macro chapter 9

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Which of the following changes shifts the AD curve up and to the​ right?

A rise in the nominal money supply.

Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the​ asset, labor, and goods​ markets?

A rise in the price​ level, shifting the LM curve up and to the left.

Which of the following changes shifts the SRAS curve​ up?

An increase in​ firms' costs.

Is money neutral in the short run or the long​ run, according to the ​AD-AS​ model?

In the short​ run, money is not​ neutral, but in the long run it is neutral

Consider the impact of a decrease in the money supply. The shock is most likely to affect the...

LM curve.

A decrease in money demand causes the​ _____ curve to shift​ _____.

LM; down and to the right

An increase in money demand causes the​ _____ curve to shift​ _____.

LM; up and to the right

Increasing the money supply shifts the​ ____ curve​ _____.

LM​; down and to the right

FE line

The FE line is vertical at the​ full-employment level of output.

Which market adjusts the quickest in response to shocks to the​ economy?

The asset market.

According to the classical​ model, after an economic​ disturbance, which of the following is​ true?

The economy will rapidly return to general equilibrium as prices adjust quickly.

what shifts the FE line

a beneficial supply shock, an increase in labor supply, and an increase in capital stock

When economists say that money is​ neutral, this means​ that:

a change in the money supply changes nominal variables but not real variables.

Monetary neutrality means that...

a change in the money supply has no effect on real variables.

In classical IS−LM ​ analysis, the effects of a decline in desired investment include

a decline in the real interest rate.

An increase in​ people's inflation expectations from​ 2% to​ 4% causes​ _____ and causes the​ _____.

a decrease in money demand; LM curve to shift down and to the right

what shifts the LM curve down and to the right

a decrease in the risk of holding alternative assets relative to the risk of holding money, a reduction in price level, and an increase in expected inflation

Suppose a new cryptocurrency replaces all need for dollars in the U.S. economy. As a​ result, there will be​ ____ in money​_____. (You may assume that holdings of the cryptocurrency are not counted as​ money.)

a decrease; demand

in the ​AD-AS​ model, the​ long-run effect of a decrease in the money supply is

a proportionate fall in the price​ level, but no changes to real variables such as output

what factors shift the AD up and to the right

a reduction in taxes, T, when Ricardian equivalence does not hold, an increase in expected future output, an increase in the nominal money supply M

what will shift the IS curve down and the left

a reduction in the expected future output, an increase in taxes if Ricardian equivalence does not hold, and a temporary reduction in government purchases

in the ​AD-AS​ model, the​ short-run effect of a decrease in the money supply is

a shift down and to the left of the AD ​curve, causing output to fall at an unchanged price level

What economic forces act to bring the economy back to general​ equilibrium?

adjustment of the price level moves the LM curve

You have just read that Australia has suffered a​ drought, destroying its wheat crop for this year. The effect of this adverse supply shock on Australia would probably be

an increase in prices and an increase in real interest rates.

Looking only at the asset​ market, an increase in output would cause

an increase in the real interest rate along the LM curve.

If people reduce their expectations of inflation from​ 4% to​ 2%, then there will be​ ____ in money​ _____.

an increase; demand

After prices​ adjust, money is neutral in the ​IS-LM model​ because:

any change in money supply that shifts the LM curve is finally matched by a proportional change in the price level that shifts the LM curve to its original position.

Why is the​ short-run aggregate supply curve​ horizontal?

because prices remain fixed in the short run

Why is the​ long-run aggregate supply curve​ vertical?

because the aggregate amount of output supplied is the​ full-employment level, regardless of the price level

The aggregate demand curve slopes​ downward:

because with fixed nominal supply of​ money, an increase in the price level shifts the LM curve up and to the​ left, leading to lower output at the intersection of the IS and LM curves.

Regarding neutrality of​ money:

classical economists believe that money is neutral in both the short run and the long​ run, but Keynesians believe that money is neutral only in the long run but not in the short run due to sluggish adjustment of the price level in the short run.

The IS curve​ represents:

combinations of output and the real interest rate such that desired national saving is equal to desired investment.

For each of the following​ variables, select whether you would expect it to​ increase, decrease, or remain constant as a result of the temporary adverse supply shock. consumption? investment? government spending? nominal money supply?

consumption : decrease investment : decrease government spending : stay the same nominal money supply : stay the same

A financial​ innovation, such as the introduction of money market mutual​ funds, which increases the liquidity of alternatives to​ money, would

decrease money​ demand, shifting the LM curve down and to the right.

The likely effect of introducing an increased number of automatic teller machines is to

decrease money​ demand, shifting the LM curve down and to the right.

how does an increase in the money supply affect the FE line

does not change the FE line

how does an increase in the money supply affect the IS curve

does not change the IS curve

how does an increase in consumption effect SRAS

does not shift

how does an increase in the price level effect AD curve

does not shift the AD curve

how does an increase in government spending effect the LM curve

does not shift the LM curve

how does an increase in the money supply effect the SRAS

does not shift the SRAS

A rise in the price of a bond causes the yield of the bond to

fall

When the money supply declines by​ 10%, in the short run​ (before the price level adjusts to restore general​equilibrium), output​ ________ and the price level​ ________.

falls; is unchanged

If money is​ neutral, then monetary policy...

has real effects only in the short run

After general equilibrium is​ restored, the real interest rate is​ _____ and the price level is​ _____. (Compare with the situation before the​ shock.)

higher;higher

At a given output​ level, a temporary reduction in government purchases will

increase desired​ saving, causing the IS curve to shift down and to the left.

