Economics Today The Macro View Ch. 11 Classical and Keynesian Macro Analyses

In the modern Keynesian model the short-run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on the capital input?

Existing machinery can be used longer hours.

The modern Keynesian short-run aggregate supply curve is best described by which of the following statements?

It is very flat at low levels of real GDP, increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.

The current state of the US domestic economy is depicted in the graph. Draw a new aggregate demand curve. Draw a new SRAS curve.

Suppose that the curves shifted in the opposite direction. The price level decrease and real GDP remains at the original level.

Inflation in an economy implies that

The average price level has increased over a state period of time.

A depreciation of the U.S dollar should be result in

a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short run aggregate supply.

Which of the following would create demand-pull inflation?

an increase in household income.

The balanced budget multiplier is equal to

1.

The Keynesian model was supported empirically by data from the decade of the

1930's. depicted as the era of the great depression. This is when Keynes developed his model in hopes of proving macroeconomic tools for governments to correct the economy.

Demand pull inflation arises due to

A depreciation of the US $ this causes the AD curve to increase and create a demand pull inflation.

Modern Keynesian analysis assumes that the​ short-run aggregate supply curve is A. upward sloping. B. horizontal. C. vertical. D. downward sloping.

A. upward sloping.

Which of the following is true concerning shifts of the long-run aggregate supply curve?

An increase in the long-run aggregate supply curve is depicted as rightward shifts and an increase in real GDP.

Say's law fits best in the _____ since this philosophy placed great importance on _____ to determine the _____.

Classical theory, aggregate supply, level of output.

In early 2008, it appeared that the U.S economy was either in a recession or growing very slowly. President Bush announced a program of tax rebates. This program can be described as ___________ and was intended to ___________

Discretionary fiscal policy; Increase consumer spending.

In the Keynesian model the amount of consumption is dependent on

Disposable income.

One of the main conclusions of says law was that

If people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

The macroeconomy is depicted by the graph to the right. Suppose the AD has changed due to reduced taxes. The new short-run equilibrium price level had and the real GDP has _____ Thus, in the short run it is ____ to produce beyond the full employment level of real GDP The cost of producing beyond the full employment level of real GDP is ______

Increased, Increased. Possible. A higher price level. The price level and real GDP move in the same direction as aggregate demand.

Crowding out occurs when

Increases in government spending cause interest rates to rise, reducing investment and consumption.

Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to

Reduce their workforce.

States that if something of value is created it will in turn generate an equal amount of income that will be spent ( demand) on other goods and services.

Say's Law

Suppose that the US dollar was $1 = 4 euros. Today the exchange rate is $1 = 3 euros

The US dollar depreciated.

Which of the following will increase both the short-run and long-run aggregate supply curves?

Younger workers in the labor force receive better and more training than their predecessors.

In the classical model, a decrease in AD will result in

a decrease in the price level and no change in output.

Cost-push inflation arises due to

a decrease in the short run aggregate supply curve.

So any change in the level of taxes leads to

a smaller change in consumption and expenditures compared to the change in taxes.

In modern Keynesian analysis, an increase in aggregate demand will result in

an increase in both price level and output.

Which of the following would create cost-push inflation.

an increase in wages paid to workers.

Since investment is inversely related to the rate of interest, the former will obviously

decrease.

The model of a long run equilibrium

is the same as the classical model

Since modern Keynesian model allows for price response, the aggregate supply curve

is upward sloping.

Thus, according to the Keynesian model full employment is

possible but not guaranteed.

The modern Keynesian model assumes that

prices respond to changes in aggregate demand but not fully.

Suppose that the value of the US dollar yesterday was $1 = 4 yen. Today the exchange rate changed such that the $1 = 3 yen. Given that the US dollar has depreciated, the aggregate demand in the united states should

shift to the right. The Short run supply curve shifts to the left.

Persistent inflation arises due to

the AD curve increasing by a larger portion that the long run supply curve.

All of the following will shift the short-run aggregate supply and the long-run aggregate supply except for

A temporary change in input prices.

According to the classical​ model, if the economy starts at full employment an increase in aggregate demand will cause all of the following to occur except A. a decrease in unemployment. B. a decrease in wage rates. C. a rise in real GDP above its​ long-run level. D. an increase in input prices.

B. a decrease in wage rates.

Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short​ run? A. The price level rises. B. An inflationary gap is created. C. The unemployment rate falls. D. A recessionary gap is created.

