Chapter 10,11,13

One of the advantages of fiscal policy is that it

B. generates a psyche of safety for consumers and investors because they know the government has the ability to use it.

Automatic stabilizers The purpose of automatic stabilizers is to

D. cause changes in the economy without the action of Congress and the President. B. lessen the impact of unemployment in a recession and slowdown inflation during an expansion.

Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short​ run?

A recessionary gap is created.

Which of the following would cause a decrease in​ long-run aggregate​ supply? A. A decrease in the labor force. B. A decrease in wealth. C. A decrease in the price level. D. A decrease in the number of consumers in the market. E. All of the above would cause a decrease in​ long-run aggregate supply.

A. A decrease in the labor force.

Which of the following is not an automatic​ stabilizer? A progressive tax system is one in which the tax rates

A. Defense spending. A. increase as income increases.

The​ long-run aggregate supply curve is determined by

A. the real value of cash balances. B. the​ full-employment level of real output. Your answer is correct. C. the relationship between price and quantity supplied. D. the amount of inflation in the economy. B

The graph below shows the Laffer Curve. Using the point drawing tool​, identify a tax​ rate/tax revenue combination such that tax rates can be reduced without reducing tax revenues. Label your new point ​'T Subscript 1​'. Part 2 Carefully follow the instructions​ above, and only draw the required object.

Answer Graph Question 20 HW 13

Consider the figure to the right. Suppose that businesses in this nation initially had been exporting significant amounts of domestically produced goods and services abroad. Assume that other nations of the world have experienced a sudden improvement in economic conditions. What happens to the​ nation's aggregate demand​ curve? In the short​ run, will the nation experience an inflationary gap or a recessionary​ gap? Explain. Part 2 ​1.) Using the line drawing​ tool, draw a new AD curve that shows the effects of a sudden improvement in economic conditions in other nations. Label your line ​'AD2​.' ​2.) Using the point drawing tool​, indicate the​ economy's new​ short-run equilibrium price and level of real GDP. Label this point ​'E2​.' Carefully follow the instructions​ above, and only draw the required objects. Part 3 In the short​ run, the equilibrium price level will rise and the nation will experience an inflationary gap because the​ short-run equilibrium level of real GDP per year is greater than real GDP at full employment. ... Question content area right Part 1 Real GDP per Year ($ trillions)Price Level E1AD1LRAS1P1AS1E2AD2 interactive graph

Answer to the left

Indirect crowding out occurs because of an interest rate effect in which the​ government's efforts to finance its deficit spending cause interest rates to increase​, thereby crowding out private investment and​ spending, particularly on cars and houses. This is called the ​crowding-out effect. Part 2 Direct expenditure offsets occur when government spending competes with the private sector and is increased. A direct​ crowding-out effect may occur. Part 3 The Ricardian equivalence theorem holds that an increase in the government budget deficit has no effect on aggregate demand because individuals anticipate that their future taxes will increase and therefore save more today to pay for them. Part 4 Changes in marginal tax rates may cause supply-side effects if a reduction in marginal tax rates induces enough additional​ work, saving, and investing. Government tax receipts can actually increase. This is called supply-side economics.

Answer to the left

The current situation would be described as a recessionary gap . If the government wished to use discretionary fiscal policy to remedy this​ problem, it would need to increase government spending.

Answer to the left

The government provides a subsidy to help keep an existing firm​ operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business. This is an example of direct expenditure offsets to a fiscal policy action. Part 2 b. The government reduces its taxes without decreasing its​ expenditures; to cover the resulting budget​ deficit, it issues more​ bonds, thereby pushing up the market interest rate and discouraging private planned investment spending. This is an example of indirect crowding out from a fiscal policy action. Part 3 c. Government expenditures fund construction of a​ high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building. This is an example of direct expenditure offsets to a fiscal policy action.

Answer to the left

Time lags of various sorts reduce the effectiveness of fiscal policy. The recognition time lag is the time required to gather information about the current state of the economy. Part 2 The action time lag is the time between recognition of a perceived need for a policy response and implementation of that response. Part 3 The effect time lag is the time between implementation of a policy and the​ policy's results.

Answer to the left

Currently the government has a balanced budget. It decides to follow an expansionary fiscal policy of reducing taxes by​ $100 billion. Which of the following statements bests describes the Ricardian Equivalence Theorem under these​ conditions? The Ricardian Equivalence Theorem implies that expansionary fiscal policy that creates a budget deficit will result in

B. Households save more than anticipated. A. no changes in aggregate demand.

You are a member of Congress. The economy is currently experiencing an inflationary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the​ economy?

C. A decrease in government spending and an increase in taxes.

The aggregate demand curve would shift to the right as a result of A. tax increases. B. a drop in the price level. C. a drop in the foreign exchange value of the dollar. D. a decrease in the amount of money in circulation.

C. a drop in the foreign exchange value of the dollar.

Suppose that the economy is shown to the right. This economy is currently experiencing

C. a recessionary gap.

The U.S. government is in the midst of spending more than​ $1 billion on seven buildings containing more than​ 100,000 square feet of space to be used for study of infectious diseases. Prior to the​ government's decision to construct these​ buildings, a few universities had been planning to build essentially the same facilities using privately obtained funds. After construction on the government buildings​ began, however, the universities dropped their plans. Part 2 The​ government's $1 billion expenditure will

C. not push U.S. real GDP above the level it would have reached in the absence of the​ government's construction spree because this expenditure would have been undertaken by universities.

