unit 5 macro

The market below experiences sticky prices and wages. What is the new quantity demanded after a decrease in aggregate demand?

250 Keynes argued that wages and prices are sticky in the short run. This means that after a decrease in aggregate demand, they do not automatically adjust in the short run. Price and wage remain at the equilibrium level, while the quantity demanded decreases. The economy will continue to produce at the original price level, causing an excess in supply of both labor and goods and services, causing unemployment and recession.

Which of the following graphs most likely illustrates the total spending on domestic goods and services by consumers, businesses, government and the foreign sector (also terms total planned expenditure)?

A Total Planned Expenditure = Aggregate Demand Aggregate demand (AD) slopes down, showing that, as the price level rises, the amount of total spending on domestic goods and services declines. aggregate demand, im mad (agrivated) bcs i have to spend money on goods and services, so im sloped downwards bcs thats what i do when im mad

Suppose, in the nation of Xurbia, the cost of electricity decreases; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

A decrease in the price of inputs, in this case electricity, will cause the AS curve to shift to the right, which means that at each given price level for outputs, a lower price for electricity will encourage production because it will increase the possibilities for earning profits.

Suppose AD falls by 3 units at each price level and the economy enters a recession. Illustrate how this change will impact the product market if prices are sticky.

A recession begins when aggregate demand declines from AD0 to AD1. The recession persists because of the assumption of sticky wages, which makes the SRAS flat below potential GDP. The intersection E1 occurs in the flat portion of the SRAS curve where GDP is less than potential. This results in a decrease in Real GDP while wages stay the same.

Suppose AD falls by 5 units at each price level and the economy enters a recession. Place a point at the new market price and quantity demanded if prices are sticky.

A recession begins when aggregate demand declines from AD0 to AD1. The recession persists because of the assumption of sticky wages, which makes the SRAS flat below potential GDP. The intersection E1 occurs in the flat portion of the SRAS curve where GDP is less than potential. This results in a decrease in Real GDP while wages stay the same.

Suppose the U.S economy is initially in long-run equilibrium in the AS/AD model. If a recession strikes in China leading to a decrease in U.S. exports, which type of gap will occur within the U.S economy and why? Keep trying - mistakes can help us grow. A recessionary gap will occur because AD will shift left as a result of falling net exports. An inflationary gap will occur because AD will shift left as a result of falling net exports. A recessionary gap will occur because AD will shift right as a result of increasing net exports. An inflationary gap will occur because AD will shift right as a result of increasing net exports.

A recessionary gap will occur because AD will shift left as a result of falling net exports. When a recession in China leads to a decrease in exports, ADwill shift to the left. When AD shifts to the left, a recessionary gap occurs as the short-run equilibrium takes place at a price and employment level below potential GDP.

What do neoclassical economists believe is the root cause of changes in economic output? Correct! You nailed it. Aggregate supply. Aggregate demand. Government spending. Investment.

Aggregate supply. A distinct difference between Keynesians and neoclassical economists is their belief about economic output. Neoclassical economists believe that output is more a function of aggregate supply, while Keynesians believe that economic output is affected more by shifts in aggregate demand.

Which of the following are a characteristic of real GDP? Great work! That's correct. It offers an accurate measure of the actual quantity of goods and services that a nation produces. It accounts for inflation. It often has a lower value than nominal GDP. All of the above are true.

All of the above are true. Real GDP is the total value of all final goods and services produced in a country during a year adjusted to eliminate the effects of changes in price. It accounts for inflation so that it is more accurate when used to compare the economy at different points in time to determine whether or not growth is occurring. It also often has a lower value than nominal GDP because of inflation.

Which of the following scenarios determines consumption by influencing expectations of expected future income? Great work! That's correct. News of a recession. A young employee's contributions to a 401(k) plan. News of an economic boom. All of the above

All of the above. Consumer expectations about future income also are important in determining consumption. If consumers feel optimistic about the future, they are more likely to spend and increase overall aggregate demand. News of recession and troubles in the economy will make them pull back on consumption.

What does the expenditure multiplier help to determine or understand? Correct! You nailed it. It helps to evaluate the effectiveness of existing fiscal policies. It helps to project the impact of a proposed expansionary fiscal policy undertaken to recover from a recession. The multiplier can be used to track the impact of decreases in spending on the GDP. All of the above.

All of the above. The expenditure multiplier has been particularly useful in evaluating the effectiveness of existing fiscal policies, guiding new policy making, and estimating the impact of a proposed expansionary fiscal policy to recover from a recession. It is also important to realize that the multiplier can work in both a negative and positive direction. That is, it can calculate an increase in expenditure, which translates into an increase in incomes, which leads to further increases in expenditure - and in the opposite direction as well to take fiscal and monetary policy actions to prevent a recession.

Which of the following are examples of the expenditure multiplier concept? Great work! That's correct. Twelve-year-old Sam buys a raffle ticket at a school fundraiser and wins $50. She spends $35 on software for her computer. Alanzo stopped on the road to help a driver fix a flat tire and was given a $20 tip which he used to go to the movies that night with friends. Over the weekend, Ray did some yard work for a neighbor and earned $100, $50 of which he uses to buy new sneakers. All of the above.

All of the above. The idea behind the expenditure multiplier is that when one area of expenditure increases, this causes a change in GDP greater than the amount of initial expenditure. For example, when Sam spends her $35 on software, the retail store spends that money on advertising to increase its sales, the store attracts more shoppers who spend their money on goods and creates demand for more staff, which leads to people getting jobs, earning income, and spending some or all of what they earn. So consumption increases with each purchase generated. In each of these cases, money spent was income to someone, who then re-spent or planned to re-spend that income so that the end result of the initial spending has been multiplied repeatedly as it has changed hands. if they are getting money and then putting it back into the economy, it causes that domino effect

American households become less confident about American vehicles; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

An decrease in consumer confidence shifts AD to the left. When AD shifts to the left, the new equilibrium will have a lower quantity of output and also a lower price level compared with the original equilibrium.

