Macroeconomics Midterm 2 Study Guide

Refer to Figure 12.1. This economy reaches capacity at

$1,500 billion.

Refer to Figure 13.2. The output multiplier is largest when the aggregate demand curve shifts from

AD1 to AD2.

Refer to Figure 13.2. Firms respond to an increase in government spending by mostly raising their prices when the aggregate demand curve shifts from

AD5 to AD6.

Refer to Figure 13.2. In response to an increase in government spending, the Fed would increase the interest rate by the greatest amount when the aggregate demand curve shifts from

AD5 to AD6.

If the Fed has a strong preference for stable prices relative to output, the ________ curve is relatively ________.

AD; flat

With a cost shock, a large decrease in output relative to the increase in the price level would occur if the ________ curve is relatively ________.

AD; flat

In a binding situation, the ________ curve is ________.

AD; vertical

Refer to Figure 12.4. Suppose the economy is at Point A, an increase in aggregate demand moves the economy to Point

B.

Refer to Figure 13.1. Suppose the economy is at Point A an increase in government purchases can cause a movement to Point

B.

Refer to Figure 12.8. If the economy is currently at Point D producing output level Y2, which of the following is NOT true?

The economy is operating above full employment.

What sequence of events results from a decrease in aggregate demand?

The price level falls, inventories increase, firms respond by reducing output and employment.

The classical view of the labor market is basically consistent with the assumption of ________ aggregate supply curve.

a vertical (or almost vertical)

If the economy is operating on the relatively vertical segment of the aggregate supply curve, an increase in aggregate demand causes a ________ change in the price level and a ________ change in output.

big; small

There is no systematic relationship between the price level and the level of aggregate output when

both aggregate supply and aggregate demand are changing simultaneously.

A sudden increase in the price of oil causes a ________ inflation and ________ output.

cost-push; lower

Refer to Figure 12.1. At aggregate output levels above $1,500 billion, firms in this economy are most likely experiencing

costs increasing as fast as output prices.

The type of unemployment that arises during recessions is known as

cyclical unemployment.

Refer to Figure 12.5. Which of the following combinations would definitely increase the equilibrium interest rate?

government spending increases and the price level increases

Refer to Figure 13.3. Assume the economy is at Point A. Higher oil prices shift the aggregate supply curve to AS2. If the government decides to counter the effects of higher oil prices by increasing government spending, then the price level will be ________ than P2 and output will be ________ than Y2.

greater; greater

According to the classical economists, those who are not working

have chosen not to work at the market wage.

If wages adjust fully to price increases in the long run, fiscal policy will

have no affect on output.

What determines the slope of the aggregate supply curve is

how fast the price of factors of production respond to changes in the price level.

If the Fed has a strong preference for stable prices relative to output, it responds to a price ________ with a ________ increase in the interest rate.

increase; large

The Federal Reserve's policy to "lean against the wind" means that

interest rates are increased gradually as the economy expands.

Refer to Figure 12.7. The level of aggregate output that can be sustained in the long run without inflation

is $700 million.

If the long-run aggregate supply curve is vertical, the multiplier effect of a change in net taxes on aggregate output in the long run

is zero.

Changes in the ________ market affect the shape of the short run aggregate supply curve.

labor

Potential output is equal to

long-run aggregate supply.

The level of aggregate output demanded falls when the price level rises, because the resulting increase in the interest rate will lead to

lower investment spending and lower consumption spending.

In a binding situation,

neither planned investment nor output change when the price level decreases.

The aggregate demand curve would shift to the left if

net taxes were increased.

If a decrease in net taxes in the United States resulted in a very large increase in aggregate output and a very small increase in the price level, then the U.S. economy must have been

on the very flat part of the short-run aggregate supply curve.

The measured unemployment rate can be pushed below the natural rate, but

only in the short run and not without inflation.

In a binding situation, an increase in government spending

shifts the AD curve to the right.

Refer to Figure 13.3. Assume the economy is currently at Point A on aggregate supply curve AS1. An increase in inflationary expectations that causes firms to increase their prices

shifts the aggregate supply curve to AS2.

