Econ 1040 Final Chapters 15-17

Which of the following are effects of an increase in government spending financed by a tax increase?

The tax increase reduces consumption; the change in the interest rate reduces residential construction.

A reduction in personal income taxes increases aggregate demand through

an increase in personal consumption.

Wages tend to be sticky

because of contracts, social norms, and notions of fairness.

Monetary policy

can be implemented quickly, but most of its impact on aggregate demand occurs months after policy is implemented.

Monetary policy affects the economy with a long lag, in part because

changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.

When the price level falls the quantity of

consumption goods demanded and the quantity of net exports demanded both rise.

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.

An increase in household saving causes consumption to

fall and aggregate demand to decrease.

When the dollar appreciates, US

net exports fall, which decreases the aggregate quantity of goods and services demanded.

According to classical macroeconomic theory, changes in the money supply affect

nominal variables, but not real variables

The goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

Monetary and fiscal policy influence

output in the short run only.

2 Critics of stabilization policy argue that

policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.

When households find themselves holding too much money, they respond by

purchasing interest-earning financial assets and interest rates fall.

The aggregate quantity of goods and services demanded changes as the price level rises because

real wealth falls, interest rates rise, and the dollar appreciates.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,

relative to prices wages are higher and employment falls.

If the price level falls, the real value of the 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.

Liquidity preference theory is most relevant to the

short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

If speculators lost confidence in foreign economies and so wanted to buy more US bonds

the dollar would appreciate which would cause aggregate demand to shift left.

If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer US bonds,

the dollar would depreciate which would cause the aggregate demand curve to shift right.

During periods of expansion, automatic stabilizers cause government expenditures

to fall and taxes to rise.

The short-run Phillips curve shows the combinations of

unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.

An example of an automatic stabilizer is

unemployment benefits

Economist AW Phillips found a negative correlation between

wage inflation and unemployment.

The saying "Money is a veil" means that

while nominal variables are the first thing we may observe about an economy, what's important are the real variables and the forces that determine them.

One determinant of the natural rate of unemployment is the

minimum wage rate.

When the dollar depreciates, US

net exports rise, which increases the aggregate quantity of goods and services demanded.

In the long run, changes in the money supply affect

prices.

Assume the MPC is 0.72. The multiplier is

3.57

When taxes decrease, consumption

increases as shown by a shift of the aggregate demand curve to the right.

When taxes increase, consumption

decreases as shown by a shift of the aggregate demand curve to the left.

People are likely to want to hold more money if the interest rate

decreases, making the opportunity cost of holding money fall.

During a recession the economy experiences

falling employment and income

If the stock market crashes, then

aggregate demand decreases, which the Fed could offset by purchasing bonds.

If the stock market booms, then

aggregate demand increases, which the Fed could offset by decreasing the money supply.

Other things the same, when the government spends more, the initial effect is that

aggregate demand shifts right.

When aggregate demand shifts right along the short-run aggregate supply curve, unemployment

falls, so there are upward pressures on wages and prices.

Which of the following is an example of an increase in government purchases?

The government builds new roads.

During recessions

Workers are laid off Factories are idle Firms may find they are unable to sell all they produce

Which of the following is included in the aggregate demand for goods and services?

Consumption and demand Investment demand Net exports

The long-run aggregate supply curve shifts right if

Immigration from abroad increases The capital stock increases Technology advances

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

Increase government expenditures or increase the money supply.

Government builds new water plant....

Multiplier effect

Government buys new weapons systems...

Multiplier effect.

Which of the following would both shift aggregate demand right?

Taxes decrease and government expenditures increase.

Which of the following shifts aggregate demand to the right?

The Fed buys bonds in the open market.

Suppose there is an increase in government spending. To stabilize output, the Federal Reserve would

decrease money supply.

If the price level is higher than expected, firms might raise their production in the short run if

All of the above

1 Critics of stabilization policy argue that

All of the above.

Which of the following shifts long-run aggregate supply right?

An increase in either technology or the human capital stock.

Which of the following correctly explains the crowding-out effect?

An increase in government expenditures increases the interest rate and so reduces investment spending.

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall.

People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this?

Both sticky price theory and sticky wage theory.

Suppose that the Federal Reserve is concerned about the effects of falling stock prices on the economy. What could it do?

Buy bonds to lower the interest rate.

Which of the following Is correct?

Real GDP is the variable most commonly used to measure short run economic fluctuations. It is almost impossible to predict these fluctuations with much accuracy.

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.

Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to

decrease consumption, which shifts aggregate demand left.

Other things the same, during recessions taxes tend to

fall. The fall in taxes stimulates aggregate demand.

When the price level increases, the real value of people's money holdings

falls, so they buy less.

If households view a tax cut as temporary, then the tax cut

has less of an effect on aggregate demand than if households view it as permanent.

In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.

According to interest-rate effect, an increase in the price level will

increase money demand and interest rates. Investment declines.

Suppose households attempt to increase their money holdings. To stabilize output by countering this increase in money demand, the Federal Reserve would

increase the money supply.

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.

The misperceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has

increased, so they increase production.

In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households

increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.

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 a business and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

increasing money supply, which lowers interest rates.

In the long run,

inflation depends primarily upon the money supply growth rate.

When the money supply increases,

interest rates fall and so aggregate demand shifts right.

One determinant of the long-run average unemployment rate is the

minimum wage, while the inflation rate depends primarily upon the money supply growth rate.

Other things the same, an increase in the price level induces people to hold

more money, so they lend less, and the interest rate rises.

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

sell bonds to raise interest rates.

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

The short-run relationship between inflation and unemployment is often called

the Phillips curve.

Liquidity refers to

the ease with which an asset is converted into a medium of exchange.

If the Fed increases the money supply,

the interest rate decreases, which tends to raise stock prices.

When the price level falls,

the interest rate falls, so the quantity of goods and services demanded rises.

Critics of stabilization policy argue that

the lag problem ends up being a cause of economic fluctuations.

The lag problem associated with fiscal policy is due mostly to

the political system of checks and balances that slows down the process of implementing fiscal policy.

Fiscal policy is determined by

the president and Congress and involves changing government spending and taxation.

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

the slope of the aggregate-demand curve.