Suppose, in the nation of Xurbia, input prices within its agricultural sector increase; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

An increase in the price of inputs for agriculture will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will encourage production because it will increase the possibilities for earning profits. stressballs cost more to make, so u cant make as many, shift to left (supply)

Suppose, in the nation of Xurbia, input prices within its mining sector increase; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

An increase in the price of inputs will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will encourage production because it will increase the possibilities for earning profits.

Suppose, in the nation of Xurbia, input prices within its industrial sector increase; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

An increase in the price of inputs, in this case within the industrial sector, will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will discourage production because it will dampen the possibilities for earning profits.

According to neoclassical economists, what will families do when government carries out a policy that increases the debt? Correct! You nailed it. Take a vacation. Anticipate an increase in taxes. Reduce spending and consumption. Spend more during the holidays.

Anticipate an increase in taxes. Reduce spending and consumption. Neoclassical economists argue that fiscal policy does not shift the aggregate demand curve at all. Consider, for example, an expansionary fiscal policy. Such a policy involves an increase in government purchases, or transfer payments, or a cut in taxes. Any of these policies will increase the deficit or reduce the surplus. Neoclassical economists argue that households, when they observe the government carrying out a policy that increases the debt, will anticipate an increase in their taxes. Additionally, these households will reduce their consumption as a result. This will cancel any tendency for the expansionary policy to affect aggregate demand.

Which of the following graphs most likely illustrates full employment GDP

B The full employment GDP line shows the maximum output that the economy can produce with full employment of workers and physical capital. Since that maximum output is, theoretically, a certain level of output or GDP, potential GDP is illustrated as a vertical line at a certain level of output.

To which concept in economics does this formula relate? ΔYΔSpending>1 Well done! You got it right. Marginal propensity for saving Expenditure multiplier Marginal propensity for consumption GDP

Expenditure multiplier The expenditure multiplier is the idea that not only does spending affect the equilibrium level of GDP, but that spending is powerful. More precisely, it means that a change in spending causes a more than proportionate change in GDP, represented by: Δ YΔ Spending>1

True or false? Inflationary gaps occur if the level of aggregate demand is not high enough to provide firms with an incentive to hire enough workers to reach full employment. Yes that's right. Keep it up! True False

False According to the Keynesian view of recession, aggregate demand is not always automatically high enough to provide firms with an incentive to hire enough workers to reach full employment, a recessionary gap will occur.

rue or false?An inflationary gap is the result of a decrease in aggregate demand. Select the correct answer below: True False

False An recessionary gap occurs when aggregate demand decreases and there is a rise in unemployment since output is below its full employment level. An inflationary gap occurs when aggregate demand increases, and the economy is pushed past potential output. Consequently, the economy experiences inflation. inflationary gap= increase AD

True or false?A recessionary gap is associated with a business-cycle expansion. Yes that's right. Keep it up! True False

False An recessionary gap occurs when aggregate demand decreases and there is a rise in unemployment. An inflationary gap occurs when aggregate demand increases, and the economy is pushed past potential output. Consequently, the economy experiences inflation.

True or false?A recessionary gap is associated with a business-cycle expansion. Not quite right - check out the answer explanation. True False

False An recessionary gap occurs when aggregate demand decreases and there is a rise in unemployment. An inflationary gap occurs when aggregate demand increases, and the economy is pushed past potential output. Consequently, the economy experiences inflation. inflationary gap=business cycle, increase in AD (inflate like a balloon) recessionary gap= decrease in AD (decrease = recession, depression)

True or false?An unchanging Phillips curve is valid for both the long run and the short run. Perfect. Your hard work is paying off 😀 True False

False In short, we should interpret a downward-sloping Phillips curve as valid for short-run periods of several years, but over longer periods, when aggregate supply shifts, the downward-sloping Phillips curve can shift so that unemployment and inflation are both higher or both lower. like a slide, short, downward someone shakes the slide while ur going, it will take a longer time to go down and the experience may not be the same, aka inflation may not always go up or down according to unemployment so this is when stagflation occurs

True or false?Lowering interest rates will reduce investment spending. Select the correct answer below: True False

False The interest rate measures the opportunity cost of purchasing business capital. Lower interest rates stimulate investment spending and higher interest rates reduce it.

If an economy goes into recession due to a drop in aggregate demand, which of the following efforts would a Keynesian economist advocate in the short run? Correct! You nailed it. Fiscal policy measures. Government retraining programs for structurally unemployed workers. Revamping welfare programs to give workers more incentive to look for work. Monetary policy measures.

Fiscal policy measures. Monetary policy measures. Keynesian economists advocate intervening in an economy in the short run through the use of fiscal and monetary policies to stabilize an economy and restore aggregate demand.

Suppose, in order to stimulate the economy out of a recession, the French government decides to increase government expenditure. Use the graph below to illustrate the impact of the aforementioned on the French economy by shifting the appropriate curve(s).

Government spending is one component of AD.Thus, higher government spending will cause AD to shift to the right

Suppose, the Congress decides to increase spending on domestic infrastructure in order to upgrade the nation's infrastructure. Use the graph below to show the impact of the aforementioned on the economy by shifting the appropriate curve(s).

Government spending is one component of AD.Thus, higher government spending will cause AD to shift to the right if government spends more, they expect a high payoff bcs from consumers, so demand will go to right

Suppose, in order to attempt to cool an overheating economy, the Australian government decides to cut government expenditure. Use the graph below to illustrate the impact of the aforementioned on the Australian economy by shifting the appropriate curve(s).

Government spending is one component of AD.Thus, lower government spending will cause AD to shift to the left. lower government spending, AD moves to left bcs lower = left

All of the following are examples of menu costs except for what? Select the correct answer below: When deciding what to order at a local restaurant, the length of the menu causes Bob to spend a significant time deciding what to eat. When Steven's small business looks to adjust its price, he must pay to have the local printing shop make new menus. When the conditions of the economy change, Joanna must have her forecasting department use data to determine the new equilibrium prices for her items. When Joe wants to change prices for his fishing products, he must send out new catalogs to his customers with the updated prices.

