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The level of exports is affected by the real interest rate because


A) the level of imports depends on the real interest rate.
B) the level of imports depends on the real exchange rate.
C) the level of exports depends on the level of foreign income.
D) the level of exports depends on the real exchange rate.

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An increase in the baseline level of consumption spending will


A) shift the IS curve to the left.
B) shift the IS curve to the right.
C) make the IS curve more vertical.
D) make the IS curve less vertical.

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In the late 1980s (1985 to 1990) the US economy


A) experienced a shifting of the IS curve to the right because of increased business optimism, tax increases, and decreased government spending.
B) experienced a movement down and to the right along the IS curve.
C) experienced a shifting of the IS curve to the right because of tax reductions, and increased government spending.
D) experienced a shifting of the IS curve to the right due to a decrease in interest rates.

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A decrease in the domestic real interest rate


A) will increase the real exchange rate and increase the level of exports.
B) will reduce the real exchange rate and reduce the level of exports.
C) will reduce the real exchange rate and increase the level of exports.
D) will increase the real exchange rate and reduce the level of exports.

Correct Answer

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If the economy is operating above (to the right of) the IS curve, then real GDP is _______ than planned expenditure,


A) greater; inventories are decreasing faster than expected, and businesses will reduce production.
B) less; inventories are decreasing faster than expected, and businesses will increase production.
C) greater; inventories are increasing faster than expected, and businesses will reduce production.
D) less; inventories are increasing faster than expected, and businesses will increase production.

Correct Answer

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The questions with which Chapter 10 is concerned include each of the following except


A) do the determinants of investment in the sticky-price model differ from those of the flexible-price model?
B) do the determinants of net exports in a sticky-price model differ from those of the flexible-price model?
C) do the determinants of potential output in the sticky-price model differ from those of the flexible-price model?
D) how do changes in interest rates affect the equilibrium level of real GDP and national income in the sticky-price model?

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If the marginal propensity to expend is equal to .6, the interest rate sensitivity of investment is equal to $100 billion, the interest rate sensitivity of the exchange rate is 10, and the exchange rate sensitivity of exports is $7 billion, a one percentage point change in the real interest rate will change the level of aggregate demand by


A) $170 billion.
B) $425 billion.
C) -$425 billion.
D) -$170 billion.

Correct Answer

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The questions with which Chapter 10 is concerned include each of the following except


A) how do we calculate the equilibrium level of real GDP in the sticky-price model when the central bank's policy is to peg the real interest rate?
B) do the determinants of net exports in a sticky-price model differ from those of the flexible-price model?
C) how do changes in interest rates affect the equilibrium level of real GDP and national income in the sticky-price model?
D) how are the determinants of the money supply different in the sticky-price than in the flexible-price model?

Correct Answer

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From 1979 to 1982 the US economy


A) experienced a shifting of the IS curve to the left due to an increase in interest rates.
B) experienced a movement down and to the right along the IS curve.
C) experienced a shifting of the IS curve to the left because of decreased business optimism, tax increases, and decreased government spending.
D) experienced a movement up and to the left along the IS curve.

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An increase in government purchases will


A) shift the IS curve to the left.
B) shift the IS curve to the right.
C) make the IS curve more vertical.
D) make the IS curve less vertical.

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Long-term interest rates will be ______ relative to short-term interest rates if


A) high; people expect the Federal Reserve to decrease short-term rates in the future.
B) high; people expect the Federal Reserve to increase long-term rates in the future.
C) low; people expect the Federal Reserve to increase short-term rates in the future.
D) low; people expect the Federal Reserve to decrease short-term rates in the future.

Correct Answer

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The interest sensitivity of exports is equal to


A) the sensitivity of exports to changes in the exchange rate plus the sensitivity of the exchange rate to changes in the interest rate.
B) the sensitivity of exports to changes in the exchange rate times the sensitivity of the exchange rate to changes in the interest rate.
C) the sensitivity of exports to changes in the exchange rate minus the sensitivity of the exchange rate to changes in the interest rate.
D) the sensitivity of exports to changes in the exchange rate divided by the sensitivity of the exchange rate to changes in the interest rate.

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The yield curve


A) shows the nominal interest rates on bonds of various durations.
B) shows the expected profitability of various investment projects.
C) shows the expected rates of return on various stocks.
D) shows the expected selling price of used assets.

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Each of the following is a potential cause of slippage between short-term, nominal, safe, interest rates and long-term, real, risky, interest rates except


A) changes in the term premium between short and long interest rates.
B) changes in the rate of inflation.
C) changes in the expected profitability of investment projects.
D) changes in the risk premium.

Correct Answer

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The slope of the IS curve depends on


A) the value of the multiplier and the responsiveness of baseline autonomous spending to real interest rate changes.
B) the value of the multiplier and the responsiveness of investment spending and exports to real interest rate changes.
C) the inverse of the value of the multiplier and the responsiveness of baseline autonomous spending to real interest rate changes.
D) the inverse of the value of the multiplier and the responsiveness of investment spending and exports to real interest rate changes.

Correct Answer

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If the Federal Reserve raises interest rates,


A) the IS curve will shift to the left and the level of planned expenditure will decrease.
B) the level of planned expenditure will move downward along the IS curve and thus increase.
C) the IS curve will shift to the right and the level of planned expenditure will increase.
D) the level of planned expenditure will move upward along the IS curve and thus decrease.

Correct Answer

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A decrease in the baseline level of investment spending will


A) shift the IS curve to the left.
B) shift the IS curve to the right.
C) make the IS curve more vertical.
D) make the IS curve less vertical.

Correct Answer

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Changes in _____________ are the driving force behind the business cycle.


A) consumption spending
B) the money supply
C) government purchases
D) investment spending

Correct Answer

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The increase in the interest rate that the market charges on _________ loans over __________ loans is called the ____________.


A) short-term; long-term; term premium
B) long-term; short term; yield premium
C) short-term; long-term; yield premium
D) long-term; short-term; term premium

Correct Answer

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In the 1960s the IS curve


A) shifted to the right because of increased business optimism, tax reductions, and increased government spending.
B) shifted to the left because of increased business optimism, tax reductions, and increased government spending.
C) shifted to the right because of decreased business optimism, tax increases, and decreased government spending.
D) shifted to the right due to a decrease in interest rates.

Correct Answer

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