Macro CH. 20

which of the following will reduce the price level and real output in the short run

a decrease in the money supply

according to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply leads to

a decrease in the price level but does not change real GDP

which of the following would cause investment spending to decrease and aggregate demand to shift left?

a decrease int eh money supply and the repeal of an investment tax credit

a decreases in US interest rates kids ti

a depreciation of the dollar that leads to greater net exports

A relatively mild period of falling incomes and rising unemployment is called

a recession

the classical dichotomy and monetary neutrality are represented graphically by

a vertical long-run aggregate-curve

if businesses in general decide that they have overbuilt and so n ow have too much capital, their response to this would initially shift

aggregate demand left

the initial impact of an increase in an investment tax credit is to shift

aggregate demand right

which of the following would cause prices and real GDP to rise in the short run

aggregate demand shifts right

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

which of the following would raise the price level in both the short and long run

an increase in government expenditures

which of the following shifts short-run aggregate supply left

an increase in price expectations

which of the following would increase output in the short run?

an increase in stock prices makes people feel wealthier, government spending increases, firms chose to purchase more investment goods

which of the following shifts both the short-run and long-run AS right

an increase in the capital stock

which of the following would cause prices and real GDP to rise in the short run?

an increase in the money supply

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

suppose the economy is in long-run equilibrium and the government decreases its expenditures. which of the following helps explain the logic of why the economy moves back to long-run equilibrium

as people revise their price-level expectations downward, firms and workers strike bargains for lower nominal wages

an increase in the price level and a reduction in output (stagflation) would result from

bad weather in farm states

wages tend to be stick

because of contracts, social norms, and notions of fairness

suppose that there is an increase in the costs of production that shifts the short run aggregate supply curve left. if there is no policy response, then eventually

because unemployment is high, wages will be bid down and short-run aggregate supply will shift right

which of the following decreases in response to the interest-rate effect from an increase in the price level?

both investment and consumption

when the actual change in the price level differs from its expected change, which of the following can explain why firms might change their production

both menu costs and mistaking a price level change for a change in relative price

of the following theories, which is consistent with the vertical LRAS

both the sticky wage and misperceptions theory

when the price level falls the quantity of

consumption goods demanded and the quantity of net exports demanded both rise

often the last fifty years both the real GDPD and prices have trended upward in most countries. Continuing real GDP growth and inflation can be explained by

continued technological progress and continuing increases in the money supply

other things the same, if the long-run aggregate supply curve shifts right, prices

decrease and output increases

other things the same, if the price level is lower than expected, then some firms believe that the relative price of what they produce has

decreased so they decrease production

other things the same, if workers and firms expected inflation to be 2% but its o only 1% then

employment and production fall

An increase in household saving causes consumption to

fall and aggregate demand to decrease

and increases in the interest rate cases investment to

fall and the exchange rate to appreciate

other things the same, if the price level falls, domestic interest rates

fall, so domestic residents will want to hold more foreign bonds

during recessions, employment typically

falls substantially. As the recession ends, employment rises gradually

when the price level increases, the real value of peoples money holdings

falls, so they buy less

in which case can we be sure real GDP rises in the short run

foreign economies expand and government purchases rise

in the AD and AS model, sticky wages, sticky prices, an dmisperceptions about relative prices

have temporary effects

other things the same, fi the price level rises by 2% and people were expecting it to rise by 5% then some firms have

higher than desired prices, which depresses their sales

the sticky-price theory of the short-run ASC says that if they price level rises by 5% and people were expecting it to rise by 2% then firms have

higher than desired prices, which leads to an increase in the agg quantity of goods and services supplied

the long-run aggregate supply curve shifts right if

immigrations from abroad increases, the capital stock increases, technology increases

the long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change

in the price level

Keynes explained, that recessions and depressions occur because of

inadequate demand

Keynes believed that economies experiencing high unemployment should adopt policies to

increase aggregate demand

suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire

increased consumption, which shifts the aggregate-demand curve right

the misperceptions theory of the short run ASC says that if the price level is higher than people expected, then s one firms believe that the relative price of what they produce has

increased, so they increase production

the effect of an increase in the price level on the aggregate-demand curve is represented by a

movement to the left along a given aggregate-demand curve

the effects of a higher than expected price level are shown by

moving to the right along a give AS

when the dollar appreciates, US

net exports fall, which decreases the aggregate quantity of goods and services demanded

which of the following both shift aggregate demand right

net exports rise for some reason other than a price exchange and government purchases rise

when the dollar depreciates, US

net exports rise, which increases the aggregate quantity of goods and services demanded

