Econ Ch 11 and 12

when G increases... when Z increases... when costs increase... what happens to AD?

right left left

when G increases, IS curve shifts...

right (Y goes up)

the Fed raises the discount rate, what happens to the AD curve?

shift left (discount rate=interest rate)

fed gov decreases fed income tax rates in an effort to stimulate the economy, what happens to the AD curve?

shift right

optimistic firms increase investment spending, what happens to the AD curve?

shift right

how will cost-push inflation affect the AS curve?

shift to the left

The simultaneous increase in unemployment and inflation.

stagflation

if price level rises, equilibrium point for aggregate demand would move...

up and left (price increase and Y decrease)

When the interest rate​ falls, the planned aggregate expenditure curve shifts​ (up or down) because planned investment is​ (higher or lower).

up, higher

higher interest rate causes aggregate output to (rise or fall)

fall

if price of input goes down, supply goes...

up

what is the shape of the AS short run curve?

upward

when interest rate is 0, the monetary policy curve is...

horizontal

When a monetary authority chooses its interest rate values with the aim of keeping the inflation rate within some specified band over some specified horizon.

inflation targeting

in a binding situation...

interest rate doesn't change and the AD curve is vertical

contractionary fiscal policy

interest rate increases and money supply decreases (AD shifts left)

The level of aggregate output that can be sustained in the long run without inflation

potential output/potential GDP

What effects will an increase in the money supply with the economy operating at near full capacity have on GDP and the price​ level?

price level will increase significantly and GDP will increase very little

fed rule equation

r=aY+BP+yZ -r= interest rate -y=output -p=price level -z=other economic factors

The change in consumption brought about by a change in real wealth that results from a change in the price level

real wealth effect

fed gov decreases purchases in an effort to reduce fed deficit, what happens to the AD curve?

shift left

if the economy experiences a surge in energy prices, what will happen to the AS curve?

shift left

inflation rate rises by 6%, what happens to the AD curve?

shift left

-what will happen to AD curve when impacted by a contractionary demand-side policy? -Which of the following best describes your​ diagram's depiction of the relative changes in aggregate output and the price​ level? A.The price level increased more than aggregate output. B.The price level increased less than aggregate output. C.Both aggregate output and the price level decreased. D.Aggregate output decreased and the price level increased.

shift left C

increase in money supply with economy operating at near full capacity, what happens to price level and equilibrium GDP in the short run?

small increase in GDP and large increase in price level

The level of aggregate output where the curve at right is drawn (horizontal AS curve) is called A.potential output or potential GDP. B.real GDP. C.full capacity output. D.zero unemployment output.

A

Which of the following will generate a decrease in aggregate​ demand? A.A tax increase. B.Increased government expenditures for infrastructure. C.An increase in the price level. D.An increase in the money supply.

A

if the interest rate is fixed, what happened to AE and Y when gov spending increases?

AE increases and Y increases in equilibrium

planned aggregate expenditure and the interest rate (formula)

AE=C+I+G

If there is a cost shock of higher oil prices and a national security related surge in defense expenditures, what would happen to the AD and AS curve? -the price level would...

AS left and AD right -price will unambiguously rise

which curve is vertical -why

AS long run in the short run you can temporarily produce more but in long run there is a productive capacity (can't increase output, only price)

If there is an experiences a surge of technological breakthroughs and a dramatic increase in household wealth, what will happen to AD and AS? -the price level would...

AS shift right and AD shift right -impact on price level is indeterminate

Since 1970 the Fed has faced a​ "binding situation" during the A.1990-1991 and 2001 recessions. B.2008-2012 period. C.stagflation period of the late 1970s and early 1980s. D.oil price shocks of the 1970s.

B

The negative slope of a simple demand curve... A.occurs because less is supplied at higher prices B.depends on the price of a single product relative to other product prices C.occurs because prices change when incomes are lower D.is due to a higher price level raising interest rates, reducing investment and aggregate output

B

Which of the following is incorrect if interest rates do not affect​ investment? A.Fiscal policy would become more effective than monetary policy because fiscal policy directly influences aggregate expenditure and there would now be no crowding out. B.Fiscal policy would become less effective than monetary policy because fiscal policy directly influences​ investment,which depends on interest rates. C.Monetary policy would become ineffective because changing the interest rates would no longer affect investment and thus aggregate expenditures would not change. D.All of the above are correct.

B

A change in real wealth helps explain the downward slope of the aggregate demand curve because the decline in real wealth leads to​ _______.​(Check all that apply.​) A.a decrease in investment B.a decrease in planned aggregate expenditure C.a decrease in consumption D.a decrease in savings

B and C

to increase output (Y) gov spending and net taxes will... -AD will...

G increase T decrease AD shift right

if Z increases and there is no change in gov spending, what happens to equilibrium values of IR and Y?

IR goes up Y goes down

Relationship between aggregate output and the interest rate in the goods market (Y and r)

IS curve

The Congress and the president raise income taxes while at the same time the Fed increases the money supply: what happens to the MD and MS curve with higher taxes and the impact of the expansionary monetary policy?

MD shift left and MS shift right

decrease in price of oil with no change in gov spending, what happens to the equilibrium values of price level and aggregate output?