The government lowers the marginal income tax rates so that after-tax wages are increased. This most likely will shift the labor

supply curve to the right.

Refer to Figure 14.2. At wage rate $15, there is a ________ of labor equal to ________ million people.

surplus; 120

When analyzing the effects of government spending, net taxes, and the Z factors, what primarily matters is the shape of

the AS curve.

If the combination r = 10% and Y = $200 billion is on the IS curve, we know that the combination r = 10% and Y = $300 billion would represent

the IS curve shifting to the right.

For an economy to experience both a recession and inflation at the same time,

the aggregate supply curve must shift to the left.

Which of the following is an example of an expansionary fiscal policy?

the federal government increasing the amount of money spent on public health programs

In the long run, the Phillips curve will be vertical at the natural rate of unemployment if

the long-run aggregate supply curve is vertical at potential output.

Refer to Figure 12.8. This economy cannot continue to produce Y1 (or at point B) because

the price of raw material and wages will increase shifting the aggregate supply curve to AS1.

The aggregate demand curve slopes downward because at higher price level

the purchasing power of consumers' assets declines and consumption decreases.

Refer to Figure 12.3. Hurricane Katrina destroyed a large portion of the infrastructure along the Gulf of Mexico coast. This caused

the short-run aggregate supply curve to shift from AS1 to AS2.

If the United States were to pass legislation that would make it easier for people to emigrate to the United States, this would cause

the short-run aggregate supply curve to shift to the right.

If a decrease in the Z factors resulted in a very large change in the price level and a very small change in aggregate output,

then the U.S. economy must have been on the very steep part of its short-run aggregate supply curve.

If the economy is on the flat portion of the AS curve,

there is little crowding out of planned investment.

A binding situation occurred during the recession of

2008-2009.

________ shifts the Fed rule to the right.

A decrease in the price level

Refer to Figure 12.8. Suppose the economy is currently at Point A producing potential output Y0. If the government increases spending, the economy moves to Point ________ in the short-run and to Point ________ in the long-run.

B; C

Refer to Figure 12.5. An increase in the price level shifts the ________ to the ________.

Fed rule; left

Refer to Figure 12.5. An increase in government spending shifts the ________ to the ________.

IS curve; right

Refer to Figure 12.7. Which of the following statements characterizes an output level of $800 billion?

It is attainable in the short run but it is associated with increases in the price level.

Refer to Figure 12.6. Which of the following will, unambiguously, decrease the price level?

a decrease in government spending and a decrease in costs

Refer to Figure 13.1. An aggregate demand shift from AD1 to AD0 can be caused by

a decrease in government spending.

Demand-pull inflation can be the result of

a decrease in the Z factors.

To decrease the price level the government could

adopt policies that encourage immigration and decrease government spending.

Employment tends to rise when

aggregate output rises.

The economy experiences both a falling price level and falling unemployment when

aggregate supply increases with aggregate demand stable.

Refer to Figure 12.6. Suppose the equilibrium output is initially $600 billion. An oil embargo would probably

decrease the equilibrium output and increase the price level.

A(n) ________ in inflationary expectations that causes firms to decrease their prices shifts the aggregate supply curve to the ________.

decrease; right

If the AD curve shifts from year to year and the AS curve does not, then the short run Phillips curve would be

downward sloping.

When a firm pays higher wages for its workers to improve workers' productivity, the firm pays

efficiency wages.

Refer to Figure 12.1. At aggregate output levels below $500 billion, this economy is most likely experiencing

excess capacity.

Which of the following sequence of events follows an open market purchase by the Fed?

r↓ I↑ AE↑ Y↑

Since 1970, the Fed generally ________ the interest rate when inflation was ________.

raised; high

The objective of a contractionary fiscal policy is to

reduce inflation.

The aggregate supply curve

relates output with the price level.

According to classical economists, excessive unemployment does not persist in the economy because

wages will always adjust to ensure equilibrium in the labor market.