ECN 102: Final MC Practice
The division of variables into real and nominal is a dichotomy assumed by
classical economists
A movement to the left along a given short-run Phillips curve could be caused by
expansionary monetary policy, but not a reduction in the natural rate of unemployment
The marginal propensity to consume (MPC) is defined as the fraction of
extra income that a household consumes rather than saves
The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it
increases income and thereby increases consumer spending
If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by
increasing the money supply, which lowers interest rates
Other things the same, a decrease in the U.S. interest rate
induces firms to invest more
If a central bank is independent,
its operations are not controlled by the political process
Contractionary monetary policy
leads to disinflation and makes the short-run Phillips curve shift left
The sacrifice ratio is the
number of percentage points annual output falls for each percentage point reduction in inflation
A goal of monetary policy and fiscal policy is to
offset shifts in aggregate demand and thereby stabilize the economy
The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,
production is less profitable and employment falls
Automatic stabilizers
are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession
If aggregate demand shifts right then in the short run
firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left
Fiscal policy refers to the idea that aggregate demand is affected by changes in
government spending and taxes
If the Fed announced a policy to reduce inflation and people found it credible, the short-run Phillips curve would shift
left and the sacrifice ratio would fall
An increase in the expected price level shifts short-run aggregate supply to the
left, and an increase in the actual price level does not shift short-run aggregate supply
People choose to hold a larger quantity of money if
the interest rate falls, which causes the opportunity cost of holding money to fall
The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services [ay their employees. This sequence of events illustrates
the multiplier effect
Fiscal policy is determined by
the president and Congress and involves changing government spending and taxation
If aggregate demand shifts left, then in the short run
the price and real GDP both fall
Aggregate demand includes
the quantity of goods and services households, the firms, the government, and customer abroad want to buy
The term crowding-out effect refers to
the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase
Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes
the short run, but not the long run
When production costs rise,
the short-run aggregate supply curve shifts to the left
When the Fed buys bonds
the supply of money increases and so aggregate demand shifts right.
If the economy starts at A, a decrease in the money supply moves the economy
to C in the long run
An example of an automatic stabilizer is
unemployment benefits
The aggregate supply curve is
vertical in the long run and slopes upward in the short run
If the stock market crashes, then
aggregate demand decreases, which the Fed could offset by increasing the money supply
From 2006 to 2008 there was a dramatic fall in the price of houses. If this fall made people feel less wealthy, then it would have shifted
aggregate demand left
In 1986, OPEC countries increased their production of oil. This caused
aggregate supply to shift right
Which of the following both shift aggregate demand left?
an increase in taxes and at a given price level consumers feel less wealthy
A basis for the slope of the short-run Phillips curve is that when unemployment is high there are
downward pressures on prices and wages
A period of relatively rising incomes and falling unemployment is called an
expansion
Most economists believe that classical theory describes the world
in the long run
When taxes increase, interest rates
increase, making the change in aggregate demand smaller
During recessions
workers are laid off, factories are idle, firms may find they are unable to sell all they produce
An economy has a current inflation rate of 7%. If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2, then how much annual output must be sacrificed in the transition?
6%
If the economy is in long-run equilibrium, then an adverse shift in aggregate supply would move the economy from
C to D
France has a higher natural rate of unemployment than the United States. This suggest that
France's Phillips curve is to right of that of the United States, possibly because they have more generous unemployment compensation
According to the classical model, which of the following would double if the quantity of money doubled?
both prices and nominal income
At the end of World War II many European countries were rebuilding and so were eager to buy capital goods from the UD and had rising incomes. We would expect that the rebuilding increased aggregate demand in
both the United States & Europe
The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change
in the price level, but not output
To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could
increase the money supply by buying bonds
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
increased consumption, which shifts the aggregate-demand curve right
Which of the following shifts aggregate demand to the right?
increases in the profitability of capital due perhaps to technological progress
An increase in the money supply will
reduce interest rates, increasing investment and aggregate demand
Disinflation is a
reduction in the rate of inflation, whereas deflation is a reduction in the price level
Stagflation exists when prices
rise and unemployment rises
An economic expansion caused by a shift in aggregate demand causes prices to
rise in the short run, and rise even more in the long run
If the price level falls, the real value of a dollar
rises, so people will want to buy more
If the Federal Reserve decided to raise interest rates, it could
sell bonds to lower the money supply
Recessions in Canada and Mexico would cause
the U.S. price level and real GDP to fall