What is the primary reason that households and firms demand money?

A. To feel rich.

B. To make investments.

C. For speculative purposes.

D. To facilitate buying and selling.

Are all business cycles the same in length and severity?

A. Most business cycles have different lengths with equal degrees of severity.

B. All business cycles follow the same pattern of length and severity.

C. Business cycles possess various lengths and degree of severity.

D. Most business cycles have the same length but have various degrees of severity.

In what sense does the government have a dominant role in the mortgage market?

A. It mandates private securitization of mortgages.

B. It guarantees Fannie Mae and Freddie Mac mortgage-backed securities.

C. It regulates interest rates and mortgage terms.

D. It mandates banks hold the majority of residential mortgages.

All of the following are ways, other than through their effects on aggregate demand, that higher exchange rates can affect the U.S. economy, except:

A. reduce the price of imports.

B. hurt U.S. exporters.

C. help U.S. firms that import products for resale.

D. increase the prices of imports.

What is meant by the term price stickiness in the new Keynesian view?

A. Price changes are tied tightly to changes in aggregate demand.

B. Prices are settled by the government.

C. Prices adjust slowly in the short run in response to changes in aggregate demand.

D. Prices do not adjust to changes in AD in the long run.

When the economy is in a short-run equilibrium, with output greater than potential GDP, the short-run aggregate supply curve will shift to the left. Why would this happen?

A. With output above potential GDP, the economy produces too many goods and those goods are sold at prices that are too high.

B. This happens only after government interference.

C. With output above potential GDP, wages will be bid up and the expected price level will rise from the increase in the actual price level.

D. With output above potential GDP, the economy does not produce enough goods and those goods are sold at prices that are too high.

What effect would these increases in household wealth have on consumption spending?

A. Consumption spending would decrease.

B. Consumption spending would increase.

C. Consumption spending would not change.

D. None of the above.

Why might attempts to fine-tune the economy be ineffective?

A. The policy of fine-tuning does not take into account the fluctuations in aggregate supply.

B. The policy instruments which are used in short run are inefficient in the long run.

C. The policy of fine-tuning does not take into account the fluctuations in aggregate demand.

D. There are potentially long lags in formulating and implementing stabilization policies.

Why did the default risk dramatically increase during the 2007-2009 financial crisis?

A. Because the overall risk level decreased.

B. Because of the high level of defaults.

C. Because of the low level of defaults.

D. Because the risk-free rate decreased tremendously.

In the following situation, explain whether the IS curve will shift and, if it does shift, in which direction it will shift:

Firms become optimistic about the future probability of spending on new information technology.

A. This would shift the IS curve to the right.

B. This would shift the IS curve to the left.

C. This would cause a movement up along the IS curve.

D. This would cause a movement down along the IS curve.