ECON EXAM. 2- chap 11

The concept of Say's law can be summed up by the phrase,

"Supply creates its own demand."

What is TRUE when the credit market is in equilibrium? A) Desired saving equals desired investment. B) Desired employment equals the number of jobs available. C) Desired consumption spending equals the total of saving plus investment. D) The legal minimum wage equals the actual wage.

A) Desired saving equals desired investment.

Which of the following is NOT a key assumption of the classical model? A) There is a single monopoly seller in many markets for goods and services. B) People cannot be fooled by money illusion. C) People are motivated by self-interest. D) Wages and prices are flexible.

A) There is a single monopoly seller in many markets for goods and services.

Which of the following is NOT an assumption of the classical model? A) Wages and prices are fixed. B) People are motivated by the own self-interest. C) Pure competition exists. D) Buyers react to changes in relative prices.

A) Wages and prices are fixed.

All of the following will shift the short-run aggregate supply (SRAS) curve EXCEPT A) a change in the price level. B) a change in the price of labor. C) a change in the prices of raw materials. D) technological progress.

A) a change in the price level.

All items below will decrease short-run aggregate supply EXCEPT A) a decrease in the marginal tax rates. B) an increase in the prices of inputs. C) a decrease in training and education. D) a decrease in labor supply.

A) a decrease in the marginal tax rates.

All the following are assumptions of the classical model EXCEPT A) pure competition exists. B) buyers and sellers react to nominal money prices rather than to relative prices. C) people are motivated by self-interest. D) wages and prices are flexible.

B) buyers and sellers react to nominal money prices rather than to relative prices.

According to Keynes, the "stickiness" of wage rates could best be explained by A) minimum wage laws. B) unions and long-term labor contracts. C) short-term labor contracts. D) government interference.

B) unions and long-term labor contracts.

The idea that "supply creates its own demand" is attributed to which of the following economists? A) Adam Smith B) David Ricardo C) J. B. Say D) John Maynard Keynes

C) J. B. Say

Which of the following is NOT an assumption of the classical system? A) Pure competition exists. B) People are motivated by self interest. C) Wages and prices are inflexible. D) There is no money illusion.

C) Wages and prices are inflexible.

Which of the following causes a rightward shift of the short-run aggregate supply (SRAS) curve? A) an increase in the wage rate B) a decrease in firms' production with more inputs C) a reduction in the price of a raw material D) an increase in the overall price level

C) a reduction in the price of a raw material

Which of the following statements is NOT true about Say's law? A) Desired expenditures will equal actual expenditures. B) Surpluses will be eliminated by falling prices and shortages will be eliminated by increasing prices. C) People produce more goods than they want for their own use only if they seek to trade them for other goods. D) Markets would be regularly hit by severe shortages and surpluses.

D) Markets would be regularly hit by severe shortages and surpluses.

Which of the following will NOT shift the Keynesian short-run aggregate supply curve? A) a change in technology B) a change in profit expectations C) a change in input prices D) a change in the price level

D) a change in the price level

Which of the following decreases aggregate supply? A) discoveries of new natural resources B) an increase in competition C) an increase in educational attainment D) a decrease in labor supply

D) a decrease in labor supply

Which of the following would increase aggregate supply? A) increased training and education B) a reduction in input prices C) a discovery of new raw materials D) all of these

D) all of these

Economic growth due to labor force expansion or capital investments will result in I. A leftward shift of short-run aggregate supply. II. A rightward shift in long-run aggregate supply.

II only

The above figure presents the view of the economy according to (many AD lines and SRAS)

Keynesian economics.

In the classical model, how do shifts in aggregate demand affect real GDP?

Real GDP will remain unchanged.

"Supply creates its own demand" is known as

Say's Law

Why is persistent unemployment a possibility in the Keynesian model but NOT in the classical model?

The Keynesian model assumes that nominal wages are inflexible downward.

In the classical model, what occurs if a wage of $20/hour results in unemployed workers?

The wage rate will drop, more workers will be hired, and the unemployment rate falls.

One effect of a stronger dollar is

a reduction in U.S. exports and an increase in U.S. imports.

According to the classical model, prices and wages

are flexible

A short-run equilibrium occurs

at the intersection of the short-run aggregate supply curve and the aggregate demand curve.

The full-employment rate of output can

be surpassed only in the short run.

If the U.S. government were to relax its restrictions on offshore oil well drilling in Alaska, the result to aggregate supply would be to

cause a shift in both LRAS and SRAS to the right.

According to the classical model, an increase in aggregate demand would

cause an adjustment to a higher price level.

