Macro 2

if aggregate demand increases in the short run (where AS curve is up sloping), then employment, gross domestic product, and the general price level will all increase

True

the aspect of the classical economics includes a) supply creates its own demand b) interest rates are flexible in money markets; c) prices and wages are flexible in product markets and labor markets respectively; and d) savings and investment are not necessarily equal

false. a), b), and c) are correct but d) is incorrect because classical economists contend that savings and investment are equal owing to flexible interest in the money market

according to the keynesian theory, cyclical unemployment is a consequence of the dynamics of technology change free of labor market

false. according to the keynesian theory, cyclical unemployment is a consequence of deficiency of aggregate demand (or spending) of the economy.

Aggregate supply curve will shift in the presence of (a) a change in resource endowment and prices, (b) technological improvement, (c) more efficient resource utilization, and (d) a change in general price level of goods and services.

false. aggregate supply curve will shift in the presence of (a) a change in resource endowment and prices, (b) technological improvement, (c) more efficient resource utilization. However, a change in the general price level of goods and services will move the economy along the AS curve.

business cycle includes seasonal variation and secular trend

false. business cycle does not include seasonal variation(i.e. very short term changes in business activities, for example, before christmas) and secular trend (i.e. long term economic movement such as 15, 20, 50 years

Business cycle refers to the mvement of business profits over time

false. business cycle refers to periodic fluctuation in output(Q) employment(L) and price level (P)

inflation caused by a decrease in aggregate supply is referred as demand-pull inflation

false. inflation caused by a decrease in aggregate supply is referred as cost-push inflation

if the consumer price index was 120 in 1980 and 132 in 1981, the rate of inflation in 1981 was 15 percent

false. inflation rate in 1981= [(CPI^1981-CPI^1980)/CPI^1980] x100=10%

keynesian economics argue that business cycles are caused by changes in external forces such as war, diseases or discoveries

false. keynesian economist argue that business cycles are caused by changes in the economy's total spending (=aggregate demand(AD) = C+I^g+G+X-M). classical economists argue that business cycles are caused by changes in external forces such as war, diseases, or discoveries, but once disturbed, market system tends to restore stability soon

Keynesian consumption theory assumes that a) average prosperity to consume (APC) decreases as Disposable income (DI) increases; (b) APS increases as disposable income (DI) increases; c) MPC and MPS are stable and defined between 0 and 1

true

Keynesian economics discredits price and wage flexibility as a mechanism for achieving full-employment by arguing that monopolistic forces in the economy cause wages and prices downward inflexible

true

business cycles are usually measured in terms of real GDP

true

classical economists argued that business cycles are caused by changes in external forces such as war, diseases or discoveries

true

cyclical impacts are different among industries: in general, industries producing durables are more affected by business cycle than the industries producing nondurables

true

economic cost of unemployment is measured by GDP gap (=actual GDP-potential GDP) where potential GDP is the GDP at full-employment

true

in the immediate short-run (=Keynesian horizontal) range of aggregate supply curve, an increase in aggregate demand will increase output and employment but not the price level

true

part time worker and discouraged worker are not counted as unemployed

true

the full employment unemployment rate (= natural rate of unemployment) results from: frictional and structural conditions in the labor market

true

the immediate short-run (=the keynesian horizontal) range of aggregate supply curve implies that output and employment can be increased without increasing the price level

true

the long-run (=the classical vertical) range of aggregate supply curve implies that price level can be increased without increasing output and employment levels

true

if the full-employment unemployment rate is 5 percent, and the actual rate of unemployment of 2002 is 8 percent, then okun's law indicates that the GDP gap of 2002 is 4%

false. okuns law states that for every 1% by which actual unemployment exceeds the natural rate of unemployment, a negative GDP gap of 2% occurs. so, GDP gap of 2002 is (8%-5%)x2=6.0%

If the price level increases 3 percent while nominal income increases by 5 percent, then in percentage terms, real income would rise by 1 percent

false. since %▲real income= %▲ nominal income - inflation rate (=%▲ price), real income would rise by 2 percent

structural unemployment is a result of recession

false. structural unemployment is a result of inadequate matching of qualified workers and available jobs - so education or retraining is necessary to reduce it

the classical economists believe that a) free market economy is inherently stable; b) interest rates, wages, and prices are downward inflexible; c) savings mainly depend on disposable income; d) booms or recessions are caused by changes in aggregate demand

false. the classical economists believe that a) free market economy is inherently stable; b) interest rates, wages, and prices are upward and downward inflexible; c) savings and investment mainly depend on interest rate; and d) booms or recessions are caused by changes in external forces

the interest rate effecct (of aggregate demand) suggests that an increase in the price level will increase the demand for money, lowers interest rates, and decrease consumption and investment spending

false. the interest rate effect (of aggregate demand) suggests that an increase in the price level will increase the demand for money, raise interest rates, and decrease consumption and investment spending

suppose that in a population of 200 million, 100 million are in a labor force and 10 million are unemployed, the unemployment rate is 5 percent

false. the unemployment rate is 10 percent

a headline states: "real GDP falls again as the economy slumps" this condition is most likely to increase structural unemployment

false. this condition is most likely to increase cyclical unemployment

"If the price level increases in the united states relative to foreign countries, then both american and foreign consumers will purchase more foreign goods and fewer american goods" this statement describes the wealth effect of AD

false. this statement describes the foreign purchases effect of AD

Unanticipated inflation tends to penalize the government

false. unanticipated inflation tends to penalize creditors and benefit debtors. since the US govt is a huge debtor, it gains from an unanticipated inflation

unemployment rate is obtained by dividing number of unemployed by population

false. unemployment rate is obtained by dividing number of unemployed by the number of people in the labor force.

if the rate of inflation is 10% a year, the price level will be doubled in 5 years

false. using the rule of 70, 70/10=7 years

both the classical economics and the keynesian economists argue that output (Q), employment (L), and price level (P) falls during recession and trough

false. wile both the classical economists and the keynesian argued that output (Q), employment (L) falls during recession and trough, they disagree on the price change: while the classical economists argue that prices tend to fall during recession and trough (because the market economy is competitive), the keynesians argue that during recession and trough prices are down-ward inflexible due to monopolistic forces in the economy (big business and labor union)

the real balance effect (or the wealth effect) of aggregated demand suggest that an increase in the price level lowers the real value of monetary assets such as savings and bonds, and as a result, the public will reduce their spending

true

the short-run (=the intermediate-run up-sloping) range of aggregate supply curve implies that increasing output and employment levels are accompanied by an increase in the price level

true