Chapter 22
When financial frictions increase, the real cost of borrowing __________, and the AD curve __________.
increases, shifts left
The self-correcting mechanism describes how the economy eventually returns to the _______ regardless of where output is initially.
natural rate level of output
The ______ is where the economy gravitates to in the long run.
natural rate of unemployment
Compared to positive supply shocks, negative supply shocks have the _________ effect on aggregate supply.
opposite #60 Screenshot CH22
Demand shocks are exogenous events that cause _______ the aggregate demand curve.
shifts in
Supply shocks are exogenous events that cause ______ the aggregate supply curve.
shifts in #60 Screenshot CH22
If autonomous consumption declines, then the AD curve
shifts to the left.
If autonomous consumption increases, then the AD curve
shifts to the right
When the unemployment rate is above the natural rate of unemployment, there is ______ in the labor market and output is _______ potential. This causes the short-run aggregate supply curve to ______ . Hence inflation __________ and output ___________ over time, until the economy reaches a __________ equilibrium.
slack; below; shift downward; decreases; increases; long-run
Whether positive or negative, supply shocks that ultimately leave output and inflation unchanged are
temporary #60 Screenshot CH22
In the short run, a leftward shift in the aggregate demand curve will cause
the inflation rate to fall and output to fall.
In the short run, a rightward shift in the aggregate demand curve will cause
the inflation rate to rise and output to rise.
If a pill were invented that made workers twice as productive but their wages did not change, what would happen to the position of the short-run aggregate supply curve?
Short-run aggregate supply will shift rightward.
Observe a positive demand shock in the graph to the right. In the short run, __________ In the long run, _______________ In the figure, the long-run equilibrium is given by_______
"both inflation and output rise." "inflation rises, but output does not change." point 3 #50 Screenshot CH20
An economy's aggregate demand is shown graphically as a downward-sloping curve. The position of this curve relative to the vertical axis is impacted by six basic factors. The top portion of the following table lists these six factors along with several that do not affect the position of the aggregate demand curve. A response box is attached to each factor. The table's bottom portion contains a labeling key. Label any factor that does not impact AD with an X. For a factor that shifts aggregate demand to the right, use the label R; similarly, for a factor that shifts aggregate demand to the left, use the label L. Keep in mind that each factor is to be assessed on the assumption that all else is constant. (Note: Each letter is used three times.)
# 1 Screenshot CH22
The top portion of the following table lists a variety of factors that shift some component of the aggregate demand and supply model. A response box is attached to each factor. The table's bottom portion contains a labeling key. Label any factor that shifts the short-run aggregate supply curve with an S. Use an X to label any factor that does not shift the short-run aggregate supply curve. (Note: Each label is used multiple times.)
#21 Screenshot CH22
During the first half of 2010, Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the future, what would be the effect on the short-run aggregate supply curve. Using the line drawing tool, show the effect of higher expected inflation on the short-run aggregate supply curve. Properly label your curve.
#23 Screenshot CH22
Using the line drawing tool, show how the economy will self-correct. Label your new line.
#31 Screenshot CH22
The top portion of the following table lists several demand shocks along with several exogenous events that do not affect the position of the aggregate demand curve. A response box is attached to each event. The table's bottom portion contains a labeling key. For a positive demand shock, use the label P; similarly, for a negative demand shock, use the label N. Label any exogenous event that does not impact AD with an X. (Note: Each letter is used three times.)
#44 Screenshot CH22
Let the economy initially be in long-run equilibrium at point 1 in the figure to the right. Now suppose that in an effort to reduce the current federal government budget deficit, the White House decides to sharply decrease government spending. On Graph A 1) Using the line drawing tool, shift a single curve in the accompanying figure to illustrate the short-run effect of the sharp spending cut. Properly label your curve. 2) Using the point drawing tool, identify the short-run equilibrium. Label this point '2'. Carefully follow the instructions above, and only draw the required objects. According to your graph, the short-run effect of the White House policy is: At the short-run equilibrium shown in your graph, the economy has an output gap that is ________ , suggesting that theeconomy's self-correcting mechanism will"kick-in" to propel it toward _________ Compared to the original long-run equilibrium, the economy has, in the new long-run equilibrium at point 3, output that is __________ and inflation that is _________
#46 Screenshot CH22 lower output, lower inflation, and unemployment above the natural rate. negative; full employment unchanged; lower
Which of the following factors would not cause an increase in aggregate demand?
