Econ 10

In a June​ 17, 2015 press​ conference, Fed Chair Janet Yellen indicated the possibility of the Fed raising interest rates by the end of the year. On this​ date, the federal funds rate target set by the Fed was 0.00−0.25 ​percent, where it had been since January 2009. According to the Fed​ rule, the Fed will raise the interest rate when​ ______. ​(Check all that apply.​)

inflation is high output is high

In the goods​ market, the relationship between aggregate output and the interest rate is represented by a​ downward-sloping IS curve. An increase in the interest rate would cause a​ __________.

movement up and to the left along the IS curve

When the interest rate​ falls, the planned aggregate expenditure curve shifts​ ________ because planned investment is​ ________.

up; higher

A decrease in government spending shifts the​ ________, and a decrease in the price level shifts the​ ________.

IS curve to the​ left; Fed rule to the right

What would be the impact on the graph if there is an increase in the price​ level?

The Fed rule curve would shift to the left.

The​ Fed's tendency to​ "lean against the​ wind" occurs when it​ _______ the money supply to​ _______ interest rates to counteract contraction of the​ economy, and​ _______ the money supply to​ _______ interest rates to counteract rapid expansion. These policies are designed to​ _______ the economy.

​increases; lower;​ decreases; raise; stabilize

A decrease in government spending shifts the aggregate demand curve to the​ ________ and a decrease in the Z factors shifts the aggregate demand curve to the​ ________.

​left; right

A sudden increase in oil prices results in a supply​ shock, shifting the​ short-run aggregate supply curve to the​ ________, resulting in society getting a​ ________ aggregate output at any price level.

​left; smaller

On a​ short-run aggregate supply​ curve, wages tend to be sticky at​ ________ levels of aggregate output and prices tend to be sticky at​ ________ levels of aggregate output.

​low; low

When output is above potential​ GDP, there is​ ________ pressure on wages. As the economy approaches​ short-run capacity, these changing wages shift the​ short-run AS curve to the​ ____.

​upward; left

Which of the following would cause the IS curve to shift from IS1 to IS2​? (it shifted right)

An increase in government spending

There is a positive relationship between the overall price level and aggregate output in the goods market with the Fed​ rule, and this relationship is the aggregate demand curve.

False

On November​ 9, 2011, the European Central Bank acted to decrease the​ short-term interest rate in Europe by​ one-fourth of a percentage​ point, to 1.25​ percent, and additional cuts were made over the next three​ years, to a low rate of 0.05 percent by September 2014. The rate cuts were made because European countries were growing very slowly or were in recession. What effect did the bank hope the action would have on the​ economy?

Increase​ GDP, which would set off a multiplier effect with consumption rising. and Increase investment spending and raise GDP.

Which of the following statements describe the shape of the​ short-run aggregate supply​ curve? ​ (Check all that apply.​)

The curve becomes vertical when the economy is at capacity. The curve is relatively flat at low levels of aggregate output. The curve is relatively steep at high levels of aggregate output.

An increase in the price level that lowers the real value of wealth is one reason for the downward slope of the AD curve.

True

Using the AS​/AD​ graph, suppose the economy is currently at point A. Which of the following would occur to return the economy back to its​ long-run equilibrium?

Wages would adjust​ upward, causing the​ short-run AS curve to shift to the left.

A change in real wealth helps explain the downward slope of the aggregate demand curve because the decline in real wealth leads to​ _______. ​(Check all that apply.​)

a decrease in consumption a decrease in planned aggregate expenditure

​If, over​ time, both inflation and unemployment trend in the same direction​, an analysis using aggregate supply and demand curves would imply a shift in

aggregate supply along a stationary aggregate demand.

Which of the following is the best explanation of the shape of the AD​ curve? The aggregate demand curve slopes downward because

an increase in the price level causes the demand for money to​ rise, driving up the interest rate and discouraging​ investment, which causes aggregate demand to fall.

