Macroeconomics Midterm #3

If inflation is higher than what was expected,

creditors receive a lower real interest rate than they had anticipated

The Federal Reserve controls _____ and influences ______ with the intention of influencing ____ .

money supply interest rates investment

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,

production is more profitable and employment rises

Relative-price variability

rises with inflation, leading to a misallocation of resources

In order to understand how the economy works in the short run, we need to

study a model in which real and nominal variables interact.

Graph, Phillips curve above. natural rate of unemployment is 4.5% The fed res decides to decrease the money supply and the effects are PERFECTLY anticipated .

B

Which graph best describes the effect of a DECREASE in price level, all else constant?

B

The unemployment rate was most likely greater than the natural rate at points

B and C

Graph Federal reserve has decided that the inflation rate is too high and implements a contraction in the money supply. What best describes the path the economy takes as a result of the contraction in money supply and the subsequent adjustment to a new long-run equilibrium

B to C to D

Refer to the Phillips curve above. Suppose the relevant Phillips curve is curve I and the economy is currently at point "B." If the Federal Reserve implements a policy to decrease the money supply and the effects are not anticipated, the economy most likely moves to point

A

Which graph best describes the short-run effect of a decrease in the quantity of discount loans made by the federal reserve?

D

Which of the following accounts for about 2/3 of the decline in output during a recession?

The decline in investment spending

Which of the following would be classified as fiscal policy?

The federal gov cuts taxes to stimulate the economy

Suppose the expected inflation rate increases from 5% to 8%. According to the Fisher effect

The nominal interest rate increases by 3% points.

Economy is producing at A. Which of the following best describes the adjustment back to the natural level of output

Wages and input prices rise and the new equilibrium at point B

Money neutrality suggests that an increase in the money supply leads to _____ in price level and inflation and _____ in real GDP.

an increase no change

Which of the following would not lead to a decrease in aggregate demand and a leftward shift in the AD curve?

an increase in domestic price level

Which of the following shifts both the short-run and long-run aggregate supply right?

an increase in the capital stock

In the long-run

an increase in the price level has no effect on the aggregate quantity of GDP supplied

Graph

P2

Which of the following policy actions shifts the aggregate-demand curve?

-an increase in gov spending -an increase in the money supply -an increase in taxes

The inflation tax

-is like a tax on everyone who holds money -is an alternative ti income taxes and government borrowing -is the revenue created when the government prints money

3 part question

......

Expected inflation rate is 5% and the relevant Phillips curve is curve 2. What is the natural rate of unemployment

4.5%

Refer to the figure above. Suppose the the economy begins in recession. What is the short-run result of an open market purchase of securities by the Federal Reserve?

A movement from C to B

The short-run consequence of an increase in the personal income tax levied on household is best described by graph

C AD1 shifts left to AD2

Which of the following would lead to a decrease in the multiplier effect of fiscal policy?

Households save a higher fraction of income.

which of the following would lead to a shift in the short-run aggregate supply curve but no change in the long-run aggregate supply curve?

a decrease in the expected price level

Refer to the figure above. Which of the following would cause a movement from point B to C

a fall in housing prices

an earthquake destroys capital stock in an economy. The result is

a leftward shift in the long-run aggregate supply curve.

In the short-run, an increase in aggregate supply leads to _____ price level and _____ in unemployment.

decrease, decrease

If the economy is producing below the natural rate of output in the short-run, wages and input prices will eventually___________ and _______________ will increase, returning the economy to long-run equilibrium

fall, short-run aggregate supply

Other things the same, when the price level falls, interest rates

fall, so firms increase investment

Suppose an economy is experiencing a period of high inflation. The government and central bank announce a contradictonary policy to reduce the rate of inflation. The Phillips curve predicts an _______ in unemployment. If households and firms believe the policy to be credible and revise their expectations to expect lower inflation, the change in unemployment would be ________ than if household and firms maintain their previous expectations.

increase less

Examples of automatic stabilizers include government expenditures that ____ when national income decreases and help explain why deficits are ____ during recessions.

increase larger

Suppose the Federal Reserve announces an expansion in the money supply. Households and firms act rationally by revising expectations to anticipate an increase in the inflation rate. As a result,

inflation rises and the unemployment rate does not change very much

The Phillips curve suggests that in the short-run,

unemployment and inflation are negatively/inversely related

A favorable supply shock, like a decrease in the price of oil, would cause

the short-run Phillips curve to shift to the left and a more favorable trade-off between unemployment and inflation.