A decrease in the price level.
Which of the following would cause the short-run aggregate supply curve to shift upward and to the left?
A negative price shock.
Classify the following situation as a supply or demand shock: Households and firms become more optimistic about the economy.
A positive demand shock. #59Part2 Screenshot CH22
What factors led to a decrease in both the unemployment rate and the inflation rate in the 1990s? (Check all that apply.)
A. Changes in the health care industry comma which greatly reduced medical care costs relative to other goods and services.Changes in the health care industry, which greatly reduced medical care costs relative to other goods and services. C. The computer revolution comma which caused rapid increases in productivity.
In the long run, a leftward shift in aggregate demand will cause
A. the inflation rate to fall and output to remain unchanged.
Changes in the following variables will cause a shift of the long-run aggregate supply curve:
A. total capital, total labor, and available technology. shocks.
Which of the following shifts the aggregate demand curve?
An increase in the autonomous real interest rate
Supply shocks that are positive are events that induce, at any given inflation rate, _________ in supply, thus shifting the AS curve _________
An increase; rightward #60 Screenshot CH22
What determines the unemployment rate when output is at potential?
B. A mismatch between the skills of unemployed workers and the skills needed for available jobs. C. The length of time between jobs when a worker is transitioning from one job to another.
If the Federal Reserve increases the money supply at the same time that Congress implements an income tax cut, then which of the following is true? The graph to the right depicts aggregate supply and demand in long-run equilibrium. 1) Using the line drawing tool, show the short-run effect of an increase in the money supply combined with a tax cut. Properly label your line. 2) Using the point drawing tool, indicate the short-run equilibrium. Label the point 'E2'. Carefully follow the instructions above, and only draw the required objects. In the long run, the equilibrium price level will _______ and the equilibrium level of aggregate output will __________
Both of these actions will increase aggregate demand. #49 Screenshot CH20 increase; remain unchanged
Which of the following will not cause the aggregate demand curve to shift?
C. tightness in the labor market
Which of the following will cause the aggregate demand curve to shift?
D. Each of these factors can cause the aggregate demand curve to shift.
Suppose that the public believes that a newly announced anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the inflation rate in the short run?
The inflation rate will fall and aggregate output will rise.
When aggregate output is below the natural rate, what will happen to the inflation rate over time if the aggregate demand curve remains unchanged?
The inflation rate will fall because the slackness of the labor market will eventually cause wages to fall.
Why are central banks so concerned about inflation expectations?
When inflation expectations rise, the short-run aggregate supply curve shifts up, leading to higher actual inflation in the short run.
What happens to inflation and output in the short run and the long run when government spending increases? If government spending increases, the ________ curve shifts _______ . In the shortrun, inflation __________ and output ____________ . This leads to tightness in the labormarket, which _____________ inflation expectations and shifts the _____________ curve ___________ . When thisoccurs, the economy moves to a new ________ equilibrium, output ________ , and inflation _______
aggregate demand; rightward; increases; increases; raises; short-run aggregate supply; up; long-run; falls back to potential; increases
Suppose the inflation rate remains relatively constant, and output decreases and the unemployment rate increases. This is possible if:
both the aggregate supply and demand curves shift horizontally to the left by the same amount.
The short-run aggregate supply curve slopes upward because an increase in output relative to potential output:
creates tight labor and product markets that cause inflation to rise.
A negative demand shock will _________ inflation and will __________ aggregate output in the short run.
decrease; decrease
A negative demand shock will ______ inflation and will ________ aggregate output in the long run.
decrease; not change
Internet sites that allow people to post their resumes reduce the cost of a job search. How do you think the Internet has affected the natural rate of unemployment? The Internet has_______ the natural rate of unemployment.
decreased
Both short-run and long-run equilibria require that the quantity of aggregate output demanded and the quantity supplied are ______ Beyond this equality, the attainment of a long-run equilibrium also requires that actual output _____ In the figure to the right, a long-run equilibrium exists at ________ , while ashort-run equilibrium occurs at
equal equal Point 1 (#35 Screenshot CH22) Points 1 and 2
Suppose the economy is starting from a situation of long-run equilibrium. In this case, we know that its equilibrium output (Upper Y starY*) is _________ its potential output (Upper Y Superscript Upper PYP).
