Econ Test 3
T/F: The level of employment in an economy determines its real GDP
True
All of the following will shift the short-run aggregate supply and the long run aggregate supply except for
a temporary change in input prices
In the labor market, full employment occurs at a _____ _____ at which demanded equals quantity supplied. That particular level of employment is associated with the full employment level of real GDP per year
a wage rate
The long-run aggregate supply curve will not shift if there is a change in
the price level
T/F: The classical economists believed that the leakage of saving would be matched by the injection of business investment
true
Now that the macroeconomy is in a disequilibrium, what happens in the labor market?
unemployment increases, which decreases wages
In the classical model, because LRAS is ______, the equilibrium level of real GDP is supply determined. Any changes in aggregate demand simply change the _____ ______
vertical; price level
After reading a recent best-seller documenting a growing population of low minus income elderly people who were ill minus prepared for retirement, most residents of this country decide to increase their saving at any given interest rate. What will happen to the: 1) Current equilibrium interest rate 2) Equilibrium real GDP 3) Equilibrium employment 4) Equilibrium investment 5) Equilibrium real GDP
1) Decrease 2) No effect 3) No effect 4) Increase 5) Increase
The classical model assumes that (4)
1) Pure competition exists 2) Wages and prices are completely flexible 3) Individuals are motivated by self interest 4) individuals cannot be fooled by money illusions
The Keynesian model was supported empirically by data from the decade of the
1930s
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that there is decreased security about jobs and future income, the new short run position of the economy finds itself in is termed
A recessionary gap
Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short run?
A recessionary gap is created
An economy is currently in a long run equilibrium where SRAS = LRAS = AD. Suppose that there is increased security about jobs and future income, which of the following is the best explanation of the outcome?
Aggregate demand increases
Which of the following factors will shift the short run aggregate supply curve, but not the long-run AS?
An economy wide decrease in wages
Which of the following is the best example of uncounted production?
An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine partsAn
Which of the following would create demand-pull inflation?
An increase in household income
Suppose that the wage rate of labor decreased temporarily. The result of this would be best described by
An increase in the SRAS curve only
Which of the following would create cost-push inflation?
An increase in wages paid to workers
Which of the following statements best characterizes demand-pull and cost-push inflation?
Both are short run types of inflation
Suppose, there are fewer regulatory impediments to business. Which of the following best describes the result of this event?
Both the SR and LR aggregate supply curves shift outward
Suppose that aggregate demand were to decrease due to a stronger dollar. Which of the following would be the result?
Deflation only
In the Modern Keynesian Model the short run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on the capital input?
Existing machinery can be used longer hours
A stronger dollar contributes to inflation.
False
How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on profits?
Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.
The short run Keynesian supply curve is
Horizontal
The Modern Keynesian short run aggregate supply curve is best described by which of the following statements
It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.
Which of the following is a possible explanation for sticky prices?
Labor contracts cause wages to be fixed over the contract period
Factors influencing long-run output
Labor, capital, technology
The lower the rate of interest, the ______ profitable it is to invest and the ______ the level of desired investment
More; higher
The Keynesian model argues that prices are sticky. One reason supporting this argument is that
Nominal wages are inflexible downwards
Which of the following is not one of the four major assumptions of the classical model?
People suffer from money illusion
What did Keynes mean when he said that prices are sticky?
Prices, especially the price of labor, are inflexible downard
Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to
Reduce their workforce
During the rapid adjustment period (that results from the change in the AD curve), the economy will immediately tend toward a price level that _________ and a level of real GDP that _______ before quickly returning to full employment.
Remains constant; decreases
Any unanticipated shifts in aggregate demand or supply are called aggregate demand or aggregate supply
Shocks
The Keynesian Model of the Macroeconomy argues that prices are sticky due to labor contracts and unions. This existence of sticky prices causes the _________________ to be horizontal
Short run aggregate supply
Inflation in an economy implies that
The average price level has increased over a stated period of time.
