Intermediate Macro Exam #4
What relationship does the aggregate supply curve describe? A. It describes the relationship between the total quantity of output supplied and the inflation rate. B. It describes the relationship between the total quantity of output supplied and the unemployment rate. C. It describes the relationship between the total quantity of money supplied and the interest rate. D. It describes the relationship between the total quantity of money supplied and the inflation rate.
A
Which of the following describes a reason why the long-run Phillips curve relationship differs from the short-run relationship? A. In the long run, expected inflation is taken into account when making work and hiring decisions. B. In the long run, wages and prices are stickier (less flexible) than in the short run. C. In the long run, workers and firms focus on nominal wages, instead of real wages. D. All of the above are correct.
A
Which of the following would cause the long-run aggregate supply curve to shift rightward? A. An increase in available technology. B. A decrease in the total amount of labor supplied in the economy. C. A decrease in the total amount of capital in the economy. D. Both B and C are correct. E. All of the above are correct.
A
Which of the following would cause the short-run aggregate supply curve to shift upward and to the left? A. A negative price shock. B. A decrease in expected inflation. C. Aggregate output kept below potential for a significant period of time. D. All of the above are correct.
A
Which type of unemployment benefits the economy by promoting a better match between workers and jobs? A. Frictional unemployment B. Cyclical unemployment C. Natural unemployment D. Structural unemployment
A
"The depreciation of the dollar from December 2008 to December 2009 had a positive effect on aggregate demand in the U.S." Is this statement true, false, or uncertain? Explain your answer. A. True, since a cheaper dollar increases net exports, a component of aggregate demand. B. False, since a dollar depreciation harms U.S. competitiveness in world markets. C. False, since the dollar's value in foreign exchange markets has no bearing upon aggregate demand. D. Uncertain, since many other variables were changing at the same time.
A
According to modern Phillips curve analysis, an increase in the unemployment gap would: A. increase the inflation rate by shifting the Phillips curve upward. B. decrease the inflation rate by moving downward and to the right along the Phillips curve. C. increase the inflation rate by moving upward and to the left along the Phillips curve. D. decrease the inflation rate by shifting the Phillips curve downward.
B
Combining Okun's law with the Phillips curve helps derive the short-run aggregate supply curve in that: A. the Phillips curve describes the short-run positive relationship between the unemployment rate and the inflation rate, while the short-run aggregate supply curve describes the negative relationship between output and inflation. B. the Phillips curve describes the short-run negative relationship between the unemployment rate and the inflation rate, while the short-run aggregate supply curve describes the positive relationship between output and inflation. C. the Phillips curve describes the short-run positive relationship between the unemployment rate and the inflation rate, and the short-run aggregate supply curve describes the positive relationship between output and inflation. D. the Phillips curve describes the short-run negative relationship between the unemployment rate and the inflation rate, and the short-run aggregate supply curve describes the negative relationship between output and inflation.
B
In his first State of the Union speech in January 2010, President Obama proposed a tax credit for small businesses and tax incentives for all businesses that invest in new plant and equipment. The anticipated effect of these proposals on aggregate demand is A. positive, causing movement up along the AD curve. B. positive, increasing AD at any given inflation rate. C. negative, decreasing AD at any given inflation rate. D. negligible, since business decisions to spend are not impacted by government policies.
B
One risk mentioned in the text that could follow from policy makers targeting zero inflation might be A. the use of price controls to keep inflation so low. B. the risk of deflation. C. a reduction in competition. D. all of the above.
B
The aggregate demand curve slopes downward because a rise in inflation leads: A. consumers and businesses to increase autonomous expenditures. B. the monetary policy authorities to raise real interest rates. C. the fiscal policy authorities to impose contractionary fiscal measures. D. the monetary policy authorities to impose credit controls.
B
What basic relationship does the short-run Phillips curve describe? A. It describes the positive relationship between unemployment and inflation. B. It describes the negative relationship between unemployment and inflation. C. It describes the negative relationship between the natural rate of output and the price level. D. It describes the positive relationship between the natural rate of output and the price level.
B
What trade-offs does this relationship seem to offer policymakers? A. Policymakers can decrease the price level to increase the natural rate of output. B. Policymakers can increase inflation to decrease unemployment. C. Policymakers can increase the price level to increase the natural rate of output. D. Policymakers can decrease inflation to decrease unemployment.
