My lab Pearson Ch. 15 Econ

1.) Suppose the economy is at full employment and foreign firms open their markets and U.S. firms start to produce more for export. Everything else remains the same. In the short​ run, U.S. GDP will A. increase. B. be unchanged. C. decrease. D. change in some indeterminate way.

1.) a.) increase 2.) D.) Increase

Government spending can cause crowding out in the long run because A. interest rates rise during the adjustment process and crowd out private investment. B. interest rates rise during the adjustment process and encourage private investment. C. interest rates fall during the adjustment process and encourage private investment. D. interest rates fall during the adjustment process and crowd out private investment.

A.) interest rates rise during the adjustment process and crowd out private investment.

When there is an economic policy​ change, the move from the short run to the long run A. is difficult to predict how long it will take. B. takes about 36 months. C. depends on the political party in control of the Senate. D. takes about 2 months.

A.) is difficult to predict how long it will take.

The idea that a change in the supply of money has no effect on real interest​ rates, investment, or output in the long run is called A. ​long-run neutrality of money. B. an outside lag. C. a political business cycle. D. an implementation lag.

A.) long-run neutrality of money.

When the economy is operating above full​ employment, A. prices will​ rise, shifting the​ short-run aggregate supply curve​ upward, and returning output to its​ full-employment level. B. prices will​ rise, shifting the​ short-run aggregate supply curve​ downward, and moving output away from its​ full-employment level. C. prices will​ rise, shifting the​ short-run aggregate supply curve​ upward, and moving output away from its​ full-employment level. D. prices will​ fall, shifting the​ short-run aggregate supply curve​ downward, and returning output to its​ full-employment level.

A.) prices will​ rise, shifting the​ short-run aggregate supply curve​ upward, and returning output to its​ full-employment level.

​"In the long​ run, we do not have to worry about increased government spending causing crowding​ out, because the Fed can always increase the money supply to lower interest rates to prevent​ this." The quote A. is accurate because the Fed can directly stop crowding out. B. is erroneous because increases in the money supply do not influence real interest rates in the long run. C. is accurate because increases in the money supply lowers interest rates so that crowding out does not occur. D. is erroneous because increases in the money supply cannot influence interest rates.

B.) is erroneous because increases in the money supply do not influence real interest rates in the long run.

Suppose that firms are more likely to invest if government provides better roads and transportation. Explain how this factor may decrease the likelihood that private investment spending will be crowded out by infrastructure​ investment? In an open​ economy, what other types of spending could be crowded​ out? If infrastructure investment makes private investment more​ profitable, then the latter A. will increase as interest rates rise. This could mean in an open economy that either consumption or imports are crowded out. B. may not decrease even if interest rates rise. This could mean in an open economy that either consumption or exports are crowded out. C. will increase as interest rates rise. This could mean in an open economy that either consumption or exports are crowded out. D. may not decrease even if interest rates rise. This could mean in an open economy that either consumption or imports are crowded out.

B.) may not decrease even if interest rates rise. This could mean in an open economy that either consumption or exports are crowded out.

Classical economics is often associated with​ Say's law, the doctrine that A. ​"the market behaves like an invisible​ hand." B. ​"demand creates its own​ supply." C. ​"supply creates its own​ demand." D. ​"marginal benefit equals marginal​ cost."

C.) "supply creates its own​ demand."

Milton​ Friedman's views on economic policy were greatly influenced by his interpretation of the Great Depression. He argued that the Great Depression was caused by government mismanagement of the money supply. ​Friedman's interpretation of history led him to advocate which of the following economic policies in times of​ recession? A. The Federal Reserve should increase the money supply to stimulate investment. B. The government should use activist policies such as tax cuts or government spending increases. C. The government and the Federal Reserve should do​ nothing, as activist policies may do more harm than good. D. The Federal Reserve should reduce the money supply to discourage future inflation.

C.) The government and the Federal Reserve should do​ nothing, as activist policies may do more harm than good.

When there is a situation in which nominal interest rates are so low they can no longer​ fall, it is known as A. an interest rate​ bound, or zero liquidity. B. an interest rate​ trap, or a zero lower bound. C. a liquidity​ trap, or a zero lower bound. D. a monetary​ trap, or a zero interest rate bound.

C.) a liquidity​ trap, or a zero lower bound.

According to the​ long-run neutrality of​ money, an increase in the money supply has no effect on A. nominal interest​ rates, but increases investment and output in the long run. B. real interest​ rates, investment, or​ output, in the short run. C. real interest​ rates, investment, or​ output, in the long run. D. nominal interest rates or​ investment, but increases output in the long run.