equal to #55 Screenshot CH22
Suppose the economy is starting from a situation of long-run equilibrium. In this case, we know that its equilibrium output (Upper Y starY*) __________ its potential output Starting from its long-run equilibrium at point 1 in the figure to the right, suppose the economy experiences a positive demand shock. 1) Using the line drawing tool, shift a single curve to show the initial short-run effect. Properly label your curve. 2) Using the point drawing tool, identify the new short-run equilibrium. Label this point '2'.
equal to #45 Screenshot CH22
Changes in the following variables will cause a shift of the short-run aggregate supply curve: Refer to the figure on your right. 1.) Use the line drawing tool to show how an increase in the available technology will affect the long-run aggregate supply curve. Draw and label the new graph properly.
expected inflation, output gap, and price (supply) shocks. #28 Screenshot CH22
The three components of short-run aggregate supply are
expected inflation, output gap, and price (supply) shock.
Demand shocks that are negative are events that induce planned spending at any given inflation rate to _____________ thus pushing the AD curve ____________
fall; leftward
Inflation _______ when the unemployment rate is greater than the natural rate of unemployment.
falls
Inflation _______ when the unemployment rate is less than the natural rate of unemployment.
rises
A loosening of the labor market will cause
the aggregate demand curve to shift left.
A tightening of the labor market will cause
the aggregate supply curve to shift up.
The aggregate demand curve describes the relationship between
the inflation rate and the quantity of aggregate output demanded.
The aggregate supply curve describes the relationship between
the inflation rate and the quantity of aggregate output supplied.
In the long run, a rightward shift in aggregate demand will cause
the inflation rate to rise and output to remain unchanged.
The aggregate demand curve slopes downward because a rise in inflation leads:
the monetary policy authorities to raise real interest rates.
When inflation and inflation expectations adjust to move output to potential, this is an example of
the self-correcting mechanism.
Inflation expectations affect
the short-run aggregate supply curve, but not the long-run supply curve. #16 Screenshot CH22
The long-run aggregate supply curve is:
vertical because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run.
A successful cost-push shock by workers means 1.) Use the line drawing tool to show the effect of a(n) favorable price shock. Label the new line properly. 2) 1.) Use the line drawing tool to show the effect of a(n) unfavorable price shock. Label the new line properly.
wage increases are higher than productivity growth, and the aggregate supply curve will shift up. #30 Screenshot CH22
When the labor market is tight,
wages rise, and the aggregate supply curve shifts up.
What would happen to the position of the long-run aggregate supply curve?
Long-run aggregate supply will shift rightward.
If huge budget deficits cause the public to think that there will be higher inflation in the future, what will happen to the position of the short-run aggregate supply curve?
Short-run aggregate supply will shift leftward.
Observe a temporary negative supply shock in the graph to the right. In the short run, _________ . In the long run, ______________. In the figure, the long-run equilibrium is given by _________
"inflation rises, but output decreases." "neither inflation nor output change." point 1. #63 Screenshot CH22
Which of the following is an example of a "good" supply shock?
B. The computer revolution in the late 1990 s.
Using the line drawing tool, show the effect of increased consumer pessimism on the aggregate demand curve. Label your new line 'AD2'. John Maynard Keynes described waves of consumer and investor optimism and pessimism as:
#5 Screenshot CH20 animal spirits.
The top portion of the following table lists several supply shocks along with several exogenous events that do not affect the position of the aggregate supply curve. A response box is attached to each event. The table's bottom portion contains a labeling key. For a positive supply shock, use the label P; similarly, for a negative shock, use the label N. Label any exogenous event that does not impact AS with an X. (Note: Each letter is used three times.)
#60 Screenshot CH22
The graph to the right shows the effect of an increase in oil prices. 1) Using the line drawing tool, show how the economy will self-correct. Properly label your line. 2) Using the point drawing tool, indicate the new equilibrium point. Label the point 'E2'. Note: Carefully follow the instructions above, and only draw the required objects.