During normal​ times, fiscal policy probably achieves most of its impact through

C. the workings of automatic stabilizers.

Fiscal policy is likely to be more effective

D. All of the above.

The extent to which real GDP responds to changes in the price level along the​ short-run aggregate supply curve is largely determined by

D. All of the above.

What did Keynes mean when he said that prices are​ sticky? If the prices were​ sticky, according to​ Keynes, this would then imply that the

D. ​Prices, especially the price of​ labor, are inflexible downward. D. ​short-run aggregate supply is horizontal.

As real GDP​ rises, tax revenues tend to​ ________ and government transfers tend to​ ________.

D. ​rise; fall

Inflation can be caused by an increase in aggregate demand or by a decrease in aggregate supply. Part 2 Supply ​-side inflation cannot account for persistent inflation in a growing​ economy, but demand​-side inflation can occur even as real GDP increases. Part 3 Because the U.S. economy has grown in recent​ decades, the persistent inflation during those years has been caused by the aggregate demand curve shifting rightward at a faster pace than the​ long-run aggregate supply curve.

Demand, supply, supply, demand, rightward

An increase in the price level shifts the aggregate demand curve ​(AD​) to the left. A. True B. False

False

One-time tax rebates generally result in significant changes in consumer spending.

False

Which of the following is a possible explanation for sticky​ prices?

Labor contracts cause wages to be fixed over the contract period.

Which of the following is not one of the four major assumptions of the classical​ model?

People suffer from money illusion.

The lower the price​ level, the greater the total planned spending on goods and services. A. False B. True

True

The classical economists believed that the leakage of saving would be matched by the injection of business investment. The lower the rate of​ interest, the​ ________ profitable it is to invest and the​ ________ the level of desired investment.

True, more; higher

Suppose that the barrel price of petroleum increased temporarily. The result of this would be best described by

a decrease in the​short-run aggregate supply curve only.

The Ricardian equivalence theorem states that

an increase in the government budget deficit has no effect on aggregate demand.

Cost-push inflation is caused by persistent

decreases in​ short-run aggregate supply.

When there is an economic​ downturn, Congress and the President use fiscal policyLOADING... to stabilize real GDP. But the conduct of the fiscal policy involves several time​ lags, such as the recognition time lag that causes a delay in identification of the economic​ problem, the action time lag that is caused by the delay in Congressional approval of the​ policy, and the effect time lag that arises because policy actions take time to exert their full effects on the economy. These time lags could actually cause discretionary fiscal policy to

destabilize real GDP because by the time a policy has begun to have its​ effects, the economy might already be recovering and the policy action might push real GDP up faster than​ intended, thereby making real GDP less stable.

An important difference between the Classical Model and the Keynesian Model is that The Keynesian Model was supported empirically by data from the decade of the

prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in the Keynesian Model. D. 1930s.

Changes in factors of production that influence economic growth will

shift SRAS and LRAS.

​Say's law asserts that

supply creates its own demand.

The​ long-run aggregate supply curve shifts outward when

there is economic growth.

​Long-run equilibrium in the economy will occur Part 2 A. at the output level consistent with the vertical aggregate demand curve. B. at the price level where total planned real expenditures equals real GDP at full employment. Your answer is correct. C. at the point of secular inflation. D. where the production possibilities curve intersects the demand curve.

B. at the price level where total planned real expenditures equals real GDP at full employment.

Suppose that the​ long-run aggregate supply curve is positioned at a real GDP level of ​$14 trillion in base year​ dollars, and the​ long-run equilibrium price level​ (in index number​ form) is 120. Part 2 The corresponding full employment level of nominal GDP must be ​$16.816.8 trillion dollars ​(Enter your response rounded to one decimal place​).

16.8

Consider the aggregate demand and supply curves in the figure to the right. The economy is initially at an equilibrium at E Subscript 0. Using the line drawing​ tool, draw and label the appropriate curve that shows the effect of the following​ event: Increase in government spending. Carefully follow the instructions​ above, and only draw the required object. Part 2 This will result in an inflationary gap.

Answer to the left

A stonger dollar contributes to inflation. A. False Your answer is correct. B. True Part 2 As the dollar becomes stronger in international foreign exchange​ markets, the​ short-run aggregate supply curve will shift to the​ ________ and the aggregate demand curve will shift to the​ ________. A. ​left; right B. ​left; left C. ​right; left Your answer is correct. D. ​right; right

A,C

The model of​ long-run equilibrium

A. is the same as the Classical Model.

The U.S. aggregate demand curve would shift to the left if A. the economic conditions in Europe improved. B. there was a tax decrease. C. the Federal Reserve Board caused the real interest rate to increase. D. the foreign exchange rate of the dollar decreased.

C. the Federal Reserve Board caused the real interest rate to increase.

In the long​ run, persistent deflation in a growing economy can occur if Part 2 A. AD increases regardless of what the LRAS does. B. there is a temporary decrease in input prices. C. increases in AD are proportionately larger than the increase in LRAS. D. increases in the LRAS are proportionately larger than the increases in AD.

D. increases in the LRAS are proportionately larger than the increases in AD.

According to the classical​ economists,

D. the interest rate will ensure that the amount households plan to save will equal the amount businesses desire to invest.

Graph answer

Graph Answer

Suppose there is an improvement in technology. The​ long-run aggregate supply curve will shift to the right​, the equilibrium price level will decrease​, and equilibrium GDP will increase.

Right, decrease, increase

A​ short-lived change in production input prices will

shift SRAS but not LRAS.

Classical economists thought that

​price, wage, and interest rate flexibility can quickly cure any tendencies for a recession.

All of the following would cause the aggregate demand curve to shift except A. price level changes. Your answer is correct. B. an increase in taxes. C. an improvement in in economic conditions in other countries. D. increased security about jobs and future income.

