Macroeconomics 10 AD/AS Review

An increase in price expectations shifts the long-run aggregate-supply curve to the left.

False

An increase in the expected price level shifts the short-run aggregate supply curve to the right

False

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

False

If policymakers choose to try to move the economy out of a recession, they should use their policy tools to decrease aggregate demand

False

If the Federal Reserve increases the money supply, the aggregate-demand curve shifts to the left.

False

Other things the same, as the price level falls, the exchange rate rises. A rise in the exchange rate leads to a decrease in net exports

False

If the economy is in a recession, the economy will adjust to long-run equilibrium on its own as wages and price expectations rise.

False: In a recession, the economy adjusts to long-run equilibrium as wages and prices fall.

In the long run, an increase in government spending tends to increase output and prices

False: In the long run, it tends to increase prices, but it has no impact on output.

The misperceptions theory explains why the long-run aggregate-supply curve is downward sloping.

False: It explains why the short-run aggregate-supply curve is upward sloping.

Over the last 50 years, U.S. real GDP has grown at about 5 percent per year

False: The U.S. economy has grown at about 3 percent per year.

Other things the same, which of the following is correct?

If speculators lose confidence in the American economy, the dollar depreciates. Aggregate demand shifts right.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in thelong run ?

Output and the price level are unchanged from their initial values.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending due to the end of the Cold War. According to the model of aggregate demand and aggregate supply, what happens to prices and output in theshort run ?

Prices fall; output falls.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending due to the end of the Cold War. According to the model of aggregate demand and aggregate supply, what happens to prices and output in thelong run ?

Prices fall; output is unchanged from its initial value.

One reason aggregate demand slopes downward is the wealth effect: A decrease in the price level increases the value of money holdings and consumer spending rises

True

Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

True

The aggregate demand and aggregate supply model helps us to understand both short-run economic fluctuations and how the economy moves from the short to the long run

True

The short-run effect of an increase in aggregate demand is an increase in output and an increase in the price level.

True

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

a decrease in the expected price level

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

a drop in oil prices

In 2008 home prices declined. A decline in the price of assets such as houses shifts

aggregate demand left.

Which of the following wouldnot cause a shift in the long-run aggregate-supply curve?

an increase in price expectations

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

an increase in the capital stock, but not an increase in the price level

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.

Which of the following shifts aggregate demand to the right?

both an investment tax credit and a decrease in income tax rates

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

both investment and consumption

Which of the following fall during a recession?

both retail sales and employment

In 2009 Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?

both the increased funding for states and the tax cuts

When the price level rises more than expected, a firm with a sticky price will sell its output at a price that is

less than it desires and increase its production.

According to the wealth effect, aggregate demand slopes downward (negatively) because

lower prices increase the value of money holdings and consumer spending increases.

According to the interest-rate effect, aggregate demand slopes downward (negatively) because

lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases.

Policymakers are said to "accommodate" an adverse supply shock if they

respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.

As the price level rises, the exchange rate

rises, so exports fall and imports rise.

As the price level rises, the interest rate

rises, so the supply of dollars in the market for foreign currency exchange shifts left.

Suppose government expenditures increase. In the short run, the price level

rises. So if wages are sticky, production is increased because it is more profitable.

Stagflation occurs when the economy experiences

rising prices and falling output.

Other things the same, continued technological progress and continued increases in the money supply would unambiguously lead to

rising real GDP only.

In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to

shift aggregate demand to the right.

Refer to Exhibit 4. Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers wished to move output to its long-run natural rate, they should attempt to

shift aggregate demand to the right.

The aggregate demand curve shifts right if either

speculators lose confidence in U.S. assets or recessions in foreign countries end.

Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on production. This is a demonstration of the

sticky-wage theory of the short-run aggregate-supply curve.

Which of the following isnot a reason why the aggregate-demand curve slopes downward?

the classical dichotomy/monetary neutrality effects

Which of the following accounts for about two-thirds of the decline in output during a recession?

the decline in investment spending alone

Which of the following shifts aggregate demand right?

the implementation of an investment tax credit but not a decrease in the price level

Which of the following effects provide incentives for consumers to spend less when the price level rises?

the wealth effect and the interest-rate effect

The natural rate of output is the amount of real GDP produced

when the economy is at the natural rate of unemployment.

If output is above its natural rate, then according to sticky-wage theory

workers and firms will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.

If output is above its natural rate, then according to sticky-wage theory

workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.

Which of the following statements about economic fluctuations istrue ?

A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in theshort run ?

Prices rise; output falls.

A rise in price expectations that causes wages to rise causes the short-run aggregate-supply curve to shift left.

True

A rise in the price of oil tends to cause stagflation

True

If the classical dichotomy and monetary neutrality hold in the long run, then the long-run aggregate-supply curve should be vertical.

True

In the long-run, an increase in aggregate demand increases the price level, but not real GDP.

True

In the short run, if the government cuts back spending to balance its budget, it will likely cause a recession.

True

Investment is a particularly volatile component of spending across the business cycle

True

The long-run aggregate supply curve shifts right if

either immigration from abroad increases or technology improves.

When the price level increases, the real value of people's money holdings

falls, so they spend less.

Which of the following statements is true regarding the long-run aggregate-supply curve? The long-run aggregate-supply curve

is vertical because an equal change in all prices and wages leaves output unaffected.

Which of the following rises during recessions?

layoffs but not consumer spending

Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the

misperceptions theory of the short-run aggregate-supply curve.

Refer to Exhibit 4. Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers allow the economy to adjust to the long-run natural rate on its own

people will reduce their price expectations and the short-run aggregate supply will shift right.

According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause

prices to rise and output to remain unchanged.

If wages are sticky, then a greater than expected increase in the price level

reduces the costs of production, so the aggregate quantity of good and services rises.