B
According to modern Phillips curve analysis, a price shocklike a significant increase in oil priceswould: A. decrease the inflation rate by shifting the Phillips curve downward. B. increase the inflation rate by moving upward along the Phillips curve. C. increase the inflation rate by shifting the Phillips curve upward. D. decrease the inflation rate by moving downward along the Phillips curve.
C
During 2007 the U.S. economy was hit by a price shock, when the price of oil increased from around $60 per barrel to around $130 by June 2008. Whereas inflation increased during fall 2007 (from around 2.5% to 4.0%), unemployment did not change significantly (it even slightly increased during 2007). The modern Phillips curve concept would explain this phenomenon as A. a downward shift in the Phillips curve from a positive price shock (an increase in oil prices). B. a downward shift in the Phillips curve from a negative price shock (an increase in oil prices). C. an upward shift in the Phillips curve from a negative price shock (an increase in oil prices). .D. an upward shift in the Phillips curve from a positive price shock (an increase in oil prices).
C
The short-run aggregate supply curve slopes upward because an increase in output relative to potential output: A. induces aggregate demand to increase, increasing inflation. B. causes markets to have excess supplies, putting upward pressure on inflation. C. creates tight labor and product markets that cause inflation to rise. .D. leads to unstable markets and higher inflation.
C
The short-run aggregate supply curve has: A. a positive slope because as the inflation rate increases, the quantity of output supplied decreases. B. a negative slope because as the inflation rate increases, so does the quantity of output supplied. C. a positive slope because as the inflation rate increases, so does the quantity of output supplied. D. a negative slope because as the inflation rate increases, the quantity of output supplied decreases.
C
What are the two primary objectives of macroeconomic stabilization policy? A. Keeping the unemployment rate near zero percent and keeping inflation low but positive B. Stabilizing prices and contributing to a negative unemployment gap C. Stabilizing economic activity and price stability D. Decreasing inflation and stabilizing economic activity
C
Which of the following best describes the adjustment to long-run equilibrium if an economy's short-run equilibrium output is below potential output? A. Since unemployment is greater than its natural rate, there will be excess slack in the labor market and, consequently, pressure on firms to raise their prices at a less rapid rate. This deceleration of inflation shifts the short-run aggregate supply curve down, pushing the economy's potential output down toward its short-run output. B. Since unemployment is less than its natural rate, there will be excess slack in the labor market and, consequently, pressure on firms to raise their prices at a less rapid rate. This deceleration of inflation shifts the short-run aggregate supply curve up, pushing the economy's output up toward potential output. C. Since unemployment is greater than its natural rate, there will be excess slack in the labor market and, consequently, pressure on firms to raise their prices at a less rapid rate. This deceleration of inflation shifts the short-run aggregate supply curve down, pushing the economy's output up toward potential output. D. Since unemployment is less than its natural rate, there will be excessive tightness in the labor market and, consequently, pressure on firms to raise their prices at a more rapid rate. This acceleration of inflation shifts the short-run aggregate supply curve up, pushing the economy's output down toward its potential output.
C
According to the expectations-augmented Phillips curve, which of the following factors determines the rate of inflation? A. The degree of tightness in the labor market. B. Expected inflation. C. The difference between the unemployment rate and the natural rate of unemployment. D. All of the above are correct.
D
Policy makers want the unemployment rate and the inflation rate to be A. positive. B. as close to zero as possible. C. negative. D. low but not zero.
D
What happens when policy makers respond to a temporary supply shock? A. Shifting the aggregate demand curve to restore the economy to potential output will result in no change in the price level. B. Shifting the aggregate supply curve to regain price stability will move the economy farther away from potential output. C. Shifting the aggregate demand curve will return the economy to long-run equilibrium at potential output. D. Shifting the aggregate demand curve to regain price stability will move the economy farther away from potential output.
D
Why do activists believe the economy's self-correcting mechanism is slow? A. Because government policy has a tendency to create higher unemployment. B. Because government policy has a tendency to move the economy further away from potential output. C. Because pricesespecially wagesare flexible. D. Because pricesespecially wagesare sticky.
D
In what situations will the divine coincidence prevail? A. An aggregate demand shock. B. A permanent supply shock. C. A temporary supply shock. D. Any of the above. E. A and B only.