If the economy is near full capacity, the effect of a negative aggregate demand shock is to

cause the price level to fall.

In the classical model, a change in aggregate demand

causes a change in the price level but not in the long-run real GDP.

Oil prices increased significantly in 2008. According to the Keynesian model, this increase in oil prices should have caused which of the following to occur?

cost-push inflation

Inflation that is caused solely by an increase in aggregate demand is called

demand-pull inflation.

In the simple Keynesian portion of the short-run aggregate supply curve,

equilibrium real GDP is demand-determined.

In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that

existing capital equipment can be used more intensively.

An individual who suffers from money illusion will

feel that the same percentage increase in prices and income improves his economic position.

Full employment in the classical model is maintained by

flexible wage rates.

The short-run aggregate supply curve is horizontal if

here are unutilized resources in the economy.

The simplified Keynesian model

holds the price level constant.

At higher rates of interest

households save more and businesses invest less.

Demand-pull inflation is

inflation caused by increases in aggregate demand that are not matched by increases in aggregate supply.

Saving is NOT a problem in the classical model because

interest rates are flexible, and savings were channeled into investment.

The Keynesian short-run aggregate supply (SRAS) curve

is horizontal.

According to the classical model, investment

is inversely related to the interest rate.

The horizontal portion of the short-run aggregate supply curve in which there is excessive unemployment and unused capacity in the economy

is the Keynesian short-run aggregate supply curve.

Money illusion

is when people think they are better off when their income increases even though prices have increased by the same amount.

The Keynesian short-run aggregate supply curve is horizontal because

it reflects wage and price inflexibility.

Higher unemployment tends to be associated with

lower real GDP.

The original Keynesian economic theory states that

many prices would not decline even when aggregate demand decreases.

To explain the existence of excess capacity, Keynes argued that

prices and wages are inflexible in the downward direction.

A key component of the Keynesian model is that

prices are sticky.

A decrease in aggregate demand will cause

prices to fall according to classical economists, and unemployment to increase according to Keynes.

The simple Keynesian model assumes that

prices, especially the price of wages, are "sticky downward."

Say's law implies that

producing goods and services generates the means and the willingness to purchase other goods and services.

According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand decreases,

real GDP will fall and price level will remain constant.

The gap that exists when equilibrium real Gross Domestic Product (GDP) is less than full employment real Gross Domestic Product (GDP) is called a(n)

recessionary gap.

In the classical model, the interest rate will adjust to equate

saving with investment.

A short-lived increase in oil prices caused by destruction of oil-producing and oil-refining facilities by a large hurricane will

shift the SRAS curve to the left.

A change in tastes for U.S. produced goods will

shift the aggregate demand curve.

According to the classical economists, an economy producing $10 million in goods and services

simultaneously generates the income necessary to purchase $10 million in goods and services.

The Keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption that there are

sticky prices.

Classical economists tend to

support Say's law.

If aggregate demand and nominal GDP increase while the price level is constant, we would conclude that

the aggregate supply curve is horizontal.

Equilibrium real GDP rises after the dollar strengthened. From this, we can conclude that

the decrease in aggregate demand was less than the increase in aggregate supply.

Both the long-run and short-run aggregate supply curves will shift when

the endowments of the factors of production change.

In the classical view, if desired saving exceeds desired investment,

the interest rate would decline.

Given the assumptions of the classical model,

the market is a self-correcting mechanism

One tenet of classical economics is that

the role of the government should be limited, since the market will always be self-correcting.

Keynes argued that because of sticky prices and wages

the short-run aggregate supply curve could be horizontal.

The relationship between the price level and the real Gross Domestic Product (GDP) without full adjustment or full information is represented by

the short-run aggregate supply curve.

"Supply creates its own demand" implies that

the very act of supplying a particular level of goods and services necessarily equals the level of goods and services demanded.

According to the Keynesian model, the short-run aggregate supply (SRAS) curve is horizontal when

there are unemployed resources and prices do not fall when aggregate demand falls.

Keynesian economists argue that

unemployment is a long-lasting phenomenon in the economy.

According to classical economists, when aggregate demand decreases

unemployment temporarily increases, the price level decreases, and equilibrium real GDP is reached.

In the modern Keynesian model, over much of its range the short-run aggregate supply (SRAS) curve is

upward sloping.

The classical model makes little distinction between the long run and short run because

wages and prices adjust so fast that the economy is quickly moving towards the long run.

Cost-push inflation occurs

when the aggregate supply curve shifts to the left, while aggregate demand remains stable.

Holding the level of prices fixed implies that a given decrease in aggregate demand

will have a larger effect on real GDP than would be the case if prices were more flexible.