Econ 311 exam 3

Exhibit: AD-AS ShiftsStarting from long-run equilibrium at A with output equal to and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the short-run nonneutrality of money is represented by the movement from:

A to G

What are the defining features of a recession?

a period of time with negative gdp growth and a rise in unemployment.

During the financial crisis of 2008-2009, many financial institutions stopped making loans even to creditworthy customers, which could be represented in the IS-LM model as a(n):

contractionary shift in the LM curve.

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.

Both models of aggregate supply discussed in Chapter 14 imply that if the price level is higher than expected, then output ______ natural rate of output.

exceeds the

Most economists believe that prices are:

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

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

increase

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

increase but by less than 100

In the IS-LM model, a decrease in output would be the result of a(n):

increase in money demand.

Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is:

less than the expected price level.

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

low aggregate demand.

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to _____ income and a ____ interest rate.

lower; lower

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, _____ output and _____ interest rates.

lower; raise

All of the following are exogenous variables in "The Mother of All Models" in the appendix to Chapter 14 except the:

price level

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

technological progress; variations in labor-market utilization

If MPC= 0.75, when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

300

Exhibit: Supply Shock Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

A. which is SRAS0, B where the economy is located is the downward sloped line meeting A and Y (LRAS)

Starting from long-run equilibrium at A with output equal to and the price level equal to P1, a cost-push inflation would be represented by a shift from:

AS1 to AS2

In the IS-LM model, starting with zero expected inflation, if expected inflation becomes negative, then the:

IS curve shifts leftward.

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

LM; right

After examining international data, the economist Robert Lucas found that aggregate demand has the biggest effect on output in countries where aggregate demand:

and prices are most stable.

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Federal Reserve should ____ he money supply shifting to ____.

decrease; LM3

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

decreases; the interest rate

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should ____ the money supply shifting to ____.

increase, LM2

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______ and output will ______.

increase; decrease

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

increase; demand

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

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income:

increases by more than 250.

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in Keynesian-cross model is that the Keynesian-cross model assumes that:

investment is not affected by the interest rate whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

In the IS-LM analysis, the increase in income resulting from a tax cut is usually ____ the increase in income resulting from an equal rise in government spending.

less than

The increase in income in response to a fiscal expansion in the IS-LM is:

less than in the Keynesian-cross model unless the LM curve is horizontal.

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run.

only output; only prices

If the short-run aggregate supply curve is horizontal, and each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:

output and employment will decrease in the short run.

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

r2, Y3

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2 and the Federal Reserve does not change the money supply, the new equilibrium combination of interest and income will be ____.

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

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

rises; rises

When drawn on a graph with income along the horizontal axis and the interest rate along the vertical axis, the IS curve:

slopes downward and to the right.

Other things equal, a given change in government spending has a larger effect on demand the:

steeper the IS curve.

In the case of demand-pull inflation, other things being equal:

the inflation rate rises but the unemployment rate falls.

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:

the money supply.

According to the imperfect-information model, in countries in which there is a great deal of variability of prices:

the response of output to unexpected changes in prices will be relatively small.

The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in:

the short run only.