E
The table's bottom portion contains a labeling key. For a positive demand shock, use the label P; similarly, for a negative demand shock, use the label N. Label any exogenous event that does not impact AD with an X The Federal Reserve autonomously tightens monetary policy. The government adopts ill-advised regulations that diminish the economy's overall efficiency The government imposes much higher taxes on households. A temporary disruption in oil production occurs, pushing oil prices higher. Consumer optimism surges as the media reports encouraging news about the economy. The nation's labor unions push forcefully for higher wages and expanded benefits. Foreign economies rebound, producing a substantial rise in net exports. Sudden optimism within the business community induces a big jump in planned business expenditures. Peace breaks out, enabling the government to substantially curtail defense expenditures. X This exogenous event does not constitute a demand shock. P This is a positive demand shock. N This is a negative demand shock.
N X N X P X P P N
The table's bottom portion contains a labeling key. Label any factor that does not impact AD with an X. For a factor that shifts aggregate demand to the right, use the label R; similarly, for a factor that shifts aggregate demand to the left, use the label L. Keep in mind that each factor is to be assessed on the assumption that all else is constant. R The Federal Reserve autonomously monetary policy. X The government ill-advised regulations that the economy's overall efficiency. L The government allows previously enacted tax cuts to expire, resulting in much higher taxes for households. X The prospect of worsening inflation induces the Federal Reserve to tighten monetary policy. L Consumer spreads as the media reports news about the economy. X Actual output potential output, "tightness" in resource markets. L Foreign economies , producing a substantial in net exports. R Optimism within the business community induces a surge in planned business expenditures. R war breaks out, the government to substantially defense expenditures. X This factor does not affect the location of the aggregate demand curve. R This factor shifts aggregate demand to the right. L This factor shifts aggregate demand to the left.
R X L X L X L R R
The table's bottom portion contains a labeling key. For a positive supply shock, use the label P; similarly, for a negative shock, use the label N. Label any exogenous event that does not impact AS with an X. (Note: Each letter is used three times.) The Federal Reserve autonomously loosens monetary policy. The government rescinds ill-advised regulations that hamper the economy's overall efficiency. The U.S. dollar sharply depreciates, suddenly raising the prices of imported inputs. Foreign economies crash, producing a substantial drop in net exports. Phenomenally poor weather leads to dismal harvests of most grains. The nation's labor unions passively accept lower wages and reduced benefits. Startling advances in nanotechnology dramatically raise productivity across the economy. Sudden optimism among firms induces a big jump in planned business expenditures. Hurricanes blast the U.S. Gulf Coast, seriously damaging refining facilities. X This exogenous event does not constitute a supply shock. P This is a positive supply shock. N This is a negative supply shock. In the preceding table, the permanent supply shocks are associated with regulations and technology
X P N X N P P X N
The top portion of the following table lists a variety of factors that shift some component of the aggregate demand and supply model. A response box is attached to each factor. The table's bottom portion contains a labeling key. Label any factor that shifts the short-run aggregate supply curve with an S. Use an X to label any factor that does not shift the short-run aggregate supply curve. Firms alter their plans for investment expenditures. Households and businesses come to expect an acceleration in inflation. A negative price shock occurs in the form of higher oil prices. An autonomous easing of monetary policy is implemented by the Federal Reserve. Output remains persistently high relative to potential output . Consumer and business spread as the media reports news about the economy. X This factor does not affect the location of the short-run aggregate supply curve. S This factor shifts the short-run aggregate supply curve.
X S S X S X
Supply shocks that are positive are events that induce, at any given inflation rate, ................. in supply, thus shifting the AS curve ................ .
an increase, rightward
The time it takes to collect and process the data that indicate how well the economy is faring is known as the
data lag
Demand shocks that are negative are events that induce planned spending at any given inflation rate to .............. thus pushing the AD curve .............. .
decrease, leftward
The inflation rate tends to increase, ceteris paribus, as the actual unemployment rate .
decreases
The inflation rate tends to increase, ceteris paribus, as the unemployment gap ......................... .
decreases
A ...................mandate best describes the policy making environment in the United States.
dual
When macroeconomic stabilization policy gives equal priority to price stability and stabilizing overall economic activity, it is referred to as a ................... mandate.
