econ 102 exam 3 HW questions

What causes the economy to move from its short-run equilibrium to its long-run equilibrium? a. The government increases taxes to curb aggregate demand. b. Nominal wages, prices, and perceptions adjust downward to this new price level. c. Nominal wages, prices, and perceptions adjust upward to this new price level. d. The government increases spending to increase aggregate demand.

c. Nominal wages, prices, and perceptions adjust upward to this new price level.

Consider two policies: a tax cut that will last for only one year and a tax cut that is expected to be permanent. True or False: A tax cut that will last for only one year will stimulate greater spending by consumers than a tax cut that is expected to be permanent.

false

True or False: The effect on aggregate demand would be larger if the Federal Reserve held the money supply constant in response than if the Fed were committed to maintaining a fixed interest rate.

false

The problem of time inconsistency applies to fiscal policy as well as to monetary policy. Suppose the government announced a reduction in taxes on income from capital investments, such as new factories. If investors believed that capital taxes would remain low, the government's action would lead to a (higher/lower) level of investment. After investors have responded to the announced tax reduction, the government can get more tax revenue by (increasing/decreasing) taxes on income from capital investments. True or False: Given your answer to the preceding part, investors would believe the government's announcement.

higher increasing false

true or false: the long-run adjustment generally occurs in a matter of years

true

Indicate whether each of the following events will increase, decrease, or have no effect on long-run aggregate supply (LRAS). 1. Many workers leave the United States for employment opportunities in Asia. 2. Congress raises the minimum wage to $15 per hour. 3. The number of workers with college degrees increases 4. The United States discovers a new mineral deposit.

1. decrease 2. decrease 3. increase 4. increase

Suppose economists observe that an increase in government spending of $10 billion raises the total demand for goods and services by $30 billion. If these economists ignore the possibility of crowding out, they would estimate the marginal propensity to consume (MPC) to be ______. Now suppose the economists allow for crowding out. Their new estimate of the MPC would be (larger/smaller) than their initial one.

2/3 larger

Consider an economy described by the following equations: Y=C+I+G C=100+0.75×(Y−T) I=500−50×r G=125 T=100 where Y is GDP, C is consumption, I is investment, G is government purchases, T is taxes, and r is the interest rate. If the economy were at full employment (that is, at the natural rate of output), GDP would be $2,000. Identify the equation(s) each of the following statements describes. Check all that apply. a. It is an autonomous amount, independent of other factors. b. It is a function of disposable income. c. It depends on the interest rate. The marginal propensity to consume in this economy is _____ Suppose the central bank's policy is to adjust the money supply to maintain the interest rate at 4%, so r = 4. When the interest rate is 4%, GDP is _______ GDP at an interest rate of 4% is (above/below) the full-employment level. Assuming no change in monetary policy, (an increase/a decrease) in government purchases by _____ would restore GDP to the full-employment level.

a. G & T b. C c. I 0.75 $1,800 below Y = C + I + G = (100+0.75 * (Y-100)) + (500-50 * 4) + 125 = (25+0.75Y) + 300 + 125 0.25Y = 450 Y = 1,800 an increase , $50 spending multiplier = 1/(1-MPC) = 1/(1-0.75) = 4 200/4 = $50

Which of the following is true according to the sticky-wage theory of aggregate supply as a result of the increase in the money supply? Check all that apply. a. Nominal wages at the initial equilibrium are equal to nominal wages at the new short-run equilibrium. b. Nominal wages at the initial equilibrium are less than nominal wages at the new long-run equilibrium. c. Real wages at the initial equilibrium are less than real wages at the new short-run equilibrium. d. Real wages at the initial equilibrium are equal to real wages at the new long-run equilibrium.

a. Nominal wages at the initial equilibrium are equal to nominal wages at the new short-run equilibrium. b. Nominal wages at the initial equilibrium are less than nominal wages at the new long-run equilibrium. d. Real wages at the initial equilibrium are equal to real wages at the new long-run equilibrium.

Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment. Which of the following reasons could explain why the aggregate quantity of output supplied changes? Check all that apply. a. The price level has risen. b. People have misperceptions about the price level. c. Prices are sticky. d. Wages are not sticky.

a. The price level has risen. b. People have misperceptions about the price level. c. Prices are sticky.

