Macro Exam 3

Productivity

explains most of the differences in the standard of living across countries.

The long-run aggregate supply curve shows that by itself (ignoring the Short-run Aggregate Supply) a permanent change in aggregate demand would lead to a long-run change

in the price level, but not real GDP

An event like Katrina, which has reduced the amount of physical capital in New Orleans temporarily, will

shift the short-run aggregate supply curve to the left, which will increase the price level but decrease output.

A positive supply shock will

shift the short-run aggregate supply curve to the right, which will decrease the price level but increase output

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

short-run fluctuations in the economy

Most economists use the aggregate demand and aggregate supply model developed by John Maynard Keynes primarily to analyze

short-run fluctuations in the economy.

There is a

short-run tradeoff between inflation and unemployment

Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has more capital and so more real GDP per person than the other. Finally, suppose that the saving rate in both countries increases from 5 percent to 6 percent. Over the next ten years we would expect that

the country that started with less capital will grow faster.

The aggregate supply curve is upward sloping in

the short run, but not the long run.

Over the past 100 years, U.S. real GDP per person has doubled about every 35 years. If in the next 100 years it doubles every 25 years, then a century from now U.S. real GDP per person will be

16 times higher than it is now.

During the past century the average growth rate of U.S. real GDP per person implies that it doubled about every

35 years

Which of the following is correct?

The long-run, but not the short-run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables.

Assume the economy is at its initial equilibrium (point A on the graph). Suppose due to deepening financial crisis and rising uncertainty, consumption and investment decline. In the short run, this shock will cause _______ to _______.

AD; shift to the left

If the actual price level is higher than expected, firms might raise their production in the short run if

All of the above are correct

The long-run aggregate supply curve shifts right if

All of the above are correct

Which of the following is a determinant of productivity?

All of the above are correct

Which of the following shifts aggregate demand to the right?

All of the above are correct.

Which of the sentences 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.

Between 2012 and 2013 what happens to Econoland's total output (GDP) and its standard of living (as measured by GDP per-capita), if we know the following information? The population of Econoland remains constant at 1,000 persons during both years. The number of employed workers increases from 400 in 2012 to 440 in 2013, but labor productivity, as measured by output per employed worker, decreases from $2,000 to $1,900 during the same time period.

Both GDP per-capita and total output increase

Which of the following monetary policy actions can be used to close the inflationary gap shown in the graph above?

Decrease the money supply to increase interest rates.

In the above figure, the short-run equilibrium indicates an inflationary gap exists at point E when a positive demand shock shifts the AD (i.e., short-run real GDP equals $14 trillion, which exceeds the natural rate of output (real GDP) of $12 trillion). Which of the following policies could close this inflationary gap, other things held constant?

Decreasing government expenditures and increasing taxes

Which of the following is correct

The level of real GDP per person is a good gauge of economic prosperity, and the growth rate of real GDP per person is a good gauge of economic progress

Germany has a higher natural rate of unemployment than the United States. This suggests that

Germany's long-run Phillips curve is to the right of that of the United States, possibly because they have more generous unemployment compensation.

How would a decrease in unemployment compensation affect the long-run Phillips curve?

It would shift the long-run Phillips curve left as people unemployed find jobs quicker.

Two important factors that determine a nation's standard of living are: 1) the proportion of the population that works, and 2) its output per worker. Mexico has a relatively young population and, thus, the proportion of its population that works is expected to increase in the future. Given these circumstances, which of the following statements about its standard of living is TRUE:

Mexico can increase its standard of living by either increasing its output per worker or by increasing the proportion of the population that works

The Phillips curve should not reflect any relationship between inflation and unemployment in the Long Run because of monetary neutrality. This notion was pushed by the well-known economist

Milton Friedman.

There are two types of stabilization policy, fiscal policy and monetary policy. Which of the following is a monetary policy tool?

Open-market operations.

The President of our country is proposing that our country needs to help domestic firms by imposing trade restrictions.

These are inward-oriented policies and most economists believe they would have adverse effects on growth.

GDP per-capita is a common measure of a nation's standard of living. Two imoortant factors that influence GDP per-capita are output per worker (labor productivity) and the proportion of the population that works. The United States has an aging population and the proportion of the population that works is expected to decrease. Argentina has a young population and the proportion of the population that works is expected to increase. Given this information, which of the following statements about standard of living is TRUE?

US can increase its standard of living only by increasing its labor productivity.

