Macro Chapter 13

In an economy with a large manufacturing sector, a reduction in the oil supply is like a reduction in _____ in an agricultural economy.

rainfall Rainfall and agricultural labor are complementary.

What is NOT a potential explanation for the stickiness of prices and wages in the short run?

real shocks Real shocks cause shifts in the long-run aggregate supply curve; they don't explain the slope of the SRAS curve.

Which event would cause a change in the growth rate of the velocity of money? a change in the productivity of labor a change in the growth rate of the money supply a change in the weather a change in the growth rate of investment

a change in the growth rate of investment A change in the growth rate of the velocity of money can be broken down into changes in the growth rates of consumption, investment, government spending, or net exports.

Which event would cause a change in the growth rate of the velocity of money?

a change in the growth rate of net exports A change in the growth rate of the velocity of money can be broken down into changes in the growth rates of consumption, investment, government spending, or net exports.

Refer to the following figure, which shows the aggregate demand curve for an economy with 7 percent spending growth as well as some possible positions for the long-run aggregate supply curve. If the long-run aggregate supply curve moves from C to B, what does this represent?

a decrease in the potential growth rate A negative real shock drives the inflation rate up and the growth rate down.

Refer to the aggregate demand curve in the following figure. Given this AD curve, if the growth rate of the money supply is 7 percent, the growth rate of the velocity of money must be:

-1 percent. This is because 5 percent + 1 percent = 7 percent − 1 percent.

Refer to the aggregate demand curve in the following figure. If the Solow growth rate is equal to 5 percent, then what will be the rate of inflation?

1 percent The growth rate of spending in this case is 6 percent, so the Solow growth rate and the rate of inflation must sum to 6 percent.

According to the AD curve, if M is 5 percent, V is 0, and the rate of inflation is 3 percent, what must be the growth rate of real GDP?

2 percent The rate of spending growth for this AD curve is 5 percent.

Refer to the following figure, which shows the aggregate demand curve for an economy with 7 percent spending growth as well as some possible long-run aggregate supply curves. If long-run aggregate supply curve B represents the current Solow growth rate, what will be the rate of inflation?

3 percent 7 - 4 = 3 The growth rate of spending is 7 percent, so the Solow growth rate and the rate of inflation must sum to 7 percent.

According to the quantity theory of money, if spending grows by 4 percent and real GDP grows by 0 percent, what must be the rate of inflation?

4 percent The aggregate demand curve shows all of the combinations of inflation and real growth that are consistent with a specified rate of spending growth.

According to the AD curve, if V is 0, the rate of inflation is 2 percent, and the rate of real growth is 3 percent, then what must M be ?

5 percent The rate of spending growth for this AD curve is 5 percent.

In the AD/SRAS model, what impact would a temporary decrease in aggregate demand have on the inflation rate and the growth rate in the short run?

A temporary decrease in AD reduces both the inflation rate and the growth rate in the short run. As shown in Figure 32.14, a temporary decrease in AD reduces the inflation rate and the growth rate in the short run.

What impact does an increase in the expected inflation rate have on the SRAS curve?

An increase in the expected inflation rate shifts the SRAS curve up and to the left. As shown in Figure 32.13, an increase in the expected inflation rate shifts the SRAS curve up and to the left.

Which statement is FALSE? Unexpected inflation always turns into expected inflation. Higher taxes would cause a negative aggregate demand shock. Menu costs are the costs of changing prices. An increase in the growth rate of the money supply would be a negative aggregate demand shock.

An increase in the growth rate of the money supply would be a negative aggregate demand shock. (This would cause a positive demand shock.)

Which statement is TRUE?

An increase in the growth rate of the money supply would be a positive aggregate demand shock Higher taxes would cause a negative aggregate demand shock. A spending increase creates a temporary increase in growth. When unexpected inflation becomes expected inflation, it causes the SRAS curve to shift. Prices don't move instantly to their new long-run equilibrium; thus, increases in growth can be brought about by a spending increase. Prices do not move instantly. Recall the concept of menu costs.

A negative AD shock affects:

Both inflation and the real growth rate in the short run but in the long run only affects inflation. In the short run, the economy will travel along the SRAS curve; in the long run, the SRAS curve will shift toward the long-run aggregate supply curve.

Refer to the points in the following figure. Which pair of points could lie on the same aggregate demand curve?

C and G The specified growth rate of spending would be 4 percent in this case.

If the rate of real growth is fixed by real factors, what will accompany changes in M and V?

If the rate of real growth is fixed by real factors, changes in M and V can change only the inflation rate. On a given long-run aggregate supply curve, a shift of the AD curve will only affect the rate of inflation at which the two curves intersect.

According to the AD curve, if in a certain economy in a given year the money supply rises from $1,000 billion to $1,070 billion, real GDP rises from $15,000 billion to $15,300 billion, and the rate of inflation is 5 percent, then what must have happened to the velocity of money in this same year?

It remained stable. The rate of spending growth for this AD curve is 7 percent.

