macro chapter 9
Which of the following changes shifts the AD curve up and to the right?
A rise in the nominal money supply.
Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labor, and goods markets?
A rise in the price level, shifting the LM curve up and to the left.
Which of the following changes shifts the SRAS curve up?
An increase in firms' costs.
Is money neutral in the short run or the long run, according to the AD-AS model?
In the short run, money is not neutral, but in the long run it is neutral
Consider the impact of a decrease in the money supply. The shock is most likely to affect the...
LM curve.
A decrease in money demand causes the _____ curve to shift _____.
LM; down and to the right
An increase in money demand causes the _____ curve to shift _____.
LM; up and to the right
Increasing the money supply shifts the ____ curve _____.
LM; down and to the right
FE line
The FE line is vertical at the full-employment level of output.
Which market adjusts the quickest in response to shocks to the economy?
The asset market.
According to the classical model, after an economic disturbance, which of the following is true?
The economy will rapidly return to general equilibrium as prices adjust quickly.
what shifts the FE line
a beneficial supply shock, an increase in labor supply, and an increase in capital stock
When economists say that money is neutral, this means that:
a change in the money supply changes nominal variables but not real variables.
Monetary neutrality means that...
a change in the money supply has no effect on real variables.
In classical IS−LM analysis, the effects of a decline in desired investment include
a decline in the real interest rate.
An increase in people's inflation expectations from 2% to 4% causes _____ and causes the _____.
a decrease in money demand; LM curve to shift down and to the right
what shifts the LM curve down and to the right
a decrease in the risk of holding alternative assets relative to the risk of holding money, a reduction in price level, and an increase in expected inflation
Suppose a new cryptocurrency replaces all need for dollars in the U.S. economy. As a result, there will be ____ in money_____. (You may assume that holdings of the cryptocurrency are not counted as money.)
a decrease; demand
in the AD-AS model, the long-run effect of a decrease in the money supply is
a proportionate fall in the price level, but no changes to real variables such as output
what factors shift the AD up and to the right
a reduction in taxes, T, when Ricardian equivalence does not hold, an increase in expected future output, an increase in the nominal money supply M
what will shift the IS curve down and the left
a reduction in the expected future output, an increase in taxes if Ricardian equivalence does not hold, and a temporary reduction in government purchases
in the AD-AS model, the short-run effect of a decrease in the money supply is
a shift down and to the left of the AD curve, causing output to fall at an unchanged price level
What economic forces act to bring the economy back to general equilibrium?
adjustment of the price level moves the LM curve
You have just read that Australia has suffered a drought, destroying its wheat crop for this year. The effect of this adverse supply shock on Australia would probably be
an increase in prices and an increase in real interest rates.
Looking only at the asset market, an increase in output would cause
an increase in the real interest rate along the LM curve.
If people reduce their expectations of inflation from 4% to 2%, then there will be ____ in money _____.
an increase; demand
After prices adjust, money is neutral in the IS-LM model because:
any change in money supply that shifts the LM curve is finally matched by a proportional change in the price level that shifts the LM curve to its original position.
Why is the short-run aggregate supply curve horizontal?
because prices remain fixed in the short run
Why is the long-run aggregate supply curve vertical?
because the aggregate amount of output supplied is the full-employment level, regardless of the price level
The aggregate demand curve slopes downward:
because with fixed nominal supply of money, an increase in the price level shifts the LM curve up and to the left, leading to lower output at the intersection of the IS and LM curves.
Regarding neutrality of money:
classical economists believe that money is neutral in both the short run and the long run, but Keynesians believe that money is neutral only in the long run but not in the short run due to sluggish adjustment of the price level in the short run.
The IS curve represents:
combinations of output and the real interest rate such that desired national saving is equal to desired investment.
For each of the following variables, select whether you would expect it to increase, decrease, or remain constant as a result of the temporary adverse supply shock. consumption? investment? government spending? nominal money supply?
consumption : decrease investment : decrease government spending : stay the same nominal money supply : stay the same
A financial innovation, such as the introduction of money market mutual funds, which increases the liquidity of alternatives to money, would
decrease money demand, shifting the LM curve down and to the right.
The likely effect of introducing an increased number of automatic teller machines is to
decrease money demand, shifting the LM curve down and to the right.
how does an increase in the money supply affect the FE line
does not change the FE line
how does an increase in the money supply affect the IS curve
does not change the IS curve
how does an increase in consumption effect SRAS
does not shift
how does an increase in the price level effect AD curve
does not shift the AD curve
how does an increase in government spending effect the LM curve
does not shift the LM curve
how does an increase in the money supply effect the SRAS
does not shift the SRAS
A rise in the price of a bond causes the yield of the bond to
fall
When the money supply declines by 10%, in the short run (before the price level adjusts to restore generalequilibrium), output ________ and the price level ________.
falls; is unchanged
If money is neutral, then monetary policy...
has real effects only in the short run
After general equilibrium is restored, the real interest rate is _____ and the price level is _____. (Compare with the situation before the shock.)
higher;higher
At a given output level, a temporary reduction in government purchases will
increase desired saving, causing the IS curve to shift down and to the left.
