Exam 2 Macroeconomics

Other things the same, automatic stabilizers tend to

raise expenditures during recessions and lower expenditures during expansions.

If the current interest rate is 3.25 percent,

people will sell more bonds, which drives interest rates up.

If the stock market crashes, then

aggregate demand decreases, which the Fed could offset by purchasing bonds.

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left.

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

aggregate demand to the right.

When the Fed increases the money supply, we expect

interest rates to fall and stock prices to rise.

if the economy is at O and there is a reduction in aggregate demand, in the short run the economy

moves to R

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.

An increase in taxes will

shift aggregate demand from AD2 to AD3.

Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2.In the long run, the change in price expectations created by the reduction of federal government purchases

short-run aggregate supply right.

A tax cut shifts the aggregate demand curve the farthest if

the MPC is large and if the tax cut is permanent.

If the economy is in long-run equilibrium, a favorable shift in short-run aggregate supply curve would move the economy from

O to P

A decrease in taxes would move the economy from Q to

P in the short run and O in the long run.

Suppose the economy starts at Point R. If aggregate demand increases from AD2 to AD3, then in the short run the economy moves to

Point O

If the economy starts at Point R, then a recession occurs at

Point P

Suppose the economy starts at Point R. If there is a reduction in aggregate demand, then in the long run the economy moves to

Point S

Refer to Figure 33-7. If the economy starts at point O, a short-run fall in output would be consistent with a movement to point

R

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows:

"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. "

If the MPC is 0.50 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $95 billion will eventually shift the aggregate demand curve to the right by

$190 billion

Which of the following is not a determinant of the long-run level of real GDP?

the price level

As the interest rate falls to equilibrium in the market for money,

the quantity of money demanded rises, which would reduce a surplus of money.

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

the slope of the aggregate-demand curve.

The Federal Open Market Committee is ​

​the group at the Federal Reserve that sets monetary policy.

In the short run, open-market purchases

increase investment and real GDP, and decrease interest rates.

Which of the following shifts aggregate demand to the left?

A decrease in the money supply

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases.

If the MPC is 3/5 then the multiplier is

2.5, so a $100 increase in government spending increases aggregate demand by $250.

If the multiplier is 3, then the MPC is

2/3

Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect on the slope of aggregate demand?

3, 2, 1, 4

Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2.Which curve shifts and in which direction?

Aggregate demand shifts left.

A decrease in Y from Y1 to Y2 is explained as follows:

An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

Which of the following correctly explains the crowding-out effect?

An increase in government expenditures increases the interest rate and so reduces investment spending.

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall.

Which of the following shifts the long-run aggregate supply curve to the left?

An increase in the price of imported natural resources and an increase in trade restrictions

People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this?

Both sticky price theory and sticky wage theory

Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2.In the short run what happens to the price level and real GDP?

Both the price level and real GDP fall.

Which of the following would not be directly included in aggregate demand?

Government's tax collections

Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could

decrease the money supply, which will increase interest rates.

If Taxes

decrease, then consumption increases, and aggregate demand shifts rightward.

If expected inflation is constant and the nominal interest rate decreases by 4 percentage points, then the real interest rate

decreases by 4 percentage points.

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level

decreases the real value of households' money holdings.

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

demand right

If households view a tax cut as temporary, then the tax cut

has less of an effect on aggregate demand than if households view it as permanent.