D. A recessionary gap is created.

The model of​ long-run equilibrium A. and the Classical Model are based on totally different assumptions. B. assumes that markets always clear but the Classical Model assumes that markets sometimes may not clear. C. is the same as the Keynesian Model. D. is the same as the Classical Model.

D. is the same as the Classical Model.

Labor contracts

Prevent nominal wages from falling.

An important difference between the classical model and the Keynesian model is that..

Prices adjust to bring equilibrium in the classic model and output adjusts to bring about an equilibrium in the Keynesian model.

What did Keynes mean when he said that prices are sticky?

Prices, especially the price of labor, are inflexible downward. Prices are inflexible sine the firms costs are inflexible too. If input costs are difficult to decrease, it implies that the prices firms charge for their products are unlikely to decrease too.

Money illusion

Reacting to changes in money prices rather than relative prices. If a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion.

Suppose that congress enacts a lump-sim tax cut of $750 billion. The marginal propensity to consume is equal to 0.75 If Ricardian equivalence holds true, equilibrium Real GDP will If Ricardian equivalence holds true, savings will

Remain unchanged. increase by the amount of the tax cut.

The proposition that an increase in the federal budget deficit caused entirely by a current tax cut has no effect on aggregate demand is called the

Ricardian equivalence theorem.

Suppose that foreign currencies depreciate relative to the dollar.

Suppose that the curves shifted in the same proportions. The price level decreases and real GDP remains at the origin.

Suppose that the Keynesian​ short-run aggregate supply curve is applicable for a​ nation's economy. Now suppose that a decrease occurs in nominal wages. a. Using the line drawing tool​, show how this change affects the economy in the short run. Properly label your line. (Carefully follow the instructions​ above, and only draw the required objects.) b. Which of the following might also yield the outcome shown by your​ diagram? A. An increase in productivity. B. A decrease in raw materials prices. C. An increase in business taxes. D. All of the above. E. A and B only. c. In considering the forces which may increase an​ economy's real GDP in the long​ run, which of the following will NOT play a​ role? A. Discoveries of new raw materials. B. Increased education and training. C. Greater capital accumulation. D. An expanded workforce. E. Lower wages for labor.

(see figure in #17 above definition) E. A and B only. E. Lower wages for labor.

In the modern Keynesian model the short run aggregate curve slopes upward. This model explains the reason behind the upward sloping SRAS curve by One can explain the shape of the upward sloping short run aggregate supply curve by only focusing on the capital input by.. One can explain the shape of the upward sloping short run aggregate supply curve by only focusing on profit by holding the nominal wage constant and therefore increasing the profit margin as the product price rises.

-Increasing worker effort, -Increasing the amount of time present workers work ( either hours or days) -Switching workers from "uncounted production" to counted production. Uncounted production pertains to work carried out that does not directly produce output for the market. ---------------------------------- -Using capital more intensively ( more hours per day). -By having the machines operate at a faster rate. -by delaying maintenance.

Which of the following might also yield the outcome shown by the diagram? I considering the forces which may increase an economy's real GDP in the long run, which of the following will not play a role?

A and B Lower wages for labor.

In the classical model, a decrease in aggregate demand will result in

A decrease in the price level and no change in output.

Suppose that the rental rate of machinery increased temporarily. The result of this would be best described by what if it decrease?

A decrease in the short run aggregate supply curve. An increase.

Say's law

A dictum of economist J.B. Say that supply creates its own demand. Producing goods and services generates the means and willingness to purchase other goods and services.

Suppose that there is an increase in oil prices.

A leftward shift of the SRAS and a cost push inflation.

Consider the following diagram in which the current short-run equilibrium is at point A. At point A, the economy has __________ If the marginal propensity to save equals 0.10, calculate the change in government spending that could eliminate the gap. $___ trillion.

A recessionary gap 0.10

The current situation would be described as a ______________. If the government wished to use discretionary fiscal policy to remedy this problem, it would need to ______ government spending. Show how the increase in government spending could be used to return the economy to full employment.

A recessionary gap. Increase.

The classical economists believed that the leakage of saving would be matched by the injection of business investment. A. False B. True The lower the rate of​ interest, the​ ________ profitable it is to invest and the​ ________ the level of desired investment. A. ​less; higher B. ​more; lower C. ​more; higher D. ​less; lower

A. True C. more; higher

Suppose that there is a​ temporary, but significant increase in oil prices in an economy with an​ upward-sloping SRAS curve. As a policy response to this​ short-lived but sudden increase in oil​ prices, a central bank A. cannot stabilize both the price level and the real GDP simultaneously. B. has no responsibility to stabilize the real GDP. C. can stabilize neither the price level nor the real GDP. D. can stabilize both the price level and the real GDP simultaneously.