A. price level changes. Your answer is correct.

​Initially, an economy is in​ long-run equilibrium with a real GDP of​ $4 trillion. Suppose that the productive capacity of the economy increases by​ 50% but that there are no other changes. ​1.) Using the line drawing tool​, show the effect on the economy. Properly label your new line. ​2.) Using the point drawing tool​, show the new equilibrium price level and output. Label the point E Subscript 2. Part 2 Carefully follow the instructions​ above, and only draw the required objects. Part 3 The situation shown above is called A. secular deflation. Your answer is correct. B. ​demand-side inflation. C. ​supply-side inflation. D. ​supply-side deflation.

A. secular deflation.

The primary difference between the aggregate demand curve and an individual demand curve is that A. the aggregate demand curve represents total planned expenditures on all goods and services while an individual demand curve represents a single good or service. B. a change in real balances will shift an individual demand curve but not the aggregate demand curve. C. the aggregate demand curve is vertical in the long​ run, while an individual demand curve is downward sloping. D. a change in the price level will shift the aggregate demand curve but not an individual demand curve.

A. the aggregate demand curve represents total planned expenditures on all goods and services while an individual demand curve represents a single good or service.

In May and June of​ 2008, the federal government issued​ one-time tax rebates—checks returning a small portion of taxes previously paid—to millions of U.S.​ residents, and U.S. real disposable income temporarily jumped by nearly​ $500 billion. ​However, household real consumption spending did not increase in response to the​ short-lived increase in real disposable income because Which of the following economic theories can be used to account for this apparent​ non-relationship between real consumption and real disposable income in the late spring of​ 2008?

A. the​ one-time tax rebate failed to increase the​ recipients' permanent income which determines an​ individual's current consumption. C. the permanent income hypothesis

It is late​ 2023, and the U.S. economy is showing signs of slipping into a potentially deep recession. Government policymakers are searching for​ income-tax-policy changes that will bring about a significant and lasting boost to real consumption spending. According to the logic of the permanent income​ hypothesis, the proposed​ income-tax-policy changes should involve

A. ​long-lasting tax reductions.

The aggregate demand curve slopes downward because of the A. ​real-balance, interest rate and open economy effects. B. ​real-balance and transfer effects only. C. ​real-balance and interest rate effects only. D. ​real-balance effect only.

A. ​real-balance, interest rate and open economy effects.

Graph answer Which of the following factors will shift the​ short-run aggregate supply curve but not the​ long-run AS? If petroleum prices decrease temporarily the short-run aggregate supply curve would shift to the right.

An economy wide increase in wages. Answer to the left

An important difference between the Classical Model and the Keynesian Model is that the Part 2 a. Keynesians believe that the aggregate supply curve is horizontal in the short run. Part 3 b. The Classical model assumes prices are flexible so that the aggregate supply curve is vertical and the economy is always at full employment. Part 4 c. The Keynesian model indicates that the economy will find an equilibrium however the economy will not always reach full employment.

Answer to the left

Any change in factors influencing long​-run ​output, such as labor​, ​capital, or technology​, will shift both the SRAS curve and the LRAS curve. Part 2 A temporary change in input prices will shift only the SRAS curve.

Answer to the left

Label each of the following scenarios in which there are problems enacting and applying fiscal policy as being an example of either a recognition time​ lag, action time​ lag, or effect time lag. Part 2 Distracted by a war that is going​ badly, inflation reaches 8 percent before politicians take notice. This is a recognition time lag. Part 3 A sudden recession is recognized by​ politicians, but it takes many months of political deal making before a stimulus bill is finally approved. This is an action lag. Part 4 To fight a​ recession, the president orders federal agencies to get rid of petty regulations that burden private businesses but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations. This is an action lag. Part 5 John Kennedy became president in​ 1960, in the middle of a mild slow down of the economy. He immediately proposed a tax cut according to Keynesian fiscal policy.​ However, the tax cut was not enacted until 1964. This is an action lag.

Answer to the left

Suppose that the economy is depicted in the graph to the right. Part 2 Using the line drawing tool​, show​ demand-pull inflation by correctly shifting aggregate demand. Label the new line ​'AD Subscript 1​'. Part 3 Carefully follow the instructions​ above, and only draw the required objects.

Answer to the left

Suppose that the economy is depicted in the graph to the right. Part 2 a. The current equilibrium price level and output level respectively​ are: 100100 and ​$1212 trillion. ​(Enter your response as a whole​ number.) Part 3 b. Using the line drawing tool​, show a change in aggregate demand that leads to an inflationary gap. Use the line drawing tool and label this new line ​'AD Subscript 1​'. Part 4 Carefully follow the instructions​ above, and only draw the required objects.

Answer to the left

The graph shows aggregate​ demand, long-run aggregate​ supply, and the​ short-run aggregate supply​ curve, using modern Keynesian analysis. Suppose that there is a decrease in the money supply. ​1.) Using either the line drawing tool or the​ 3-point curved line drawing tool​, show the​ short-run effect on the economy. Properly label the curve. ​2.) Using the point drawing tool​, identify the new ​ short-run equilibrium price and output. Label the point ​'E Subscript 1​'. Part 2 Carefully follow the instructions​ above, and only draw the required objects.

Answer to the left

The macroeconomy is depicted by the graph to the right Part 2 a. The current equilibrium price level and output level respectively​ are: 9090 and ​$88 trillion. ​(Enter your responses as a whole​ numbers.) Part 3 b. The full employment level of GDP is A. unknown since no information was provided about the labor market. B. ​$8 trillion since the LRAS is defined at this point. Your answer is correct. C. ​$8 trillion now but it depends on the SRAS curve. D. ​$8 trillion now but thereafter it depends on what the aggregate demand curve does.

