfect capital mobility, a reduction in the governments budget
deficit_____ net exports and the real exchange rate______.



 
 
 

A. increases; appreciates
B. increases; depreciates
C. decreases; appreciates
D. decreases; depreciates
Score: 0/8.3

cc

In a small open economy, if the government adopts a policy that lowers imports, then that
policy:



 
 
 

A. raises the real exchange rate and increases net exports
B. raises the real exchange rate and does not change net exports
C. raises the real exchange rate and decreases net exports
D. lowers the real exchange rate
Score: 8.3/8.3

c

In a small open economy, if the world interest rate is above the rate at which national saving
exceeds domestic investment, then there will be a trade ______ and ______ net capital
outflow.



 
 
 

A. surplus; negative
B. deficit; positive
C. surplus; positive
D. deficit; negative
Score: 8.3/8.3

c

According to the Mundell-Fleming model, under:



 
 
 

A. fiscal expansion does not.
B. both floating and fixed exchange rates, a monetary expansion raises
income, but a fiscal
expansion does not
C. both floating and fixed exchange rates, a fiscal expansion raises
income, but a monetary
expansion does not
D. floating exchange rates, a fiscal expansion raises income whereas a
monetary expansion
does not, but under a fixed exchange rate, a monetary expansion raises
income whereas
Score: 0/8.33



In a small open economy with a fixed exchange rate, if the government increases government
purchases, then in the process of adjusting to the new short-run equilibrium the money supply



 
 
 

A. increases to keep the exchange rate unchanged, thus augmenting the
effect of government
spending on income
B. decreases to keep the exchange rate unchanged, thus offsetting the
effect of government
spending on income
C. remains unchanged, and there is no effect of government spending on
income
D. remains unchanged to keep the interest rate at the world interest, so
that government
spending reduces income
Score: 8.33/8.33


In a small open economy with a fixed exchange rate, if the government imposes an import
quota, then net exports:



 
 
 

A. decrease but the money supply falls and income falls
B. increase, the money supply increases, and income increases
C. are unchanged but the money supply falls and income falls
D. are unchanged, the money supply is unchanged, and income is
unchanged
Score: 8.33/8.33

]

In a small open economy with a floating exchange rate, if the government imposes a
tariff on foreign goods, then in the new short-run equilibrium:



 
 
 

A. imports will decrease while exports remain constant, leading to a rise
in net exports
B. imports will decrease and exports will increase, leading to a rise in net
exports
C. imports will decrease and exports will decrease by an equal amount
D. both imports and exports will remain unchanged
Score: 0/8.33



The Mundell-Fleming model assumes that:



 
 
 

A. prices are flexible, whereas the IS-LM model assumes that prices are
fixed
B. prices are fixed, whereas the IS-LM model assumes that prices are
 flexible
C. as in the IS-LM model, prices are fixed
D. as in the IS-LM model, prices are flexible
Score: 8.33/8.33



If there is a fixed-exchange rate system, then in the short run described by the Mundell-
Fleming model:



 
 
 

A. the nominal exchange rate is fixed, but the real exchange rate is free to
vary
B. the real exchange rate is fixed, but the nominal exchange rate is free to
vary
C. both the nominal and real exchange rates are fixed
D. the nominal exchange rate is fixed, but whether the real exchange rate
is fixed depends
on whether the central bank follows a rule of constant growth of the
money supply
Score: 8.33/8.33

w

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:



 
 
 

A. income rises
B. income falls
C. the exchange rate falls
D. income remains constant
Score: 8.33/8.33


Under a fixed system, the exchange rate:



 
 
 

A. fluctuates in response to changing economic conditions
B. is maintained at a predetermined level by the central bank
C. is changed at regular intervals by the central bank
D. fluctuates is response to changes in the price of gold
Score: 8.33/8.33



In a small open economy with a floating exchange rate, if the government increases the
money supply, then in the new short-run equilibrium the:



 
 
 

A. interest rate falls and the level of investment rises
B. exchange rate falls and net exports increase
C. interest rate falls but the level of investment does not rise
D. exchange rate falls but net exports do not increase
Score: 8.33/8.33

c

A devaluation of a currency under a fixed-exchange-rate system occurs when the level

at which the currency is fixed is:



 
 
 

A. increased
B. decreased
C. allowed to float
D. kept fixed within a band
Score: 8.33/8.33
cc

According to the Mundell-Fleming model, under flexible exchange rates expansionary

monetary policy______ increase income and under fixed exchange rates expansionary
monetary policy______ increase income



 
 
 

A. can; can
B. can; cannot
C. cannot; can
D. cannot; cannot
Score: 0/8.33

c

In a small open economy with a floating exchange rate, the exchange rate will appreciate if:



 
 
 

A. the money supply is increased
B. the money supply is decreased
C. government spending is decreased
D. taxes are decreased
Score: 8.33/8.33