EC 111 Final

Image that in the current year the economy is in the long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Which sure shifts and in what direction?

aggregate demand shifts left

The Federal Open Market committee is

the group at the federal reserve that sets monetary policy

Suppose the economy starts at the center point. If the aggregate demand increase from the top diagonal line to the middle diagonal line then in the short run the economy moves to

the higher and further right point

If the Fed increases the money supply

the interest rate decreases, which tends to increase investment and therefore the aggregate demanded

For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?

the interest-rate effect

If the economy is in long-run equilibrium, then an adverse shift in short-run aggregate supply would move the economy from

the lower center point to the left upper point

There is an excess demand for money at an interest rate of

the money demanded line past the money supplied line (on the right)

Which of the following is NOT a determinant of the long-run level of real GDP?

the price level

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

the slope of the aggregate-demand curve

Which would have the smallest quantity of money demanded?

the smallest number when r x P

Suppose the economy starts at the center point. Stagflation would be consistent with the move to

the upper horizontal line and the farthest left vertical line

If the economy starts at the upper center point, a decrease in money supply moves the economy

to the lower center point in the long run

An example of an automatic stabilizer is

unemployment benefits

According to the liquidity preference theory, the money supply curve is

vertical

An increase in government purchases will

will shift the aggregate demand line upwards

A decrease in the money supply

would shift the aggregate demand to the left

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

output is higher and prices are lower

Which of the following is an example of crowing out?

An increase in government spending increases interest rtes, causing investment to fall.

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S. assets. What would happen to the dollar?

It would appreciate in foreign exchange markets making U.S. goods are expensive compared to foreign goods.

Economics expansions boom in Canada would cause the

U.S. price level and real GDP to rise

the natural level of output occurs at

Y2 (the center vertical line)

If the stock market crashes, then

aggregate demand decreases, which the Fed could offset by purchasing bonds.

Which of the following would cause stagflation?

aggregate supply shifts left

People have been expecting the price level to be 120 but it turns out to be 122. In response a tire company increases the number of workers it employs. What could explain this?

both sticky price theory and sticky wage theory

The shift of the short-run aggregate supply curve from the upper diagonal line to the lower diagonal line

could be caused by a decrease in the expected price level

From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel wealthier, than it would have shifted aggregate

demand right

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

federal funds rate

In 2008, the United States was in a recession. What would you expect to have happened?

increased claims for unemployment for unemployment insurance, increased layoffs and firings, a higher rate of bankruptcy

The economic boom of the early 1940s resulted mostly from

increased government expenditures

In 2008, the United States was in a recession. Which of the following things would you NOT have expect to have happened?

increased real GDP

When the Fed buys bonds the supply of money

increases and so the aggregate demand shifts right

When the interest rate increases, the opportunity costs of holding money

increases, so the quantity of money demanded decreases

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2% then some firms with high menu costs will have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied.

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

Suppose that foreigners had reduced confidence in the U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on U.S. net exports would

rise which by itself would increase aggregate demand.

If the Federal Reserve decided to raise interest rates, it could

sell bonds to lower the money supply

If the money supply curve MS were to shift left then

the AD curve would shift left too

The following are determinants of the long-run level of GDP

the amount of capital used by firms, available stock of human capital, available technology

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

the equilibrium interest rate increases