A. cannot stabilize both the price level and the real GDP simultaneously.

$1 = 4 pesos now its worth 6 pesos. Given that the US $ has appreciated, the aggregate demand in the united states should

AD shifts to the left Short-run supply shifts to the right.

Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If there is decreased security about jobs and future income, which of the following is the best description of the outcome in the economy?

Aggregate demand decrease.

An economy is currently in a long run equilibrium where SRAS = LRAS = AD. Suppose that there is an increase in the money supply, which of the following is the best explanation of the outcome.

Aggregate demand increases

Leftward movement along the short-run aggregate supply curve was caused when

Aggregate demand shifted to the left.

You are a member of congress. The economy is currently experiencing a recessionary gap. which of the following are fiscal policies that Congress can enact in an attempt to correct the economy?

An increase in government spending and decrease in taxes.

Suppose that the economy is in short-run equilibrium but there is a recessionary gap. Which of the following is an example of discretionary fiscal policy that could be used to return the economy to full-employment real GDP?

An increase in government spending.

Between early 2005 and late 2007, total planned expenditures by U.S households substantially increase in response to an increase in the quantity of money in circulation. From a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were. The resulting spending gap between early 2005 and 2007 in response to the increases.

An increase in the price level along with an increase in equilibrium real GDP. An inflationary gap.

Suppose that the economy is shown to the right. This economy is currently experiencing _______ Draw and label the fiscal policy correction that would bring the economy to full employment GDP.

An inflationary gap

Given that the economy is currently in a long run equilibrium where SRAS = LRAS = AD there is an increase in the money supply the economy would then experience.

An inflationary gap.

Aggregate demand shock

Any event that causes the aggregate demand curve to shift inward or outward.

Aggregate supply shock

Any event that causes the aggregate supply curve to shift inward or outward.

The classical model assumes that wages and prices

Are always completely flexible

One of the main conclusions of​ Say's Law was that A. if people supply goods in order to then demand​ goods, there can be overproduction in a market economy and less than full employment will be the normal state of affairs. B. if people supply goods in order to then demand​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs. C. if people demand goods in order to then supply​ goods, there can be overproduction in a market economy and less than full employment will be the normal state of affairs. D. if people demand goods in order to then supply​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

B. if people supply goods in order to then demand​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

Consider the open economy displayed in the figure to the right. Firms in this nation do import raw materials and other productive inputs from​ abroad, and foreign residents purchase many of the​ nation's goods and services. a. Using the three point curved line drawing tool, determine the most likely​ short-run effect on this​ nation's economy if there is a significant raw materials price inflation in other nations around the world. Label this line​ 'Shock'. (Carefully follow the instructions​ above, and only draw the required objects.) b. According to your​ diagram, the ​short-run effect upon the economy is A. a lower price level and an economic recession. B. inflation and a lower real GDP. C. a higher price level and an economic expansion. D. deflation and a lower real GDP.

B. inflation and a lower real GDP.

The economy is depicted in the graph to the right. Suppose, there is an increase in the supply of labor. which of the following best describes the result of this event?

Both the short-run and long-run aggregate supply curves shift outward.

Suppose that an economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. If the US dollar appreciates​, which of the following is the best description of the outcome in the​ economy? A. Aggregate demand increases. B. ​Short-run aggregate supply decreases. C. Aggregate demand decreases. D. ​Long-run aggregate supply increases. Suppose that an economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. Given that nbsp the US dollar appreciates​, the new short run position of the economy finds itself in is termed A. an inflationary gap. B. a depressionary gap. C. stagflation. D. a recessionary gap.

C. Aggregate demand decreases. D. a recessionary gap.

In the Classical​ Model, an increase in aggregate demand will result in A. an increase in output and no change in the price level. B. a decrease in both the price level and output. C. an increase in the price level and no change in output. D. a decrease in the price level and an increase in output. E. an increase in both the price level and output.

C. an increase in the price level and no change in output.

Suppose that an economy beings at the short-run equilibrium shown as point A in the figure to the right. Few workers in this nations economy are union members. unions had large wage givebacks. economic conditions improved abroad, real GDP raised. Hurricane caused short term halts in production and created bottlenecks in production. At the same time, the nations banks significantly pushed up the rate of growth of the nations money supply. A strengthening of the value of this nation's currency in terms of other countries currencies affects both SRAS curve and the AD curve. A weakening of the value of this nations currency occurs. Unions successfully negotiated wage boosts, economic conditions worsen abroad and disposable income in other nations. A run of good weather led to great crop harvests.