Answer to the left

The macroeconomy is depicted by the graph to the right. Part 2 a. Suppose that AD has changed due to higher taxes. Using the line drawing tool​, draw this new line and label it ​'D Subscript 1​'. Part 3 Carefully follow the instructions​ above, and only draw the required objects. Part 4 b. The new​ short-run equilibrium price level has decreased and real GDP has decreased. Part 5 c.​ Thus, in the short run it is possible to produce below the full employment level of real GDP. Part 6 d. The cost of producing below the full employment level of real GDP is higher unemployment.

Answer to the left

With stable aggregate​ supply, an abrupt outward shift in AD may lead to what is called demand-pull inflation. Part 2 With stable aggregate​ demand, an abrupt shift inward in SRAS may lead to what is called cost-push inflation. Part 3 A stronger dollar will reduce the cost of imported​ inputs, thereby causing SRAS to shift outward to the right. At the same​ time, a stronger dollar will lead to lower net​ exports, causing the aggregate demand curve to shift inward. The equilibrium price level definitely​ falls, but the net effect on equilibrium real GDP depends on which shift is larger.

Answer to the left

a. A government agency arranges to make loans to businesses whenever an economic downturn begins. This is an example of an automatic fiscal stabilizer. Part 2 b. As the economy heats​ up, the resulting increase in equilibrium real GDP immediately results in higher income tax​ payments, which dampen consumption spending somewhat. This is an example of an automatic fiscal stabilizer. Part 3 c. As the economy starts to recover from a recession and more people go back to​ work, government funded unemployment compensation payments begin to decline. This is an example of an automatic fiscal stabilizer. Part 4 d. To stem an overheated​ economy, the​ President, using special powers granted by​ Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on government programs. This is an example of a discretionary fiscal policy.

Answer to the left

a. A recession​ occurs, and​ government-funded unemployment compensation is paid to​ laid-off workers. This is an example of an automatic fiscal stabilizer. Part 2 b. Congress votes to fund a new jobs program designed to put unemployed workers to work. This is an example of a discretionary fiscal policy. Part 3 c. The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation. This is an example of a monetary policy. Part 4 d. Under powers authorized by an act of​ Congress, the president decides to authorize an emergency release of funds for spending programs intended head off economic crises. This is an example of a discretionary fiscal policy.

Answer to the left

.) Using the line drawing tool​, draw a new aggregate demand curve. Properly label your line. ​2.) Using the​ 3-point curved line drawing tool​, draw a new SRAS curve. Properly label your curve. Part 2 Carefully follow the instructions​ above, and only draw the required objects. Part 3 Due to the weakening of the​ dollar, the price level​ ________, and real GDP​ _________. A. will​ decrease, will decrease B. will​ increase, will increase C. will​ increase, may increase or decrease depending on the size of the shifts Your answer is correct. D. will​ increase, will decrease E. will​ decrease, may increase or decrease depending on the size of the shifts

Answer to the left C. will​ increase, may increase or decrease depending on the size of the shifts

When there is​ ________ gap, the government would increase taxes in an attempt to shift the aggregate demand curve to the​ ________.

B. an​ inflationary; left

Expansionary fiscal policy that creates a budget deficit can lead to crowding out. This crowding out effect is exhibited by Increased government spending crowds out investment due to

B. increased government expenditures and decreased investment. A. higher interest rates.

According to the Laffer​ curve, as the tax rate continues to​ increase, total tax revenues

B. initially rise but eventually fall.

Which of the following government expenditures is least likely to result in a direct expenditure​ offset?

B. purchasing military aircraft

​Initially, an economy is in​ long-run equilibrium with a real GDP of​ $4 trillion. Suppose that increases in marginal tax rates on wages reduce the supply of labor. ​1.) Using the line drawing tool​, show the effect on the economy. Properly label your new line. ​2.) Using the point drawing tool​, show the new equilibrium price level and output. Label the point E Subscript 2. Part 2 Carefully follow the instructions​ above, and only draw the required objects. Part 3 The situation shown above can be described as A. ​supply-side deflation. B. ​supply-side inflation. Your answer is correct. C. ​demand-side inflation. D. secular deflation.

B. ​supply-side inflation.

The Congressional​ meetings, discussions,​ arguments, debates over fiscal policy and the subsequent signing or vetoing by the President of a bill are part of the Which of the following statements is true when considering time​ lags?

C. action time lag. D. Time lags in fiscal policy can be extremely long and may take several years before any impact is felt.

During normal economic​ times, when there is not​ "excessive" unemployment or​ inflation, discretionary fiscal policy

C. is probably not very effective due to lags and the uncertainty created by repeated tax policy changes.

The​ long-run aggregate supply curve A. shows the various amounts of real output businesses are willing to consume at each price level. B. is downward sloping because a higher price level causes businesses and consumers to reduce spending. C. is vertical because changes in the price level have no effect on real output. Your answer is correct. D. is vertical because a change in real GDP has no effect on the price level.

C. is vertical because changes in the price level have no effect on real output.

Which of the following events would cause a movement up along the AD curve​, other things being​ equal? A.Real GDP levels of all the nation's major trading partners have declined. Real GDP levels of all the nation's major trading partners have declined. B.Deflation has occurred during the past year. Deflation has occurred during the past year. C.The price level has increased this year. The price level has increased this year. Your answer is correct. D.There has been a decline in the foreign exchange value of the nation's currency. There has been a decline in the foreign exchange value of the nation's currency.

C.The price level has increased this year.