According to the AD curve, if in a certain economy in a given year the money supply rises from $1,000 billion to $1,050 billion, real GDP rises from $12,000 billion to $12,240 billion, and the rate of inflation is 4 percent, then what must have happened to the velocity of money in this same year?

It rose by 1 percent 12240 / 0.04 = 489.6; 12240-489.6 = 11750.4; 11750.4 / 12000 = 0.98 or 1 percent The rate of spending growth for this AD curve is 6 percent.

The rate of economic growth, given flexible prices and the existing real factors of capital, labor, and technology, is known as the:

Solow growth rate. This is the definition of the Solow growth rate.

Rapid and unexpected shifts in spending matter for the economy most when wages and prices are:

Sticky When wages and prices are sticky, an aggregate demand shift will cause a shift along the short-run aggregate supply curve, which will cause the rate of real growth to change.

Which statement is correct?

The AD curve is downward sloping; the long-run aggregate supply curve is vertical; the SRAS curve is upward sloping. And in the long run, they all intersect at the same point.

What is TRUE regarding the causes of the Great Depression? The Great Depression was caused by real shocks only. The Great Depression was caused by aggregate demand shocks. The Great Depression was caused by a combination of real shocks and aggregate demand shocks. The Great Depression was not caused by shocks to the economy but rather by a stock market crash.

The Great Depression was caused by a combination of real shocks and aggregate demand shocks. (The Great Depression resulted from an unfortunate concentrated and interrelated series of aggregate demand and real shocks.)

What impact will an increase in the money supply have on the AD curve?

There is not enough information to determine the impact on aggregate demand. An increase in the growth of the money supply will increase aggregate demand, but no information about the growth rate has been given; this question only says that the variable itself (not its growth rate) increases

What impact will higher taxes have on the AD curve?

There will be a decrease in aggregate demand. As shown in Table 32.2, higher taxes will cause a decrease in aggregate demand

Refer to the following figure, which shows the aggregate demand curve for an economy with 7 percent spending growth as well as some possible positions for the long-run aggregate supply curve. If the long-run aggregate supply curve moves from A to C, what does this represent?

an increase in the potential growth rate A positive real shock drives the inflation rate down and the growth rate up.

Which would cause the LRAS to shift left?

bad weather a major, destructive flood This would decrease production.

A negative AD shock will decrease inflation in:

both the short and long run. In the short run, the economy will travel along the SRAS curve; in the long run, the SRAS curve will shift toward the long-run aggregate supply curve.

A positive AD shock will increase inflation in:

both the short and long run. In the short run, the economy will travel along the SRAS curve; in the long run, the SRAS curve will shift toward the long-run aggregate supply curve.

Typically, the aggregate demand curve is:

downward sloping. Given a constant level of spending growth, if the rate of inflation rises, the rate of real GDP growth must slow down.

Refer to the aggregate demand curve in the following figure. Given this AD curve, if the growth rate of the money supply is 4 percent, the:

growth rate of the velocity of money must be 2 percent. This is because 5 percent + 1 percent = 4 percent + 2 percent.

What increases aggregate demand?

increased wealth As shown in Table 32.2, increased wealth increases aggregate demand.

Which would NOT cause the LRAS to shift right or left?

inflation Changes in inflation do not lead to changes in the LRAS.

Which would NOT cause the LRAS to shift left?

less government regulation Less government regulation would increase the LRAS. lower taxes This would increase the LRAS.

A negative AD shock will increase output in:

neither the short run nor the long run. A negative AD shock will decrease inflation in both the short run and the long run.

If workers in the economy respond to changes in the wage number on their paycheck rather than to what their wages can buy, they are experiencing:

nominal wage confusion. This is one reason prices and wages don't instantly adjust to changing market conditions.

Which condition is mentioned in the textbook as an aggregate demand shock that contributed to the Great Depression?

pessimism following a stock market crash Fear and pessimism can cause negative AD shocks.

In many countries, such as India, when the weather fluctuates:

so does GDP. Figure 32.8 shows this relationship.

In a typical year in the U.S. economy:

the good shocks outweigh the bad shocks, and the economy grows. The textbook lists many possible shocks, such as supply changes, weather, wars, terrorist attacks, regulations, tax rate changes, mass strikes, and new technologies.

Which growth rate is NOT necessarily the same as the others?

the real growth rate The real growth rate is the growth rate of GDP, which can differ from the potential, long-run, or Solow growth rate.

A positive AD shock will increase the real growth rate in:

the short run only. In the short run, the economy will travel along the SRAS curve; in the long run, the SRAS curve will shift toward the long-run aggregate supply curve.

A negative AD shock will decrease the real growth rate in:

the short run only. In the short run, the economy will travel along the SRAS curve; in the long run, the SRAS curve will shift toward the long-run aggregate supply curve.

What is a potential explanation for the stickiness of prices and wages in the short run?

uncertainty about the permanence of a change in market conditions If firms are unsure, they will hold off on changing prices, at least for a while menu costs Menu costs are the costs of changing prices. nominal wage confusion Nominal wage confusion occurs when workers respond to their nominal wage instead of their real wage