When deciding what to order at a local restaurant, the length of the menu causes Bob to spend a significant time deciding what to eat. Menu costs refer to the costs incurred by firms when they look to change the prices for their goods and services. These prices include costs of recalculating prices, physically changing prices, and other costs associated with the price change.

What kind of conditions can lead to stagflation? Select the two correct answers below. Not quite - review the answer explanation to help get the next one. Workers have just received wage increases that reflect expectations of future inflation. A few months later, however, prices rise faster than expected. A military conflict results in a sharp and unexpected rise in the cost of oil. Prices tend to remain sticky even though wages have risen. Over the course of a year, unemployment falls at a rate directly proportional to the rise in inflation.

Workers have just received wage increases that reflect expectations of future inflation. A few months later, however, prices rise faster than expected. A military conflict results in a sharp and unexpected rise in the cost of oil. Stagflation can occur when there's a supply shock (such as the unexpectedly high rise of the price of oil) or when the rate of inflation rises higher than expected. Prices drive wages up and wages drive prices up in a vicious circle.

In the AD-AS model, what change leads to the Stagflation phase of the Phillips curve? Select the correct answer below: a rightward shift of aggregate supply a leftward shift of aggregate supply a rightward shift of aggregate demand a leftward shift of aggregate demand

a leftward shift of aggregate supply The relationship between inflation and unemployment expressed by the traditional Phillips curve corresponds to changes in the AD curve. When demand increases, inflation goes up and unemployment goes down. However, this negative relationship between inflation and unemployment changes when supply shifts. When AS shifts left, we see both unemployment and inflation increasing, a situation referred to as stagflation.

In the AD-AS model, what change leads to the Stagflation phase of the Phillips curve? Well done! You got it right. a rightward shift of aggregate supply a leftward shift of aggregate supply a rightward shift of aggregate demand a leftward shift of aggregate demand

a leftward shift of aggregate supply The relationship between inflation and unemployment expressed by the traditional Phillips curve corresponds to changes in the AD curve. When demand increases, inflation goes up and unemployment goes down. However, this negative relationship between inflation and unemployment changes when supply shifts. When AS shifts left, we see both unemployment and inflation increasing, a situation referred to as stagflation.

An increase in the stock market results in ________. Yes that's right. Keep it up! an increase in saving. an increase in expectations of a stock market crash greater uncertainty about the economic future an increase in spending

an increase in spending When households experience a rise in wealth, they may be willing to consume a higher share of their income and to save less. When the U.S. stock market rose dramatically in the late 1990s, for example, U.S. savings rates declined, probably in part because people felt that their wealth had increased and there was less need to save. People began borrowing more as they began to spend beyond their incomes.

A movement along the AD curve up and to the left is caused by Correct! You nailed it. an increase in the price level an increase in supply an increase in Real GDP an increase in total expenditure

an increase in the price level The AD curve slopes down, which means that increases in the price level of outputs lead to a lower quantity of total spending. Therefore, a movement along the AD curve up to the left must correspond to an increase in the price level

Which of the following is an example of an adverse supply shock? Select the correct answer below: a sudden increase in the price level an outbreak of war in major oil producing nations an increase in the quantity of labor none of the above

an outbreak of war in major oil producing nations Sudden shocks to input goods or labor are termed supply shocks.

The unemployment rate on the long-run Phillips curve will __________. That's incorrect - mistakes are part of learning. Keep trying! rise above the natural rate of unemployment be the natural rate of unemployment fall below the natural rate of unemployment show significant fluctuations above and below the natural rate of unemployment

be the natural rate of unemployment According to the long-run Phillips curve, the unemployment rate will be the natural rate of unemployment. That is, a small increase in the price level (a small increase in inflation) will have the same natural rate of unemployment as a larger increase in the price level (a larger increase in inflation). The graph below shows the long run phillips curve vertical at the natural rate of unemployment which is the same for every increase and decrease in inflation. So, the macroeconomic equilibrium along the vertical aggregate supply curve can occur at a variety of different price levels, and the natural rate of unemployment can remain consistent even with different rates of inflation.

If the income in Nigeria rises steadily, then what will that likely mean for its imports? Nigeria will import __________ goods and services from other countries. Correct! You nailed it. more less the same amount either more or less depending on political circumstances

more As consumers have more income, they will spend more money on goods, and some of those goods will likely be made in other countries, which will increase the quantity of imports. The amount of income in the domestic economy directly affects the quantity of a nation's imports: more income will bring a higher level of imports.

In a recession, a _______economist would likely argue for changes to labor policy institutions and nothing more. Not quite right - check out the answer explanation. neoclassical Keynesian neoclassical and a Keynesian None of the above.

neoclassical A neoclassical economist would argue for policy changes in labor institutions, but would not advocate for fiscal or monetary policy measures due to the length of time these would take, as well as the inherent belief that the economy will stabilize itself over the long run.

Which of the following will occur if aggregate demand is not high enough? Correct! You nailed it. recession growth increased interest rates increased employment rates

recession According to the Keynesian view of recession,aggregate demand is not always automatically high enough to provide firms with an incentive to hire enough workers to reach full employment, a recession will occur.

If the price level increases in the short run, assuming costs of production are unchanged, _________________. Yes that's right. Keep it up! labor costs will increase as well suppliers will increase production real GDP will remain constant none of the above

suppliers will increase production The AS curve describes how suppliers will react to a higher price level for final outputs of goods and services, while holding the prices of inputs like labor and energy constant. If firms across the economy face a situation where the price level of what they produce and sell is rising, but their costs of production are not rising, then the lure of higher profits will induce them to expand production.

Suppose that a country experiences a recession with a fall in both the equilibrium GDP and the price level. Illustrate how the AD or the AS curve shifted in order to cause this outcome.

the AD curve shifted down (to the left). This caused the equilibrium GDP and the price level both to fall.