Consider a country whose economic structure matches the assumptions of the classical model. After reading a recent​ best-seller documenting a growing population of low−income elderly people who were ill−prepared for​ retirement, most residents of this country decide to increase their saving at any given interest rate. From the list given below choose the letter that gives the resulting outcome for each of the following​ variables: I − Increase D − Decrease N − No Effect ​(Enter a letter​ I, D, or​ N) Part 2 The current equilibrium interest rate. Upper DD Part 3 Current equilibrium real GDP. Upper NN Part 4 Current equilibrium employment. Upper NN Part 5 Current equilibrium investment. Upper II Part 6 Future equilibrium real GDP. Upper II

D,N,N,I,I

According to the interest rate​ effect, an increase in the price level A. reduces borrowing and spending. B. reduces the aggregate quantity of goods and services demanded. C. increases nominal interest rates. D. All of the above.

D. All of the above.

Which of the following statements is​ true? A. Annual U.S. inflation rates have risen steadily since the 1960s. B. The inflation rate has risen significantly in recent years after creeping downward during the early and middle 2000s. C. Annual U.S. inflation rates have fallen steadily since the 1960s. D. Annual U.S. inflation rates rose considerably during the 1970s but declined to lower levels after the 1980s.

D. Annual U.S. inflation rates rose considerably during the 1970s but declined to lower levels after the 1980s.

Which of the following will generate an increase in aggregate​ demand? A. An increase in the foreign exchange value of the dollar. B. A tax increase. C. A decrease in the price level. D. Government spending for the onset of a war.

D. Government spending for the onset of a war.

Which of the following helps to explain why the aggregate demand curve slopes​ downward? A. When government spending​ rises, the price level falls. B. When the domestic price level​ rises, our goods and services become less expensive to foreigners. C. There is an inverse relationship between consumer expectations and personal taxes. D. When the price level​ rises, the real value of financial assets​ (like bonds, and savings account​ balances) declines.

D. When the price level​ rises, the real value of financial assets​ (like bonds, and savings account​ balances) declines.

Year to year rightward shifts in​ long-run aggregate supply leads to A. inflation. B. shifts in aggregate demand. C. decreases in the production possibilities curve. D. a​ long-run trend path for real GDP.

D. a​ long-run trend path for real GDP.

In early​ 2008, it appeared that the U.S. economy was either in a recession or growing very slowly. President Bush announced a program of tax rebates. This program can be described as​ ___________ and was intended to​ ______________.

D. discretionary fiscal​ policy; increase consumer spending

The government just passed a new tax bill that will be applied to the economy next year. Most people will not immediately feel the impact of this new tax bill and not adjust their​ W-2 tax forms. The impact of the new tax bill​ won't become apparent to them until the following April when their tax bills are due. This problem is referred to as the

D. effect time​ lag, and it makes it difficult to use discretionary fiscal policy to close a recessionary gap. Your answer is correct.

Question content area Part 1 The position of the​ long-run aggregate supply curve is determined by Part 2 A. the interest rate effect. B. the​ long-run aggregate demand curve. C. the open economy effect. D. the production possibilities curve.

D. the production possibilities curve.

Consider the figure to the right. If the Federal Reserve decreases the quantity of money in circulation sufficiently to generate a leftward shift in the aggregate demand curve by​ $0.5 trillion, will actual equilibrium real GDP rise by this amount in the classical​ model? Explain. Part 2 ​1.) Using the line drawing​ tool, draw a new AD curve that shows the effects of decreasing the quantity of money in circulation by​ $0.5 trillion. Label your line ​'AD2​.' ​2.) Using the point drawing tool​, indicate the​ economy's new​ long-run equilibrium price and level of real GDP. Label this point ​'E2​.' Carefully follow the instructions​ above, and only draw the required objects. Part 3 In the classical​ model, actual equilibrium real GDP will not fall by this amount because prices fall and the economy moves quickly from E1 to E2. Part 4 In other​ words, with A. ​Say's law and inflexible interest​ rates, prices and wages would always lead to greater than full employment at a level of real GDP of over​ $18 trillion. B. ​Say's law and flexible interest​ rates, prices and wages would always lead to full employment at a level of real GDP of​ $18 trillion. Your answer is correct. C. ​Say's law and inflexible interest​ rates, prices and wages would always lead to less than full employment at a level of real GDP of under​ $18 trillion. D. inflexible interest​ rates, prices and wages would always lead to full employment at a level of real GDP of​ $18 trillion. ... Question content area right Part 1 Real GDP per Year ($ trillions)Price LevelAD1LRAS1P1E118.51817.5E2AD2 interactive graph

Decreasing, AD 2, E 2, will not, fall, quickly, B. ​Say's law and flexible interest​ rates, prices and wages would always lead to full employment at a level of real GDP of​ $18 trillion.

In Ciudad​ Barrios, El​ Salvador, the latest payments from relatives working in the United States have finally arrived. When the credit unions open for​ business, up to 150 people are already waiting in line. After receiving the funds their relatives have transmitted to these​ institutions, customers go off to outdoor markets to stock up on food or clothing or to appliance stores to purchase new stereos or televisions. Similar scenes occur throughout the developing​ world, as each year migrants working in​ higher-income, developed nations send around​ $200 billion of their earnings back to their relatives in less developed nations. Evidence indicates that the​ relatives, such as those in Ciudad​ Barrios, typically spend nearly all of the funds on current consumption. Part 2 a. Based on the above​ information, developing​ countries' income inflows transmitted by migrant workers are primarily affecting their​ economies' long-run aggregate demand curves. The equilibrium price levels in nations that are recipients of large inflows of funds from migrants will likely

Demand, A. rise because there is an increase in the aggregate demand in these countries.