#61 Screenshot CH22
Assume Okun's law is given by the following: Upper U minus Upper U Subscript n Baseline equals negative 0.75 times left parenthesis Upper Y minus Upper Y Superscript p Baseline right parenthesisU − Un = −0.75 × Y − Yp and that the Phillips curve is given by the following: pi equals pi Superscript e minus 0.6 times left parenthesis Upper U minus Upper U Subscript n Baseline right parenthesis plus rhoπ = πe − 0.6 ×U − Un + ρ If expectations are adaptive, inflation was 33% last year, there is a price shock such that rhoρequals=00, and potential output is $1111 trillion, then the short-run aggregate supply curve would be written as follows:
#90 Screenshot CH22
When Paul Volcker became the chairman of the Federal Reserve in August 1979, inflation had spun out of control and the inflation rate exceeded 10%. Volcker was determined to get inflation down. By early 1981, the Federal Reserve had raised the federal funds rate to over 20%, which led to a sharp increase in real interest rates. Volcker was indeed successful in bringing inflation down, as panel (b) of Figure 10LOADING... indicates, with the inflation rate falling from 13.5% in 1980 to 1.9% in 1986. The decline in inflation came at a high cost: the economy experienced the worst recession since World War II, with the unemployment rate soaring to 9.7% in 1982. This outcome is exactly what our aggregate demand and supply analysis predicts. The autonomous tightening of monetary policy decreased aggregate demand and shifted the aggregate demand curve to the left from AD1 to AD2, as we show in panel (a) of Figure 10LOADING.... The economy moved to point 2, indicating that unemployment would rise and inflation would fall. With unemployment above the natural rate and output below potential, the short-run aggregate supply curve shifted downward and to the right to AS2. The economy moved toward long-run equilibrium at point 3, with inflation continuing to fall, output rising back to potential output, and the unemployment rate moving toward its natural rate level. By 1986, panel (b) of Figure 10LOADING... shows that the unemployment rate had fallen to 7% and the inflation rate was 1.9%, just as our aggregate demand and supply analysis predicts.
#91 Screenshot CH22
Application: Negative Demand Shocks, 2001minus−2004 In 2000, the U.S. economy was expanding when it was hit by a series of negative shocks to aggregate demand. 1. The "tech bubble" burst in March 2000 and the stock market fell sharply. 2. The September 11, 2001, terrorist attacks weakened both consumer and business confidence. 3. The Enron bankruptcy in late 2001 and other corporate accounting scandals in 2002 revealed that corporate financial data were not to be trusted. Interest rates on corporate bonds rose as a result, making it more expensive for corporations to finance their investments. All these negative demand shocks led to a decline in household and business spending, decreasing aggregate demand and shifting the aggregate demand curve to the left from AD1 to AD2 in panel (a) of Figure 11LOADING.... At point 2, as our aggregate demand and supply analysis predicts, unemployment rose and inflation fell. Panel (b) of Figure 11LOADING... shows that the unemployment rate, which had been at 4% in 2000, rose to 6% in 2003, while the annual rate of inflation fell from 3.4% in 2000 to 1.6% in 2002. With unemployment above the natural rate (estimated to be around 5%) and output below potential, the short-run aggregate supply curve shifted downward to AS2, as we show in panel (a) of Figure 11LOADING.... The economy moved to point 3, with inflation falling, output rising back to potential output, and the unemployment rate returning to its natural rate level. By 2004, the self-correcting mechanism feature of aggregate demand and supply analysis began to come into play,
#92 Screenshot CH22
In 1973, the U.S. economy was hit by a series of negative supply shocks: 1. As a result of the oil embargo stemming from the Arab-Israeli war of 1973, the Organization of Petroleum Exporting Countries (OPEC) engineered a quadrupling of oil prices by restricting oil production. 2. A series of crop failures throughout the world led to a sharp increase in food prices. 3. The termination of U.S. wage and price controls in 1973 and 1974 led to a push by workers to obtain wage increases that had been prevented by the controls. The triple thrust of these events shifted the short-run aggregate supply curve sharply upward and to the left from AS1 to AS2 in panel (a) of Figure 13LOADING..., and the economy moved to point 2. As the aggregate demand and supply diagram in Figure 13 predicts, both inflation and unemployment rose (inflation by 3 percentage points and unemployment by 3.5 percentage points, as per panel (b) of Figure 13LOADING...). The 1978-1980 period was almost an exact replay of the 1973-1975 period. By 1978, the economy had just about fully recovered from the 1973-1975 supply shocks, when poor harvests and a doubling of oil prices (as a result of the overthrow of the Shah of Iran) again led to another sharp upward and leftward shift of the short-run aggregate supply curve in 1979. The pattern predicted by Figure 13LOADING... played itself out againlong dash—inflation and unemployment both shot upward.