A negative supply​ shock, such as an increase in oil​ prices, causes the​ short-run aggregate supply curve to​ __________.

decrease and therefore shift to the left

In the tiny island nation of​ Bongo, the​ nation's wealth is broken down as​ follows: 50 percent is cash in checking and savings​ accounts, 25 percent is​ housing, and 25 percent is stock holdings. Last​ year, Bongo experienced an inflation rate of 29 ​percent, and housing prices and stock prices each increased by 12 percent. Real wealth in Bongo ___________ last year.

decreased

In the AS​/AD model, equilibrium is found where aggregate demand is____________. This equilibrium determines the value of_______________and ________________

equal to aggregate supply ​, aggregate output ​, the price level

When the price level​ increases, the Fed rule curve shifts to the_________​, causing aggregate output to _____________. Given this relationship between the price level and aggregate​ output, the aggregate demand curve must be ________________.

left ​, decrease ​, downward sloping

In the first few chapters of this​ book, we introduced the notion of supply and demand. One of the first things we did was to derive the relationship between the price of a product and the quantity demanded per time period by an individual household. Now we have derived what is called the aggregate demand curve. The two look the same and both seem to have a negative​ slope, but the logic is completely different. The negative slope of a simple demand curve

is explained by the substitution effect and the income effect.

The Federal Reserve Bank of St. Louis publishes PCE price index data on its Website​ at: https://research.stlouisfed.org/fred2/categories/9. Go to this Website and look at the 1​ year, 5​ year, and 10 year graphs for both "Personal Consumption Expenditures: Chain-type Price Index" and "Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index)". The Fed obtains a more accurate representation of inflation and the state of the economy by concentration on the PCE index which excludes food and energy pricing because​ ________. ​(Check all that​ apply.)

it is less volatile for all three timeframes than the inclusive PCE index changes in food and energy prices often are not related to the level of aggregate output in the economy

The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very steep portion of AS​ curve, when

the economy is operating at or near full employment and output level is above full capacity.

All of the following are exogenous variables to the aggregate​ supply-aggregate demand model except

the price level.

Related to Economics in Practice​: The Simple "Keynesian" Aggregate Supply Curve This example describes the simple Keynesian aggregate supply curve as one in which there is a maximum level of output given the constraints of a fixed capital stock and a fixed supply of labor. The presumption is that increases in demand when firms are operating below capacity will result in output increases and no input price or output price changes but that at levels of output above full​ capacity, firms have no choice but to raise prices if demand increases. The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very flat portion of AS​ curve, when

there exists considerable excess capacity and high unemployment in the economy.

The Fed rule is an equation that shows how the interest rate behavior of the Fed depends on the state of the economy.

true

The IS curve shows the relationship between output and the interest rate.

true

Refer to​ Figure-1 to the right. Consider an economy where the current GDP is higher than potential GDP. Assuming that input prices fully adjust to output prices after some lag. In the long​ run,

wages and other input prices will​ rise, shifting the aggregate supply curve to the left to AS1.

In​ reality, however, the​ short-run aggregate supply curve​ isn't flat and then vertical.​ Rather, it becomes steeper as we move from left to right. This somewhat unique shape of the​ short-run aggregate supply curve is based in part on the fact that

when the economy has excess​ capacity, input prices are slow to adjust whereas output adjusts quickly to increases in aggregate​ demand; as the economy approaches full capacity prices increase at a faster rate than does output.

A decrease in the interest rate would cause investment to -increase.- This will lead to an -upward- shift in the aggregate expenditure ​(AE​) curve. In the​ end, the new equilibrium output​ (income) ​(Y​) will change by -more than- the change in investment.

x

The figure on the right shows a plot of the 24 monthly rates on a graph with the unemployment rate measured on the​ x-axis and the inflation rate on the​ y-axis. If the points in such a scatterplot appeared to run along a line having a positive ​slope, one would say that a​ trade-off between inflation and unemployment -was not- present.

x