Graph Answer

Graph Answer

​Say's law states that supply creates its own demand and therefore desired expenditures will equal actual expenditures. Part 2 The classical model assumes that​ (1) pure competition ​exists, (2) wages and prices are completely​ flexible, (3) individuals are motivated by self-interest​, and​ (4) they cannot be fooled by money illusion. Part 3 When saving is introduced into the​ model, equilibrium occurs in the credit market through changes in the interest rate such that desired saving equals desired investment at the equilibrium rate of interest. Part 4 In the labor​ market, full employment occurs at a wage rate at which quantity demanded equals quantity supplied. That particular level of employment is associated with the​ full-employment level of real GDP per year. Part 5 In the classical​ model, because LRAS is vertical​, the equilibrium level of real GDP is supply determined. Any changes in aggregate demand simply change the price level.

Supply, demand, pure competition, wages, prices, self-interest, money illusion, saving, investment, a wage rate, vertical, price level

Unemployment compensation payments help stabilize aggregate demand during business fluctuations by reducing changes in​ people's disposable income.

True

Between early 2018 and late​ 2019, total planned expenditures by U.S. households substantially increased in response to changes in federal tax laws that resulted in a net tax reduction. From a​ short-run Keynesian​ perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were Part 2 The resulting spending gap between early 2018 and late 2019 when total planned expenditures by U.S. households substantially increased in response to changes in federal tax laws that resulted in a net tax reduction can best be described as

an increase in the price level along with an increase in equilibrium real GDP. an inflationary gap.

The economy is depicted in the graph to the right. Part 2 a.​ Suppose, there is an increase in the supply of labor. Which of the following best describes the result of this​ event? Part 3 A. The​ short-run aggregate supply curve shifts out while the​ long-run aggregate supply curve shifts in. B. Both the short and​ long-run aggregate supply curves shift inward. C. Both the​ short-run and​ long-run aggregate supply curves shift outward. Your answer is correct. D. The​ short-run aggregate supply curve shifts inward while the​ long-run aggregate supply curve shifts outward. Part 4 b. Complete the diagram. ​1.) Using the line drawing tool​, draw the new​ long-run aggregate supply curve representing this shock. Label it as LRAS Subscript 1. ​2.) Using the​ 3-point curved line drawing tool​, draw the new SRAS representing this shock. Label it ​'SRAS Subscript 1​'. Part 5 Carefully follow the instructions​ above, and only draw the required objects. ... Question content area right Part 1 048121620Real GDP ($ trillions)Price levelLRAS SRASSRAS1LRAS1 interactive graph Get more help

answer to the left

Inflation can be caused by Part 2 A. decreases in the​ long-run aggregate supply curve or increases in the aggregate demand curve. Your answer is correct. B. decreases in the​ long-run aggregate supply curve or decreases in the aggregate demand curve. C. increases in the​ long-run aggregate supply curve or increases in the aggregate demand curve. D. increases in the​ long-run aggregate supply curve or decreases in the aggregate demand curve.

decreases in the​ long-run aggregate supply curve or increases in the aggregate demand curve.

The Keynesian Model of the macroeconomy argues that prices are sticky due to labor contracts and unions. Part 2 a. The existence of sticky prices causes the short-run aggregate supply to be horizontal. Part 3 b. Suppose that the aggregate demand changes due to an decrease in the amount of money in circulation. Using the line drawing tool​, draw the new aggregate demand curve. Label it AD Subscript 1.

short-run aggregate supply, decrease

According to classical​ economists, aggregate demand primarily determines

the price level.

The​ long-run aggregate supply curve will not shift if there is a change in All of the following will shift the​ short-run aggregate supply and the​ long-run aggregate supply except for

the price level. a temporary change in input prices.

Aggregate demand is the total of all planned expenditures in the​ economy, and aggregate supply is the total of all planned production in the economy. The aggregate demand curve shows the various quantities of total planned spending on final goods and services at various price​ levels; it is downward sloping. Part 2 There are three reasons why the aggregate demand curve is downward sloping. They are the real-balance ​effect, the interest rate ​effect, and the open-economy effect. Part 3 The real-balance effect occurs because price level changes alter the real value of cash​ balances, thereby causing people to desire to spend more or​ less, depending on whether the price level decreases or increases. Part 4 The interest rate effect is caused by interest rate changes that mimic price level changes. At higher interest​ rates, people seek to buy fewer houses and​ cars, and at lower interest​ rates, they seek to buy more. Part 5 The open economy effect occurs because of a shift away from expenditures on domestic goods and a shift toward expenditures on foreign goods when the domestic price level increases.

expenditures, production, spending, real-balance, interest rate, open-economy, real-balance, interest rate, fewer, more, domestic, foreign

The ​long-run aggregate supply​ curve, ​LRAS, is a vertical line determined by amounts of available resources such as labor and capital and by technology and resource productivity. The position of the LRAS gives the​ full-information and​ full-adjustment level of real GDP per year. Part 2 The natural rate of unemployment occurs at the​ long-run level of real GDP per year given by the position of the LRAS. Part 3 If labor or capital increases from year to year or if the productivity of either of these resources rises from one year to the​ next, the LRAS shifts rightward. In a growing​ economy, therefore, real GDP per year gradually increases over time.

A vertical, natural, rightward, increases

From the list​ below, match the letter of the outcome each of the following events produces upon the LRAS curve. A Shifts to right B Shifts to left C Movement up along D Movement down along ​(Enter a letter​ A, B,​ C, or​ D.) Part 3 Last​ year, businesses invested in new capital​ equipment, so this year the​ nation's capital stock is higher than it was last year. A Part 4 There has been an 8 percent increase in the quantity of money in circulation that has shifted the AD curve. C Part 5 A hurricane of unprecedented strength has damaged oil​ rigs, factories, and ports all along the​ nation's coast. B Part 6 Inflation has occurred during the past year as a result of rightward shifts of the AD curve. C

A,C,B,C

An economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. Suppose that there is increased security about jobs and future income​, which of the following is the best explanation of the​ outcome? Given that the economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD there is increased security about jobs and future income the economy would then experience

Aggregate demand increases. an inflationary gap.

