Inquizitive Chapter 14
Drag each label to the appropriate curve to build the aggregate expenditure model below.
(Order: Indigo, Cyan, Orange, Red) C + PI + G + NX = AE C + PI + G C + PI C
The graph below plots the log of U.S. real GDP growth over the course of more than a century. Click on the region of the graph that depicts the Great Depression.
1930
Based on the graph, which time interval which shows a surge in real GDP?
1940 - 1950
The graph below depicts the FHFA House Purchase Price Index for U.S. houses, a useful statistic for analyzing housing price changes over time. Click on the segment of the graph that corresponds to the start of the Great Recession.
2008
In 2009 dollars, U.S. GDP was $1057 billion at the start of the Great Depression but fell to $778 billion by 1933. What percentage decline does this represent?
26%
Given the marginal propensity to save (MPS) is .25, what is the spending multiplier?
4
Assume that a country is currently producing at a level of output equal to $600 billion. The government decides to increase expenditures by $25 billion, and the nation's MPC is 0.8. Based on the spending multiplier, what is the nation's new level of total output (in billions of dollars)?
725 billion dollars
Match each statement with the portion of the aggregate demand-aggregate supply model that would be affected by it.
A game manufacturer produces 5,000 puzzles and sells 5,200 over the course of the year - negative unplanned investment. Anticipating an increase in the demand for refrigerators, an appliance manufacturer builds a new factory - planned investment. An auto manufacturer produces 2,000 cars this month and sells 1,700 of them to consumers and 100 of them to businesses - positive unplanned investment.
In a classical economy, citizens begin to expect lower prices five years in the future. As a result, prices and nominal wages fall in the present and remain low, while GDP and real wages fall for a few months but then return to normal. Click the curve that depicts the described event.
AD 2
_____ economists believed that the economy _____. They trusted that _____ adjustments would take place quickly and saw no need for _____ governmental policy to correct for underperformance or overperformance of the economy.
Classical, self-corrects, market, macroeconomic
Which of the following statements regarding the Great Recession are correct?
Correct Answer(s): After output began to decline, it took four years for U.S. GDP to return to pre-recession levels.
Which of the following statements regarding the Great Depression are true?
Correct Answer(s): Like the Great Recession, the Great Depression involved significant stress in financial markets. In the first few years of the Great Depression, stock prices fell by 90%.
Which of the following are true according to the Keynesian economic view?
Correct Answer(s): Nominal prices matter to the long-run economy.
A major financial crisis was one cause of the Great Recession; the primary regulatory response to this financial crisis was the _____.
Dodd-Frank Act
What are the effects of a war fought on home soil on long-run aggregate supply?
Effect(s): lower real GDP, inflation
The new financial regulations imposed under the Dodd-Frank Act in 2010 represented a permanent decline in short-run aggregate supply but not in long-run aggregate supply.
False
Refer to the figure below. Which economist would believe that the macroeconomy will not quickly reach point B after a shift in aggregate demand from AD1 to AD2?
J. M. Keynes
What are the similarities and the differences between the Great Recession and the Great Depression?
Similiarities: Problems existed in financial markets. Stock market values declined. The economic downturn was longer and more severe than in an average recession.
Match each statement with the correct portion of the aggregate demand-aggregate supply model that would be affected by it.
There are declines in expected income due to lower consumer confidence - aggregate demand. New oversight of financial markets makes it permanently more difficult for firms to get funds for investment - long-run aggregate supply. Financial market instability temporarily decreases output - short-run aggregate supply. There are declines in wealth due to decreases in real estate values - aggregate demand.
Drag each label to its proper place on the graph representing a demand-induced recession.
Top to bottom: A, b , C, AD0, AD1
The aggregate supply and aggregate demand model is a useful tool for analyzing recessions. The graph below is a model of the Great Recession. Correctly label the long-run aggregate supply (LRAS) and aggregate demand (AD) curves below to complete this model.
Top two: LRAS 2008, LRAS 2007 Bottom two: AD 2008, AD 2007
Drag each label to its proper place on the graph representing the type of induced recession.
Top: declining business firm confidence. low consumer confidence because future economic outlook is dismal. Left: rising oil prices (oil is an input for many goods). Right: natural disaster. collapsed government.
In 1928 and 1929, the federal government's tightening of the money supply was one of the policies that contributed to the Great Depression.
True
While classical economists believe prices to be fully flexible, Keynesian economists believe prices to be sticky.
True
The items below describe the events leading up to and including the Great Recession. Put these events in order of causation, so that each event causes the event that follows.
U.S. home prices begin to fall. The values of mortgage-backed securities fall. The loanable-funds market stops functioning properly. Aggregate supply decreases. The Great Recession begins.
The Great Depression challenged the prevailing _____ economic belief that the macroeconomy _____ returns to long-run equilibrium following a _____ shock, since it wasn't until _____ after the Depression began that real GDP returned to pre-Depression levels.
classical, quickly, demand, seven years
Match each term with the phrase that best describes it.
direction in which Keynesians believe prices are sticky - downward. Keynesian motivation for government intervention - sticky prices time frame emphasized by classical economists - long run a cause of sticky prices - long-term contracts a source of long-run economic growth - savings shape of long-run aggregate supply curve - vertical
The aggregate _____ model is essentially another way of viewing a country's aggregate _____. In this model, the economy is viewed from a _____ economist's perspective, and it assumes that in the _____, prices are _____.
expenditures, demand, keynesian, short run, sticky
Compared to other recessions post-World War II, what did the Great Recession have?
higher levels of unemployment and a slower real GDP recovery
If a consumer confidence _____, meaning that consumers are _____ optimistic about future economic conditions, they increase their _____, which increases _____.
increases, more, consumption, aggregate demand
An aggregate demand factor such as decrease in _____ causes the aggregate demand curve to shift _____. The effect on the economy is increased _____.
investment, leftward, unemployment rate
The figure above depicts U.S. real GDP (the red line) and the long-run trend in GDP that prevailed before the Great Recession (the dotted blue line). After the Great Recession, there does not appear to be any tendency for real GDP to return to the long-run trend line. This situation is most consistent with a _____ in aggregate _____.
permanent decrease, supply
The Great Depression is generally regarded as beginning with the _____ crash of October 29, _____. Including that day, stock prices fell by almost _____ over the next few years. The Great Depression ended in _____.
stock market, 1929, 90%, 1938
Put the following dates and events in chronological order beginning with the earliest.
the era in which the classical view dominated economic thought beginning of the Great Depression J. M. Keynes's General Theory of Employment, Interest, and Money published end of the Great Depression F. A. Hayek's Road to Serfdom published beginning of the Great Recession