Eco exam 2 Ch. 7, 10-12

Which of the following is the best example of structural unemployment?Which of the following is the best example of structural unemployment?

Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.

Changes in monetary policy shift the:

LM curve.

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______.

LM: shifts to the right

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______

LM; does not shift

If the money supply increases, then in the IS-LM analysis the ______ curve shifts to the ______.

LM; right

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

LM; right

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:

by lowering the interest rate so that investment spending increases.

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

downward and to the left.

Most economists believe that the classical dichotomy:

holds approximately in the long run but not at all in the short run.

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases.

income

The tax multiplier indicates how much ______ change(s) in response to a $1 change in taxes.

income

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

income and the interest rate rise, whereas consumption and investment fall.

An explanation for the slope of the LM curve is that as:

income rises, money demand rises, and a higher interest rate is required.

Over the business cycle, investment spending ______ consumption spending

is more volatile than

If the short-run aggregate supply curve is horizontal, then the:

money supply cannot affect prices in the short run.

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending.

lower; raises; reduces

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$1 billion; more than $1 billion

If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:

400.

Most spells of unemployment are ______ term, and most weeks of unemployment are attributable to ______-term unemployment.

short; long

The LM curve, in the usual case:

slopes up to the right.

A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production.

slowdown; slowdown

The IS curve shifts when any of the following economic variables change except:

the interest rate.

Policies to substantially reduce the natural rate of unemployment should be targeted at

the long-term unemployed

The IS-LM model takes ______ as exogenous.

the price level

Frictional unemployment is unemployment caused by

the time it takes workers to search for a job.

Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.

two

The debt-deflation theory of the Great Depression suggests that an ______ deflation redistributes wealth in such a way as to ______ spending on goods and services.

unexpected; reduce

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

upward and to the right.

Leading economic indicators are:

variables that tend to fluctuate in advance of the overall economy.

If expected inflation equals 3 percent and monetary policymakers push the nominal interest rate to 1 percent, the real interest rate equals ______ percent.

-2

In past non-recessionary periods, a typical worker in the United States who is covered by unemployment insurance receives ______ percent of his or her former wages for ______ weeks.

50; 26

The natural rate of unemployment in the United States since 1950 has averaged between ______ and ______ percent.

5; 6

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ______ percent (rounded to the nearest percent).

9

In this graph, initially the economy is at point E, with the price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD2. The economy moves first to point ______ and then, in the long run, to point ______.

A;D

Which of the following is an example of frictional unemployment?

Dave searches for a new job after voluntarily moving to San Diego.

An increase in consumer saving for any given level of income will shift the:

IS curve downward and to the left.

Changes in fiscal policy shift the:

IS curve.

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______

IS; right

A tax cut shifts the ______ to the right, and the aggregate demand curve ______.

IS; shifts to the right

In this graph, the equilibrium levels of income and expenditure are:

Y2 and PE2.

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with:

a higher interest rate.

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

actual expenditure equals planned expenditure.

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run aggregate supply.

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income.

aggregate supply; aggregate demand

In the long run, the level of output is determined by the:

amounts of capital and labor and the available technology

A favorable supply shock occurs when:

an oil cartel breaks up and oil prices fall.

The theory of liquidity preference implies that

as the interest rate rises, the demand for real balances will fall.

The IS and LM curves together generally determine:

both income and the interest rate.

Short-run fluctuations in output and employment are called:

business cycles.

Both Keynesians and supply-siders believe a tax cut will lead to growth:

but Keynesians believe it works through aggregate demand whereas supply-siders believe it works through incentive effects.

When bond traders for the Federal Reserve seek to decrease interest rates, they ______ bonds, which shifts the ______ curve to the right.

buy; LM

In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy:

changes income, which changes consumption, which further changes income.

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.

decrease

The simple investment function shows that investment ______ as ______ increases.

decreases; the interest rate

When GDP growth declines, investment spending typically ______ and consumption spending typically ______.

decreases; decreases

In the IS-LM model when taxation increases, in short-run equilibrium, the interest rate ______ and output ______.

falls; falls

Most economists believe that prices are:

flexible in the long run but many are sticky in the short run.

Unemployment caused by the time it takes workers to search for a job is called ______ unemployment.

frictional

In the case of unions, the conflict of interest between different groups of workers results in insiders wanting ______, while outsiders want ______.

high wages; more hirings

According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run.

increase; decrease

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.

increase; demand

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate.

increase; increase

An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM framework, ______ output and ______ interest rates.

increase; raise

Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) ______ in the money supply or a(n) ______ in velocity.

increase;increase

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income:

increases by more than 250.

In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income:

increases by more than 250.

The unemployment insurance system may be desirable because unemployment insurance:

induces workers to reject unattractive job offers.

A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective.

The monetary transmission mechanism works through the effects of changes in the money supply on:

investment.

According to the theory of liquidity preference, the supply of nominal money balances:

is chosen by the central bank.

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

level of output but not prices.

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:

low aggregate demand.

Okun's law is the ______ relationship between real GDP and the ______.

negative; unemployment rate

When Paul Volcker tightened the money supply:

nominal interest rates fell in the long run.

Discouraged workers are counted as:

out of the labor force.

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.

output decreases and prices are unchanged; fall

Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run.

output; prices

Centralized union wage bargaining with government intervention in Sweden gives relatively more influence to ______, while firm-level union wage bargaining in the United States gives relatively more influence to ______.

outsiders; insiders

For the purposes of the Keynesian cross, planned expenditure consists of:

planned investment, government spending, and consumption expenditures.

Wage rigidity:

prevents labor demand and labor supply from reaching the equilibrium level.

The macroeconomic model may be completed by adding either the Keynesian assumption that ______ or the classical assumption that ______.

prices are fixed; output is fixed

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.

prices; output

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in the money supply would generate the new equilibrium combination of interest rate and income:

r2, Y2

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:

r2, Y3

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in government spending would generate the new equilibrium combination of interest rate and income:

r2, Y3

(Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income:

r3, Y2

For any given interest rate and price level, an increase in the money supply:

raises income.

An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output.

raises; and may also lower

Reducing the money supply ______ nominal interest rates in the short run, and ______ nominal interest rates in the long run.

raises; lowers

In this graph, if firms are producing at level Y3, then inventories will ______, inducing firms to ______ production.

rise; decrease

Stagflation occurs when prices ______ and output ______.

rise; falls

In the IS-LM model when government spending rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

rises; rises

Based on the graph, if the interest rate is r3, then people will ______ bonds and the interest rate will ______.

sell; rise

In the IS-LM model when the Federal Reserve decreases the money supply, people ______ bonds and the interest rate ______, leading to a(n) ______ in investment and income.

sell; rises; decrease

The interaction of the IS curve and the LM curve together determine:

the equilibrium level of the interest rate and output.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

the government-spending multiplier is larger than the tax multiplier.

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.

weaker; stronger