ECON chapter 10
At arrow 1 in the graph, the economy is in ______ full- employment equilibrium and the intersection of the AD and SAS curves is to the ______ of the LAS curve.
a below; left
A monetarist is a macroeconomist who believes that the economy is self-regulating and that it will normally operate _____,
at full employment; money growth
Long-run macroeconomic equilibrium occurs when real GDP _____ potential GDP - equivalently, when the economy is on its _____ curve.
equals; LAS
A below full-employment equilibrium is an equilibrium in which potential GDP _____ real GDP.
exceeds
When potential GDP _____ real GDP, the output gap is called a recessionary gap.
exceeds
An above full-employment equilibrium is an equilibrium when real GDP _____.
exceeds potential GDP
The economy returns to a full-employment equilibrium as the money wage rate __________
falls
People substitute goods in the ______ for goods in the __________ .
future; present
1. Calculate the short-run equilibrium real GDP and price level. The short-run equilibrium real GDP is ________ billion and the price level is _______.
575; 110
Consider the following events. Event 1: Growth in the world economy slows. Event 2: The world price of oil rises. Event 3: U.S. labor productivity declines. Choose the statement that is correct.
A classical macroeconomist and a monetarist recommend that taxes be kept low to avoid disincentive effects for all of the events and a Keynesian recommends active fiscal policy and monetary policy to offset all events.
3. How does the government budget influence aggregate demand?
An increase in the goverment budget increases aggregate demand.
4. How does the government budget influence aggregate supply?
Capital expenditure on transportation and expenditure on healthcare and education increase human capital and therefore increase aggregate supply.
Shoppers Stimulate Discount Stores The ______ macroeconomic school of thought justifies the policy discussed in this news clip.
Keynesian
Krugman on Monetary and Fiscal Policy Based on this news clip, Paul Krugman most likely follows the ______ school of thought and Ben Bernanke most likely follows the ______ school of thought.
Keynesian or new Keynesian; Keynesian or new Keynesian
Adding Up the Cost of Obama's Agenda Based on this news clip, Barack Obama most likely follows the ______ school of thought and John McCain most likely follows the ______ school of thought.
Keynesian or new Keynesian; classical or new classical
Which of the following statements about the monetarist view of the macroeconomy is incorrect?
Left alone, the economy rarely operates at full employment.
Choose the statement that is incorrect.
Over the business cycle, aggregate supply fluctuates around potential GDP.
Which of the following economies is facing a stagflation?
The European economy is experiencing a decrease in real GDP for three quarters and a rise in the price level.
3. What is the Fed concerned about?
The Fed is concerned about how a decrease in government spending might result in lower real GDP
2. What is the Fed expected to do given the current state of the U.S. economy?
The Fed is expected to increase monetary stimulus to lower long-term interest rates, given the current state of the U.S. economy.
1. How has the U.S. economy been performing in recent weeks?
The U.S. economy's performance in recent weeks shows that employment is growing and the housing market is recovering
Labor productivity is rising at a rapid rate in China and wages are rising at a similar rate. Choose the statement that is incorrect.
The increase in labor productivity has no effect on short-run aggregate supply.
3. If aggregate demand increases by $50 billion, what is the new short-run macroeconomic equilibrium and the output gap?
The new short-run macroeconomic equilibrium is at a real GDP of $600 billion and a price level of 120. The economy has no output gap.
Choose the correct statement
The quantity of real GDP demanded is the sum of the real consumption expenditure, investment, government expenditure, and exports minus imports.
Geithner Urges Action on Economy Choose the statement that is incorrect
Treasury Secretary Timothy Geithner most likely follows the monetarist school of thought if he thinks that a falling money wage rate will respond quickly to changes in government tax policy.
Suppose the economy had been operating at a full- employment equilibrium. After the fall in consumer confidence, the economy moves to ______ equilibrium and ______ gap emerges.
a below full employment; a recessionary
If an economy is at a full-employment equilibrium and a decrease in consumption expenditure occurs, the new short-run equilibrium is _____ and _____ gap emerges.
a below full-employment equilibrium; a recessionary
So, as the price level rises, there is ______.
a decrease in the quantity of real GDP demanded
A rise in the money wage rate with no change in potential GDP creates ______.
a leftward shift of the SAS curve and no change in the LAS curve
If potential GDP is $1 trillion, the economy has __________________ gap.
a recessionary
2. Does the country have an inflationary gap or a recessionary gap and what is its magnitude? The country has _____ gap and its magnitude is $ _____ billion.
a recessionary; 25
In the graph, the initial aggregate supply curve is SAS0 and the initial aggregate demand curve is AD0. The events which could have changed short-run aggregate supply from SAS0 to SAS1 are ______.
a rise in the money wage rate or a rise in the money price of any other factor of production
If potential GDP is $1 trillion, the economy has moved to ______________________________ equilibrium.
