Ch. 22 - Money and Banking

Many of the resources devoted to the January 2009 U.S. stimulus package encouraged investment in research and development of new technologies​ (e.g., more​ fuel-efficient cars and wind and solar​ power). Assume this policy results in positive technological change for the U.S. economy and​ "takes hold" at a time when the economy has been restored to a position of​ long-run equilibrium as depicted by point 1 in the figure to the right. Compared to its original​ state, the economy in the​ short-run equilibrium at point 2 has output that is ______________ and inflation that is _______________. However, a negative output gap now exists since _______________, so consequently the​short-run aggregate supply curve (AS2​) will shift _______________. The shifts in the​ short-run aggregate supply curve continue​ until:

LRAS will shift to the right AS will shift down and to the right Higher; lower ( Y * < Y^P ); down and to the right the output gap falls to zero, the AS curve intersects AD1 and LRAS2, and a new​ long-run equilibrium is attained.

The​ table's bottom portion contains a labeling key. For a positive demand​ shock, use the label​ P; similarly, for a negative demand​ shock, use the label N. Label any exogenous event that does not impact AD with an X. ​(Note​: Each letter is used three​ times.) X - This exogenous event does not constitute a demand shock P - This is a positive demand shock N - This is a negative demand shock

P - The Federal Reserve autonomously loosens monetary policy X - The government adopts ill-advised regulations that diminish the economy's overall efficiency N - The government imposes much higher taxes on households X - A temporary disruption in oil production occurs, pushing oil prices higher N - Consumer pessimism deepens as the media reports disappointing news about the economy X - The nation's labor unions push forcefully for higher wages and expanded benefits N - Foreign economies crash, producing a substantial drop in the net exports P - Sudden optimism within the business community induces a big jump in planned business expenditures P - War breaks out, forcing the government to substantially enhance defense expenditures

An​ economy's aggregate demand is shown graphically as a​ downward-sloping curve. The position of this curve relative to the vertical axis is impacted by six basic factors. The top portion of the following table lists these six factors along with several that do not affect the position of the aggregate demand curve. A response box is attached to each factor. The​ table's bottom portion contains a labeling key. Label any factor that does not impact AD with an X. For a factor that shifts aggregate demand to the​ right, use the label​ R; similarly, for a factor that shifts aggregate demand to the​ left, use the label L. Keep in mind that each factor is to be assessed on the assumption that all else is constant. ​(Note​: Each letter is used three​ times.) X - This factor does not affect the location of the aggregate demand curve R - This factor shifts aggregate demand curve to the right L - This factor shifts aggregate demand curve to the left

R - The Federal Reserve autonomously loosens monetary policy X - The government rescinds ill-advised regulations that hamper the​ economy's overall efficiency. L - The government allows previously enacted tax cuts to​ expire, resulting in much higher taxes for households. X - The prospect of worsening inflation induces the Federal Reserve to tighten monetary policy. L - Consumer pessimism spreads as the media reports disappointing news about the economy. X - Actual output rises above potential​ output, creating "tightness" in resource markets L - Foreign economies crash​, producing a substantial drop in net exports. R - Optimism within the business community induces a surge in planned business expenditures. R - War breaks​ out, forcing the government to substantially enhance defense expenditures.

Suppose there is a sudden and significant increase in oil prices. Which of the following describes the​ short-run effect on the​ economy?

Short-run aggregate supply​ decreases, the price level​ rises, and output falls below the natural rate.

Which of the following best describes the adjustment to​ long-run equilibrium if an​ economy's short-run equilibrium output is below potential​ output?

Since unemployment is greater than its natural​ rate, there will be excess slack in the labor market​ and, consequently, pressure on firms to raise their prices at a less rapid rate. This deceleration of inflation shifts the short-run aggregate supply curve down​, pushing the economy's output up toward potential output.

The top portion of the following table lists a variety of factors that shift some component of the aggregate demand and supply model. A response box is attached to each factor. The​ table's bottom portion contains a labeling key. Label any factor that shifts the​ short-run aggregate supply curve with an S. Use an X to label any factor that does not shift the​ short-run aggregate supply curve. ​(Note​: Each label is used multiple​ times.) X - This factor does not affect the location of the short-run aggregate supply curve S - This factor shifts the short-run aggregate supply curve Of the factors identified above that shift the​ short-run aggregate supply​ curve, the only factor that possibly also shifts the​ long-run aggregate supply curve is __________ but only if this factor is ____________.

X - Firms alter their plans for investment expenditures S - Households and businesses come to expect an acceleration in inflation S - A negative price shock occurs in the form of higher oil prices X - An autonomous easing of monetary policy is implemented by the Federal Reserve S - Output remains persistently high relative to potential output ( Y > YP ) X - Consumer and business optimism spread as the media reports encouraging news about the economy Price shocks; Permanent

The top portion of the following table lists several supply shocks along with several exogenous events that do not affect the position of the aggregate supply curve. A response box is attached to each event. The​ table's bottom portion contains a labeling key. For a positive supply​ shock, use the label P​; ​similarly, for a negative​ shock, use the label N. Label any exogenous event that does not impact AS with an X. ​(Note​: Each letter is used three​ times.) X - This exogenous event does not constitute a supply shock P - This is a positive supply shock N - This is a negative supply shock In the preceding​ table, the permanent supply shocks are associated with:

X - The Federal Reserve autonomously tightens monetary policy N - The government adopts ill-advised regulations that diminish the economy's overall efficiency P - The U.S. dollar sharply appreciates, suddenly lowering the prices of imported inputs X - Foreign economies rebound, producing a substantial rise in net exports P - Phenomenally good weather leads to outstanding harvests of most grains N - The nation's labor unions aggressively press for higher wages and expanded benefits P - Startling advances in nanotechnology dramatically rise productivity across the economy X - Sudden optimism among firms induces a big jump in planned business expenditures N - Hurricanes blast the U.S. Gulf Coast, seriously damaging refining facilities Regulations and technology

The financial crisis that began in August 2007 in the United​ States:

caused a collapse of​ China's exports and the Chinese government used a fiscal stimulus package to restore economic activity.

