econ final chap 16, 17

which of the following events could explain the shift of the aggregate supply curve from AS1 to AS2

An increase in the world price of oil

which of the following events shifts aggregate demand rightward

an increase in government expenditures, but not a change in the price level

the volcker disinflation

caused inflation to fall but with high unemployment rates

suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the federal reserve could

decrease money supply to raise interest rates

fiscal policy refers to the idea that aggregate demand is affected by changes in

government spending and taxes

people who disagree with heavily using monetary policy or fiscal policy to stabilize economy in short run claim that both policies

impact on aggregate demand several months after policy is implemented, so there will be a time lag

The interest rate effect

in the U.s is the most important reason that causes the downward slope of the aggregate demand curve

Which of the following statements is correct

in the short run unemployment and inflation are positively related. In the long run they are largely unrelated problems

In the long run which of the following depends primarily on the growth rate of the money supply

inflation but not the natural rate of unemployment

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

according to friedman and phelps, policymakers face a trade off between inflation and unemployment

only in the short run

In the long run an increase in the money supply

raises prices but leaves unemployment unchanged

the shift of the aggregate supply curve from AS1 to AS2

represents an adverse shock to aggregate supply. this moves the point from C to D, representing higher inflation and unemployment

an event that directly affects firms costs of production and thus the prices they charge is called a

supply shock

The employment act of 1946 states that

the government should promote full employment and production

disinflation is a reduction of

the inflation rate

According to the theory of liquidity preference

the monetary policy affects AD through interest rate, since people prefer to increase money demand by holding liquid assets, like cash, when the interest rate is low

the government builds a new water treatment plant. the owner of the company that builds the plant pays her workers. the workers increase their spending. firms from which the workers buy goods increase their output. this type of effect on spending illustrates

the multiplier effect

The short run relationship between inflation and unemployment is often called

the phillips curve

as the interest rate falls the theory of liquidity predicts that

the quantity of money demanded rises

the term crowding out effect refers to

the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to eventually increase, thus decreasing domestic investment

in the late 1960s milton friedman and edmund phelps argued that

the trade off between inflation and unemployment did not apply in the long run. this claim is consistent with monetary neutrality in the long run

what is measured along the horizontal axis of the right hand graph

the unemployment rate

Kaynes argued that aggregate demand is

unstable, because waves of pessimism and optimism create fluctuations in aggregate demand