dual
The time it takes for a policy to have an effect on the economy is known as the
effectiveness lag
Both short-run and long-run equilibria require that the quantity of aggregate output demanded and the quantity supplied are
equal
Beyond this equality, the attainment of a long-run equilibrium also requires that actual output .......... potential output
equals
When macroeconomic stabilization policy requires stable prices as a condition of pursuing other goals, it is referred to as a ..................... mandate.
hierarchical
The time required for policymakers to put a policy into action once approved is known as the
implementation lag
The inflation rate tends to increase, ceteris paribus, as expected inflation .............. .
increases
The inflation rate tends to increase, ceteris paribus, as the natural rate of unemployment .
increases
Phillips Curve
indicates a short-run inverse relationship between inflation and unemployment rates
The time to decide on the appropriate policy for the current economic situation is known as the
legislative lag
Compared to positive supply shocks, negative supply shocks have the .............. effect on aggregate supply.
opposite
The time that policymakers may wait for data that support their initial impression of the current state of the economy is known as the
recognition lag
Demand shocks are exogenous events that cause .......... in the AD curve
shifts in
Supply shocks are exogenous events that cause ______ the aggregate supply curve
shifts in
Compared to negative demand shocks, positive demand shocks have ............. effect on aggregate demand.
the opposite
If the oil price decline is viewed as a temporary shock, the anticipated impact on the long-run aggregate supply is
unchanged
Question 12 ch11 Suppose Okun's law can be expressed according to the following formula: (DO THE MATH) U - Un = -0.75 x (Y - Yp) Assuming potential output grows at a steady rate of 3% and that the natural rate of unemployment remains unchanged: Unemployment will increase by ............ % when real GDP decreases by one percentage point Real GDP will INCREASE/DECREASE by ................. when unemployment decreases by two percentage points.
??
Suppose that the expectations-augmented Phillips curve is given by the following formula: π = πe − 0.5 (U − Un) If expected inflation is 4% and the natural rate of unemployment is 5%, calculate the inflation rate according to the Phillips curve for each unemployment rate listed. If unemployment is 4%, the Phillips curve would predict an inflation rate of ....... percent
??
According to modern Phillips curve analysis, an increase in expected inflation would: A. increase the inflation rate by shifting the Phillips curve upward. B. increase the inflation rate by moving upward along the Phillips curve. C. decrease the inflation rate by shifting the Phillips curve downward. D. decrease the inflation rate by moving downward along the Phillips curve
A
Is stabilization policy more likely to be conducted with monetary policy or fiscal policy? Why? A. With monetary policyas fiscal policy takes longer to deliberate and enact. .B. With fiscal policyas monetary policy takes longer to deliberate and enact. C. With monetary policyas monetary policy is always more effective than fiscal policy. D. With fiscal policyas fiscal policy is always more effective than monetary policy.
A
Oil prices declined in the summer of 2008, following months of increases since the winter of 2007. Considering only this fall in oil prices, the impact on the short-run aggregate supply was A. an increase, since the fall in prices was a positive supply shock that lowered production costs. B. nonexistant, since lower oil prices only impact aggregate demand. C. a decrease, since the decline in oil prices pushed the short-run aggregate supply curve downward. D. a decrease, since according to the law of supply, lower prices discourage production.
A
Okun's law describes the: A. negative relationship between the unemployment gap and the output gap. B. positive relationship between the unemployment gap and the output gap. C. negative relationship between the inflation gap and the output gap. D. positive relationship between the inflation gap and the output gap.
A
Policy activists generally believe that: A. the economy adjusts slowly. B. policymakers cannot know potential output or the natural rate of unemployment. C. policy making is a time-consuming process. D. problems with the government require active protest.
A
The divine coincidence A. refers to policies that accomplish both goals of stabilization policy. B. results in an upward-sloping Phillips curve. C. happens when an increase in the inflation rate produces no change in the quantity supplied of output. D. refers to events that cause both deflation and increases in output.
A
The long-run aggregate supply curve is: A. vertical because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run. B. upward-sloping because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run. C. upward-sloping because the output an economy can produce increases as does the inflation rate in the long run. D. vertical because the output an economy can produce increases as does the inflation rate in the long run.
A
What basic relationship does the long-run Phillips curve describe? A. It indicates unemployment will move toward its natural rate regardless of the inflation rate. B. It indicates the unemployment rate tends to decrease as the inflation rate increases. C. It indicates inflation will move toward its natural rate regardless of the unemployment rate. D. It indicates the unemployment rate tends to increase as the inflation rate increases.
A