D,B,C,B, E,C

An economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. Suppose that nbsp the US dollar depreciates​, which of the following is the best explanation of the​ outcome? A. ​Long-run aggregate supply increases. B. Aggregate​ demand, short-run and​ long-run aggregate supply all increase. C. ​Short-run aggregate supply increases. D. Aggregate demand increases. Given that the economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD nbsp the US dollar depreciates the economy would then experience A. a depressionary gap. B. stagflation. C. an inflationary gap. D. a recessionary gap.

D. Aggregate demand increases. C. an inflationary gap.

In modern Keynesian​ analysis, a decrease in aggregate demand will result in A. a decrease in output and no change in the price level. B. a decrease in the price level and no change in output. C. an increase in both the price level and output. D. a decrease in both the price level and output. E. an increase in the price level and a decrease in output.

D. a decrease in both the price level and output.

Consider a country whose economic structure matches the assumptions of the classical model. Suppose that businesses in this nation suddenly anticipate lower future profitability from investments they undertake today. From the following list choose the letter that gives the resulting outcome for each of the variables given​ below: I - Increase D - Decrease N - No Effect ​(Enter a letter​ I, D, or​ N) The current equilibrium interest rate. ___ Current equilibrium real GDP. ___ Current equilibrium employment. ___ Current equilibrium saving. ___ Future equilibrium real GDP. ___

Decrease No Effect No Effect Decrease Decrease

Consider a country whose economic structure matches the assumptions of the classical model. After reading a recent best-seller documenting a growing population of low-income elderly people who were ill- prepared for retirement, most residents of this country decide to increase their saving at any given interest rate. The current equilibrium interest rate will___ Current equilibrium real GDP___ Current equilibrium employment___ Current equilibrium investment___ Future equilibrium real GDP___

Decrease No effect No effect Increase Increase

Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given the recessionary gap.

Decreasing taxes

Determine the most likely short-run effect on this nations economy if there is a significant downturn in economic activity.

Deflation and a lower real GDP

In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use. This is an example of _______________. The government increases it expenditures without raising taxes; to cover the resulting budget deficit, it issues more bonds, thereby pushing up the market interest rate and discouraging private planned investment spending. This is an example of _________________. The government finances the construction of a classical music museum that otherwise never would have received private funding. This is an example of ______________.

Direct expenditure offset to. Indirect crowing out from. Neither a direct expenditure nor an indirect crowing out offset to.

(#19 part2 [opposite] above) b. Which of the following might also yield the outcome shown by your​ diagram? A. An increase in union bargaining power. B. A decrease in productivity. C. A decrease in regulations. D. All of the above. E. A and B only. c. In considering the forces which may increase an​ economy's real GDP in the long​ run, which of the following will NOT play a​ role? A. Greater capital accumulation. B. An expanded workforce. C. Increased education and training. D. Discoveries of new raw materials. E. Lower wages for labor.

E. A and B only. E. Lower wages for labor.

How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on profits?

Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.

Cost-push inflation

Inflation caused by decreases in short-run aggregate supply.

Demand-pull inflation

Inflation caused by increases in aggregate demand not matched by increases in aggregate supply.

Consider the assumption of the classical model. Draw the long-run aggregate supply curve such that real GDP is $10 trillion. Draw the aggregate demand curve. Properly label your line. Suppose that aggregate demand were to increase due to a weaker dollar. which of the following would be the result?

Inflation only.

The gap that exists when equilibrium real gross domestic product is greater than full employment RGDP>Full employment.

Inflationary gap.

Which of the followings is a possible explanation for sticky prices?

Labor contracts cause wages to be fixed over the contract period.

Because investment is the process by which physical capital is put into place for future production, a lower-than-otherwise level of investment implies a _____ level of future equilibrium real GDP.

Lower-than-otherwise.

Suppose that AD has changed due to higher taxes

New short run EQ has decreased and real GDP has decreased. thus it is in the short run possible to produce below the full employment level. The cost is higher unemployment.

The Keynesian model argues that prices are sticky. One reason supporting this argument is that

Nominal wages are inflexible downwards.

suppose that the value of the US dollar depreciated. AD will the Short run supply will

Shift to the right Shift to the left.

If the prices were sticky, according to Keynes, this would then imply that the

Short-run aggregate supply is horizontal.

