Econ Chapter 10 Homework

when the government cuts income taxes,

disposable income increases

the increase in investment ___ aggregate demand (AD) the decrease in government spending ___ aggregate demand (AD)

increases; decreases

the increase in the personal consumption expenditures ___ aggregate demand (AD) the increase in exports ___ aggregate demand (AD)

increases; decreases

starting from a full-employment equilibrium, a decrease in short-run aggregate supply ___ the price level and ___ real GDP. Creating ___

increases; decreases; stagflation

the fall in the average weekly wage rate ___ short-run aggregate supply (SAS) and ___ long-run aggregate supply (LRAS)

increases; does not change

the fall in the minimum wage ___ short-run aggregate supply (SAS) and ___ long-run aggregate supply (LRAS)

increases; increases

starting from a full-employment equilibrium, an increase in AD ___ real GDP, and creates a __ gap

increases; inflationary

which of these policies affects the economy through intended changes in the quantity of money and interest rates?

monetary policy

long-run aggregate supply (LRAS) 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

the classical view assumes

money wage rates adjust quickly

which of these factors will cause the long-run aggregate supply curve to shirt to the right?

the accumulation of more machinery and equipment

people substitute goods in the ___ for goods in the ___

future; present

the wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption

when the price level in mexico falls

the quantity of real GDP demanded increases

Aggregate demand increases if the exchange rate ___ or foreign income ____. A). increases; increases B). decreases; increases C). decreases; decreases D). increases; decreases

B). decreases; decreases

Starting from a position of long-run equilibrium, an increase in government expenditures ___ real GDP and ___ the price level. A). increases real GDP and raises the price level B). increases; real GDP and lowers the price level C). decreases real GDP and lowers the price level D). decreases real GDP and raises the price level

A). increases real GDP and raises the price level

Aggregate demand increases if fiscal policy ___ taxes or ___ transfer payments. A). increases; increases B). decreases; increases C). decreases; decreases D). increases; decreases

B). decreases; increases

If an economy is at full-employment equilibrium and a decrease in consumption expenditure occurs, the new short-run equilibrium is ___ and ___ gap emerges. A). an above full-employment equilibrium; an inflationary B). a below full-employment equilibrium; an inflationary C). an above full-employment equilibrium; a recessionary D). a below full-employment equilibrium; a recessionary

D). a below full-employment equilibrium; a recessionary

Inflation expectations "become self-fulfilling" because consumers decide to __, which __. A). produce more goods and services at today's lower prices; increases short-run aggregate supply B). produce fewer goods and services at today's lower prices; decreases short-run aggregate supply C). buy fewer goods and services until prices return to lower levels; decreases aggregate demand D). buy more goods and services at today's lower prices; increases aggregate demand

D). buy more goods and services at today's lower prices; increases aggregate demand

Which of the following statements about the monetarist view of the macroeconomy is incorrect? A). the money wage rate is sticky B). taxes should be kept low to avoid disincentive effects that decrease potential GDP C). all recessions result from inappropriate monetary policy D). left alone, the economy rarely operates at full employment

D). left alone, the economy rarely operates at full employment

Everything else remaining the same, an increase in aggregate demand increases ___. A). long-run aggregate supply B). short-run aggregate supply C). potential GDP D). the quantity of real GDP supplied

D). the quantity o real GDP supplied

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

Events: growth in the world economy slows the world price of oil rises US labor productivity declines

___ advocates active government intervention via fiscal policy when the economy is in recession

Keynesian theory

which of these factors will cause the aggregate demand curve to shift?

a change in the expectations of households and firms

a higher exchange rate will result in

a decrease in net exports and a decrease in aggregate demand

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

monetarism is a school of economic thought that favors

a monetary growth rule

a classical macroeconomist believes that the economy is self-regulating and always

at full employment

a monetarist is a macroeconomist who believes that the economy is self-regulating and that it will normally operate ___, provided that monetary policy is not erratic and that the pace of ___ is kept steady

at full employment; money growth

how can government policies shift the aggregate demand curve to the right?

by increasing government purchases

fiscal policy includes

changing taxes, transfer payments, and government expenditure on goods and services the fact that the US government has proposed a hike in the corporate tax rate implies a change in taxes. so it illustrates fiscal policy

Stagflation is a

combination of inflation and recession

in she short run, an unexpected decrease in oil prices will

decrease the price level but increase real GDP

US businesses expect future profits to fall

decreases AD

a deep recession hits the world economy

decreases AD

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 (AS)

decreases China's short-run (SAS)

the world oil price rises sharply

decreases SAS

when mexico decreases the quantity of money, mexico's AD

decreases and its AD curve shifts leftward

the "average overall increase across the board" wage increase ___

decreases short-run aggregate supply (SAS)

if the price level and the money wage are 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

