Econ test 3

Which of the following would lead to a shift in the short-run aggregate supply curve but no change in the long-run aggregate supply curve?

A decrease in the expected price level.

Which of the following would lead to a decrease in the multiplier effect of fiscal policy?

Households save a higher fraction of income.

Which of the following would be classified as fiscal policy?

The federal government cuts taxes to stimulate the economy.

In the short-run, an increase in aggregate supply leads to _____ price level and _____ in unemployment.

a decrease / a decrease

An earthquake destroys capital stock in an economy. The result is

a leftward shift in the long-run aggregate supply curve.

The long-run aggregate supply curve

affected by labor, capital, natural resources, and levels of technology.

After-tax nominal interest rate - inflation rate

after-tax real interest rate

From 2001 to 2005 there was a dramatic rise in the price of houses. If this rise made people feel wealthier, then it would have shifted

aggregate demand right.

Money neutrality suggests that an increase in the money supply leads to _____ in price level and inflation and _____ in real GDP.

an increase / no change

Which of the following would not lead to a decrease in aggregate demand and a leftward shift in the AD curve?

an increase in domestic price level.

Which of the following shifts both the short-run and long-run aggregate supply right?

an increase in the capital stock

In the long-run,

an increase in the price level has no effect on the aggregate quantity of GDP supplied.

If inflation is higher than what was expected,

creditors receive a lower real interest rate than they had anticipated.

If the economy is producing below the natural rate of output in the short-run, wages and input prices will eventually ____ and ____ will increase, returning the economy to long-run equilibrium.

fall / short-run aggregate supply

Other things the same, when the price level falls, interest rates

fall, so firms increase investment.

Liquidity refers to

he ease with which an asset is converted to the medium of exchange

Relative price variability

in positive correlation with inflation.

Examples of automatic stabilizers include government expenditures that ____ when national income decreases and help explain why deficits are ____ during recessions.

increase / larger

The inflation tax

is the revenue the government raises by creating (printing) money. It is like a tax on everyone who holds money (when the government prints money).

In the long run, an economy's production of goods and services depends on its supply of

labor, natural resources, capital, and available technology.

The Federal Reserve controls _____ and influences ______ with the intention of influencing ____ .

money supply / interest rates / investment

The aggregate supply curve and the price level

negative correlation

Fisher effect

one-for-one adjustment of the nominal interest rate to the inflation rate.

an increase in the expected price level

only affects the aggregate demand curve

an increase in the actual price level

only affects the aggregate demand curve.

price level and interest rate

positive correlation

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,

production is more profitable and employment rises.

*nominal interest rate - inflation rate

real interest rate

Assume the MPC is 0.65. Assuming only the multiplier effect matters, an increase in government purchases of $20 billion will shift the aggregate demand curve to the

right by about $57.1 billion.

Relative-price variability

rises with inflation, leading to a misallocation of resources.

ad curve

shows the quantity of all goods and services demanded in the economy at any given price level

In order to understand how the economy works in the short run, we need to

study a model in which real and nominal variables interact

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

the MPC is small and changes in the interest rate have a large effect on investment

Which of the following accounts for about two-thirds of the decline in output during a recession?

the decline in investment spending

Which of the following policy actions shifts the aggregate-demand curve?

the four factors that shift the aggregate demand curve are: Changes in C (consumer spending), changes in I (investment), changes in G (government spending), and changes in NX (net exports).

Suppose the expected inflation rate increases from 5% to 8%. According to the Fisher effect

the nominal interest rate increases by 3 percentage points.

aggregate demand

the total demand for final goods and services in an economy at a given time

when the real GDP is at the lowest point,

the unemployment rate would be the largest in the economy.

fiscal policy definition

the use of government spending and TAX policies to influence the economic conditions.

. If the price level decreases

then the quantity of money also decreases.

If the Fed decided to decrease the quantity of the discount loans,

then the quantity of money in the economy would decrease and the money supply in the market would also decrease. Thus, the money supply curve would shift to the left.