The Keynesian model of the macroeconomy argues that prices are sticky due to labor contracts and unions. The existence of sticky prices cause the ____ to be horizontal. Suppose that the aggregate demand changes due to an decrease in the amount of money in circulation. Draw the new AD curve.

Short-run aggregate supply.

If the price level did not remain constant when the government spending increases then

The change in total expenditures would be less than they would be if the price level remained constant.

Consider a country whose economic structure matches the assumptions of the classical model. Suppose that businesses in this nation suddenly anticipate lower future profitability from investments they undertake today.

The current EQ interest rate will - D Current EQ real GDP will - N Current EQ employment will - N Current EQ saving- D Future EQ real GDP will - D

In the figure at right, the inflationary gap can correctly e identified as

The difference between 12.2 trillion and 12 trillion.

The macroeconomy is depicted by the graph to the right. The eq. price level and output is 80,12 trillion.

The full employment level of GDP is $12 trillion since the LRAS is defined at this point.

Inflationary gap

The gap that exists whenever equilibrium real GDP per year is greater than full-employment real GDP, as shown by the position of the long-run aggregate supply curve.

Recessionary gap

The gap that exists whenever equilibrium real GDP per year is less than full-employment real GDP as shown by the position of the long-run aggregate supply curve.

Keynesian short-run aggregate supply curve

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

Which of the following must be true if the balanced budget multiplier to equal one?

The increases in income stemming from a change in government spending must be greater than the change in income stemming from the change in taxes.

The assumption that the price level is fixed in the Keynesian model allows

The multiplier to be fully applied.

Suppose the short-run supply curve shifts by more than the aggregate demand curve. In this case, the result would be that

The price level decreases and real GDP increases.

An increase in government spending shows up exclusively as a change in real GDP when

The price level is assumed to be constant.

The long-run aggregate supply curve will not shift if there is a change in

The price level.

Which of the following best exemplifies say's law?

The production of a $4000 plasma TV set creates demand for other goods and services valued at $4000.

Short-run aggregate supply curve

The relationship between total planned economywide production and the price level in the short run, all other things held constant. If prices adjust incompletely in the short run, the curve is positively sloped.

During the summer of 2011, the stock market took a beating as the average value of shares traded in the U.S. stock market dropped by more than 15 percent. In response, total planned expenditures began to decline at any given price level because.

The stock market shock created a negative aggregate demand shock.

Which of the following defines an effect time lag?

The time that elapses between the implementation of a policy and the results of a policy.

In the modern Keynesian model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only address labor input? Which of the following is the best example of uncounted production?

The workers are switched from uncounted production to counted production, thus enabling the firm to expand output as the price level expands. An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine parts.

$1 = 4 euros now its worth 5 An appreciation of the US $ result in

US $ appreciated. A lower price level but the impact on the level of real GDP depends on the magnitude of the shifts in the AD and short run supply curves

In this most recent case of finical shocks during the summer of 2011, aggregate demand declined generating a leftward movement along the short-run aggregate supply curve, thus creating...

a recessionary gap.

Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that there is decreased security about jobs and future income, the new short run position of the economy finds itself in is termed.

a recessionary gap.

Complete the following diagram. Draw a long-run aggregate supply curve for any value of GDP greater than 2 trillion. Draw a short-run aggregate supply curve label. a) Which of the following factors will shift the short-run aggregate supply curve but not the long run AS. b) If petroleum prices increase temporarily the _______ curve would shift to the _____

a) An economy wide increase in wages. b) Short-run aggregate supply curve, Left

Refer to the economy shown in the graph to the right. Suppose that there is an increase in oil prices. The​ short-run effect of this change on the economy is a) A. a leftward shift of the AD​ curve, and​ demand-pull inflation. B. a rightward shift of the AD​ curve, and​ demand-pull inflation. C. a leftward shift of the SRAS​ curve, and​ cost-push inflation. D. a rightward shift of the SRAS​ curve, and​ cost-push inflation. E. ​none; changes in prices have no effect on the economy in the short run. b) Due to the weakening of the​ dollar, the price level​ ________, and real GDP​ _________. A. will​ increase, will increase B. will​ increase, will decrease C. will​ decrease, will decrease D. will​ decrease, may increase or decrease depending on the size of the shifts E. will​ increase, may increase or decrease depending on the size of the shifts

a) C. a leftward shift of the SRAS​ curve, and​ cost-push inflation. a) E. will​ increase, may increase or decrease depending on the size of the shifts

An important difference between the classical model and the Keynesian model is that the a. Keynesians believe that the aggregate supply curve is ________. b. The classical model assumes prices ____ so that the aggregate supply curve is _______ and the economy is always _______ c. The Keynesian model indicates that the economy will find an equilibrium however the economy will not always _________.

a. Horizontal in the short run. b. Are flexible, vertical, at full employment c. Reach full employment.