The core assumption(s) of the neoclassical theory rests on __________. Correct! You nailed it. the inherent frictions in the economy the behavior of individuals to make rational decisions in their own self-interest the irrational decision-making of economic agents the reliability of individuals to always maximize their utility, wealth, and profit

the behavior of individuals to make rational decisions in their own self-interest the reliability of individuals to always maximize their utility, wealth, and profit Neoclassical economists believe that the economy will self-correct. The core assumption rests on the behavior of individuals; they are rational, operate with complete information, and make decisions that maximize their wealth, utility, and profit.

Which of the following best explains the coordination problem? Select the correct answer below: People are not willing to see a decline in their wages during bad economic times, which explains why wages are sticky. Employers willing to cut wages even if that leads to depressed morale and hurts productivity. Most people are willing to take a wage cut during bad economic times so long as everyone else does as well, but markets cannot organize this activity, explaining why wages are sticky. Employers are willing to cut wages, but employees are not willing to take wage cuts, explaining why prices and wages are sticky

Most people are willing to take a wage cut during bad economic times so long as everyone else does as well, but markets cannot organize this activity, explaining why wages are sticky. The coordination argument explains one reason why wages are sticky- people are willing to see their wages decline during hard economic times if others also see a decline. However, the market cannot keep up with these reductions, and employers are unwilling to reduce wages because they do not want to hurt morale or productivity.

If an economy goes into recession due to a drop in aggregate demand, a ______ economist would advocate for government retraining programs for structurally unemployed workers. Select the correct answer below: Keynesian Neoclassical Traditional None of the above.

Neoclassical Neoclassical economists don't feel that intervention is timely or wise, and instead advocate for reformation of labor market policies to help address unemployment.

____________ economists focus on the long run growth of the economy and on the natural rate of unemployment. _________ economists focus on short run fluctuations in the economy and using fiscal and monetary policy to smooth the business cycle.

Neoclassical; Keynesian The short run Keynesian model places its emphasis on the importance of AD in causing business cycles and a degree of price and wage rigidity. It does a sound job of explaining recession and cyclical unemployment. The neoclassical model has its focus on aggregate supply, and emphasizes how the underlying determinants of production and output. It does a good job of explaining growth and the workings of labor markets.

What will happen to the net exports of Mexico when there is an increase in income in the United States? Yes that's right. Keep it up! Net exports will increase because imports increase. Net exports will increase because exports will increase. Net exports will decrease because imports decrease. Net exports will decrease because exports will decrease.

Net exports will increase because exports will increase. When income in the United States increase, consumers will want to purchase more goods and services, both domestically and abroad. As a result, U.S. consumers will want to buy more goods from Mexico, increasing Mexico's exports and net exports.

Which of the following best explains how news of a recession affects consumption? Perfect. Your hard work is paying off 😀 News of a recession will encourage consumers to consume more. News of a recession will cause consumers to purchase less. News of a recession has no impact on consumption. The impact of the recession on consumption is unknown.

News of a recession will cause consumers to purchase less. Consumer expectations about future income also are important in determining consumption. If consumers feel optimistic about the future, they are more likely to spend and increase overall aggregate demand. News of recession and troubles in the economy will make them pull back on consumption.

The shape of the short-run aggregate supply curve is determined by Select the correct answer below: The wealth effect The interest rate effect The foreign price effect None of the above

None of the above The wealth effect, interest rate effect, and foreign price effect influence the shape of the aggregate demand curve. The Short-run Aggregate supply (AS) slopes up, because as the price level for outputs rises, with the price of inputs remaining fixed, firms have an incentive to produce more to earn higher profits. Thus, the AS curve describes how suppliers will react to a higher price level for final outputs of goods and services, while holding the prices of inputs like labor and energy constant. If firms across the economy face a situation where the price level of what they produce and sell is rising, but their costs of production are not rising, then the lure of higher profits will induce them to expand production.

If a company adopts new production processes that make the cost of production cheaper, why might the result be an increased demand for U.S. exports? Yes that's right. Keep it up! New production processes will increase the perceived quality of the goods and increase demand. Producing goods more cheaply means the relative prices of those goods will decrease compared to major trading partners. New production processes will be sold in addition to the goods, making the combination more desirable. There would likely be no increased demand for U.S. exports.

Producing goods more cheaply means the relative prices of those goods will decrease compared to major trading partners. One factor that influences the demand for exports is the relative price of those goods as compared to other countries' good. If a product from a certain country becomes relatively cheaper, perhaps because a group of producers has mastered certain productivity breakthroughs, then exports are likely to rise.

Which of the following statements about real GDP are true? Hint: There are two correct answers. Not quite - review the answer explanation to help get the next one. Real GDP can rise or fall simply based on changes in price level. Real GDP is used to determine whether output is rising or falling. Real GDP tends to lead to erroneous conclusions about economic performance. Real GDP is a better indicator of economic performance than nominal GDP because real GDP is based on real values.

Real GDP is used to determine whether output is rising or falling. Real GDP is a better indicator of economic performance than nominal GDP because real GDP is based on real values. Real GDP is a better indicator of economic performance because it is based on real values instead of nominal ones. Additionally, real GDP is used to determine whether the total output of a country is rising or falling.

A downward sloping Phillips curve that does not shift cannot explain _____________. Select the correct answer below: an inverse relationship between unemployment and inflation expansionary policies leading to greater inflation the double digit inflation accompanied by a decline in output, experienced in the 1970s economic boom accompanied by a high inflation

the double digit inflation accompanied by a decline in output, experienced in the 1970s The relationship between inflation and unemployment expressed by the traditional Phillips curve corresponds to changes in the aggregate demand curve. When demand increases, inflation goes up and unemployment goes down. However, this negative relationship between inflation and unemployment changes when supply shifts. When aggregate supply shifts left, we see both unemployment and inflation increasing, a situation referred to as stagflation. In short, we should interpret a downward-sloping Phillips curve as valid for short-run periods of several years, but over longer periods, when aggregate supply shifts, the downward-sloping Phillips curve can shift so that unemployment and inflation are both higher (as in the 1970s and early 1980s) or both lower (as in the early 1990s or first decade of the 2000s). if inflation is super high

Which of the following are associated with menu costs? Great work! That's correct. The resources it takes to gather information on market forces and determine proper prices. The costs in time and manpower for a company to research and determine the new equilibrium prices for a mobile phone in the wake of a new release from a competitor. The costs of walking to the bank to get money when inflation is high The opportunity cost of holding cash instead of saving it in a bank.