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

when aggregate demand increases, unemployment will usually ___ and inflation will ____.

fall, rise

An increase in expected future income ___ aggregate demand

increases

An increase in expected future inflation rates ___ aggregate demand

increases

An increase in expected future profits ___ aggregate demand.

increases

the fed increases the quantity of money and all other things remain the same. in the short run, aggregate demand

increases

the increase in labor productivity ___ LRAS and SAS

increases

an increase in business investment

increases AD

an increase in consumer spending

increases AD

an increase in exports

increases AD

when AD increases, real GDP

increases and the price level rises

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

according to Keynesian theory, fiscal policymakers can combat the impact of recessions by

increasing government spending

if the economy moves into a recession, monetarists argue that the Fed should

keep the money supply growing at a constant rate

the 1974-1975 recession was a result of a

leftward shift of the short-run aggregate supply curve

which of these shifts aggregate demand curve to the right

lower interest rates

keynesian macroeconomists recommend

policies that actively offset changes in AD 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 AD remains constant because over time

potential GDP increases

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

rarely

the defining feature of Keynesian view of macro is that the economy is

rarely at full-employment

the gap between ___ is the output gap

real GDP and potential GDP

when ___ there is a full-employment equilibrium

real GDP equals potential GDP

when ___, the output gap is called an inflationary gap

real GDP exceeds potential GDP

AD 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 (SAS) 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 (SAS) ___, and the economy returns to a full-employent equilibrium

rises; decreases

the defining feature of the classical view of macroeconomics is that the economy is

self-regulating and always at full-employment

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

the long-run aggregate supply curve

shifts to the right as technological change occurs

If firms reduce investment spending and the economy enters a recession, which of these contributes to the adjustment that causes the economy to return to its long-run equilibrium?

the eventual agreement by workers to accept lower wages

example of monetary policy

the fed has raised the federal funds rate by .3 percent

In the long-run, the level of output is

the full-employment level of output

economic growth results when there are increases in

the full-employment quantity of labor

inflation results when

the increase in aggregate demand exceeds the increase in potential gdp

correct statements

the overall effect of the increase in labor productivity and the rise in the wage rates is an increase in potential GDP rising wage rates decrease short-run aggregate supply (SAS) and have no effect on long-run aggregate supply the increase in labor productivity increases long-run aggregate supply (LRAS)

the aggregate demand (AD) curve shows the relationship between the quantity of real GDP demanded and ____, when everything else remains the same

the price level

the aggregate demand curve shows the relationship between

the price level and the quantity of real GDP demanded

a movement along the aggregate demand curve (AD) occurs if ___

the price level changes and all other factors remain unchanged

New classical theorists believe that

the uneven pace of technological change is the most significant cause of business cycle fluctuations

when the price level rises but the money wage rage and other factor prices remain the same, there is a movement along ___. the quantity of real GDP supplied ___. A). the SAS curve; increases B). the SAS curve; decreases C). the LAS curve; decreases D). the LAS curve and the SAS curve; decreases

A). the SAS curve; increases

As we move along the short-rib aggregate supply curve, ___. A). the money wage rate, the prices of other resources, and the potential GDP remain constant B). potential GDP increases C). the real wage rate, the prices of other resources, and potential GDP remain constant D). the money wage rate and the prices of other resources change by the same percentage

A). the money wage rate, the prices of other resources, and potential GDP reman constant

According to the Shoppers Stimulate Discount Stores Article, the ___ macroeconomic school of thought justifies the policy discussed in this news clip. A). monetarist B). Keynesian C). new classical D). classical

B). Keynesian

Changes in consumption spending play a large role in the business cycle because ___ accounts for approximately ____ percent of GDP. A). consumption expenditure; 90 B). consumption expenditure; 70 C). U.S. consumer purchases of net exports; 70 D). U.S. consumer purchases of net exports; 50

B). consumption expenditure; 70

As we move up along the long-run aggregate supply curve, ____. A). the prices of goods and services remain constant B). the real wage rate remains constant C). the money wage rate remains constant D). the prices of goods and services increase and the money wage rate decreases

B). the real wage rate remains constant

so, as the price level rises, there is

a decrease in the quantity of real GDP demanded because people cut back spending

which of these factors will shift the short-run aggregate supply to the left?