Banks decide to raise the interest rate they pay on checking accounts from 1% to 2%. This action would
increase money demand, shifting the LM curve up and to the left.
Any change that reduces desired saving relative to desired investment (for a given level of output) causes the real interest rate to ________ and shifts the IS curve ________.
increase; up and to the right
Keynesians believe that, in a recession, the government could help the economy improve by...
increasing the money supply.
The long-run aggregate supply curve
is vertical.
Keynesian economists believe that in the short run,
money neutrality does not exist and prices do not adjust rapidly.
For each of the following variables, select whether you would expect it to increase, decrease, or remain constant in general equilibrium as a result of the temporary supply shock. output? the real interest rate? the price level?
output : decrease real interest rate : increase price level : increase
For constant output, if the real money supply exceeds the real quantity of money demanded at some initial real interest rate,
people with excess money balances purchase nonmonetary assets, thus increasing the market price of the nonmonetary assets and reducing the real interest rate until an equilibrium is reached.
Keynesians contend that in a recession caused by a decline in aggregate demand, a policy of increasing the nominal money supply would
raise the level of aggregate demand, which would help return the economy to full-employment output.
An IS curve shows the combinations of the...
real interest rate and output for which the goods market is in equilibrium.
A temporary decline in productivity would cause the IS curve to
remain unchanged.
A decrease in wealth would cause the IS curve to
shift down and to the left.
You have just read that the Federal Reserve has increased the money supply to avoid a recession. For a given price level, you would expect the LM curve to
shift down and to the right as the real money supply rises.
A temporary supply shock, such as a bumper crop, would
shift the FE line to the right and leave the IS curve unchanged.
A beneficial supply shock would cause the FE line to
shift to the right.
An increase in the expected future marginal product of capital would cause the IS curve to
shift up and to the right
how does an increase in the effective tax rate on capital effect the AD curve
shifts the AD curve down and to the left
how does an increase in the money supply effect the AD curve
shifts the AD curve up and to the right
how does an adverse supply shock affect the FE line
shifts the FE line leftward
how does an increase in the labor supply affect the FE line
shifts the FE line rightward
how does an increase in the effective tax rate on capital affect the IS curve
shifts the IS curve down and to the left
how does a temporary increase in government spending affect the IS curve
shifts the IS curve up and to the right
how does an increase in the expected inflation rate effect the LM curve
shifts the LM curve down and to the right
how does an increase in the price level effect the LM curve
shifts the LM curve up and to the left
how does an increase in firm costs effect the SRAS
shifts the SRAS up
The aggregate demand curve shows the combinations of output and the price level that put the economy on
the IS curve and the LM curve.
Describe the short-run aggregate supply (SRAS) curve and the long-run aggregate supply (LRAS) curve.
the SRAS curve is horizontal and the LRAS curve is vertical
the LM curve shows
the combinations of the real interest rate and output such that the asset market is in equilibrium
The full-employment level of employment is:
the equilibrium level of employment reached after all wages and prices have fully adjusted
The position of the FE line is determined by:
the labor market and the production function
General equilibrium occurs at which point in the IS−LM diagram?
the point at which the FE line and the IS and LM curves intersect
if the economy isn't in general equilibrium, what determines output and the real interest rate?
the point at which the IS and LM curves intersect
The aggregate supply curve shows the relation between
the price level and the aggregate amount of output that firms supply.
The aggregate demand (AD) curve shows the relationship between:
the price level and the aggregate demand for goods and services.
Consider the impact of a decrease in taxes if Ricardian equivalence does not hold. After general equilibrium is restored, output is _____ and the price level is _____. (Compare with the situation before the shock.)
unchanged; higher
Consider the impact of a decrease in the money supply. After general equilibrium is restored, output is _____ and the price level is _____. (Compare with the situation before the shock.)
unchanged; lower
In the short run, before general equilibrium is restored, the LM curve shifts _____ and causes _____.
up and to the left; output to decline and the price level to remain unchanged
In the short run, before general equilibrium is restored, the IS curve shifts _____ and causes _____.
up and to the right; output to rise and the price level to remain unchanged
In the short run, before general equilibrium is restored, the IS curve shifts _____ and causes _____
up and to the right; the real interest rate to rise and the price level to remain unchanged
Which of the following changes shifts the AD curve down and to the left?
A decrease in consumer confidence.
Which of the following changes shifts the long-run aggregate supply curve to the right?
A demographic change that increases the labor supply.
Which of the following best describes a general equilibrium?
All markets are simultaneously in equilibrium.
Consider the impact of a decrease in effective tax rate on capital. The shock is most likely to affect the...
IS curve
Consider the impact of a decrease in taxes if Ricardian equivalence does not hold. The shock is most likely to affect the...
IS curve
According to the Keynesian model, after an economic disturbance, which of the following is true?
Price adjustment will eventually return the economy to general equilibrium, but this may take several years.