P decrease and Y increase (AS shift right)

increase in the price of oil and decrease in G, what happens to the equilibrium values of price level and aggregate output?

P uncertain and Y goes down (AD shifts right)

if G decreases and the Fed changes money supply enough to keep interest rates constant, what happens to equilibrium values of IR and Y?

Y goes down, IR stays the same

if P increases and G decreases, what happens to equilibrium values of IR and Y?

Y goes down, can't tell for IR

if P decreases and there is no change in gov spending, what happens to equilibrium values of IR and Y?

Y goes up and IR stays the same

What effects will a decrease in taxes and an increase in government spending supported by a cooperative Fed acting to keep output from rising have on GDP and the price​ level? A.The fiscal and monetary policies have opposing effects on the AD ​curve, therefore GDP and the price level will be unchanged. B.The fiscal and monetary policies reinforce the effects on the AS ​curve, therefore GDP will be unchanged and the price level will increase. C.The fiscal and monetary policies have opposing effects on the AS ​curve, therefore GDP and the price level will be unchanged. D.The fiscal and monetary policies reinforce the effects on the AD ​curve, therefore both GDP and the price level will decrease.

a

Which of the following is most likely to cause the cost shock that shifts the AS curve consistent with​ cost-push inflation? A.A surge in the price of crude oil. B.A tax increase on households. C.An increase in the size of government. D.A flood of new immigrants.

a

The total supply of all goods and services in an economy.

aggregate supply

A graph that shows the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level.

aggregate supply (AS) curve

when r increases, what happens to I AE and Y?

all decrease

If the​ economy's policymakers seek to reverse the output loss via the implementation ofexpansionary​ policies, the result will be A.lower prices and higher output. B.even higher prices. C.lower prices and lower output. D.even less output.

b

State of the economy in which the Fed rule calls for a negative interest rate

binding situation

T or F: the AD curve is a market demand curve

false (not a sum of all market demand curves in the economy)

increase in Z with no change in gov spending, what happens to the equilibrium values of price level and aggregate output?

both go down

is G decreases with money supply held constant by the Fed, what happens to the equilibrium values of price level and aggregate output?

both go down

if G decreases and money supply is held constant by the Fed, what happens to equilibrium values of IR and Y?

both go down (IS curve shifts left)

stagflation means that unemployment and inflation...

both increase at the same time

decrease in taxes and increase in gov spending supported by a cooperative Fed acting to keep output from rising, what happens to price level and equilibrium GDP in the short run?

both remain the same (tax decreasing and gov spending increasing cancel each other out)

During​ 2009, the Federal Reserve was easing monetary policy in an attempt to boost the economy. That same​ year, Congress passed the American Recovery and Reinvestment Act that cut taxes and expanded existing tax credits for working families and businesses. As a result of this​ policy, ____________. A.the interest rate should increase and the effect on GDP should be ambiguous. B.GDP should increase and the effect on the interest rate should be ambiguous. C.GDP should increase and the interest rate should decrease. D.both the interest rate and GDP should increase.

c

A change in costs that shifts the short-run aggregate supply (AS) curve

cost shock/supply shock

Inflation caused by an increase in costs

cost-push or supply-side inflation

a high interest rate causes planned investment (I) to...

decrease

Inflation that is initiated by an increase in aggregate demand.

demand-pull inflation

leftward shift of supply curve means...

environmental issues, increase in wage rates/energy prices

when the economy is producing on the flat portion of the AS curve...

expansionary fiscal policy (many people are unemployed)

when the economy is producing on the horizontal portion of the AS curve...

expansionary fiscal policy doesn't work (economy is near full employment)

when P increases, AD... this is because higher P leads to what in r, which does what to I and Y?

falls leads to Fed raising r, which decreases I and Y

Equation that shows how the Fed's interest rate decision depends on the state of the economy

fed rule

when the fed buys bonds, money supply...

goes up

All else​ equal, a cost shock that shifts the aggregate supply curve to the left leads to a​ (higher or lower) price level and a​ (higher or lower) level of aggregate output if the aggregate demand curve is downward sloping.

higher, lower

if the federal gov decreases fed income tax rates in an effort to stimulate the economy, then AD...

increases

when P goes up, fed rule shifts...

left

when Z goes up, fed rule shifts...

left

On a​ short-run aggregate supply​ curve, wages tend to be sticky at​ (high or low) levels of aggregate output and prices tend to be sticky at​ (high or low) levels of aggregate output.

low, low

as firms and the economy move closer to full capacity, the response of firms is likely to change from...

mainly increasing output to mainly increasing prices

expansionary fiscal policy

money supply increases and interest rate decreases (AD shifts right)

price level increases, what happens to the AD curve?

move along the AD curve, output goes down

there is a (negative or positive) relationship between interest rate and output

negative

rightward shift of the supply curve means...

technology increase, decrease in wage rates/energy prices

T or F: the IS curve shows the relationship between output and interest rate

true

T or F: when the AD curve is vertical and a cost shock shifts the AS curve left, there is no change in output

true

if investment depended on interest rate in no way, the investment curve would be...

vertical

The interest rate cannot go below zero.

zero interest rate bound