#93 Screenshot CH22
In February 1994, the Federal Reserve began to raise interest rates. It believed the economy would be reaching potential output and the natural rate of unemployment in 1995, and it might become overheated thereafter, with output climbing above potential and inflation rising. As we can see in panel (b) of Figure 15LOADING..., however, the economy continued to grow rapidly, with the unemployment rate falling to below 5% in 1997. Yet inflation continued to fall, even declining to around 1.6% in 1998. Can aggregate demand and supply analysis explain what happened? Two permanent positive supply shocks hit the economy in the late 1990s. 1. Changes in the health care industry, such as the emergence of health maintenance organizations (HMOs), reduced medical care costs substantially relative to other goods and services. 2. The computer revolution finally began to impact productivity favorably, raising the potential growth rate of the economy (which journalists dubbed the "new economy"). In addition, demographic factors, such as an increase in the relative number of older workers who are less likely to be unemployed, led to a fall in the natural rate of unemployment. These factors led to a rightward shift in the long-run aggregate supply curve to LRAS2 and a downward and rightward shift in the short-run aggregate supply curve from AS1 to AS2, as shown in panel (a) of Figure 15LOADING.... Aggregate output rose, and unemployment fell, while inflation also declined.
#94 Screenshot CH22
At the beginning of 2007, higher demand for oil from rapidly growing developing countries like China and India and slowing of production in places like Mexico, Russia, and Nigeria drove up oil prices sharply from around the $60 per barrel level. By the end of 2007, oil prices had risen to $100 per barrel and reached a peak of over $140 in July 2008. The run-up of oil prices, along with other commodity prices, led to a negative supply shock that shifted the short-run aggregate supply curve in panel (a) of Figure 16LOADING... sharply upward from AS1 to AS2. To make matters worse, a financial crisis hit the economy starting in August 2007, causing a sharp increase in financial frictions, which led to contraction in both household and business spending. This negative demand shock shifted the aggregate demand curve to the left from AD1 to AD2 in panel (a) of Figure 16LOADING... and moved the economy to point 2. These shocks led to a rise in the unemployment rate, a rise in the inflation rate, and a decline in output, as point 2 indicates. As our aggregate demand and supply analysis predicts, this perfect storm of negative shocks led to a recession starting in December 2007, with the unemployment rate rising from the 4.6% level in 2006 and 2007 to 5.5% by June 2008, and with the inflation rate rising from 2.5% in 2006 to 5% in June 2008 (see panel (b) of Figure 16LOADING...). After July 2008, oil prices fell sharply, shifting short-run aggregate supply back downward to AS1. However, in the fall of 2008, the financial crisis entered a particularly virulent phase following the bankruptcy of Lehman BrothersLOADING..., decreasing aggregate demand sharply to AD3. As a result, the economy moved to point 3, with the unemployment rate rising to 10.0% by the end of 2009, while the inflation rate fell to 2.8% (see panel (b) of Figure 16LOADING...).
#95 Screenshot CH22
As in the United States, the rise in the price of oil in 2007 led to a negative supply shock. In Figure 17 panel (a)LOADING..., the short-run aggregate supply curve shifted up from AS1 to AS2 in the United Kingdom. The financial crisis did not at first have a large impact on spending, so the aggregate demand curve did not shift and equilibrium instead moved from point 1 to point 2 on AD1. The aggregate demand and supply framework indicates that inflation would rise, which is what occurred (see the increase in the inflation rate from 2.3% in 2007 to 3.9% in December 2008 in Figure 17 panel (b)LOADING...). With output below potential and oil prices falling after July of 2008, the short-run aggregate supply curve shifted down to AS1. At the same time, the financial crisis after the Lehman Brothers bankruptcyLOADING... impacted spending worldwide, causing a negative demand shock that shifted the aggregate demand curve to the left to AD2. The economy now moved to point 3, with a further fall in output, a rise in unemployment, and a fall in inflation. As the aggregate demand and supply analysis predicts, the U.K. unemployment rate rose to 7.8% by the end of 2009, with the inflation rate falling to 2.1%.
