Macroeconomics - Chapters 20-22

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, then we would expect that in the short-run,

Real GDP will fall and the price level might rise, fall, or stay the same

Over the long run the Volcker disinflation

Shifted the short-run, but not the long run Phillips curve left

in 1936, Keynes published a book, the General Theory, which attempted to explain

Short-run economic fluctuations

In the long run, which of the following depends primarily on the growth rate of the money supply?

The inflation rate but not the natural rate of unemployment

Which of the following shifts the long-run Phillips curve left?

a decrease in the minimum wage rate, but not an increase in the inflation rate

The initial impact of an increase in an investment tax credit is to shift

aggregate demand right

The aggregate demand curve shows the

quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level

If there is a temporary adverse supply shock, then the short-run Phillips curve shifts to the

right. It remains to the right if the central ban pursues expansionary monetary policy

An economy has a current inflation rate of 12%. If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2, how much annual output must be sacrificed in the transition?

16%

If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year, the sacrifice ratio is

5

During the last half of 1980, the U.S. unemployment rate was about 7.5 percent. Historical experience suggests that this is?

Above the natural rate, so real GDP growth was likely low

Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left. If there is no policy response, then eventually

Because unemployment is high wages will be bid down and short-run aggregate supply will shift right.

In the short run what happens to the price level and real GDP?

Both the price level and real GDP rise

Samuelson and Solow argued that when unemployment is high there is

Downward pressures on wages and prices

In which case can we be sure real GDP rises in the short run?

The money supply increases and taxes fall

According to the Phillips curve, unemployment and inflation are negatively related in

The short-run but not in the long run

Which of the following shifts aggregate demand to the right?

an increase in the money supply

Samuelson and Solow reasoned that when aggregate demand was high, unemployment was

low, so there was upward pressure on wages and prices

If the interest rate is above the FED's target, the FED should

buy bonds to increase the money supply

Other things the same, if the long-run aggregate supply curve shifts right, prices

decrease and output increases

In the short run, an increase in the money supply causes interest rates to

decrease, and aggregate demand to shift right

An economic contraction caused by a shift in aggregate demand causes prices to

fall in the short run, and fall even more in the long run

Macroeconomics forecast are

imprecise; this makes policy lags more relevant

Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then

unemployment falls, but it would have fallen less if people had been expecting 25% inflation.

Most economists believe that fiscal policy

Primarily affects aggregate demand

Which of the following rises when the U.S. price level falls?

real wealth

Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?

As people revise their price-level expectation downward, firms and workers strike bargains for lower nominal wages

If the natural rate of unemployment falls

Both the short-run and long-run Phillips curves shift left

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

Consumption, investment, and net exports

Proponents of rational expectations argued that the sacrifice ratio

Could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

If countries that imported goods and services from the United States went into recession, we would expect that U.S. net exports

Fall, making aggregate demand shift left

Other things the same, during recessions tax tend to

Fall. The fall in taxes stimulates aggregate demand

Other things the same, an unexpected fall in the price level results in some firms having

Higher than desired prices which depresses their sales

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

Increase taxes

Which of the following is correct concerning the long-run Phillips curve?

Its position depends on the natural rate of unemployment

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is

Keynesian in mature, and that his view is more valid for the short run for the long run

An increase in the expected price level shifts short-run aggregate supply to the

Left, and an increase in the actual price level does not shift short-run aggregate supply

The short run effects of the housing/financial crisis are shown by

Moving to the right along the short-run Phillips curve

An increase in the price level and a reduction in output would result from

Natural disasters such as hurricanes, floods and droughts

Which of the following implies that an increase in the money supply growth rate permanently changes the unemployment rate?

Neither the long-run Phillips curve nor the long-run aggregate supply curve

Which of the following both shifts aggregate demand right?

Net exports fall for some reason other than a price change and the price level rises

If the minimum wage increased, then at any given rate of inflation

Output would be lower and unemployment would be higher

When we say economic fluctuations are "irregular and unpredictable" we mean that?

Recessions do not occur at regular intervals

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

Rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.

Which of the following tends to make the size of a shift aggregate demand resulting from a tax cut smaller than it otherwise would be?

The crowding-out effect

The Employment Act of 1946 stats that

The government should promote full employment and production

The economy will move to a point on the short-run Phillips curve where unemployment is higher if

The inflation rate decreases

According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in

The interest rate

Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp decline in the stock market, a tax cut, an increase in the money supply and a decline in the value of the dollar. In the short run

The price level and real GDP will rise, fall, or neither the price level nor real GDP will change.

