Macro Unit 4

the short-run aggregate supply curve to the left but does not affect the long-run aggregate supply curve.

An increase in the expected price level shifts

reduce interest rates, increasing investment and aggregate demand.

An increase in the money supply will

Bureau of Labor Statistics

Closely watched indicators such as the inflation rate and unemployment are released each month by the

exists because of past government budget deficits.

The National debt

The economies of major trading partners experience recessions.

The aggregate demand curve would shift to the left for which of the following reasons?

a vertical long-run aggregate supply curve.

The classical dichotomy and monetary neutrality are represented graphically by

Classical "monetary neutrality"

The vertical long-run Phillips curve derives from which of the following ideas?

the slope of the aggregate-demand curve.

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

only taxes a household on the money it spends.

A consumption tax that replaces an income tax

both the time inconsistency problem and political business cycles.

A law that requires the money supply to grow by a fixed percentage each year would eliminate

decrease government expenditures when output is high and do nothing when output is low.????

A lean against the wind policy says the government should

both the short-run and the long-run Phillips curve to the left.

A policy that lowered the natural rate of unemployment would shift

2006-2009

According ti the textbook, which of the following periods is the best example og an economy moving down along a given Phillips curve?

The interest rate effect.

According to Mankiw, which explaination for why the aggregate demand curve is dowward-sloping is most important?

Modeling an ongoing inflation.

According to Professor Flanders, the key advantage offered by tge Phillips curve model compared to the aggregate demand/aggregate supply model lies in

Whether the government uses the money it spends wisely or just wastes it.

According to Professor Flanders, what is the key thing to worry about when thinking about a government budget deficit and the national debt?

The interest rate will rise, reducing investment spending.

According to the "crowding-out" effect, an increase in government purchases will fail to cause aggregate demand to increase the full amount predicted by the multiplier effect because

The interest rate and investment spending.

According to the textbook, a change in the money supply will affect the economy (the monetary transmission mechanism) by way of which of the following?

When the tax cut is perceived as being temporary.

According to the textbook, a tax cut will be less likely to stimulate aggregate demand under which of the following conditions?

Real output deviates from its natural level only when the actual price level is different from the expected price level.

Although the textbook offers three different theories to explain the shape of the short-run aggregate supply curve, they all come to the same conclusion, which is:

Follow some version of the Taylor Rule.

An example of an "activist" rule fot monetary policy is for the Fed to

Real GDP returns to its initial level but the price level will be permanently lower.

Assume that the economy is at a point of full employment long-run equilibrium when there is a permanent decrease in aggregate demand. What happens to the equilibrium price level and level of real GDP in the long-run?

The federal funds rate.

At present the Fed announces its target for monetary policy in terms of

the short-run Phillips curve, but not the long-run Phillips curve, to shift left.

Disinflation would eventually cause

the profits of corporations and the dividends shareholders receive are taxed, which is currently the case in the United States.

Double taxation means that both

and real GDP to rise.

Economic expansions in Europe and China would cause the U.S. price level

the time inconsistency of policy.

Edward Prescott and Finn Kydland won the Nobel Prize in Economics in 2004. One of their contributions was to argue that if a central bank could convince people to expect zero inflation, then the Fed would be tempted to raise output by increasing inflation. This possibility is known as

raised inflation and reduced unemployment.

From 2008-2009 the federal reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have

has less of an effect on aggregate demand than if households view it as permanent.

If households view a tax cut as temporary, then the tax cut

All the above. Decrease taxes. Increase government purchases. Increase the money supply.

If policymakers want to increase aggregate demand, which of the following would work?

The time inconsistency of policy.

If the Fed reneges on its announced policy of reducing inflation in order to achieve lower unemployment, this is an example of

$190 billion

If the MPC is 0.50 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $95 billion will eventually shift the aggregate demand curve to the right by

None of the above.

If the economy is currently to the left of the long-run Phillips curve, which of the following would be true?

on the short-run but not in the long-run.