a decrease in the size of the labor force

An increase in potential GDP increases ____. A). the price level B). the money wage rate C). both long-run aggregate supply and short-run aggregate supply D). long-run aggregate supply but does not increase short-run aggregate supply unless technology advances

C). both long-run aggregate supply and short-run aggregate supply

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. A). Keynesian; new Keynesian B). classical; monetarist C). classical; Keynesian D). new classical; monetarist

C). classical; Keynesian

Aggregate demand increases if expected future income, inflation, or profits ___. And aggregate demand increases if fiscal policy ___ government expenditure. A). increase; decreases B). decrease; increases C). increase; increases D). decrease; decreases

C). increase; increases

Starting from a position of long-run equilibrium, a world expansion ___, and an increase in expected future profits ___. A) decreases real GDP and raises the price level; decreases real GDP and raises the price level B). increases real GDP and lowers the price level; increases real GDP and raises the price level C). increases real GDP and raises the price level; increases real GDP and raises the price level D). increases real GDP and raises the price level; increases real GDP and lowers the price level

C). increases real GDP and raises the price level; increases real GDP and raises the price level

Aggregate demand increases if monetary policy ___ the quantity of money and ____ interest rates. A). decreases; increases B). decreases; decreases C). increases; decreases D). increases; increases

C). increases; increases

Stagflation ___. A). has not ben experienced in the United States since the Great Depression B). is another name for an inflationary gap C). is a combination of recession and inflation D). occurs when aggregate demand decreases by more than short-run aggregate supply increases

C). is a combination of recession and inflation

Choose the statement that is incorrect. A). the quantity of real GDP supplied is the total quantity of goods and services, valued in constant base-year (2009) dollars, that firms plan to produce during a given period. B). aggregate supply is the relationship between the quantity of real GDP supplied and the price level C). over the business cycle, aggregate supply fluctuates around potential GDP D). at any given time, the quantity of capital and the state of technology are fixed, but the quantity of labor is not fixed

C). over the business cycle, aggregate supply fluctuates around potential GDP

When the price level, the money wage rate, and other factor prices rise by the same percentage, there is a movement along ___. Potential GDP ___. A). the LAS curve and the SAS curve; decreases B). the LAS curve; decreases C). the LAS curve; does not change D). the LAS curve and the SAS curve; does not change and the quantity of real GDP supplied increases

C). the LAS curve; does not change

Choose the correct statement. A). the higher the price level, the greater is the quantity of real GDP demanded B). the quantity of real GDP demanded depends on the quantity of real GDP supplied C). the quantity of real GDP demanded is the sum of the real consumption expenditure, investment, government expenditure, and exports minus imports D). the aggregate demand curve slopes downward because of the wealth effect and the money wage rate

C). the quantity of real GDP demanded is the sum of the real consumption expenditure, investment, government expenditure, and exports minus imports

when the United States experiences strong economic growth, US income increases and US consumers buy more goods and services, including goods and services produced in Canada

Canada's exports increase, and Canada's aggregate demand (AD) increases

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

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

monetary policy includes

changing the quantity of money and the interest rate the fact that the fed has raised the federal funds rate by .3 percent, impplies a change in the interest rate. so it illustrates monetary policy

using the three questions above: 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

a monetary growth rule that might be supported by a monetarist would be a plan

for the Federal Reserve to increase the quantity of money at a fixed rate and not respond to economic fluctuations

mexico trades with the US. when the us economy goes into a recession, ___

mexico's exports to the US decrease, mexico's aggregate demand decrease, and mexico's AD curve shifts leftward

the economy is in long-run equilibrium when the short-run aggregate supply and aggregate demand curve intersect at a point

on the long-run aggregate supply curve

an unexpected change in the price of oil would cause a shift of the ___ curve

short-run aggregate supply

the aggregate demand and aggregate supply model explains

short-run fluctuations in real GDP and the price level

keynes maintained that the economy could remain long-term at levels of output below the full-employment level of output due to

sticky wages

a modern version of the Keynesian view, known as new Keynesian view, holds not only that the money wage rate is ____ but also that prices of goods and services are ____

sticky; sticky

example of fiscal policy

the US government as proposed a hike in the corporate tax rate

stagflation

the combination of recession (decreasing real GDP) and inflation (rising price level)

aggregate demand will increase if

the effect of the tax rebates and the change in the foreign exchange rate outweigh the effect on the housing, credit, and financial crises

example of stagflation

the european economy is experiencing a decrease in real GDP for three quarters and a rise in the price level