The resources it takes to gather information on market forces and determine proper prices. The costs in time and manpower for a company to research and determine the new equilibrium prices for a mobile phone in the wake of a new release from a competitor. In economics, a menu cost is the cost to a firm that results from changing its prices. The name derives from the cost restaurants bear for printing new menus, but in economics it now refers to the costs of changing prices in general. For example, depending on the type of firm, menu costs may involve reprinting menus or marketing brochures, updating price lists or retagging merchandise on the shelf. Even when there appear to be few costs involved in changing prices, changing prices may make customers decidenotto buy at a new (usually higher price) which results in another "menu cost" -- that of lost sales.

In order to combat a crippling recession, the German government passes a series of tax cuts into law. Use the graph below to show the impact of the aforementioned on the German economy by shifting the appropriate curve(s).

The tax cut, by increasing consumption, shifts the AD curve to the right. tax free holiday, ppl want to buy more, demand curve shifts to right

True or false?Neoclassical economics argues that fiscal policy does not shift the aggregate demand curve at all. Yes that's right. Keep it up! True False

True The neoclassical school offers a strong case against the operation of fiscal policy. It argues that fiscal policy does not shift the aggregate demand curve at all. Consider, for example, an expansionary fiscal policy. Such a policy involves an increase in government purchases, or transfer payments, or a cut in taxes. Any of these policies will increase the deficit or reduce the surplus. Neoclassical economists argue that households, when they observe the government carrying out a policy that increases the debt, will anticipate that this will lead to an increase in their taxes. Along these lines, these households will reduce their consumption as a result. This will, the neoclassical economists argue, cancel any tendency for the expansionary policy to affect aggregate demand.

True or false?Keynes's treatment of investment focuses on the key role of expectations about the future in influencing business decisions. Great work! That's correct. True False

True According to Keynesian economists, when a business decides to make an investment in physical assets, like plants or equipment, or in intangible assets, like skills or a research and development project, that firm considers both the expected investment benefits (future profit expectations) and the investment costs (interest rates).

True or false? A recent strengthening of the U.S. economy has led to an increase in the value of the U.S. dollar relative to other currencies, making U.S. products relatively more expensive. The result will be a decrease in U.S. net exports.

True As the value of the dollar rises relative to other currencies and U.S. products become relatively more expensive, U.S. consumers will want to import more foreign goods, and foreigners will want to buy fewer U.S. exports.

True or false?Because of the stickiness in prices (or wages), the corresponding portion of the short-run aggregate supply curve is practically flat, below the expected GDP. Correct! You nailed it. True False

True Because of the stickiness of wages and prices, the aggregate supply curve is flatter than either supply curve (labor or specific good). In fact, if wages and prices were so sticky that they did not fall at all, the aggregate supply curve would be completely flat below potential GDP. This outcome is an important example of a macroeconomic externality.

True or False The long-run supply curve determines equilibrium GDP at full employment. Correct! You nailed it. True False

True In the long-run, if the economy is operating at the full employment level, the equilibrium level of real GDP is determined by the long run aggregate supply curve.

True or false?Neoclassical economists do not see aggregate demand as a useful tool for reducing unemployment. With a vertical aggregate supply curve determining economic output, changes in aggregate demand have no long-run effects on unemployment. Select the correct answer below: True False

True Neoclassical economics focuses on the long run and highlights the equilibrium tendencies of the system. This means that the economy's growth rate will fluctuate around its potential GDP and natural rate of unemployment. Shifts in aggregate demand will only lead to changes in the price level and no lasting effects on the level of production or unemployment

True or False? Neoclassical economists tend to focus more on long term economic growth. Well done! You got it right. True False

True Neoclassical economists do not believe in "fine-tuning" the economy - they believe in long term economic growth. They believe that economic growth is fostered by a stable economic environment with a low rate of inflation.

True or false?Policy makers who try to expand the economy below its natural rate of unemployment can trigger an increase in inflation. Yes that's right. Keep it up! True False

True Policy makers who try to expand the economy below its natural rate of unemployment can trigger an inflationary spiral. More demand for labor means more income in the economy, which leads to more consumption, which leads to higher prices, which leads to inflation.

True or false?Stagflation is an unhealthy combination of high unemployment and high inflation, often caused by a rise in input prices. Yes that's right. Keep it up! True False

True Stagflation occurs when an economy experiences stagnant growth and high inflation at the same time. The oil crisis of the 1970s led to a prolonged period of stagflation in the United States because the input price of a resource used widely in production (oil) rose.

True or false?The Keynesian view advocates that policies should be used to help restore the economy to full employment during recessions. Select the correct answer below: True False

True The Keynesian view advocates the use of fiscal policies to help restore the economy to full employment during recessions. The neoclassical view advocates no response to recessions, since by this view recessions are temporary phenomena that will correct themselves.

True or false? According to Keynes, sticky wages and sticky prices in a declining economy create a recession. Perfect. Your hard work is paying off 😀 True False

True The original equilibrium of this economy occurs where aggregate demand intersects with aggregate supply. This intersection occurs at potential GDP where the economy is operating at full employment. However, when aggregate demand shifts to the left, price stickiness means that there is no decrease in price level so all the adjustment occurs through decreased real GDP. Keynes argued that because the new equilibrium occurs at a decreased GDP, the economy experiences substantial unemployment, creating recession. Unemployment proposed a number of reasons why wages might be sticky downward, most of which center on the argument that businesses avoid wage cuts because they may in one way or another depress morale and hurt the productivity of the existing workers.

True or false?The expenditure multiplier is greater than 1 because a change in spending causes a more than proportionate change in GDP. Well done! You got it right. True False

True The reason for the expenditure multiplier is that one person's spending becomes another person's income, which leads to additional spending and additional income so that the cumulative impact on GDP is larger than the initial increase in spending. So, the expenditure multiplier is about how spending money can create a chain reaction that helps the economy grow. It's like a domino effect for the economy!

