Econ Final Exam

the larger the spillover the stronger argument

government subsidies.

If the production function shifts from Y1 to Y2 in the accompanying graph of the Solow model, then:

growth from both capital accumulation and better ideas will occur.

In the basic model with an AD and LRAS curve only, if spending growth is 10% and the Solow growth rate falls from 5% to 3%, then inflation will:

increase from 5% to 7%

Assume that the economy is initially at point Y in the graph. In the best-case scenario, the Fed will:

increase money supply to take the economy to Point X

If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by:

increasing money supply growth, lowering real interest rates, and encouraging borrowing.

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising:

inflation

As a result of a positive shock to

inflation AND output growth INCREASE in the short run, but in the long run they return to the rates before the shock (temporary)

From an initial equilibrium in the basic model that includes only the AD and LRAS curves, increased spending growth causes:

inflation to increase, real growth remains the same

When the Fed supplies "too much" monetary stimulus in the face of a negative aggregate demand shock:

inflation, real growth, and nominal wage growth all increase.

The lowering of the growth rate of the money supply is represented graphically by a:

leftward shift of the AD curve

The short-run aggregate supply curve shows the _____ relationship between the inflation rate and real growth during the period when prices and wages are _____.

positive; sticky

When business firms become more pessimistic about the state of the economy, the interest rate

the interest rate decreases and the quantity of borrowing and lending decreases

Nominal wage confusion occurs when:

when workers respond to the wage number on their paychecks rather than to what their wages can buy.

Costs of Inflation

-There is price confusion and money illusion.​ -Inflation redistributes wealth.​ -Inflation interacts with other taxes.​ -Inflation is painful to stop

(Figure: Aggregate Demand) Point A on this aggregate demand curve represents a real GDP growth rate of:

5%

Which of the following factors would NOT cause aggregate demand to increase?

A decrease in price level (any change in price level)

In the AD-AS diagram, a "tight" monetary policy shifts the:

AD curve to the left.

If the Federal Reserve overstimulates the economy by increasing money growth too much, then inflation will:

Create arbitrary redistribution of wealth

How can the Fed offset a positive shock to aggregate demand?

Decrease the growth rate of the money supply.

If a baker observes an increase in demand for bread, should the baker increase outputor raise prices?

It depends on whether the change in demand is driven by inflation or by a stronger preference for bread.

Consider the world oil market diagrams presented in the figure. Which panel correctly depicts what happened in the market for oil during the 1973 OPEC oil crisis?

Panel B Increase in price decrease in quantity

The economy's potential or "Solow" growth rate fluctuates over time because of:

Real shocks

Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy?

The Fed's control of the money supply is incomplete and subject to uncertain lags.

(Figure: Loanable Funds Expansion) Which of the following reasons could cause the demand curve for loanable funds to shift to the right from DLF to D1LF in the figure?

The economy is expected to boom, thereby increasing investment returns

According to the Fisher effect, a 5 percent decrease in the expected inflation rate results in

a 5 percent decrease in the nominal interest rate.

The SRAS curve is upward sloping because:

a higher aggregate price level leads to higher output since most production costs are fixed in the short run.

A negative real shock causes:

a higher inflation rate and a lower real growth rate.

According to the quantity theory of money, if both the growth rate of the money supply and the velocity of money are fixed, then a higher inflation rate means:

a lower real growth rate

According to the AD-AS model, if the economy is initially at its long-run potential growth rate, then a temporary increase in the growth rate of investment spending will cause:

an increase in both inflation and real growth rates in the short run

If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be:

an increase in money supply growth.

Consider the three aggregate demand curves shown in the graph. Movement from Point A to Point D represents:

an increase in spending growth from 4% to 6%.

We would expect a negative real shock, such as a major countrywide drought, to result in

an increase in the inflation rate and a decrease in the growth rate of output

In times when prices rise unexpectedly:

borrowers are made better off at the expense of lenders.

If the Federal Reserve offsets a negative shock to aggregate demand with increased money growth:

both inflation and real GDP growth will rise.

if the Fed overreacts to a negative spending shock by increasing money growth too much:

both real GDP growth and inflation will increase more than the Fed prefers

In the Solow model with constant technological knowledge (A), if the economy is initially above its steady-state capital stock

capital stock needs repair but their isnt enough investment so capital shrinks bringing it back to steady state

When a negative shock to aggregate demand occurs, the inflation rate will:

decrease

The Fisher effect indicates that an increase in the expected inflation rate will cause the real rate of interest to:

remain relatively constant.

Holding everything else constant, an increase in the growth rate of the money supply will cause the aggregate demand curve to:

shift outward.