If the federal reserve increase the rate at which it increases the money supply, then unemployment is lower

4

If the marginal propensity to consume for an economy is 0.75, then the value of the spending multiplier must be:

federal funds rate.

In recent years, the Federal Reserve has conducted policy by setting a target for the

A temporary trade-off between real GDP and unemployment.

In the 1960's, Paul Samuelson and Robert Solow published an artical in which they described the Philips curve as showing which of the following?

Raising real output and rising prices.

In the long-run, if the aggregate demand curve shifts to the right by more than long-run aggregate suplly curve shifts to the right, the results will be:

A favorable supply shock.

Inflation and unemployment would both decrease at the same time as a result of

a small part of GDP, yet it accounts for a large share of the fluctuation in real GDP.

Investment is

Any such reforms would shift the tax burden from the rich to the poor.

Key reasons why the tax system should not be reformed to encourage more saving is which of the following?

short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

Liquidity preference theory is most relevant to the

vertical, which implies that monetary and fiscal policies cannot influence the level of unemployment in the long run.

Milton Friedman and Edmund Phelps argued in the late 1960s that in the long-run the Phillips curve is

raise expenditures during recessions and lower expenditures during expansions.

Other things the same, automatic stabilizers tend to

output is higher and prices are lower.

Other things the same, if technology increases, then in the long run

low, so there was upward pressure on wages and prices.

Samuelson and Solow reasoned that when aggregate demand was high, unemployment was

reduces the real value of fixed nominal wages, a little inflation may make it easier for labor markets to adjust.

Some economists argue that since inflation

Showed the importance of the Fed having credibility with the public when it comes to reducing inflation.

The "Volcker disinflation"

increased government expenditures.

The economic boom of the early 1940s resulted mostly from

increase the money supply, decreases taxes, increase government spending.

The economy goes into recession. Which of the following lists contains things policymakers could do to try to end the recession?

The short-run Phillips curve crosses the long-run Phillips curve.

The expected inflation rate associated with any particular short-run Phillips curve can be identified by looking at the point where

Decrease taxes by $500 billion.

The government has determined that the GDP gap is $2000 billion - aggregate demand needs to increase by that amount to get the economy back to full employment. The marginal propensity to consume is 0.8. Which of the following policy changed will exactly close the gap and increase aggregate demand by $2000 billion?

The misperceptions theory.

The idea that changes in the overall price level can temporarily mislead suppliers about what is happening in the individual markets in which they sell their output lies at the heart of which explanation for why the short-run aggregate supply curve will be upward-sloping?

Supply-side

The idea that cutting marginal tax rates can improve incentives and thus increase the ability of the economy to produce output is referred to as ______ fiscal policy.

Liquidity preference theory.

The idea that in the short-run the interest rate adjusts to equate money demand and money supply is called the

Rational expectations.

The idea that people optimally use all the information they have, including information about government policies, when forecasting the future, is called

Liquidity trap

The idea that the interest rate might fall to a zero lower bound so that the Fed's usual approach to monetary policy can no longer work is also called the

Natural rate hypothesis.

The idea that unemployment eventually returns to its natural rate, reguardless of the rate of inflation, is called the

Consumption spending

The multiplier effect says that, as the result of an initial increase in federal government purchases, there will be a further increase in aggregate demand caused by an increase in

increases income and thereby increases consumer spending.

The multiplier effect states that there are additional shifts in aggregate demand from expansionary fiscal policy, because it

Affect the economy only with a lag and so can turn out to be destabilizing.

The primary arguement against active monetary and fiscal policy is that these policies

changes in the interest rate to change aggregate demand.

The principle reason that monetary policy has lags is that it takes a long time for

unemployment and inflation that arise in the short-run as aggregate demand shifts the economy along the short-run aggregate supply curve.

The short-run Phillips curve shows the combinations of

more profitable and employment and output rises.

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

All the above. Reducing inflation has temporary costs but permanent benefits. If the Fed announces a credible commitment to zero inflation, the cost of reducing inflation can be very low. Zero inflation provided a more natural focal point for policymakers than any other number.