When households experience a rise in wealth, they may be willing to consume a higher share of their income and to save less. Great work! That's correct. True False

True When households experience a rise in wealth, they may be willing to consume a higher share of their income and to save less. When the U.S. stock market rose dramatically in the late 1990s, for example, U.S. savings rates declined, probably in part because people felt that their wealth had increased and there was less need to save. On the other side, when the U.S. stock market declined about 40% from March 2008 to March 2009, people felt far greater uncertainty about their economic future, so savings rates increased while consumption declined.

Assume that China is a major importer of U.S. goods. If the growth rate in China relative to the United States increases, then which of the following will occur? Well done! You got it right. U.S. exports will increase. U.S. imports will increase. U.S. AD will shift right. U.S. AD will shift left.

U.S. exports will increase. U.S. AD will shift right. One of the factors that determines net exports is changes in the relative growth rates between countries. When the Chinese economy experiences an increase in growth, Chinese citizens will have more money to purchase U.S. goods and services, so U.S. exports will increase. Because exports increase, AD will shift to the right.

In theory, prices should always adjust such that quantity supplied equals quantity demanded. However, in the macroeconomy a situation of excess supply may exist for an extended period of time. Such a situation is caused by __________. Not quite right - check out the answer explanation. reductions in consumer confidence wages and prices that do not respond to decreases or increases in demand. excess supply of labor due to shifting of the demand curve production creating its own demand

wages and prices that do not respond to decreases or increases in demand. The Keynesian view of recession is based on two key building blocks. First, aggregate demand is not always automatically high enough to provide firms with an incentive to hire enough workers to reach full employment. Second, the macroeconomy may adjust only slowly to shifts in aggregate demand because of sticky wages and prices, which are wages and prices that do not respond to decreases or increases in demand.

A rise in business confidence Perfect. Your hard work is paying off 😀 will lead to a leftward shift of the AD curve. will lead to a leftward movement along the AD curve. will lead to a rightward shift of the AD curve. will lead to a rightward movement along the AD curve.

will lead to a rightward shift of the AD curve. If business confidence is rising, then firms tend to spend more on investment, believing that the future payoff from that investment will be substantial. Higher investment spending will lead to rightward shift of the AD curve.

The data below represents the price level, the aggregate demand, and the aggregate supply data for an economy. Use the data points to plot an aggregate demand curve and aggregate supply curve for this economy. Each curve is labeled as AS (Aggregate Supply) or AD (Aggregate Demand) and each point is labeled as a, b, or c from the table headings. (Hint: Note that point a from the AD curve is already plotted with the correct coordinates. Plot the remaining points.)

Consider the points on the graph are (x, y) coordinates. On the y-axis, we have the Price Level and on the x-axis, we have amounts of Real GDP ($) to represent the Aggregate Demand (AD) and Aggregate Supply (AS) Curves. For AS, the coordinates would be in the form of (AS, Price Level) for its (x, y) coordinates. Therefore, to draw the AS curve, we use the points that occur at: a($400,110),b($1200,150),c($1580,170). For AD, the coordinates would be in the form of (AD, Price Level) for its (x, y) coordinates. Therefore, to draw the AD curve, we use the points that occur at: a($1600,110),b($780,150),c($380,170). Draw conclusions from the plotted curves on the graph: If equilibrium occurs in the flat range of AS, then economy is not close to potential GDP and will be experiencing unemployment, but stable price level. If equilibrium occurs in the steep range of AS, then the economy is close or at potential GDP and will be experiencing rising price levels or inflationary pressures, but will have a low unemployment rate.

Suppose the government decreases spending. Which of the following best describes how this fall in government spending will likely impact consumption spending? Well done! You got it right. Consumption spending will not change. Consumption spending will increase Consumption spending will decrease. The effect is unknown.

Consumption spending will decrease. A decrease in government spending results in a decrease in consumer spending due to the expenditure multiplier. The expenditure multiplier is the idea that not only does spending affect the equilibrium level of GDP, but that spending is powerful. More precisely, it means that a change in spending causes a more than proportionate change in GDP. While the multiplier is important for understanding the effectiveness of fiscal policy, it occurs whenever any autonomous increase in spending occurs. Additionally, the multiplier operates in a negative as well as a positive direction. Thus, when investment spending collapsed during the Great Depression, it caused a much larger decrease in real GDP.

Which of the following graphs most likely illustrates aggregate supply:

D The aggregate supply curve is an upward sloping curve. As the price level increases, Real GDP increases to form the the upward sloping aggregate supply curve.

___________ is the most powerful determinant of how much an individual or household consumes. Well done! You got it right. Wealth Credit Expected future income Disposable income

Disposable income Disposable income is how much income a consumer has in their take-home pay, or income after taxes. Disposable income is the single most powerful determinant of how much an individual consumes.

What is the net effect on investment expenditure if interest rates fall and expectations of future profitability increase? Well done! You got it right. investment will fall investment will stay the same investment will increase We do not have enough information.

investment will increase When interest rates decrease, investment will increase. When expectations of future profitability increase, investment will increase. Since both changes will increase investment, the net effect is an increase in investment.

The coordination argument implies that wage cuts in response to a downturn in aggregate demand would be acceptable to workers only __________. Well done! You got it right. if the economy is characterized by perfect competition if the economy is large relative to government involvement in it if labor unions play a strong role in the labor market if all firms cut wages simultaneously

if all firms cut wages simultaneously The coordination argument implies that workers are concerned with their wages relative to other workers in the same category. Thus, unless all firms cut wages simultaneously, workers will resist.

If goods in the United States experience a general price increase relative to its major trading partners, then what does this mean for its imports and exports? Perfect. Your hard work is paying off 😀 Imports will increase. Imports will decrease. Exports will increase. Exports will decrease. Imports and exports will stay the same.