an above full employment
In the graph, the initial aggregate supply curve is SAS0 and the initial aggregate demand curve is AD0. Some events that could have changed aggregate demand from AD0 to AD1 are ______.
an increase in expected future inflation or an increase in foreign income
At arrow 2, the economy is in ______ full-employment equilibrium and the intersection of the AD and SAS curves is to the ______ of the LAS curve.
an above; right
A Classical macroeconomist believes that the economy is self-regulating and always _____.
at full employment
An increase in potential GDP increases ______.
both long-run aggregate supply and short-run aggregate supply
Inflation expectations "become self-fulfilling" because consumers decide to _____, which ______.
buy more goods and services at today's lower prices; increases aggregate demand
A ______ macroeconomist believes that the economy is self-regulating and always at full employment. A ______ macroeconomist believes the economy requires active help from fiscal policy and monetary policy to maintain full employment.
classical; Keynesian
Changes in consumption spending play a large role in the business cycle because _______ accounts for approximately ______ percent of GDP.
consumption expenditure; 70
Aggregate demand increasesincreases if the exchange rate ______ or foreign income ______.
decrease, increase
The Fed cutscuts the quantity of money and all other things remain the same. In the short run, aggregate demand _______.
decreases
The following events have occurred at times in the history of the United States. 1. A deep recession hits the world economy 2. The world oil price rises sharply 3. U.S. businesses expect future profits to fall Event 1 ______. Event 2 ______.
decreases aggregate demand; decreases short-run aggregate supply
1. A deep recession hits the world economy 2. The world oil price rises sharply. 3. U.S. businesses expect future profits to fall. Starting from a position of long-run equilibrium, a deep recession ______, and a decrease in expected future profits ______.
decreases real GDP and lowers the price level; decreases real GDP and lowers the price level
Starting from a position of long-run equilibrium, a sharp increase in the world oil price ______.
decreases real GDP and raises the price level
Aggregate demand increasesincreases if fiscal policy ______ taxes or ______ transfer payments.
decreases; increases
Chinese Premier Wen Jiabao has warned Japan that its companies operating in China should raise the pay for their workers. A rise in wages in China _______ aggregate supply.
decreases China's short-run
The "average overall increase across the board" wage increase _______.
decreases short-run aggregate supply
If the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
does not change; long-run
A new Classical view is that business cycle fluctuations are the _____ responses of a well-functioning market economy that is bombarded by shocks that arise from the uneven pace of _____.
efficient; technological change
Aggregate demand increasesincreases if monetary policy ______ the quantity of money and ______ interest rates.
increase; decrease
Tax rebates ______ aggregate demand and the housing, credit, and financial crises ______ aggregate demand.
increase; decrease
Aggregate demand increasesincreases if expected future income, inflation, or profits ______. And aggregate demand increasesincreases if fiscal policy ______ government expenditure.
increase; increases
When Mexico increases the quantity of money, Mexico's aggregate demand ______.
increases and its AD curve shifts rightward
Starting from a position of long-run equilibrium, an increase in government expenditures ______ real GDP and ______ the price level.
increases real GDP and raises the price level
Starting from a position of long-run equilibrium, a world expansion ______, and an increase in expected future profits ______.
increases real GDP and raises the price level; increases real GDP and raises the price level
Starting from a full-employment equilibrium, an increase in aggregate demand ______ real GDP, and creates ______ gap.
increases; an inflationary
The increase in investment ______ aggregate demand. The decrease in government spending _______ aggregate demand.
increases; decreases
Starting from a full-employment equilibrium, a decrease in short-run aggregate supply ______ the price level and ______ real GDP.
increases; decreases a ~stagflation~ is created
The fall in the average weekly wage rate ______ short-run aggregate supply and ______ long-run aggregate supply.
increases; does not change
Geithner Urges Action on Economy In the short run, an increase in business investment ______ real GDP and ______ the price level.
increases; increases
Geithner Urges Action on Economy In the short run, an increase in consumer spending ______ real GDP and ______ the price level.
increases; increases
In the short run, an increase in exports ______ real GDP and ______ the price level.
increases; increases
Read the news clip, then answer the following questions. The increase in the personal consumption expenditures ______ aggregate demand. The increase in exports ______ aggregate demand.
increases; increases
The fall in the minimum wage ______ short-run aggregate supply and ______ long-run aggregate supply.
increases; increases
An increase in expected future income _____________ aggregate demand. An increase in the expected future inflation rate ________________ aggregate demand. An increase in expected future profits ________________ aggregate demand.
increases; increases; increases
If the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
increases; short-run
Stagflation ______.
is a combination of recession and inflation
Economic growth results when there are increases in ______.
long run aggregate supply
Long-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when the _____ changes in step with the price level to maintain full employment.
money wage rate
1. What are the three largest items in China's budget? The three largest items in China's budget are _____, _____, and _____.
other items; education; social security and unemployment
Following the change in aggregate supply, the new macroeconomic equilibrium is at ______.
point A
Following the change in aggregate demand, the new equilibrium is at ______.
point C
The initial short-run aggregate supply curve is SAS0 and the initial aggregate demand curve is AD0. Some events change aggregate demand from AD0 to AD1, and short-run aggregate supply from SAS0 to SAS1. The new macroeconomic equilibrium is at ______.
point D
Keynesian macroeconomists recommend ______.
policies that actively offset changes in aggregate demand that bring recession
Monetarist macroeconomists recommend ______.
