Econ Final Exam

Which of the following events shifts the aggregate-demand curve leftward?

A decrease in government expenditures, but not a change in the price level

Refer to Figure 1. Which of the following events would shift the aggregate demand curve from AD2 to AD3?

A tax cut.

Refer to Figure 1. Suppose the economy starts at Z. Stagflation would be consistent with the move to

P3 and Y1 .

If unemployment is decreasing, the Federal Reserve will

Sell bonds to decrease the money supply and increase the interest rate.

A change in the expected price level is likely to cause which of the following?

a shift in the short run aggregate supply curve

Stagflation

a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high

Which of the following shifts short-run aggregate supply left?

an increase in price expectations

Refer to Figure 2. If the economy is at point b, a policy to restore full employment would be

an increase in the money supply.

The equation: quantity of output supplied = natural rate of output + a (actual price level - expected price level), where a is a positive number, represents

an upward-sloping short-run aggregate supply curve

Refer to Figure 3. As we move from one point to another along the money-demand curve MD1

the price level is held fixed at P1.

If the multiplier is 6, then the MPC is

0.83

Suppose the MPC is 0.60. Assume there are no crowding out. If the government increases expenditures by $200 billion, then what is the multiplier and by how much does aggregate demand shift to the right? 1/1-MPC

2.5 and $500 billion

Figure 4. Suppose that MPC (marginal propensity to consume) is 0.75 and the economy is currently at point A

4

Figure 4 Suppose that there is an increase in government purchases of $10. How much will aggregate demand increase if there is no crowding-out?

40

Figure 4 If crowding- out exists, and government purchases increase by $10, then aggregate demand will increase and the economy will move from point A to point

B

Figure 4 Suppose that there is an increase in government purchases of $10. If there is no crowding-out, aggregate demand will increase and the economy will move from point A to point

C

If the government doesn't intervene, use the same AD/AS diagram to describe what happens in the long-run. Clearly state what happens to the price level and output in the long run.

Households see that prices are higher than expected prices in the short run. So, they start expecting higher prices. As the expected price level rises, workers demand higher wages which shifts the SRAS curve to the left. It shifts until it reaches a point where the new AD curve intersects the LRAS curve. This is the new long-run equilibrium point and it implies that output is back its natural level in the long run but the price level is permanently higher.

What will the Congress do in order to stabilize output?

In the short run output is higher than natural output. So in order to stabilize output Congress has to shift the AD curve to the left in order to return to the natural level of output. To do so it either lowers government spending or increases taxes

What will the Federal Reserve do in order to stabilize output?

In the short run output is higher than natural output. So in order to stabilize output the Fed has to shift the AD curve to the left in order to return to the natural level of output. To do so it sells government bonds in order to lower money supply

Suppose that the Federal Reserve increases the money supply. Using the AD-AS model, what is the expected effect of this policy change on the economy in the short run?

Increase real GDP (Y), and increase the price level (P).

Refer to Figure 2. Which of the following is correct?

It is possible that either fiscal or monetary policy might have caused the shift from AD1 to AD2.

Suppose that the Federal Reserve increases the interest rate. Using the AD-AS model, what is the expected effect of this policy change on the economy in the long run?

Leave real GDP (Y) the same, but decrease the price level (P).

Figure 4 If crowding- out exists, and government purchases increase by $10, then aggregate demand will increaseby

Less than $40

Suppose that the economy is initially at a long-run equilibrium. Using an AD/AS diagram show what would happen to the equilibrium in the short run after the increase in investment. State what happens to the price level and output in the short run

The AD curve shifts right which causes output and the price level to rise in the short run. Refer to slides orch. 20 in textbook for a diagram.

An aide to a U.S. Congressman computes the effect on aggregate demand of a $20 billion tax cut. The actual increase in aggregate demand is less than the aide expected. Which of the following errors in the aide's computation would be consistent with an overestimation of the impact on aggregate demand?

The aide thought the tax cut would be permanent, but the actual tax cut was temporary.

Q1B. If the money demand curve shifts from MD1 to MD2, what happens to the equilibrium interest rate and the equilibrium quantity of money?

The equilibrium interest rate falls and the quantity of money remains the same.

Refer to Figure 1. Suppose the economy starts at Z. If changes occur that move the economy to anew short run equilibrium of P3 and Y3 , then it must be the case that

The government implemented a tax cut.

Q1A. What factor can shift the money demand curve from MD1 to MD2 ?

The money demand curve can shift left either because the price level or output decreases.

Refer to Figure 2. The aggregate-demand curve could shift from AD1 to AD2 as a result of

a decrease in net exports.

Refer to Figure 2. Which of the following is correct?

a. Unemployment rises as the economy moves from point a to point b. b. Either fiscal or monetary policy could be used to move the economy from point b to point a. c. If the economy is left alone, then as the economy moves from point b to long-run equilibrium, the price level will fall farther. d. All of the above are correct.

Refer to Figure 3. If the money-supply curve MS on the left-hand graph were to shift to the left, this would

a. represent an action taken by the Federal Reserve. b. shift the AD curve to the left .c. create, until the interest rate adjusted, an excess demand for money at the interest rate that equilibrated the money market before the shift .d. All of the above are correct.

Refer to Figure 1. Suppose the economy starts at Z. If changes occur that move the economy to anew short run equilibrium of P1 and Y1 , then it must be the case that

aggregate demand has decreased.

Changes in the price level affect which components of aggregate demand?

consumption, investment, and net exports

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves.

When taxes increase, the interest rate

decreases, making the change in aggregate demand smaller.

An increase in the MPC

increases the multiplier, so that changes in government expenditures have a larger effect on aggregate demand

An increase in the price of oil leads to if there is no policy response

lower output and higher prices in the short run but no change in output and prices in the long run

When the Fed wants to increase the interest rate, it conducts an open-market operation, in which it

sells government bonds, and in so doing decreases the money supply

MPC

the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.

If the actual price level is 165, but people had been expecting it to be 160, then

the quantity of output supplied is higher than natural output, but only in the short run

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

the slope of the aggregate-demand curve.