Imports will increase. Exports will decrease. If prices in the United States become higher relative to its trading partners, then those goods will be less attractive to other nations, and exports will decrease. It will also make foreign-made goods more attractive because they will be less expensive, so imports will increase. ex: shein

Suppose, a new technology enhances labor productivity; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

In this case, higher labor productivity allows for higher output per unit of labor. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

Which of the following is true about aggregate demand Not quite right - check out the answer explanation. It is derived from exports and imports It is the sum of all goods and services demanded by a nation's consumers It is a measure of total spending on domestic goods and services. It does not take into account the expenditure that is planned for in the government budget

It is a measure of total spending on domestic goods and services. Aggregate demand (AD) refers to the amount of total spending on domestic goods and services in an economy.

Which of the following are true of the expenditure multiplier concept? Perfect. Your hard work is paying off 😀 It is the concept that increasing national income affects the equilibrium level of GDP on par with the amount of increased income. It is the idea that decreasing national income affects the equilibrium level of GDP by the same amount of that decrease in income. It is the concept that an increase in spending causes a more than proportionate change in GDP. The expenditure multiplier is the idea that a given change in spending leads to an equal change in the equilibrium level of GDP.

It is the concept that an increase in spending causes a more than proportionate change in GDP. The expenditure multiplier is the idea that not only does spending (either an increase or a decrease) affect the equilibrium level of GDP, but that a change in spending (increase or decrease respectively) causes a more than proportionate change in GDP.

A recession caused by a decrease in aggregate demand has caused a decrease in the demand for labor as shown in the graph below. Assuming wages and prices are sticky, then what is the amount of excess labor as a result of the recession?

Keynes argued that wages are sticky, meaning they do not adjust in the short run to changes in the market. In this market, although demand for labor shifts to the left as a result of aggregate demand decreasing, wages remain at $15 an hour. At $15 an hour, the quantity of labor supplied is 900 units of labor. To find the excess supply, which is also called unemployment, subtract 200 units of labor demanded at this wage from the quantity of labor supplied, or 900. The excess supply is 700 units of labor. Thus, sticky wages and sticky prices, combined with a drop in demand, bring about unemployment and recession.

A recession caused by a decrease in aggregate demand has caused a decrease in the demand for labor as shown in the graph below. If wages and prices are sticky, then how many units of labor are unemployed?

Keynes argued that wages are sticky, meaning they do not adjust in the short run to changes in the market. In this market, although demand for labor shifts to the left as a result of aggregate demand decreasing, wages remain stuck at $30. At $30, the quantity supplied is 100 units of labor. To find the excess supply, which is also called unemployment, subtract 100 units of labor from the equilibrium quantity which is 1,200 units of labor. The excess supply is 1,100 units of labor. Thus, sticky wages and sticky prices, combined with a drop in demand, bring about unemployment and recession.

Suppose a new technology increases the productive capacity of the agricultural sector, the biggest sector in Xurbia; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

Longer work hours implies that workers will produce more. Therefore, they will produce more. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

If businesses believe that an economic expansion is around the corner, then businesses are likely to __________. Perfect. Your hard work is paying off 😀 increase investment expenditures reduce investment expenditures reduce their expectations of future profit keep the same levels of investment expenditures

increase investment expenditures The clearest driver of investment benefits is expectations for future profits. When businesses perceive a growing market for their products or expect an increase in demand for their output as would occur during an economic expansion, then they become more confident that they will be able to earn economic profit in the future. Their higher degree of business confidence will encourage new investment.

According to neoclassical economics, what happens to the price level when aggregate demand increases and aggregate supply is set at potential output? Select the correct answer below: Price levels increase. Price levels decrease. Price levels remain the same. None of the above.

Price levels increase. When aggregate supply is set at potential output one can assume the model is in the long run. When aggregate supply is viewed in the long run it is the same at all price levels because potential output is maintained at all price levels. When aggregate demand increases it shifts to the right and price level increases. AD1 moves to AD2 along the LRAS curve and price level moves from P1 to P2.

A(n) __________ occurs when AD increases, resulting in an attempt to push the economy past potential output. Select the correct answer below: recessionary gap aggregate gap Keynesian gap inflationary gap

inflationary gap An inflationary gap is associated with a business-cycle expansion. It occurs when aggregate demand attempts to push the economy past potential output, resulting in inflation.

Keynes believed that the government should __________ during recessions. Great work! That's correct. refrain from intervening in any way intervene and decrease spending intervene and increase spending increase import tariffs

intervene and increase spending Keynes believed that the government needed to step in during recessions and increase aggregate demand to match potential output.

Which of the following relating to the Phillips Curve is incorrect or has been called into question in the last half century? Not quite - review the answer explanation to help get the next one. The Phillips curve is sometimes downward sloping, reflecting a trade off between unemployment and inflation. The Phillips curve can shift due to changes in inflation expectations The Phillips Curve always reflects a negative relationship between unemployment and inflation. Supply shocks can shift the Phillips curve.

The Phillips Curve always reflects a negative relationship between unemployment and inflation. During the 1960s, economists argued that a nation could choose low inflation and high unemployment, or high inflation and low unemployment, or anywhere in between. Economies could use fiscal and monetary policy to move up or down the Phillips curve as desired. However, when policymakers tried to exploit the tradeoff between inflation and unemployment, the result was an increase in both inflation and unemployment. We should interpret a downward-sloping Phillips curve as valid for short-run periods of several years, but over longer periods, when aggregate supply shifts, the downward-sloping Phillips curve can shift so that unemployment and inflation are both higher.

The table below represents the relationship between unemployment rate and inflation rate in the United States. Use the data to plot a Phillips Curve on the graph below.

The Phillips Curve shows the tradeoff between unemployment and inflation, demonstrating that if one is higher, the other must be lower. If the government attempts to reduce inflation, unemployment will rise, or if the government attempts to reduce unemployment, inflation will rise. When plotting points for the Phillips curve, unemployment rate is plotted as the x-variable and inflation rate as the y-variable. To draw a Phillips curve based off of the table above, plot the points for each year with unemployment as the x-coordinate and inflation as the y-coordinate, then connect the points. graph dat ho

Which of the following exemplifies a macroeconomic externality? Select the correct answer below: The economy as a whole finds it beneficial for the price level to fall. That does not happen, however, as individual firms prefer to keep prices fixed. The economy as a whole would benefit from minimum wage laws so the government imposes price floors on the labor market. Prices are flexible so they adjust quickly to clear the goods markets. All of the above.

