EC111 CHP 20 21

Slope of the aggregate-demand curve?

As the price level increases, the interest rate rises, so spending falls.

on the graph, an increase in the money supply would move the economy from C to

B - demand curve shifts right and A in the long run ( vertical)

Which of the following statements is correct?

Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium.

Which of the following statements is correct for the long run?

Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

People will want to hold more money as the cost of holding it falls.

disinflation

a reduction in the rate of inflation

If the stock market booms, then

aggregate demand increases, which the Fed could offset by decreasing the money supply.

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

aggregate demand right.

what results in higher inflation and higher unemployment in the short run

an adverse supply shock ex: increase in oil price

When the actual change in the price level differs from its expected change, which of the following can explain why firms might change their production?

both menu costs and mistaking a price level change for a change in relative prices

When the actual change in the price level differs from its expected change, which of the following can explain why firms might change their production?`

both menu costs and mistaking a price level change for a change in relative prices`

other things the same, if price level rises, people

decrease foreign bond purchases, so the supply of dollars in the market for foreign currency exchange decreases

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they

decreased the money supply

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate

demand rightward by more than $100 billion.

If policymakers decrease aggregate demand, then in the short run the price level

falls and unemployment rises

An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected price level

falls, shifting aggregate supply right.

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

increase government expenditures or increase the money supply

the wealth effect refers to the idea that when the price level decreases, the real wealth of households

increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.

In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households

increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.

The misperceptions theory of the short-run aggregate supply curve says that the quantity of output supplied will increase if the price level`

increases by more than expected so that firms believe the relative price of their output has increased.

The misperceptions theory of the short-run aggregate supply curve says that the Quantity of output supplied will increase if the price level

increases by more than expected so that the firms believe the relative price of their output has increased

When the money supply decreases

interest rates rise and so aggregate demand shifts left.

long-run inflation

is primarily determined by the rate of money supply growth while unemployment is primarily determined by labor market factors

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 sticky-wage theory of the short-run aggregate supply curve says that when the price level is higher than expected some firms will have

lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied

The sticky-price theory of the short-run aggregate supply curve says that when the price level is higher than expected, some firms will have

lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied.

If the economy is at A and there is a fall in aggregate demand, in the short run the economy

moves to D. left demand

If the economy starts at A and there is a fall in aggregate demand, the economy in the long run moves

moves to a lower point on the vertical line moves down to C in the long run.

if the central bank decreases the money supply, then in the short run

prices fall and unemployment rises

The aggregate quantity of goods and services demanded changes as the price level falls because

real wealth rises, interest rates fall dollar depreciates

Liquidity preference theory is most relevant to the

short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

What, if anything, did policymakers do in response to the recession of 2001?

tax cuts and expansionary monetary policy

what effects explain the downward slope of the aggregate demand curve

the exchange-rate effect the wealth effect the interest-rate effect

Shifts in the aggregate-demand curve can cause fluctuations in

the level of output and in the level of prices.

the short tun relationship between inflation and unemployment is often called

the phillips curve

The sticky-wage theory of the short-run aggregate supply curve says that when the quantity of output firms supply will increase if

the price level is higher than expected making production more profitable

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

the price level is higher than expected making production more profitable.

An increase in the expected price level shifts the

the short-run aggregate supply curve left. an increase in actual price level does not shift short-run aggregate supply curve

Critics of stabilization policy argue that

there is a lag between the time policy is passed and the time policy has an impact on the economy. the impact of policy may last longer than the problem it was designed to offset. policy can be a source of, instead of a cure for, economic fluctuations.

During a recession

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

during recessions

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