Classify the following situation as a supply or demand​ shock: Favorable weather produces a record crop of wheat and corn in the Midwest. "Favorable weather produces a record crop of wheat and corn in the Midwest" In the short​ run, output _____________ and the inflation ____________. In the long run, output ______________ to potential and inflation _______________.

A positive (temporary) supply shock increases; decreases; falls; increases to its original level

Suppose the economy experiences a positive demand shock: In the​ short-run equilibrium at point​ 2, labor markets would likely see increasing __________ and corresponding stronger pressure on wages and costs that forces firms to raise their ____________ at a more rapid rate. Graphically, this chain reaction produces shifts in the​ short-run aggregate supply curve that are ____________ These shifts in the​ short-run aggregate supply curve result in output gaps that are _____________ and the economy is evolving toward an eventual new​ long-run equilibrium with an inflation rate that is ____________.

AD will shift to the right Tightness; prices Up and to the left Narrowing; higher

The short-term effect of an increase in the money supply combined with a tax cut: In the long​ run, the equilibrium price level will ____________ and the equilibrium level of aggregate output will _____________. .

AD will shift to the right Increase; remain unchanged

During​ 2017, some Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the​ future, what would be the effect on the​ short-run aggregate supply​ curve? Use an aggregate demand and supply graph to illustrate your answer.

Higher inflation expectations moves the SRAS line to the left

The primary factor that shifts the​ short-run aggregate supply curve is changes​ in:

Production costs

What is the effect of increased oil prices on the short-term aggregate supply curve

Supply curve shifts to the left

If the Federal Reserve increases the money supply at the same time that Congress implements an income tax​ cut, then which of the following is​ true?

The change in the money supply will decrease aggregate​ demand, while the tax cut will increase aggregate demand. & The change in the money supply will increase aggregate​ demand, while the tax cut will decrease aggregate demand.

When aggregate output is below the natural​ rate, what will happen to the inflation rate over time if the aggregate demand curve remains​ unchanged?

The inflation rate will fall because the slackness of the labor market will eventually cause wages to fall.

Which of the following describes a reason why the​ long-run Phillips curve relationship differs from the​ short-run relationship?

In the long​ run, expected inflation is taken into account when making work and hiring decisions.

Suppose the economy experiences a temporary negative supply shock: Compared to its original​ state, the economy in the​ short-run equilibrium at point 2 has output that is _______________ and inflation that is ______________. In this​ short-run equilibrium at point​ 2, labor markets would likely see increasing ______________ and corresponding weaker pressure on wages and costs that enable firms to raise their ______________ at a less rapid rate. Graphically, this chain reaction from wages to costs to prices produces shifts in the​ short-run aggregate supply curve (AS2​) that are _____________. These shifts in the​ short-run aggregate supply curve result in output gaps that are _______________ and the economy is evolving toward an eventual new​ long-run equilibrium at which inflation and output​ are, compared to their original​ values, ________________.

AS will shift up and to the left Lower; higher Slack; prices Down and to the right Narrowing; unchanged

Which of the following would cause the​ short-run aggregate supply curve to shift upward and to the​ left?

Aggregate output kept below potential for a significant period of time.

Why did China fare much better than the United States and the United Kingdom during the​ 2007-2009 financial​ crisis? ​(Check all that​ apply.)

China pursued an autonomous easing of monetary policy. The Chinese economy is less closely tied to the functioning of financial markets than the economies of the United States and the United Kingdom.

Which of the following factors would not cause an increase in aggregate​ demand?

Decrease in price level

Both​ short-run and​ long-run equilibria require that the quantity of aggregate output demanded and the quantity supplied are __________. Beyond this​ equality, the attainment of a​ long-run equilibrium also requires that actual output __________ potential output.

Equal Equals

What relationship does the aggregate supply curve​ describe?

It describes the relationship between the total quantity of output supplied and the inflation rate.

What basic relationship does the​ long-run Phillips curve​ describe?

It indicates unemployment will move toward its natural rate regardless of the inflation rate.

How the economy will self-correct:

Lower wages reduce production costs, and thus short-run aggregate supply shifts rightward until the natural rate of output is reached When long-run equilibrium is restored, the LRAS, SRAS, and AD curves will intersect at the same inflation rate and aggregate output level

Supply shocks are exogenous events that cause _________________ the aggregate supply curve. Supply shocks that are positive are events that​ induce, at any given inflation​ rate, _________________ in​ supply, thus shifting the AS curve ______________. Compared to positive supply​ shocks, negative supply shocks have the ________________ effect on aggregate supply. Whether positive or​ negative, supply shocks that ultimately make output and inflation different are _____________.

Shifts in An increase; rightward Opposite Permanent

Demand shocks are exogenous events that cause ______________ the aggregate demand curve. Demand shocks that are negative are events that induce planned spending at any given inflation rate to __________ pushing the AD curve ____________. Compared to negative demand​ shocks, positive demand shocks have the ____________ effect on aggregate demand.

Shifts in Fall; Leftward Opposite

The​ short-run aggregate supply curve​ has:

a positive slope because as the inflation rate​ increases, so does the quantity of output supplied.

The​ long-run aggregate supply curve​ is:

vertical because changes in​ labor, capital, and technology​ (not the inflation​ rate) change the output an economy can produce over the long run.