Which of the following best exemplifies Say's Law
The production of a $4000 plasma TV set creates demand for others goods and service valued at $4000
The extent which real GDP responds to changes in the price level along the short-run aggregate supply curve is largely determined by
The speed with which input prices adjust and people become more fully informed; the ability of firms to use existing workers and capital more intensively; the ability of firms to hire additional inputs, particularly workers.
In the modern Keynesian Model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor input?
The workers are switched from uncounted production to counted production, thus enabling the firm to expand output as the price level expands.
Suppose that the value of the US dollar ($) yesterday was $1 = 4 yen. Today the exchange rate changed such that $1 = 1 yen. One can say that the
US $ depreciated
Which of the following will increase both the short-run and long-run aggregate supply curves?
Younger workers in the labor force receive better and more training than their predecessors
Cost-push inflation arises due to
a decrease in the short-run aggregate supply curve
According to the classical model, if the economy starts at full employment an increase in aggregate demand will cause all of the following to occur except
a decrease in wage rates
Demand-pull inflation arises due to
a depreciation of the US $
A depreciation of the U.S. dollar should result in
a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short-run aggregate supply curves.
According to Keynes, when there is excess capacity in an economy, the equilibrium level of real GDP per year is determined by
aggregate demand
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If there is decreased security about jobs and future income, which of the following is the best description of the outcome in the economy?
aggregate demand decreases
Between early 2005 and late 2007, total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation. From a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were
an increase in the price level along with an increase in equilibrium real GDP.
Given that the economy is currently in a long run equilibrium where SRAS = LRAS = AD there is increased security about jobs and future income the economy would then experience
an inflationary gap
The resulting spending gap between early 2005 and late 2007 when total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation can best be described as
an inflationary gap
classical model assumes prices ___________ so that the aggregate supply curve is ________ and the economy is always
are flexible; vertical; at full employment
Say's Law fits best in the _______ ______ since this philosophy placed great importance on ______ _______ to determine the _____ ___ ______
classical theory; aggregate supply; level of output
Cost-push inflation is caused by persistent
decrease in Short Run aggregate supply
Keynesians believe that the aggregate supply curve is
horizontal in the short run
One of the main conclusions of Say's Law was that
if people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.
The model of long-run equilibrium
is the same as the classical model
Since the modern Keynesian Model allows for some price response, the aggregate supply curve
is upward sloping
If an excess quantity of labor is supplied at a particular wage level, the wage level
must be above equilibrium
Thus, according to the Keynesian model full employment is
possible, but not guaranteed
An important difference between the Classical Model and the Keynesian Model is that
prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in the Keynesian Model.
The modern Keynesian Model assumes that
prices respond to changes in aggregate demand, but not fully
As the wage decreases, the
quantity demanded of labor increases, while the law of supply reduces the number of workers seeking jobs
The keynesian model indicates that the economy will find an equilibrium, however the economy will not always
reach full employment
As the dollar becomes stronger in international foreign exchange markets, the short-run aggregate supply curve will shift to the ________ and the aggregate demand curve will shift to the ________.
right; left
Persistent inflation arises due to
the aggregate demand curve increasing by a larger proportion than the long-run aggregate supply curve.
When saving is introduced into the model, equilibrium occurs in the credit market through changes in the interest rate such that desired ______ equals desired ________ at the equilibrium rate of interest
saving; interest
Changes in factors of production that influence economic growth will
shift SRAS and LRAS
A short lived change in production input prices will
shift SRAS but not LRAS
If the prices were sticky, according to Keynes, this would then imply that the
short run aggregate supply is horizontal
If petroleum prices increase temporarily, the ________________ curve would shift to the _____
short-run aggregate supply curve; left
Say's Law asserts that
supply creates its own demand
Say's law states that ____ creates its own ____ and therefore desired expenditures will equal actual expenditures
supply; demand