Banks decide to raise the interest rate they pay on checking accounts from​ 1% to​ 2%. This action would

increase money​ demand, shifting the LM curve up and to the left.

Any change that reduces desired saving relative to desired investment​ (for a given level of​ output) causes the real interest rate to​ ________ and shifts the IS curve​ ________.

increase; up and to the right

Keynesians believe​ that, in a​ recession, the government could help the economy improve by...

increasing the money supply.

The​ long-run aggregate supply curve

is vertical.

Keynesian economists believe that in the short​ run,

money neutrality does not exist and prices do not adjust rapidly.

For each of the following​ variables, select whether you would expect it to​ increase, decrease, or remain constant in general equilibrium as a result of the temporary supply shock. output? the real interest rate? the price level?

output : decrease real interest rate : increase price level : increase

For constant​ output, if the real money supply exceeds the real quantity of money demanded at some initial real interest​ rate,

people with excess money balances purchase nonmonetary​ assets, thus increasing the market price of the nonmonetary assets and reducing the real interest rate until an equilibrium is reached.

Keynesians contend that in a recession caused by a decline in aggregate​ demand, a policy of increasing the nominal money supply would

raise the level of aggregate​ demand, which would help return the economy to​ full-employment output.

An IS curve shows the combinations of the...

real interest rate and output for which the goods market is in equilibrium.

A temporary decline in productivity would cause the IS curve to

remain unchanged.

A decrease in wealth would cause the IS curve to

shift down and to the left.

You have just read that the Federal Reserve has increased the money supply to avoid a recession. For a given price​ level, you would expect the LM curve to

shift down and to the right as the real money supply rises.

A temporary supply​ shock, such as a bumper​ crop, would

shift the FE line to the right and leave the IS curve unchanged.

A beneficial supply shock would cause the FE line to

shift to the right.

An increase in the expected future marginal product of capital would cause the IS curve to

shift up and to the right

how does an increase in the effective tax rate on capital effect the AD curve

shifts the AD curve down and to the left

how does an increase in the money supply effect the AD curve

shifts the AD curve up and to the right

how does an adverse supply shock affect the FE line

shifts the FE line leftward

how does an increase in the labor supply affect the FE line

shifts the FE line rightward

how does an increase in the effective tax rate on capital affect the IS curve

shifts the IS curve down and to the left

how does a temporary increase in government spending affect the IS curve

shifts the IS curve up and to the right

how does an increase in the expected inflation rate effect the LM curve

shifts the LM curve down and to the right

how does an increase in the price level effect the LM curve

shifts the LM curve up and to the left

how does an increase in firm costs effect the SRAS

shifts the SRAS up

The aggregate demand curve shows the combinations of output and the price level that put the economy on

the IS curve and the LM curve.

Describe the​ short-run aggregate supply ​(SRAS​) curve and the​ long-run aggregate supply ​(LRAS​) curve.

the SRAS curve is horizontal and the LRAS curve is vertical

the LM curve shows

the combinations of the real interest rate and output such that the asset market is in equilibrium

The​ full-employment level of employment​ is:

the equilibrium level of employment reached after all wages and prices have fully adjusted

The position of the FE line is determined​ by:

the labor market and the production function

General equilibrium occurs at which point in the IS−LM diagram?

the point at which the FE line and the IS and LM curves intersect

if the economy​ isn't in general​ equilibrium, what determines output and the real interest​ rate?

the point at which the IS and LM curves intersect

The aggregate supply curve shows the relation between

the price level and the aggregate amount of output that firms supply.

The aggregate demand ​(AD​) curve shows the relationship​ between:

the price level and the aggregate demand for goods and services.

Consider the impact of a decrease in taxes if Ricardian equivalence does not hold. After general equilibrium is​ restored, output is​ _____ and the price level is​ _____. (Compare with the situation before the​ shock.)

unchanged; higher

Consider the impact of a decrease in the money supply. After general equilibrium is​ restored, output is​ _____ and the price level is​ _____. (Compare with the situation before the​ shock.)

unchanged; lower

In the short​ run, before general equilibrium is​ restored, the LM curve shifts​ _____ and causes​ _____.

up and to the​ left; output to decline and the price level to remain unchanged

In the short​ run, before general equilibrium is​ restored, the IS curve shifts​ _____ and causes​ _____.

up and to the​ right; output to rise and the price level to remain unchanged

In the short​ run, before general equilibrium is​ restored, the IS curve shifts​ _____ and causes​ _____

up and to the​ right; the real interest rate to rise and the price level to remain unchanged

Which of the following changes shifts the AD curve down and to the​ left?

A decrease in consumer confidence.

Which of the following changes shifts the​ long-run aggregate supply curve to the​ right?

A demographic change that increases the labor supply.

Which of the following best describes a general​ equilibrium?

All markets are simultaneously in equilibrium.

Consider the impact of a decrease in effective tax rate on capital. The shock is most likely to affect the...

IS curve

Consider the impact of a decrease in taxes if Ricardian equivalence does not hold. The shock is most likely to affect the...

IS curve

According to the Keynesian​ model, after an economic​ disturbance, which of the following is​ true?

Price adjustment will eventually return the economy to general​ equilibrium, but this may take several years.


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