#96 Screenshot CH22
The financial crisis that began in August 2007 at first had very little impact on China. When the financial crisis escalated in the United States in the fall of 2008 with the collapse of Lehman BrothersLOADING..., all this changed. China's economy had been driven by extremely strong export growth, which up until September of 2008 had been growing at over a 20% annual rate. Starting in October 2008, Chinese exports collapsed, falling at around a 20% annual rate through August 2009. The negative demand shock from the collapse of exports led to a decline in aggregate demand, shifting the aggregate demand curve to AD2 and moving the economy from point 1 to point 2 in Figure 18 panel (a)LOADING.... As aggregate demand and supply analysis indicates, China's economic growth slowed from over 11% in the first half of 2008 to under 5% in the second half, while inflation declined from 7.9% to 4.4%, and then became negative thereafter (see Figure 18 panel (b)LOADING...). Instead of relying solely on the economy's self-correcting mechanism, the Chinese government proposed a massive fiscal stimulus package of $580 billion in 2008, which at 12.5% of GDP was three times larger than the U.S. fiscal stimulus package relative to GDP. In addition, the People's Bank of China, the central bank, began taking measures to autonomously ease monetary policy. These decisive actions shifted the aggregate demand curve back to AD1 and the Chinese economy very quickly moved back to point 1. The Chinese economy thus weathered the financial crisis remarkably well with output growth rising rapidly in 2009 and inflation becoming positive thereafter.
#97 Screenshot CH22
Classify the following situation as a supply or demand shock: Financial frictions increase.
A negative demand shock. #59 Screenshot CH22
According to the expectations-augmented Phillips curve, which of the following factors determines the rate of inflation?
A. The degree of tightness in the labor market. B. Expected inflation. C. The difference between the unemployment rate and the natural rate of unemployment.
In the United Kingdom, the unemployment rate increased from 5.4% in 2006 to 7.8% in December 2009, while the inflation rate rose from 2.3% to 3.9% and then fell to 2.1% over this same time period. This can be explained by the following changes in aggregate demand and aggregate supply:
Aggregate supply initially decreased. Subsequently, aggregate supply increased, while aggregate demand decreased.
Why did China fare much better than the United States and the United Kingdom during the 2007-2009 financial crisis? (Check all that apply.)
D. China pursued an autonomous easing of monetary policy. E. The Chinese economy is less closely tied to the functioning of financial markets than the economies of the United States and the United Kingdom.
Which of the following describes a reason why the long-run Phillips curve relationship differs from the short-run relationship?
In the long run, expected inflation is taken into account when making work and hiring decisions.
Which of the following justifies the assumption of adaptive expectations in Phillips curve analysis?
Inflation expectations are sticky.
What basic relationship does the short-run Phillips curve describe?
It describes the negative relationship between unemployment and inflation.
What basic relationship does the long-run Phillips curve describe?
It indicates unemployment will move toward its natural rate regardless of the inflation rate.
What trade-offs does this relationship seem to offer policymakers?
Policymakers can increase inflation to decrease unemployment.
In what ways is the Volcker disinflation considered a success? What are the negative aspects of it?
The Volcker disinflation was successful in bringing inflation down with contractionary policies; however, these policies resulted in two recessions and a significant increase in unemployment.
Which of the following best explains why aggregate supply would decrease in the short run due to the implementation of a national sales tax?
The cost of goods sold would increase, making production more expensive. #58 Screenshot CH22
Which of the following best explains real business cycle theory?
The potential level of output changes due to technology and other shocks, creating business cycles even though the economy is still producing at potential output.
In the long run, a permanent negative supply shock leads to
a decline in output and a rise in inflation.
A negative supply shock that raises production costs will cause the
aggregate supply curve to shift up.
The financial crisis that began in August 2007 in the United States:
caused a collapse of China's exports and the Chinese government used a fiscal stimulus package to restore economic activity.
Adaptive expectations are based on:
past values.
Okun's law describes the:
negative relationship between the unemployment gap and the output gap.
The inflation rate tends to increase, ceteris paribus, as the actual unemployment rate
decrease
The inflation rate tends to increase, ceteris paribus, as the unemployment gap
decrease
According to modern Phillips curve analysis, an increase in the unemployment gap would:
decrease the inflation rate by moving downward and to the right along the Phillips curve.