The economy as a whole finds it beneficial for the price level to fall. That does not happen, however, as individual firms prefer to keep prices fixed. To understand macroeconomic externality, consider that it is an externality upon the economy as a whole. For example, in general, a firm should respond to a decrease in demand for its product by cutting its price to increase sales. When individual firms fail to reduce prices (perhaps due to menu costs) a negative externality will occur because what would be socially desirable for the economy as a whole (cutting prices) is not aligned with the private (firms) value of reducing prices. Sticky prices result, which keep the aggregate demand from rebounding, (which we would show as a movement along the AD curve in response to a lower price level) and that hurts the economy as a whole. externality- effects others in the economy without intention, external mic, everyone in the room hears it whether they like it or not

The market below experiences sticky prices and wages. Which of the following statements explains what happens in the immediate term following a decrease in aggregate demand? The economy will remain at the original equilibrium levels of price and output. The price will drop to $70 and the equilibrium quantity will be $900. The economy will produce at the original equilibrium price, but quantity demanded will drop, creating a surplus of output. none of the above

The economy will produce at the original equilibrium price, but quantity demanded will drop, creating a surplus of output. Keynes argued that wages and prices are sticky in the short run. This means that after a decrease in aggregate demand, they do not automatically adjust in the short run. Prices remain at the original equilibrium level, while the quantity demanded decreases. The economy will continue to produce at the original output level, causing an excess in supply of goods and services.

How can an increase in the global price of copper cause stagflation? Perfect. Your hard work is paying off 😀 The higher global price of copper causes demand for copper to decline. The higher global price of copper causes aggregate supply to decline as copper is a widely used input in production. The increase in copper price will lower production costs, leading to an increase in aggregate supply. The increase in copper price will reduce supply of copper.

The higher global price of copper causes aggregate supply to decline as copper is a widely used input in production. An increase in the price of copper will cause an increase in costs of production for businesses that use copper as an input to production. If copper is a widely used resource, this could cause the overall aggregate supply curve to decrease, leading to a higher price level and a lower level of production - stagflation.

Use the aggregate supply (AS) curve and aggregate demand (AD) curve below to determine the equilibrium price level and equilibrium real GDP for this economy.

The intersection of the aggregate supply and aggregate demand curves shows the equilibrium level of real GDP and the equilibrium price level in the economy. In this case those points are: Price Level = $50 & Real GDP = $10,000.

Which of the following will cause U.S. net exports to increase? Select all that apply: changes in relative growth rates between countries changes in relative prices between countries changes in population growth rates between two countries none of the above

changes in relative growth rates between countries changes in relative prices between countries Two sets of factors can cause shifts in export and import demand: changes in relative growth rates between countries and changes in relative prices between countries. The amount of income in the domestic economy directly affects the quantity of a nation's imports: more income will bring a higher level of imports. If U.S. goods are relatively cheaper compared with goods made in other places, then U.S. exports are likely to rise. If U.S. goods become relatively more expensive, then exports from U.S. producers are likely to decline.

A(n) __________ in disposable income will generally result in a(n) __________ in consumption. Select all that apply. Hint: There are 2 correct choices. Select all that apply: increase; decrease decrease; decrease increase; increase decrease; increase

decrease; decrease increase; increase Disposable income is how much income a consumer has in their take-home pay, or income after taxes. Disposable income is the single most powerful determinant of how much an individual consumes. For most people, there is a positive relationship between disposable income and consumption. That is, if disposable income increases, so does consumption and if disposable income decreases, then so does consumption.

By influencing incentives for investments through the tax code, governments can encourage economic growth by influencing which determinant of investment expenditure? Yes that's right. Keep it up! expectations of future profit interest rates increase marginal tax rates on business income disposable income

expectations of future profit Many factors can affect the expected profitability on investment. If the government offers special incentives for investment (for example, through the tax code), then investment will look more attractive; conversely, if the government removes special investment incentives from the tax code, or increases other business taxes, then investment will look less attractive. As Keynes noted, business investment is the most variable of all the components of aggregate demand.

Saving for retirement is an example of setting __________. Correct! You nailed it. expected future income permanent income aggregate income net income

expected future income Contributions to a retirement fund, such as a 401(k), will be available as income later in life.

The clearest driver of investment benefits is expectations for __________. Correct! You nailed it. future profits current revenue past profit expected future income

future profits The clearest driver of investment benefits is expectations for future profits. When we expect an economy to grow, businesses perceive a growing market for their products. Their higher degree of business confidence will encourage new investment

Which of the following will lead to increased investment? Well done! You got it right. higher degree of business confidence lower interest rates decreased money supply decreased disposable income

higher degree of business confidence lower interest rates When the economy is expected to grow, businesses perceive a growing market for their products, which encourages investment. A lower interest rate stimulates investment spending because it lowers the cost of purchasing business capital.

The coordination argument implies that wage cuts in response to a downturn in aggregate demand would be acceptable to workers only __________. Not quite right - check out the answer explanation. if the economy is characterized by perfect competition if the economy is large relative to government involvement in it if labor unions play a strong role in the labor market if all firms cut wages simultaneously

if all firms cut wages simultaneously The coordination argument implies that workers are concerned with their wages relative to other workers in the same category. Thus, unless all firms cut wages simultaneously, workers will resist.

The coordination argument implies that wage cuts in response to a downturn in aggregate demand would be acceptable to workers only __________. Select the correct answer below: if the economy is characterized by perfect competition if the economy is large relative to government involvement in it if labor unions play a strong role in the labor market if all firms cut wages simultaneously

if all firms cut wages simultaneously The coordination argument implies that workers are concerned with their wages relative to other workers in the same category. Thus, unless all firms cut wages simultaneously, workers will resist.