C.) real interest​ rates, investment, or​ output, in the long run.

David Ricardo and John Stuart Mill are known as ▼ Keynesian classical monetarist economists.

Classical

If the natural rate of unemployment is 5 percent and the actual rate of unemployment is 8 ​percent, wages and prices will A. stay the same. B. rise. C. be equal. D. fall.

D.) Fall

The effects on the economy of using monetary or fiscal policy to stimulate the economy before an election to improve reelection prospects is called A. politicing. B. jerrymandering. C. logrolling. D. a political business cycle.

D.) a political business cycle.

Economists who believe that the transition from the short run to the long run occurs rapidly do not generally favor using active stabilization policy. This is because if the transition from the short run to the long run occurs​ quickly, active stabilization policies A. will be neutral in the long run. B. will not work quickly enough to influence GDP and the price level. C. will not have any effect on the macroeconomy. D. can destabilize the economy.

D.) can destabilize the economy.

A decrease in government spending will ▼ increase decrease have no effect on interest rates in the long run.

Decrease

Analyze how the following factors associated with increased spending on health care might affect economic growth. ​a-b. Households may cut down on purchases of consumer durables to spend more on health. This will ▼ increasedecrease investment in the short run​, ▼ raisinglowering economic growth in the short run. Households may reduce their savings in order to spend more on health care. This will ▼ increasereduce investment in the short run​, ▼ increasingreducing economic growth in the short run.

Decrease, Lowering, reduce, reducing

Wages and prices will fall when actual output exceeds potential. T or F

F

A decrease in the money supply will have a large effect on the real rate of interest in the long run.

False

A liquidity trap means that the Fed cannot increase interest rates. T or F

False

If the adjustment process works slowly​, then economic policy is less necessary. T or F

False

If the output is below full​ employment, we expect wages and prices to rise​, money demand to increase​, and interest rates to rise. T or F

False

​Keynes's objection to​ Say's Law was that it is possible that demand creates its own supply. T or F

False

Supply shocks are sudden increases in the prices of commodities such as oil or food. These shocks shift the​ short-run aggregate supply curve. For​ example, the increase in oil prices in 2008 will shift the​ short-run aggregate supply curve​ upward, because​ firms' costs have risen and firms must charge higher prices to avoid losing money. During a supply​ shock, the price level increases and unemployment increases​, while during a demand shock​ (such as an increase in​ investment), the price level increases and unemployment decreases. Economists say that supply shocks create a dilemma for the Federal Reserve that shocks to demand​ (for example, from sudden increases in investment spending by optimistic​ firms) do not create. Which of the following best explains why economists say​ this? A. Because only fiscal policies are effective when there is a supply shock. B. Because the Fed has no policies that can reverse the price level increase created by a supply shock. C. Because the Fed can only lower unemployment due to a supply shock by increasing the price level. D. Because the Fed can only influence aggregate​ supply, not aggregate demand.

Increase, Increase, Increase, Decrease, C.) Because the Fed can only lower unemployment due to a supply shock by increasing the price level.

Suppose organized labor has successfully bargained for cost of living increases for its workers. That​ is, when prices rise—as measured by the CPI—wages are automatically adjusted by the same percentage. This would make the economy ▼ lessmore likely to experience a​ wage-price spiral.

More

The long run in macroeconomics is the time period over which ▼ the money supply does not adjust prices do not adjust prices adjust employment does not adjust to economic conditions.

Prices adjust

The ▼ long short run in macroeconomics is the period of time in which prices do not change or do not change very much. The ▼ short long run in macroeconomics is the period of time in which prices have fully adjusted to any economic changes.

Short, long

Economists who believe in secular stagnation do not believe in​ Say's Law. T or F

True

In the long​ run, the level of GDP is determined, in part, by the supply of labor. T or F

True

Professors Don Patinkin and Franco Modigliani developed the​ adjustment-process model used in this chapter. T or F

True

​Keynes's objection to​ Say's Law was that demand might be less than output for extended periods of time. T or F

True

The chart shows unemployment rates in the United States over time. Blue areas show Democratic presidential​ administrations, and red areas show Republican administrations. Gray dashed lines indicate a transition from president to president within the same party​ (for example, Reagan to Bush in the​ 1980s). This data can be used to explore the concept of political business cycles. 1. Based on the​ data, unemployment behaves differently in the first two years of a presidential term compared to the final two years. Uncertain 2. Based on the​ data, there are systematic differences in unemployment in the first years of Democratic and Republican presidencies. True