If we assume that the economy is operating on a horizontal​ short-run aggregate supply​ curve, the equilibrium level of real GDP per year is completely demand determined. Part 2 The horizontal​ short-run aggregate supply curve has been called the Keynesian​ short-run aggregate supply curve because Keynes believed that many​ prices, especially​ wages, would not be reduced even when aggregate demand decreased. Part 3 In modern Keynesian​ theory, the ​short-run aggregate supply​ curve, SRAS​, shows the relationship between the price level and real GDP without full adjustment or full information. It is upward sloping because it allows for partial price adjustment in the short run. Part 4 Real GDP can be expanded in the short run because firms can use existing workers and capital equipment more intensively. ​Also, in the short​ run, when input prices are​ fixed, a higher price level means higher ​profits, which induce firms to hire more workers.

Answer to the left

Suppose that the position of a​ nation's long-run aggregate supply​ (LRAS) curve has not​ changed, but its​ long-run equilibrium price level has increased. FACTOR a. A rise in the value of the domestic currency relative to other world currencies b. An increase in the quantity of money in circulation c. An increase in the labor force participation rate d. A decrease in taxes e. A rise in real incomes of countries that are key trading partners of this nation f. Increased​ long-run economic growth Part 2 Of the factors given​ above, which could account for the price level increase with constant​ LRAS? Part 3 A. Factors​ a, c, and f. B. Factors​ b, d, and e. Your answer is correct. C. Factors c and f. D. Factors​ b, c,​ d, and f.

B. Factors​ b, d, and e.

We draw the​ long-run aggregate supply curve as a vertical line to reflect the fact that A. the productive capacity of the economy never changes. B. changes in the price level do not alter the level of potential real output. C. an accurate depiction of the production possibilities curve would also show it as a vertical line. D. technology and resource endowments do not affect potential real output.

B. changes in the price level do not alter the level of potential real output.

​Supply-side inflation can be caused by a continual Part 2 A. increase in aggregate demand while aggregate supply remains unchanged. B. decrease in aggregate supply while aggregate demand remains unchanged. Your answer is correct. C. decrease in aggregate supply while aggregate demand has significant decreases. D. increase in aggregate supply while aggregate demand remains unchanged.

B. decrease in aggregate supply while aggregate demand remains unchanged.

According to the​ real-balance effect, an increase in the price level A. does not affect the real value of cash balances in the​ short-run. B. reduces an​ individual's expenditures due to a decrease in the real value of cash balances. C. does not affect the real value of cash balances in the​ long-run. D. increases an​ individual's expenditures due to an increase in the real value of cash balances.

B. reduces an​ individual's expenditures due to a decrease in the real value of cash balances.

If economic growth causes the​ long-run aggregate supply curve to shift rightward over​ time, but the aggregate demand curve does not​ change, we expect Part 2 A. the​ long-run equilibrium price to​ rise, and there will be secular deflation. B. the​ long-run equilibrium price to​ decline, and there will be secular deflation. Your answer is correct. C. the​ long-run equilibrium price to​ decline, and there will be secular stability. D. the​ long-run equilibrium price to​ rise, and there will be secular inflation.

B. the​ long-run equilibrium price to​ decline, and there will be secular deflation.

The​ long-run equilibrium of an economy occurs Part 2 A. where the upward sloping supply curve meets the aggregate demand curve. B. where the​ long-run aggregate supply curve meets the aggregate demand curve. Your answer is correct. C. where the​ long-run horizontal supply curve meets the aggregate demand curve. D. where the​ long-run supply curve is to the right of the aggregate demand curve.

B. where the​ long-run aggregate supply curve meets the aggregate demand curve.

The Keynesian model argues that prices are sticky. One reason supporting this argument is that Part 2 A. nominal wages are flexible but real wages are not. B. government price ceilings. C. nominal wages are inflexible downwards. Your answer is correct. D. all unemployment is voluntary. Part 3 b. Since the nominal wage is deemed​ inflexible, a decrease in aggregate demand causes firms to Part 4 A. increase wages to increase income so AD increases. B. lower the real wage. C. reduce their workforce. Your answer is correct. D. simply have all workers produce at a slower rate without any unemployment. Part 5 c.​ Thus, according to the Keynesian model full employment is possible but not guaranteed.

C,C, possible but not guaranteed

Which of the following will shift the aggregate demand curve to the right​? A.The value of the U.S. dollar rises. The value of the U.S. dollar rises. B.There is an economic recession overseas that lowers the incomes of foreign households. There is an economic recession overseas that lowers the incomes of foreign households. C. Interest rates fall. Your answer is correct. D.Government spending falls as legislators try to balance the budget. Government spending falls as legislators try to balance the budget.

C.Interest rates fall.

What effects would each of the following have on aggregate​ demand, other things​ equal? An increase in exports that exceeds an increase in imports (not due to tariffs) This would increase aggregate demand. Part 2 A decrease in exports and an increase in imports (not due to tariffs) This would decrease aggregate demand.

Increase, Decrease

In the modern Keynesian Model the​ short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor​ input? Which of the following is the best example of uncounted​ production?

The workers are switched from uncounted production to counted​ production, thus enabling the firm to expand output as the price level expands. An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine parts.

Which of the following will increase both the​ short-run and​ long-run aggregate supply​ curves? Which of the following is true concerning shifts of the​ long-run aggregate supply​ curve?

Younger workers in the labor force receive better and more training than their predecessors. An increase in the​ long-run aggregate supply curve is depicted as a rightward shift and an increase in real GDP.