Determine the effects on inflation and output in the short run and the long run using AD/AS graph analysis. In the short run, output ___________ and inflation ____________. In the long run, output ________ to potential and inflation ___________ Which of the following graphs illustrates your previous answer?
decreases; decreases; rises; falls #59 Screenshot CH22
When financial frictions decreases, the real cost of borrowing __________, and the AD curve __________.
decreases; shifts right
When inflation increases, the AD curve
does not shift
The inflation rate tends to increase, ceteris paribus, as expected inflation
increase
The inflation rate tends to increase, ceteris paribus, as the natural rate of unemployment
increase
According to modern Phillips curve analysis, a price shock — like a significant increase in oil prices — would:
increase the inflation rate by shifting the Phillips curve upward.
According to modern Phillips curve analysis, an increase in expected inflation would:
increase the inflation rate by shifting the Phillips curve upward.
Suppose Okun's law can be expressed according to the following formula: U − Un = −0.5 × Y − Yp Assuming potential output grows at a steady rate of 2.5% and that the natural rate of unemployment remains unchanged: Unemployment will _____ by _____ % when real GDP decreases by one percentage point. Real GDP will ____ by ____% when unemployment decreases by two percentage points
increase; 0.5% increase; 4%
A temporary negative supply shock will ______ inflation and will _________ aggregate output in the short run. A temporary positive supply shock will _________ inflation and will __________ aggregate output in the long run.
increase; decrease not change ;not change
When the natural rate of unemployment increases
inflation is higher comma and output is lower in the long run.
When the natural rate of unemployment decrease
inflation is lower comma and output is higher in the long run.
If autonomous consumption declines, and there is a sharp increase in energy prices, you would expect
inflation to have an ambiguous effect, but output to decrease.
If autonomous consumption increases, and there is a sharp increase in energy prices, you would expect
inflation to increase, and output to have an ambiguous effect.
The aggregate demand curve would shift to the _____ if household wealth decreases or businesses become less optimistic.
left #7 Screenshot CH22
The Federal Reserve pursued inherently recessionary policies in the early 1980s to:
lower the inflation rate, which had spun out of control.
Of the factors identified above that shift the short-run aggregate supply curve, the only factor that possibly also shifts the long-run aggregate supply curve is __________ but only if this factor is
price shocks; permanent
The primary factor that shifts the short-run aggregate supply curve is changes in:
production costs.
In the preceding table, the permanent supply shocks are associated with
regulations and technology #60 Screenshot CH22
The aggregate demand curve would shift to the _______ if household wealth increases or businesses become more optimistic.
right #7P2 Screenshot CH22
Combining Okun's law with the Phillips curve helps derive the short-run aggregate supply curve in that:
the Phillips curve describes the short-run negative relationship between the unemployment rate and the inflation rate, while the short-run aggregate supply curve describes the positive relationship between output and inflation.
An upward shift in aggregate supply ultimately causes
the inflation rate to remain unchanged and output to remain unchanged.
An upward shift in aggregate supply initially causes
the inflation rate to rise and output to fall.
The stimulus package used by China after the financial crisis that began in August 2007 in the United States was:
three times larger than the U.S. fiscal stimulus package relative to GDP.
The economy is currently in long-run equilibrium. Suppose there is a sudden and significant increase in oil prices. Which of the following describes the short-run effect on the economy?
Short-run aggregate supply decreases, the price level rises, and output falls below the natural rate.
"The depreciation of the dollar from December 2008 to December 2009 had a positive effect on aggregate demand in the U.S." Is this statement true, false, or uncertain? Explain your answer.
True, since a cheaper dollar increases net exports, a component of aggregate demand.
The four components of aggregate demand are
consumption, planned investment, government spending, and net exports.
Using the line drawing tool, show the effect of increased oil prices on the short-run aggregate supply curve. Label your new line 'AS2'.
#26 Screenshot CH22
Refer to the figure on your right. 1.) Use the line drawing tool to show how the economy will self-correct. Label your new line. 2.) Use the point drawing tool to locate the new equillibrium. Which of the following could NOT have caused the shock shown in the figure?
#39 Screenshot CH22 an increase in the price of oil
Refer to the figure on your right. 1.) Using the line drawing tool draw the aggregated demand curve (AD), the aggregate supply curve (AS). Label these lines properly. 2.) Using the point drawing tool locate the short-run equilibrium (E). Label this point 'E'. The short-run equilibrium will move as long as
#40 Screenshot CH20 output differs from its potential level.