Uncertain, true

According to the logic of the​ wage-price spiral, a decrease in wages leads to a decrease in prices ​, which in turn leads to ▼ an increase a decrease in ▼ employment unemployment prices interest rates wages .

a decrease, in prices, a decrease, in wages

When the economy is producing above full employment or potential​ output, unemployment will ▼ exceed be less than the natural rate. Firms will find it ▼ easy difficult to hire and retain​ workers, and they must offer workers ▼ more less . As all firms ▼ cut raise ​wages, the average level of wages in the economy ▼ rises falls ​, causing prices to ▼ fall rise . The ▼ short long ​-run aggregate supply curve shifts ▼ upward downward over time because the change in wages ▼ lowers raises costs for​ firms, bringing the economy to ▼ short long ​-run equilibrium.

be less than, difficult, more, raise, rises, rise, short, upward, raises, long

Lawrence Summers offered a number of reasons why there might not be sufficient aggregate demand to generate full employment with the result being secular stagnation Identify why each of the factors below may lead to insufficient aggregate demand. a. The distribution of income has shifted to higher earning individuals who save more than lower earning ones. In this​ case, consumption will fall so that there could be insufficient aggregate demand. b. The most successful corporations today like Apple or Google do not purchase as many capital goods for their business compared to companies in the past such as railroads or steel plants. In this​ case, investment will fall so that there could be insufficient aggregate demand. c. Interest rates are close to zero now. In this​ case, investment will fall so that there could be insufficient aggregate demand. d. Technological progress has reduced the prices of capital equipment. In this​ case, investment will fall so that there could be insufficient aggregate demand. e. Financial regulation has made it more difficult for banks to extend loans. In this​ case, ▼ consumptionnet exportsgovernment spendinginvestment will fall so that there could be insufficient aggregate demand.

consumption, investment, investment, investment, investment

Suppose the economy was at full employment but that interest rates were low and policy makers were worried about the threat of a future liquidity trap. To maintain full employment but ease the worry of a future liquidity​ trap, policy makers could use ▼ contractionaryexpansionary monetary policy along with ▼ expansionarycontractionary fiscal policy.

contractionary, expansionary

As the price level decreases​, the demand for money ▼ stays the same increases decreases and the interest rate ▼ increases stays the same decreases .

decrease, decrease

When the economy is producing below full employment or potential​ output, unemployment will ▼ be less than exceed the natural rate. Firms will find it ▼ difficult easy to hire and retain​ workers, and they can offer workers ▼ more less . As all firms ▼ raise cut ​wages, the average level of wages in the economy ▼ falls rises ​, causing prices to ▼ rise fall .

exceed, easy, less, cut, falls, falls

Economists emphasize that one of the necessary conditions for the classical model to work is that wages and prices must be ▼ sticky flexible . Over ▼ long short periods of​ time, wages and prices are not fully​ flexible, so ▼ Keynes' model classical model insights are important.​ However, over ▼ shorter longer periods of​ time, wages and prices do adjust and the insights of ▼ Keynes' model the classical model are more relevant.

flexible, short, Keynes model, longer, the classical model

Young households looking to obtain a mortgage to buy a new home might want to have a decrease in​ long-run government spending for its effects on financial markets. This is mainly because it would lead to lower ▼ aggregate demandinterest rates and make a mortgage ▼ lessmore expensive.

interest rates, less

The​ short-run aggregate supply curve will shift ▼ leftward rightward if the​ economy's actual output is above ​full-employment output.

leftward

Starting at full​ employment, an increase in government spending ▼ lowers raises output ▼ below above full employment. As wages and prices ▼ increase decrease ​, the demand for money ▼ decreases increases ​, ▼ lowering raising interest rates and ▼ increasing reducing investment. The economy returns to full​ employment, but at a ▼ higher lower level of interest rates and a ▼ lower higher level of investment spending.

raises, above, increase, increases, raising, reducing, higher, lower

When the economy is producing below full employment or potential​ output, the ▼ short long ​-run aggregate supply curve shifts ▼ upward downward over time because the change in wages ▼ raises lowers costs for​ firms, bringing the economy to ▼ short long ​-run equilibrium.

short, downward, lowers, long

If economic policies are implemented to decrease aggregate demand and bring the economy back to full​ employment, then the price level would be

true, lower