Assignment 6 (Unit 7)

Which of the points in the below graph are possible long run equilibriums? A and B A and C A and D B and D

A and C

Suppose the price of crude oil falls substantially. Which of the following is the most likely effect of the decrease in fuel prices on the economy? A decrease in the equilibrium price level and a decrease in equilibrium real GDP. An increase in the equilibrium price level and an increase in equilibrium real GDP. An increase in the equilibrium price level and a decrease in equilibrium real GDP. A decrease in the equilibrium price level and an increase in equilibrium real GDP.

A decrease in the equilibrium price level and an increase in equilibrium real GDP.

Which of the following will NOT shift a nation's long-run aggregate supply curve to the right? An increase in the size of the labor force. A decrease in the nominal wage rate. An increase in the capital available in the economy. An improvement in technology.

A decrease in the nominal wage rate.

During the 1990-91 recession, consumers decided to decrease consumption to repay a larger portion of household debt. What happened? Short run Aggregate supply shifted to the left, causing equilibrium GDP to decline. Aggregate demand increased, causing the recessionary GDP gap to diminish. Short run Aggregate supply and aggregate demand both shifted to the left, causing short run GDP to decline. Aggregate demand shifted to the right, causing a higher equilibrium real GDP. Aggregate demand declined, resulting in lower levels of real output and employment.

Aggregate demand declined, resulting in lower levels of real output and employment.

Factors that influence the long-run aggregate supply curve are resource availability and technology. improvements in productivity. labor, capital, and equipment. All of the above.

All of the above

Which of the following will NOT increase potential real GDP over the long run? Improvements in technology. Increases in population. Increased legal institution. An increase in demand.

An increase in demand.

Which of the following decreases in response to the interest-rate effect from an increase in the price level? a. both investment and consumption b. consumption but not investment c. investment but not consumption d. neither investment nor consumption

a. both investment and consumption

Which of the following would cause prices and real GDP to rise in the short run? a. aggregate demand shifts left b. aggregate demand shifts right c. short-run aggregate supply shifts right d. short-run aggregate supply shifts left

b. aggregate demand shifts right

The price level rises in the short run if a. aggregate demand or aggregate supply shifts right. b. aggregate demand shifts right or aggregate supply shifts left. c. aggregate demand shifts left or aggregate supply shifts right. d. aggregate demand or aggregate supply shifts right.

b. aggregate demand shifts right or aggregate supply shifts left.

Financial CrisisSuppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the change in output? a. real wages rise, so firms choose to produce more b. real wages rise, so firms choose to produce less c. real wages fall, so firms choose to produce more d. real wages fall, so firms choose to produce less

b. real wages rise, so firms choose to produce less

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected, a. relative to prices wages are lower and employment falls. b. relative to prices wages are higher and employment falls. c. relative to prices wages are lower and employment rises. d. relative to prices wages are higher and employment rise.

b. relative to prices wages are higher and employment falls.

If output is above its natural rate, then according to sticky-wage theory a. workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve right. b. workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left. c. workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve right. d. workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve left.

b. workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.

An increase in the price of a key input, such as labor, will result in Decrease in prices. Increase in national production. both increase in prices and decrease in national production. All of the above.

both increase in prices and decrease in national production.

The real interest rate effect and wealth effect are important because they help to explain why demand management policy cannot be used effectively when short run aggregate supply shifts to the left. the downward-sloping nature of the aggregate demand curve. why the aggregate demand curve may shift inward or outward. why equilibrium real GDP rarely coincides with potential real GDP

the downward-sloping nature of the aggregate demand curve.

In the basic aggregate demand and aggregate supply model, which of the following could cause a recession? An increase in: government purchases. personal income taxes. the expectations of households of their future income. the expectations of firms of the future profitability of their current investment spending.

the expectations of households of their future income.

The real interest rate effect provides a partial explanation for why the aggregate demand curve slopes downward. Which of the following statements best explains the real interest rate effect? At a lower price level, the purchasing power of accumulated savings is larger; thus, consumers will purchase more goods. At a lower price level, consumers will buy less because of a reduction in the real money supply. At a lower price level, domestically produced items are relatively less expensive than foreign goods and therefore are in greater demand. At a lower price level, the real interest rate tends to be lower; thus, the quantity of investment goods demanded is larger.

At a lower price level, the real interest rate tends to be lower; thus, the quantity of investment goods demanded is larger.

Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long run equilibrium be? A B C D

C

Other things the same, continued increases in technology lead to a. continued increases in the price level and real GDP. b. continued decreases in the price level and real GDP. c. continued increases in real GDP and continued increases in the price level. d. continued increases in real GDP and continued decreases in the price level.

D. . continued increases in real GDP and continued decreases in the price level.

Which of the following helps to explain the downward-sloping nature of the aggregate demand curve? Falling prices put downward pressure on real interest rates, causing business investment to increase. Falling prices put downward pressure on nominal interest rates, causing consumption to increase. Falling prices put upward pressure on real interest rates, causing business investment to increase. An increase in the price level induces producers to increase the aggregate output they'll offer in the domestic market for goods and services.

Falling prices put downward pressure on real interest rates, causing business investment to increase.

Which of the following would cause the short-run aggregate supply curve to be upward sloping? There is no cost to firms of changing the prices of their products. There is a fixed quantity of inputs. Firms adjust wages immediately. Labor contracts make wages sticky.

Labor contracts make wages sticky.

According to the aggregate demand/aggregate supply model, one possible cause of a recession is: an increase in government spending on education. a reduction in taxes. a decrease in demand for investment goods by businesses. an increase in government spending on military goods.

a decrease in demand for investment goods by businesses.

If aggregate demand shifts right then in the short run a. firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left. b. firms will decrease production. In the long run increased price expectations shift the short-run aggregate supply curve to the right. c. firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the right. d. firms will decrease production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.

a. firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.

Aggregate demand shifts right if a. government purchases increase and shifts left if stock prices fall. b. government purchases increase and shifts left if stock prices rise. c. government purchases decrease and shifts left if stock prices rise. d. government purchases decrease and shifts left is stock prices fall.

a. government purchases increase and shifts left if stock prices fall.

If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level a. is lower and output is the same as the original long-run equilibrium. b. is the same and output is lower than in the original long-run equilibrium. c. and output are lower than in the original long-run equilibrium. d. and output are higher than in the original long-run equilibrium.

a. is lower and output is the same as the original long-run equilibrium.

As the price level falls a. people will want to buy more bonds, so the interest rate falls. b. people will want to buy fewer bonds, so the interest rate falls. c. people will want to buy more bonds, so the interest rate rises. d. people will want to buy fewer bonds, so the interest rate rises.

a. people will want to buy more bonds, so the interest rate falls.

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level a. rises, shifting aggregate supply left. b. falls, shifting aggregate supply right. c. rises, shifting aggregate demand left. d. falls, shifting aggregate demand right.

a. rises, shifting aggregate supply left.

In the mid-1970s the price of oil rose dramatically. This a. shifted aggregate supply left, the price level rose, and real GDP fell. b. caused U.S. prices to fall, and real GDP rose. c. caused an increase in U.S. prices and real GDP. d. caused a decrease in U.S. prices and real GDP.

a. shifted aggregate supply left, the price level rose, and real GDP fell.

The long-run aggregate supply is vertical because in the long run changes in the price level do NOT: affect interest rates. affect the prices of inputs. affect the number of workers, the capital stock, or technology. shift aggregate demand.

affect the number of workers, the capital stock, or technology.

Refer to the figure below. The economy's GDP could find itself below potential GDP in short-run macroeconomic equilibrium as a result of: an increase in oil prices. a decrease in personal income taxes. a decrease in business taxes. an increase in government purchases.

an increase in oil prices.

Consider the exhibit below for the following questions. Refer to Figure 33-4. If the economy starts at A, a decrease in the money supply moves the economy a. to A in the long run. b. to C in the long run. c. to D in the long run. d. back to A in the long run.

b. to C in the long run

Refer to Figure 33-5. In Figure 33-5, a. Point B represents a short-run equilibrium and a long-run equilibrium. b. Point B represents a short-run equilibrium, and Point A represents a long-run equilibrium. c. Point B represents a long-run equilibrium, and Point A represents a short-run equilibrium. d. Point B represents a long-run equilibrium, and Point C represents a short-run equilibrium.

b. Point B represents a short-run equilibrium, and Point A represents a long-run equilibrium.

Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. Which curve shifts and in which direction? a. aggregate demand shifts right b. aggregate demand shifts left c. aggregate supply shifts left. d. aggregate supply shifts right.

b. aggregate demand shifts left

Suppose the economy is in long-run equilibrium. If there is a sharp decline in government purchases combined with a significant increase in immigration of skilled workers, then in the short run, a. the price level will fall, and real GDP might rise, fall, or stay the same. In the long-run, real GDP and the price level will be unaffected. b. real GDP will rise and the price level might rise, fall, or stay the same. In the long-run, real GDP will rise and the price level might rise, fall, or stay the same. c. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall. d. the price level will rise, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

c. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

When looking at a graph of aggregate demand, which of the following is correct? a. The variable on the vertical axis is real; the variable on the horizontal axis is nominal b. There are real variables on both the vertical and horizontal axes. c. The variable on the vertical axis is nominal; the variable on the horizontal axis is real d. There are nominal variables on both the vertical and the horizontal axes

c. The variable on the vertical axis is nominal; the variable on the horizontal axis is real

OptimismImagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. Which curve shifts and in which direction? a. aggregate supply shifts right. b. aggregate supply shifts left. c. aggregate demand shifts right d. aggregate demand shifts left

c. aggregate demand shifts right

Which of the following would cause prices and real GDP to rise in the short run? a. aggregate demand shifts left b. short-run aggregate supply shifts right c. aggregate demand shifts right d. short-run aggregate supply shifts left

c. aggregate demand shifts right

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift a. aggregate supply to the left. b. aggregate demand to the left. c. aggregate demand to the right. d. aggregate supply to the right.

c. aggregate demand to the right.

Consider the exhibit below for the following questions. Refer to Figure 33-4. If the economy is at A and there is a fall in aggregate demand, in the short run the economy a. moves to B. b. moves to C. c. moves to D. d. stays at A.

c. moves to D.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, a. . production is more profitable and employment falls. b. production is less profitable and employment rises. c. production is more profitable and employment rises. d. production is less profitable and employment falls.

c. production is more profitable and employment rises.

Other things the same, an increase in the expected price level shifts a. aggregated-demand left. b. short-run aggregate supply right. c. short-run aggregate supply left. d. aggregate-demand right.

c. short-run aggregate supply left.

When production costs rise, a. the aggregate demand curve shifts to the left. b. the aggregate demand curve shifts to the right. c. the short-run aggregate supply curve shifts to the left. d. the short-run aggregate supply curve shifts to the right.

c. the short-run aggregate supply curve shifts to the left.

When the Fed buys bonds a. the supply of money decreases and so aggregate demand shifts right. b. the supply of money decreases and so aggregate demand shifts left. c. the supply of money increases and so aggregate demand shifts right. d. the supply of money increases and so aggregate demand shifts left.

c. the supply of money increases and so aggregate demand shifts right.

If aggregate supply remains unchanged, a decrease in aggregate demand may move potential real GDP to the left. put upward pressure on the price level. cause a recession. cause inflation.

cause a recession.

Which of the following would increase output in the short run? a. an increase in stock prices makes people feel wealthier b. government spending increases c. firms chose to purchase more investment goods d. All of the above are correct.

d. All of the above are correct.

Figure 33-5. Refer to Figure 33-5. The appearance of the long-run aggregate-supply (LRAS) curve a. is consistent with the concept of monetary neutrality. b. is consistent with the idea that point A represents a long-run equilibrium and a short-run equilibrium when the relevant short-run aggregate-supply curve is SRAS1. c. indicates that Y1 is the natural rate of output. d. All of the above are correct.

d. All of the above are correct.

Which of the following effects helps to explain the slope of the aggregate-demand curve? a. the exchange-rate effect b. the wealth effect c. the interest-rate effect d. All of the above are correct.

d. All of the above are correct.

Figure 33-8. Refer to Figure 33-8. Suppose the economy starts at Z. Stagflation would be consistent with the move to . P1 and Y1 . b. P1 and Y3 . c. P3 and Y3 . d. P3 and Y1 .

d. P3 and Y1 .

Refer to Figure 33-8. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P 1 and Y 1 , then it must be the case that a. short run aggregate supply has decreased. b. aggregate demand has increased. c. short run aggregate supply has increased. d. aggregate demand has decreased.

d. aggregate demand has decreased.

Suppose government spending is cut. Other things being equal, the aggregate demand for national production will rise. remain constant. fall. All of the above.

fall.

An increase in the price level will shift the aggregate demand curve to the left. shift the aggregate demand curve to the right. move the economy up along a stationary aggregate demand curve. move the economy down along a stationary aggregate demand curve

move the economy up along a stationary aggregate demand curve.