The graph to the right shows the effect of an increase in investment spending. 1) Using the line drawing tool, show how the economy will self-correct. Properly label your line. 2) Using the point drawing tool, indicate the new equilibrium. Label the point 'E2'. Carefully follow the instructions above, and only draw the required objects. The economy is currently in long-run equilibrium. Suppose that investor optimism leads to an investment boom. Which of the following best explains the short-run effect on the economy?
#47 Screenshot CH22 Aggregate demand increases, the price level rises, and output rises above the natural rate.
During the Great Depression, investment spending collapsed. 1) Using the line drawing tool, show the effect of the collapse in investment spending on the graph to the right. Properly label your line. 2) Using the point drawing tool, indicate the new equilibrium point. Label the point 'E2'. Which of the following describes the effect of the fall in investment on output and the price level?
#48 Screenshot CH20 The price level fell and output fell below the natural rate.
Suppose the economy is starting from a situation of long-run equilibrium. In this case, we know that its equilibrium output (Upper Y starY*) is ▼ equal to greater than less than its potential output (Upper Y Superscript Upper PYP).
#56 Screenshot CH22
Many of the resources devoted to the January 2009 U.S. stimulus package encouraged investment in research and development of new technologies (e.g., more fuel-efficient cars and wind and solar power). Assume this policy results in positive technological change for the U.S. economy and "takes hold" at a time when the economy has been restored to a position of long-run equilibrium as depicted by point 1 in the figure to the right. 1) Using the line drawing tool, shift the LRAS curve in the appropriate direction. Label your curve 'LRAS2'. 2) Using the line drawing tool, shift one of the remaining curves such that a new short-run equilibrium is achieved that is not also a long-run equilibrium. Properly label your curve. 3) Using the point drawing tool, identify the new short-run equilibrium. Label this point '2'. Carefully follow the instructions above, and only draw the required objects.
#57 Screenshot CH22
If huge budget deficits cause the public to think that there will be higher inflation in the future but have no effect on business or consumer optimism, what will happen to the position of the aggregate demand curve?
Aggregate demand will not change.
Which of the following would cause the long-run aggregate supply curve to shift rightward?
An increase in available technology.
A positive demand shock will _________ inflation and will __________ aggregate output in the short run.
increase; increase
Suppose that the White House decides to sharply decreases military spending without increasing government spending in other areas. This measure would, all else constant, cause aggregate demand to
Decrease #3 Screenshot CH22
"If prices and wages are perfectly flexible, then γ= 0 and changes in aggregate demand have a smaller effect on output." Is this statement true, false, or uncertain? Explain your answer.
False. As prices and wages become more flexible, γ becomes larger, and thus for a given aggregate demand shock, the effects on output are smaller.
Suppose that the White House decides to sharply increase military spending without decreasing government spending in other areas. This measure would, all else constant, cause aggregate demand to
Increase #3P2 Screenshot CH22
What relationship does the aggregate supply curve describe?
It describes the relationship between the total quantity of output supplied and the inflation rate.
Proposals have come before Congress that advocate the implementation of a national sales tax. Which of the following is true if such a tax is implemented?
It would cause a decrease in aggregate supply in the short run and no change in the long run. #58 Screenshot CH22
Which of the following best describes the adjustment to long-run equilibrium if an economy's short-run equilibrium output is below potential output?
Since unemployment is greater than its natural rate, there will be excess slack in the labor market and, consequently, pressure on firms to raise their prices at a less rapid rate. This deceleration of inflation shifts the short-run aggregate supply curve down, pushing the economy's output up toward potential output.
Which of the following best describes the adjustment to long-run equilibrium if an economy's short-run equilibrium output is above potential output?
Since unemployment is less than its natural rate, there will be excessive tightness in the labor market and, consequently, pressure on firms to raise their prices at a more rapid rate. This acceleration of inflation shifts the short-run aggregate supply curve up, pushing the economy's output down toward potential output.
As the labor force becomes more productive over time, how does that affect the long-run aggregate supply curve?
The LRAS curve shifts to the right because the existing labor force, along with a given amount of capital and other resources, can produce more output.
Compared to negative demand shocks, positive demand shocks have _______ effect on aggregate demand.
The opposite
The short-run aggregate supply curve has:
a positive slope because as the inflation rate increases, so does the quantity of output supplied.
We can see from the graph that in the short run if a national sales tax is implemented, the equilibrium inflation rate will _______ and the equilibrium level of aggregate output will ______
increase; decrease #58 Screenshot CH22