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