Since the economy's current real GDP is unaffected by the decision of the country's residents to seek to decrease their saving, it must be true, all else constant, that the current level of employment is ___.

also unaffected.

Demand-pull inflation arises due to

an increase in household income

which of the following would create demand-pull inflation?

an increase in household income.

Consider the following diagram, in which the current short-run equilibrium is at point A. At point A, the economy has __________ If the marginal propensity to consume equals 0.8, to eliminate the gap, the government should decrease spending by ___________

an inflationary gap. *******formula*** 1-0.8 = 0.20 1/0.2 = 5 inflation gap = 1.6 1.6 ___ = 0.32 trillion 5 0.32 Trillion!

Suppose that there is a temporary​, but​ significant, increase in oil prices in the economy depicted in the figure to the right. a. Using the 3​-point curved line drawing tool​, show the impact the elevated oil prices have on the macroeconomy. Properly label this line. If the central bank wishes to prevent the equilibrium real GDP from changing in response to the oil price increase, it should b) If the central bank wishes to prevent the equilibrium price level from changing in response to the oil price​ increase, it should A. increase the quantity of money in circulation in order to shift aggregate demand rightward. B. decrease the quantity of money in circulation in order to shift the​ short-run aggregate supply curve rightward. C. decrease the quantity of money in circulation so that oil prices will fall. D. decrease the quantity of money in circulation in order to shift aggregate demand leftward. c) If the central bank wishes to prevent the equilibrium price level from changing in response to the oil price​ increase, it should A. increase the quantity of money in circulation in order to shift aggregate demand rightward. B. decrease the quantity of money in circulation in order to shift aggregate demand leftward. C. decrease the quantity of money in circulation so that oil prices will fall. D. decrease the quantity of money in circulation in order to shift the​ short-run aggregate supply curve rightward.

b) D. decrease the quantity of money in circulation in order to shift aggregate demand leftward. c) B. decrease the quantity of money in circulation in order to shift aggregate demand leftward.

Suppose that an economy begins in equilibrium at E1 as depicted in the graph to the right. Draw a new aggregate demand curve reflecting an increase in the amount of money in circulation. b) During the rapid adjustment period (that results from the change in the AD​ curve), the economy will immediately tend toward a price level that ___ ___ and a level of real GDP that ___ before quickly returning to full employment. c) Now that the macro economy is in a disequilibrium what happens in the labor market? _____. d) As the wage increase, the _____.

b) remains constant; increases c) unemployment decreases, which increases wages. d) quantity demanded of labor decreases, while the law of supply increase the number of workers seeking jobs.

Which of the following statements best characterizes demand-pull and cost-push inflation?

both are short run types of inflation.

During normal times, discretionary fiscal policy

is probably not very effective in influencing real GDP.

The graph shows the aggregate demand curve in a representative economy. Suppose that this economy is known to be operating below full employment. In this model, a change in aggregate demand will change _____.

real GDP but not the price level.

The assumption that the price level is fixed allows an increase in government spending to

show up exclusively as a rise in real GDP.

In the Classical​ Model, the equilibrium level of real GDP per year is completely _____ _____. The​ supply, in​ turn, is fixed by the​ country's resource endowments and the state of its technology and productivity.

supply determined

Regarding the economy's current equilibrium real GDP, it must be noted that in the classical model this variable is determined exclusively by___.

supply.

The time that elapses between the implementation of a policy and its intended result is referred to as.

the effect time lag

The extent of which real GDP responds to changes in the price level along the short-run aggregate supply curve is largely determined by

the speed with which input pries adjust and people become more fully informed. the ability of firms to use existing workers and capital more intensively. the ability of firms to hire additional inputs, particularly workers.

The Classical model has a _____. Therefor any change in the aggregate demand (AD) curve will only result in a change in the price level.

vertical aggregate supply curve.

Suppose that the dollar becomes weaker in foreign exchange markets. Consider the two effects of a weaker dollar. Due to the weakening of the dollar the price level _____ and real GDP ____.

will increase, may increase or decrease depending on the size of the shifts.

According to the figure at right, an increase in aggregate demand between real GDP levels Y and Y 1

would most likely result in some inflation.