The total of all planned real expenditures in the economy is A. aggregate spending. B. aggregate consumption. C. aggregate demand. D. aggregate GDP.

aggregate demand.

Inflation in an economy implies that A. the average price level has increased over a stated period of time. Your answer is correct. B. stores have increased their prices for no other reason than to earn more profit. C. the price of every good has increased. D. that real GDP is overstated due to the higher price level. ​Cost-push inflation arises due to A. an increase in the​ short-run aggregate supply curve. B. a higher price level. C. an increase in the aggregate demand. D. a decrease in the​ short-run aggregate supply curve. Your answer is correct. Which of the following would create​ cost-push inflation? Part 6 A. An increase in wages paid to workers. Your answer is correct. B. An increase in household income. C. Improved technology reducing transportation and shipping times. D. Increased training costs that produce a more than proportionate increase in worker productivity.

A,D,A

Fiscal policy refers to When an economist is using the term​ "discretionary" as in discretionary​ spending, they are referring to the

A. discretionary changes in government spending and taxes. A. amount of government spending decided upon by Congress or the​ government's ruling body.

Short ​-run equilibrium occurs at the intersection of the aggregate demand​ curve, ​AD, and the​ short-run aggregate supply​ curve, SRAS. Long​-run equilibrium occurs at the intersection of AD and the​ long-run aggregate supply​ curve, LRAS. Part 2 Any unanticipated shifts in aggregate demand or supply are called aggregate demand or aggregate supply shocks. Part 3 When aggregate demand decreases while aggregate supply is​ stable, a recessionary gap can​ occur, defined as the difference between how much the economy could be producing if it were operating on its LRAS and the equilibrium level of real GDP. An increase in aggregate demand leads to an inflationary gap.

Answer to the left

In the accompanying graph the equilibrium price level is​ ____ and the equilibrium real GDP is​ _____. Part 2 A. ​140; $10 trillion B. ​120; $8 trillion Your answer is correct. C. ​100; $6 trillion D. Insufficient info is given. Part 3 In the accompanying graph if the price level is 140 Part 4 A. real GDP equals total planned expenditures. B. real GDP exceeds total planned expenditures. Your answer is correct. C. total planned expenditures exceed real GDP. D. the price level will rise. ...

B. ​120; $8 trillion B. real GDP exceeds total planned expenditures.

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP and increase in the equilibrium price level. Part 2 Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of a decrease in equilibrium real GDP with no change in the equilibrium price level. Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP with no change in the equilibrium price level.

B. ​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by a larger amount. C. ​Long-run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the left by an equal amount. B. ​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by an equal amount.

Consider this​ statement: "Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the​ long-run aggregate supply​ curve." This statement is describing Part 2 A. ​supply-side inflation. B. ​demand-side inflation. Your answer is correct. C. Both​ demand-side and​ supply-side inflation. D. None of the above.

B. ​demand-side inflation.

In modern Keynesian​ analysis, a decrease in aggregate demand will result in

B. a decrease in both the price level and output.

Suppose that the economy is shown to the right. This economy is currently experiencing

C. an inflationary gap.

When there is​ ________ gap, the government would increase spending in an attempt to shift the aggregate demand curve to the​ ________.

C. a​ recessionary; right

a. Using the 3​-point curved line drawing tool​, show the impact the elevated oil prices have on the macroeconomy. Properly label this line. Part 2 Carefully follow the instructions​ above, and only draw the required objects. Part 3 b. If the central bank wishes to prevent the equilibrium price level from changing in response to the oil price​ increase, it should Part 4 A. decrease the quantity of money in circulation in order to shift the​ short-run aggregate supply curve rightward. B. decrease the quantity of money in circulation so that oil prices will fall. C. decrease the quantity of money in circulation in order to shift aggregate demand leftward. Your answer is correct. D. increase the quantity of money in circulation in order to shift aggregate demand rightward.

C. decrease the quantity of money in circulation in order to shift aggregate demand leftward.

a. One of the main conclusions of​ Say's Law was that b. Which of the following best exemplifies​ Say's Law? c.​ Say's Law fits best in the Classical Theory since this philosophy placed great importance on aggregate supply to determine the level of output .

C. if people supply goods in order to then demand​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs. B. The production of a​ $4000 plasma TV set creates demand for other goods and services valued at​ $4000. C. Classical Theory, aggregate supply, level of output

According to the classical​ model, if an excess quantity of labor is supplied at a particular wage​ level, full employment will be maintained because

C. wages will fall rapidly to permit businesses to continue hiring everyone who wants to work.

From the list​ below, match the letter of the outcome each of the following events produces upon the AD curveLOADING.... A Shifts to right B Shifts to left C Movement up along D Movement down along Type in a single letter​ (A, B, C or​ D). Part 3 Deflation has occurred during the past year. D Part 4 Real GDP levels of all the​ nation's major trading partners have declined. B Part 5 There has been a decline in the foreign exchange value of the​ nation's currency. A Part 6 The price level has increased this year. C

D,B,A,C

The​ long-run aggregate supply curve can shift to the right due to Part 2 A. improvements in technology. B. economic growth resulting from an increase in resources. C. improvements in labor productivity. D. All of the above.

D. All of the above.

A change in the price level has no effect on the real value of cash balances. A. True B. False Your answer is correct. Part 2 The idea that higher price levels in the United States result in foreign residents desiring to buy fewer​ U.S.-made goods and U.S. residents desiring to buy more​ foreign-made goods is referred to as the A. open economy effect. Your answer is correct. B. ​real-balance effect. C. interest rate effect. D. wealth effect.

False, A

According to​ Keynes, when there is excess capacity in an​ economy, the equilibrium level of real GDP per year is determined by

aggregate demand.