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
Classical macroeconomists recommend ______.
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
A recessionary gap eventually emerges even if aggregate demand remains constant because over time ______.
potential GDP increases
The defining feature of the Keynesian view of macroeconomics is that the economy is ______.
rarely at full employment
A Keynesian macroeconomist believes that left alone, the economy would _____ operate at full employment and that to achieve and maintain full employment, active help from fiscal policy and monetary policy is required. A modern version of the Keynesian view, known as the new Keynesian view, holds not only that the money wage rate is _____ but also that prices of goods and services are _____.
rarely; sticky; sticky
The gap between ______ is the output gap. When _____, the output gap is called an inflationary gap.
real GDP and potential GDP; real GDP exceeds potential GDP
When _____ there is a full-employment equilibrium
real GDP equals potential GDP
Aggregate demand is the relationship between the quantity of _____ demanded and the _____ when all other influences on expenditure plans remain the same.
real GDP; price level
Short-run aggregate supply is the relationship between the quantity of _____ supplied and the _____ when the money wage rate, the prices of other resources, and potential GDP remain constant.
real GDP; price level
Short-run macroeconomic equilibrium occurs when the quantity of _____ demanded equals the quantity of _____ supplied at the point of intersection of the _____ curve and the _____ curve.
real GDP; real GDP; AD; SAS
As the price level rises, interest rates ________ and real wealth ____________
rise; decreases
In the long run, the money wage rate ______, short-run aggregate supply ______, and the economy returns to a full-employment equilibrium.
rises; decreases
The defining feature of the classical view of macroeconomics is that the economy is ______.
self-regulating and always at full employment
When fuel prices risefuel prices rise _______. When the price level in India increases _______.
short-run aggregate supply decreases; the quantity of real GDP supplied increases
Which of the following statements illustrate monetary policy?
the Fed has raised the federal funds rate by .3%
When the price level, the money wage rate, and other factor prices rise by the same percentage, there is a movement along ______. Potential GDP ______.
the LAS curve; does not change
When the price level rises but the money wage rate and other factor prices remain the same, there is a movement along ______. The quantity of real GDP supplied ______.
the SAS curve; increases
Which of the following statements illustrate fiscal policy?
the US gov has proposed a hike in the corporate tax rate
Read the news clip, then answer the following questions. Aggregate demand will increase if ______.
the effect of the tax rebates and the change in the foreign exchange rate outweigh the effect of the housing, credit, and financial crises
Inflation results when ______.
the increase in aggregate demand exceeds the increase in potential GDP
As we move up along the short-run aggregate supply curve, ______.
the money wage rate, the prices of other resources, and potential GDP remain constant
The aggregate demand curve shows the relationship between the quantity of real GDP demanded and ______, when everything else remains the same
the price level
A movement along the aggregate demand curve occurs if _______.
the price level changes and all other factors remain unchanged
When the price level in Mexico rises:
the quantity of real GDP demanded decreases
Everything else remaining the same, an increase in aggregate demand increases ______.
the quantity of real GDP supplied
As we move up along the long-run aggregate supply curve, ______.
the real wage rate remains constant
Explain the effect of each of the following events on Canada's aggregate demand Canada sets new environmental standards that require power utilities to upgrade their production facilities.
Canada's aggregate demand increases
Explain the effect of each of the following events on Canada's aggregate demand. The government of Canada cuts income taxes.
Canada's aggregate demand increases
Mexico trades with the United States. When the U.S. economy goes into an expansionan expansion, ______.
Mexico's exports to the United States increase, Mexico's aggregate demand increases, and Mexico's AD curve shifts rightward
A macroeconomic equilibrium in which real GDP equals potential GDP is _____ equilibrium. And one in which real GDP exceeds potential GDP is _____ equilibrium.
a full-employment; an above full-employment
When the full-employment quantity of labor increases, or the quantity of capital increases, or technology advances ______.
long-run aggregate supply and short-run aggregate supply increase
The defining feature of the monetarist view of macroeconomics is that the economy is______.
self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
Explain the effect of each of the following events on Canada's aggregate demand The United States experiences strong economic growth.
Canada's aggregate demand increases
Event 3 _________
decreases aggregate demand