If there are constant returns to scale, the production function can be written as

Y/L = A F( 1, K/L, H/L, N/L)

(POSITIVE SUPPLY SHOCK) Consequently, we will have

a decrease in inflation and in unemployment

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting

aggregate demand right

Imagine that businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases (physical capital). Their reaction would initially shift

aggregate supply left.

Which of the following shifts long-run aggregate supply right?

an increase in either the physical or human capital stock

Which of the following shifts short-run aggregate supply right?

an increase in immigration from abroad

(Katrina event) Consequently, this will lead to

an increase in inflation and in unemployment, shifting the PC to the right.

Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to

decrease consumption, which shifts aggregate demand left.

If the U.S. Congress were to increase all personal income tax rates, one consequence would be a(n):

decrease in the short-run equilibrium output.

Let's assume that the population in Mexico remained constant, but the proportion of employed workers increased from 0.6 to 0.66 percent, and average labor productivity decreased from $20,000 per worker per year to $19,000 per worker per year. Given this information, we can deduce that the standard of living in Mexico has _____________ and consequently total output __________.

increased; increased

Assume the Mexican economy is initially at full- employment equilibrium. An economic expansion in the U.S. ______ the demand for U.S. imports from Mexico. This will consequently result in an increase in Mexican aggregate demand in Mexico and a(n) ________ period in Mexico.

increases; expansionary

Most economists believe that fiscal policy can be used to get the economy out of a recession in the short run by ________ government expenditures on goods and services and/or ________ taxes.

increasing; decreasing

(POSITIVE SUPPLY SHOCK) In the graph of the Phillips curve, the equilibrium

inflation and unemployment have decreased

When the money supply decreases

interest rates rise and so aggregate demand shifts left.

Which part of real GDP fluctuates most over the course of the business cycle?

investment expenditures

According to the theory of liquidity preference, the money supply

is independent of the interest rate, while money demand is negatively related to the interest rate.

The natural rate of unemployment

is the unemployment rate that the economy tends to move to in the long run.

If a country were to increase its saving rate, then in the long run it would also increase its

level of income

Assume consumer confidence in the economy falls (i.e. because of "animal spirits"), and as a result, actual output falls below the natural rate of output. To move U.S. GDP back to the natural rate of output, the Federal Reserve could

lower the interest rate.

Other things the same, an increase in the price level induces people to hold

more money, so they lend less, and the interest rate rises

A. W. Phillips found in 1958 a

negative relation between unemployment and inflation in the United Kingdom (England)

Which of the following is upward sloping?

neither the long-run nor the short-run Phillips curve

Which of the following would not be considered physical capital?

on-the-job training

A decrease in the expected price level would shift

only the short-run aggregate supply curve right.

If the dollar appreciates because of speculation or government policy

or if other countries experience recessions, aggregate demand shifts left in the United States.

Suppose there are constant returns to scale. Now suppose that over time a country doubles its workers, its natural resources, its physical capital and its human capital, but its technology is unchanged. Which of the following would double?

output, but not labor productivity

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

production is more profitable and employment rises, because of the increase in output.

Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically as

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

Other things the same, a fall in the economy's overall level of prices tends to

raise the quantity demanded of goods and services, but lower the quantity supplied.

Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the Marginal Propensity to Consume is 0.75. Then the government should follow a policy of

raising government spending by $25 billion to bring the economy to potential output.

Accumulating capital

requires that society sacrifice consumption goods in the present.

If the central bank increases the money supply, in the short run, prices

rise and unemployment falls

Assume the money market is in equilibrium (Theory of Liquidity Preferences). The Federal Reserve Bank has decided to sell Treasury bills (bonds) in an open market operation. The result of this action will be a

rise in the interest rate as the money supply curve shifts to the left.

The exchange rate effect indicates that, other things the same, a decrease in the price level causes real wealth to

rise, savings to rise, interest rates to fall, and the dollar to depreciate.

According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes

the interest rate to rise so aggregate demand shifts left.

Suppose the economy is in long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then we would expect that in the short run,

the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

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

the slope of the aggregate demand curve

Assume that the economy depicted above is in a short- run equilibrium point B with AD1 and SRAS0. If the economy is left to correct itself

then the expected price level should fall to shift the SRAS to the right.

If the self-adjustment mechanism of the economy takes place very slowly, so that actual output differs from the natural rate of output for lengthy periods of time, then active

use of monetary and fiscal policy can help to stabilize output.

Malthus predicted that the power of population

was greater than the power of the earth to produce subsistence. His forecast was off the mark.

(POSITIVE SUPPLY SHOCK) In the graph of the Phillips curve, the Phillips curve

will shift to the left