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In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes:

consumption per effective worker

According to the sticky-price model, other things being equal, the greater the proportion, s, of firms that follow the sticky-price rule, the ______ the ______ in output in response to an unexpected price increase.

greater; increase

In the IS-LM model, a decrease in output would be the result of a(n):

increase in money demand.

In the short run, an increase in aggregate demand will __

increase production

Suppose households decide to save more than before. If the Fed wants to prevent that household decision from affecting production and employment, they would ___.

increase the money supply

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.

increase; demand

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the:

interest rate.

Suppose the Fed enters the market and sells bonds. According to the IS-LM model ___.

interest rates will rise and production will fall

In the IS-LM model under the usual conditions in a closed economy, an increase in government spending increases the interest rate and crowds out:

investment

The monetary transmission mechanism works through the effects of changes in the money supply on:

investment.

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

is horizontal.

Over the business cycle, investment spending ______ consumption spending.

is more volatile than

Over the business cycle consumption tends to change proportionately ___ investment.

less than

Suppose the Fed unexpectedly reduces the money supply. We would predict that ___ in the long run.

lower the price level

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

lower; inward

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

lower; lower

Assume two economies are identical in every way except that one has a higher population growth rate. According to the Solow growth model, in the steady state the country with the higher population growth rate will have a ______ level of output per person and ______ rate of growth of output per worker as/than the country with the lower population growth rate.

lower; the same

In the Solow model with technological progress, the steady-state growth rate of total output is:

n + g

Schumpeter's thesis of "creative destruction" is an explanation of economic progress resulting from:

new product producers driving incumbent producers out of business.

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run.

only output; only prices

For the purposes of the Keynesian cross, planned expenditure consists of:

planned investment, government spending, and consumption expenditures.

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.

prices; output

Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.

real

An increase in the expected rate of inflation will ___.

reduce real interest rates and raise production and income

When an economy begins below the Golden Rule, reaching the Golden Rule:

requires initially reducing consumption to increase consumption in the future.

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.

right; accumulation

Other things being equal, all of the following government policies are likely to increase national saving except:

running a budget deficit.

If the marginal product of capital net depreciation equals 8 percent, the rate of growth of population equals 2 percent, and the rate of labor-augmenting technical progress equals 2 percent, to reach the Golden Rule level of the capital stock, the ____ rate in this economy must be _____.

saving; increased.

When bond traders for the Federal Reserve seek to increase interest rates, they ______ bonds, which shifts the ______ curve to the left.

sell; LM

An increase in government spending will ___.

shift the AD curve to the right

An increase in the money supply will ___.

shift the AD curve to the right

The type of legal system and the level of corruption in a country have been found to be

significant determinants of the rate of economic growth in a country.

Households have become more optimistic and decided to save less than before. We would predict that ___.

the IS curve will shift up and to the right

An increase in the price level causes ___.

the LM curve to shift to the left

Assume the economy is currently at full employment. Because it is an election year, the policymakers who determine fiscal policy decide on an expansionary policy. If the Fed decides it does not want income and production to rise, we would expect ___.

the money supply to fall and output remain the same as the interest rate rises

The imperfect-information model assumes that producers find it difficult to distinguish between changes in:

the overall level of prices and relative prices.

According to the sticky-price model, output will be at the natural level if:

the price level equals the expected price level.

The steady-state level of capital occurs when the change in the capital stock (Δk) equals:

0

If the FED was engaging in stabilization policy, they would respond to a negative demand shock by increasing the money supply. T/F

True

If the economy is experiencing at least two quarters of rising real GDP, the economy is in the expansionary phase of the business cycle.

True

In the short run, an increase in taxes will affect production and interest rates because the price level is assumed to be sticky.

True

Suppose that the government decided to increase taxes. The IS-LM model would predict the fall in income and production would be less than what the Keynesian Cross model predicts.

True

The short-run aggregate supply curve is horizontal because wages and prices are assumed to be fixed. T/F

True

An increase in government purchases will shift the LM curve down and to the right. T/F

False

An increase in government spending will increase both the rate of inflation and the rate of unemployment. T/F

False

Changes in production in the long-run are most likely the result of changes in the money supply.

False

If government policymakers choose not to respond to a negative supply shock, in the long run we would expect the economy to return to full employment at a higher price level. T/F

False

In the sticky-price model, all producers have fixed prices. T/F

False

Suppose that government purchases have been reduced. The IS-LM model would predict that income and production will fall, but the interest rate will rise.

False

Suppose that real GDP grows by 4%. According to Okun's Law, unemployment will fall by 4%. T/F

False

The IS-LM model suggests that the Great Depression was not caused by an LM shock, but monetary effects limited its severity.

False

The short-run aggregate supply curve is vertical. T/F

False

Phillips curve is horizontal in the long run.

False. Vertical

The market for goods and services is represented by the ___ curve.

IS

In the long run, an increase in aggregate demand will ___.

Increase the price level

______ cause(s) the capital stock to rise, while ______ cause(s) the capital stock to fall

Investment; depreciation

If you were interested in studying fluctuations in production and income (ie, the business cycle), you would want to use the ___.

Keynesian fixed price model

Suppose the Fed unexpectedly reduces the money supply. We would predict that ___ in the short run.

Price level, output, income will fall and unemployment will rise.

In the imperfect-information model, an unexpected increase in aggregate demand will ___.

Raise production and income, lower unemployment rate, raise price level

In the long run, an exogenous decrease in money demand will ___.

Raise the interest rate

In the short run, an exogenous decrease in money demand will ___.

Reduce, production ad income. Raise the interest rate. Increase unemployment rate.

The theory of rational expectations says the sacrifice ratio should be close to zero. T/F

Tahruuuu

A beneficial supply shock will shift the Phillips curve down. T/F

True

A decrease in government spending will shift the IS curve to the left. T/F

True

An increase in the money supply will shift the LM curve downward.

True

Which of the following will shift the aggregate supply curve up to the left?

an increase in the expected price level

The theory of liquidity preference implies that:

as the interest rate rises, the demand for real balances will fall.

Assume that a war reduces a country's labor force but does not directly affect its capital stock. If the economy was in a steady state before the war and the saving rate does not change after the war, then, over time, capital per worker will ______ and output per worker will ______ as it returns to the steady state.

decline; decrease

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold the interest rate constant, then the Fed must ______ the money supply.

decrease

Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to ______ in the short run; and in the long run the expected price level will ______, causing the level of output to return to the natural level.

decrease; decrease

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

The number of effective workers takes into account the number of workers and the:

efficiency of each worker

In the two-sector endogenous growth model, the steady-state stock of physical capital is determined by _____, and the growth in the stock of knowledge is determined by _____.

the saving rate; the fraction of labor in universities

Based on the Phillips curve, unexpected movements in inflation are related to ______, and based on the short-run aggregate supply curve, unexpected movements in the price level are related to ______.

unemployment; output

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left.

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.

weaker; stronger

If two economies are identical (with the same population growth rates and rates of technological progress), but one economy has a lower saving rate, then the steady-state level of income per worker in the economy with the lower saving rate:

will be at a lower level than in the steady state of the high-saving economy