Which of the following effects provide incentives for consumers to spend less when the price level rises?

The wealth effect and the interest-rate effect

During recessions

Workers are laid off, factories are idle, firms may find they are unable to sell all they produce

A central bank sets out to reduce unemployment by changing the money supply growth rate. The long-run Phillips curve shows that in comparison to their original rates, this policy will eventually lead to

an increase in the inflation rate and no change in the unemployment rate

Which of the following shifts the long-run aggregate supply curve to the left?

an increase in the price of imported natural resources, but not opening international trade

Other things the same, if the workers and firms expected prices to rise 2% but instead the rise by 3%, then

employment and production rise

Country A's long-run Phillips curve is farther to the right than country B's. Country A and country B are identical in all other ways. In particular, they have the same money supply growth rates. In the long run as compared to country B country A will have

higher unemployment and the same rate of inflation

In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods

When they are confronted an adverse shock to aggregate supply, policymakers face a difficult choice in that

if they contract aggregate demand, the unemployment rate will increase further. if they expand aggregate demand, the inflation rate will increase further. they face a less favorable trade-off between inflation and unemployment than they did before the shock.

Open market purchases

increase investment and real GDP

According to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5% and actual inflation was 6%, then the firm would believe that the relative price of what it produce had

increased, so it would increase production.

Aggregate demand shifts right when the government

increases the money supply

According to Friedman and Phelps, the unemployment rate is above the natural rate when actual inflation

is less than expected inflation

If inflation expectations rise, the short-run Phillips curve shifts

left, so that any rate unemployment rate inflation is lower in the short run than before

Other things the same, a decrease in the price level motivates people to hold

less money, so they lend more, and interest rate falls

Other things the same, in the long run a country that reduces the minimum wage from very high levels will have

lower unemployment and the same level of inflation

People might deposit more money into interest-bearing accounts

making the interest rate fall, if there is a surplus in the money market

According to liquidity preference theory, a decrease in the price level shifts the

money demand curve leftward, so the interest decreases

Other things the same, an increase in the price level induces people to hold

more money, so they lend less, and the interest rate rises

The effect of an increase in the price level on the aggregate-demand curve is represented by

movement to the left along a given aggregate-demand curve

People had been expecting the price level to be 170 but it turns out to be 165. Diamond power tools increases the number of workers it employs, What could explain this?

neither sticky wage theory not sticky price theory

Soon after he became chairman of the FED in 1976, Paul Volcker embarked on a course

of disinflation

According to the 2009 article, The Economists, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

operating at full capacity

If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result?

output but not the price level

As the price level rises

people will want to hold more money, interest rates rise

The model of aggregate demand and aggregate supply explains the relationship between

real GDP and the Price level

In the long run, a decrease in the money supply growth rate

reduces expected inflation so the short-run Phillips curve shifts left and unemployment returns to its natural rate

If the central bank increases the money supply, in the short run, output

rises so unemployment falls

In the mid-1970s the price of oil rose dramatically. This

shifted the aggregate supply left

In the long run, the change in price expectations caused by optimism shifts

short-run aggregate supply left

In the long run, the change in the price expectations created by the stock boom shifts

short-run aggregate supply to the left

Since the end of WWII, the U.S. has almost always had rising prices and an upward trend in real GDP. This can be explained by

technological progress and money supply growth

When the price level falls

the interest rate falls, so the quantity of goods and services demand rises

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

the interest-rate effect

The position of the long-run Phillips curve and the long-run aggregate supply curve both depends on

the natural rate of unemployment, but not monetary growth

Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run.

the price level will fall, and real GDP might rise, fall, or stay the same

If there are sticky wages, and the price level is greater than what was expected then,

the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve.

Aggregate demand includes

the quantity of goods and services households, firms, the government, and customers abroad want to buy

In the late 1970s, proponents of rational expectations argued that

the sacrifice ratio was smaller than previously thought

In recent years, the FED has chosen to target interest rates rather than the money supply because

they money supply is hard to measure with sufficient precision

The government of Murkland considers two policies. Policy A would shift AD right by 300 units while policy B would shift AD right by 200 units. According to the short-run Phillips curve, policy A will lead

to a lower unemployment rate and a higher inflation rate than policy B

An adverse supply shock will cause output

to fall and prices to rise

In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years. Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then

unemployment rises, but it would have risen more if people had been expecting 25% inflation.