The textbook suggests that the Fed should aim for zero inflation for which of the following reasons?

rational expectations.

The theory by which people optimally use all available information when forecasting the future is known as

Expansionary monetary policy.

What would cause a movement up along a given short-run Phillips Curve?

The variable on the vertical axis is nominal; the variable on the horizontal axis is real.

When looking at a graph of aggregate demand, which of the following in correct?

All the above. Eliminating the double taxation of corporate income. Reducing or eliminating the inheritance tax. Replacing the income tax with a consumption tax.

Which of the following are ways that the tax system could be reformed to encourage more saving?

Increased investment in new plant and equipment.

Which of the following changes would shift the long-run aggregate supply curve to the right?

An increase in government expenditures increases the interest rate and so reduces investment spending.

Which of the following correctly explains the crowding-our effect?

All the above. A lower price level reduces interest rates and causes the dollar to depreciate which decreases net exports. A lower price level reduces the interest rate, encouraging greater spending on investment goods. A lower price level raised the real value of money, making consumers feel wealthier and consumption spending increases.

Which of the following correctly states a reason offered in the textbook for why the aggregate demand curve is downward-sloping?

Much of the public did not believe that the Fed would keep money growth low, so unemployment rose more than it would have otherwise.

Which of the following describes the Volcker disinflation most accurately?

The Business Cycle Dating Committee of the National Bureau of Economic Research.

Which of the following groups determines the official timing of the business cycle in the United States?

It is difficult to increase spending quickly and in large amounts without wasting much of the money.

Which of the following is a ket argument for why the governemnt should use tax cuts rather than spending increases to fight recessions?

Economists are mostly flying blind when it comes to the multipliers; politicians looking for precise estimates are deluding themselves.

Which of the following is a ket conclusion of the "...in the news" box in Chapter 16 about the size of the fiscal policy multiplier?

A little bit of inflation makes the labor market work better.

Which of the following is an agrument for why the central bank should NOT aim for zero inflation?

The government spending multiplier is bigger in size than the tax cut multiplier.

Which of the following is an argument for why the government should fight recessions with spending hikes rather than tax cuts?

Budget deficits shift the cost of government spending to future generations.

Which of the following is an argument that has been advanced for requiring the federal government to balance its budget?

Money does not matter - it is a "veil."

Which of the following is an assumption of classical macroeconomics?

As the economy enters a recession, tax receipts from the income tax fall, causing a budget deficit.

Which of the following is an example of automatic stabilizers at work?

Increase taxes

Which of the following policies would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve away from long-run equilibrium?

All of the above. Economic fluctuations are irregular and unpredictable. Most macroeconomic quantities fluctuate together. As income falls, unemployment rises.

Which of the following statements is consistent with the textbook's "Three Key Facts about Economic Fluctuations"?

recession, trough, expansion, peak

Which of the following states the correct sequence for the business cycle using the terms presented in class?

Bad weather around the world destroys crops, driving up the cost of food.

Which of the following would be most likely to cause stagflation?

Aggregate supply shifts left.

Which of the following would cause stagflation?

More generous education subsidies.

Which of the following would transfer wealth from old to young?

All the above. Recessions have no benefit for society; they are a sheer waste of resources. Modern macroeconomic theory demonstrates that it is possible to reduce the severity of recessions. Left on their own, economies tend to be unstable.

Which ot the following is an agrument in favor of policymakers trying to stabilize the economy?

Milton Friedman and Edmund Phelps.

Which two economists independently developed the idea that changes in expectations about inflation will cause the short-run Phillips Curve to shift resulting in NP long-run trade-off between inflation and unemployment?

Interest-rate effect, exchange-rate effect, and wealth effect.

With respect to their impact on aggregate demand for the U.S. economy, which of the following represents the correct ordering of the wealth effect, interest-rate effect, and exchange-rate effect from most important to least important?