according to classical macroeconomic theory, changes in the money supply affect

nominal variables, but not real variables

the aggregate demand and aggregate supple model implies monetary neutrality

only in the long run

a decrease in the expected price level shifts

only the short-run AS right

in the short run an increase in the costs of production makes

output fall and prices rise

if there are floods or droughts or a decrease in the availability of raw materials

output falls in the short run

as the price level falls

people are more willing to lend, so interest rates fall

when the price level falls

people want to hold less money, the interest rate falls, investment spending rises

as the price level rises

people will want to buy fewer bonds, so the interest rate rises

as the price level falls,

people will want to buy more bonds, so the interest rate falls

the classical dichotomy refers to the separation of

prices and nominal interest rates

according to the classical model, an increase in the money supply causes

prices to rise in the long run

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

production is more profitable and employment rises

which of the following is NOT included in aggregate demand?

purchases of stocks and bonds

the aggregate-demand curve shows the

quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level

assuming that a is positive, theories of short-run AS expressed mathematically as

quantity of output supplied= natural rate of output+ a(actual rate of output+expected price level)

if the government repeals an investment tax credit and increases income taxes

real GDP and the price level fall

Microeconomic substitution is impossible for the economies a whole because

real GDP measures the total quantity of goods and services produced by all firms in all markets

most economists believe that in the short run

real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend

When we say that economic fluctuations are "irregular and unpredictable" we mean that

recessions do not occur at regular intervals

the investment component of GDP measures spending on

residential constructions, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively large amount.

tax cuts shift aggregate demand

right as do increases in government spending

stagflation exists when prices

rise and unemployment rises

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level

rises, shifting aggregate supply left

if the price level falls, the real value of a dollar

rises, so people will want to buy more

as the price level rises, the interest rate

rises, so the supply of dollars in the market for foreign currency exchange decreases

other things the same, an increase in the expected price level shifts

short-run aggregate supply left

in 1936, john maynard keynes published a book, The General Theory of Employment, Interest, and Money, which attempted to explain

short-run economic fluctuations

most economists use the aggregate demand and aggregate supply model primarily to analyze

short-run fluctuations in the economy

the aggregate demand curve shifts left if either

speculators gain confidence in US assets or foreign countries enter into recession

an unexpected increase in the price level that temporarily lowers real wages and indues more employment and output in an economy occurs in

sticky-wage theory

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

the long-run aggregate supply curve shifts right if

technology improves

suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. they may infer that the reward to working is

temporarily low and so supply a smaller quantity of labor

recessions in Canada and Mexico would cause

the US price level and real GDP to fall

as the price level rises,

the exchange rate rises, so net exports fall

which of the following effects helps to explain the slop e of the aggregate-demand curve?

the exchange rate, the wealth effect, the interest-rate effect

which of the following shifts aggregate demand to the right

the fed buys bonds in the open market

when the price level falls

the interest rate falls, so the quantity of goods and services demanded rises

which of the following is NOT a determinant of the long-run level of real GDP

the price level

the long run effect of an increase in household consumption is to raise

the price level and leave real output unchanged

which of the following statements concerning the aggregate demand and aggregate supply model is correct

the price level and quantity of output adjust to bring aggregate demand and supply into balance

acording to classical macroeconomic theory, changes in the money supply affect

the price level, but not unemployment

if there are sticky wages, and the price level is greater than what was expected, then

the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggreagate supply curve.

we depart from the assumptions of classical economics when we focus on the relationship between

the quantity of output and the price level

if the actual price level is 165 but people had been expecting it to be 160, then

the quantity of output supplied rises, but only in the short run

when the price level changes, which of the following variables will change and thereby causes a change int eh aggregate quantity of goods and services demanded?

the real value of wealth, the interest rate, and the value of currency in the market for foreign exchange

the sticky-price theory implies that

the short-run AS curve is upward sloping, an unexpected fall in the price level induces firms to reduce the quantity of goods and services they produce, menu costs influence the speed of adjustment of prices

when production costs rise

the short-run aggregate supply curve shifts to the left

an increase in the expected price level shifts the

the short-run but not the long-run AS curve left

other things the same, if the US price level rises, then

the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate rises

Real GDP

the variable most commonly used to measure short-run economic fluctuations. it is almost impossible to predict these fluctuations with much accuracy

Investment

this fluctuates the most over the business cycle

the aggregate supply curve is

vertical in the long run and upward sloping in the short run

During recessions, declines in investment account for about

2/3 of the decline in real GDP

When taxes decrease, consumption

increases as shown by a shift of the aggregate demand curve to the right

when the money supply increases

interest rates fall and so aggregate demand shifts right

which of the following explains why production rises i n most years

its increases in the labor force, increases in the capital stock, and advances in technological knowledge

in the long run, an increase in the stock of human capital

makes the price level fall, while increases in the money supply make prices rise