Suppose the federal government cuts taxes and increases spending, raising the budget deficit to 10 percent of GDP. If nominal GDP is rising 6 percent per year, such budget deficits (are/are not) sustainable forever. True or False: If budget deficits of this size are maintained for 20 years, future generations will likely pay higher taxes.

are not true

Which of the following policies redistribute income from young to old generations? Check all that apply. a. More generous subsidies for education loans b. An increase in the budget deficit c. Greater investments in highways and bridges d. An increase in Social Security benefits

b. An increase in the budget deficit d. An increase in Social Security benefits - others are old to young

The economy begins in long-run equilibrium. Then one day, the president appoints a new chair of the Federal Reserve. This new chair is well known for her view that inflation is not a major problem for an economy. Which of the following statements accurately describes what would happen as a result of this news? Check all that apply. a. People would expect the price level to fall. b. The nominal wage that workers and firms agree to in their new labor contracts would be higher than it would be otherwise. c. The profitability of producing goods and services at any given price level would decrease. d. The short-run aggregate-supply curve would shift to the right. If aggregate demand is held constant, the shift in the aggregate-supply curve will cause the price level to (rise / fall) and the quantity of output produced to (rise / fall) .

b. The nominal wage that workers and firms agree to in their new labor contracts would be higher than it would be otherwise. c. The profitability of producing goods and services at any given price level would decrease. rise , fall

In the debate about whether the central bank should aim for zero inflation, which of the following areas of disagreement involve normative statements? Check all that apply. a. Whether the costs of inflation are large or small b. Determining the size of the costs of reducing inflation c. Whether the Fed should reduce inflation to zero

c. Whether the Fed should reduce inflation to zero

True or False: If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal.

false

True or False: The government can increase national saving by increasing its budget deficit.

false

An economy is operating with output $400 billion below its natural level, and fiscal policymakers want to close this recessionary gap. The central bank agrees to adjust the money supply to hold the interest rate constant, so there is no crowding out. The marginal propensity to consume is 3/5, and the price level is completely fixed in the short run. To close the recessionary gap, the government would need to (increase/decrease) spending by _____ billion.

increase ; $160 1/(1-0.6) = 2.5 change in AD = change in G * multiplier $400 billion = change in G * 2.5 change in G = $400 billion/2.5 = $160 billion

In the early 1980s, new legislation allowed banks to pay interest on checking deposits, which they could not do previously. If we define money to include checking deposits, this legislation (increases/decreases) money demand. Which of the following is true if the Federal Reserve had maintained a constant money supply in the face of this change? Check all that apply. a. Aggregate output would have decreased. b. The interest rate would have increased. c. Aggregate demand would have decreased. To have maintained a constant market interest rate (the interest rate on nonmonetary assets) in the face of this change, the Federal Reserve would have had to (increase/decrease) the money supply. If the Fed had maintained a constant market interest rate, aggregate demand and output would have(remained unaffected/increased/decreased)

increases a. Aggregate output would have decreased. b. The interest rate would have increased. c. Aggregate demand would have decreased. increase remain unaffected

According to the sticky-wage theory, the economy is in a recession because the price level has declined so that labor demand is too (high / low) . True or False: According to the sticky-price theory, the economy is in a recession because people expect prices to rise quickly in a recession. According to the misperceptions theory, the economy is in a recession when suppliers mistakenly believe that the relative price of their goods has (risen / fallen) .

low false fallen

Suppose a huge increase in credit card frauds leads to many businesses refusing to accept payments by credit cards. As a result, people want to keep more cash on hand, increasing the demand for money. Assume the Fed does not change the money supply. According to the theory of liquidity preference, the interest rate will (rise/fall) , which causes aggregate demand to (rise/fall) . If instead the Fed wants to stabilize aggregate demand, it should (increase/decrease) the money supply by (buying/selling) government bonds.

rise , fall increase , buying

Policymakers who want to stabilize the economy must decide how much to change the money supply, government spending, or taxes. True or False: One of the reasons why it is difficult for policymakers to choose the appropriate strength of their actions is that it is difficult to forecast the economy's future condition in response to a change in policy.

true

True or False: The long-run aggregate-supply curve is vertical because the price level does not affect long-run aggregate supply.

true

True or False: Expansionary fiscal policy is more likely to lead to a short-run increase in investment when the investment accelerator is large than when it is small. True or False: Expansionary fiscal policy is more likely to lead to a short-run increase in investment when the interest rate sensitivity of investment is large than when it is small.

true false