Macro HW

Suppose the *MPC is 0.60*. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?

$500 billion and $300 billion

If the *marginal propensity to consume is 0.75*, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by

$60 billion, but the effect would be larger if there were an investment accelerator.

The *long-run aggregate supply* curve shifts right if

All of the above are correct.

When the price level changes, which of the following *variables will change* and thereby cause a change in the aggregate quantity of goods and services demanded?

All of the above are correct.

Refer to the figure. The shift in the aggregate demand from AD2 to AD1 cannot be caused by:

An increase in the money demand

The aggregate demand and aggregate *supply graph* has

The price level on the vertical axis. The price level can be measured by the GDP deflator.

Say MPC is .8 and there is no crowding out effect. What would be the effect of a $400 tax cut versus a $400 increase in government spending on aggregate demand?

The spending increase would shift AD $400 more to the right than the tax cut.

Economists who are skeptical about the relevance of *"liquidity traps"* argue that

a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.

Which of the following *shifts short-run aggregate-supply* curve to the right?

a decrease in price expectations

Which of the following both shift aggregate-demand curve to the right?

a decrease in taxes and at a given price level consumers feel more wealthy

Which of the following *shifts short-run, but not long-run* aggregate supply right?

a decrease in the expected price level

Which of the following shifts short-run aggregate-supply curve to the right?

a decrease in the expected price level

Which of the following would cause *investment spending to decrease* and aggregate demand to shift left?

a decrease in the money supply and the repeal of an investment tax credit.

Which of the following would decrease the price level?

a decrease in the money supply.

*Other things the same*, an increase in the amount of capital firms wish to purchase would initially shift

aggregate demand right.

*Refer to Pessimism*. Which curve shifts and in which direction?

aggregate demand shifts left

Refer to *Stock Market Boom 2015*. Which curve shifts and in which direction?

aggregate demand shifts right

Other things the same, when the government spends less, the initial effect is that

aggregate-demand curve shifts left.

If businesses in general decide that they have underbuilt and so now have too little capital, their response to this would initially shift

aggregate-demand curve to the right.

The quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level is shown on the

aggregate-demand curve.

"Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill."

agree

Which of the following events shifts *aggregate demand rightward*?

an increase in government expenditures, but not a change in the price level

The long- run aggregate supply curve is vertical. Which of the following would raise the quantity of output in the long run?

an increase in the capital stock, but not an increase in the price level

Which of the following would shift the long-run aggregate supply curve right?

an increase in the capital stock, but not an increase in the price level

Which of the following causes the short-run aggregate supply curve to shift left?

an increase in the price of oil

Suppose the demand for exports falls as a result of recession overseas. Other things constant, in the short run the U.S. economy will likely experience

an increase in unemployment.

*The equation: *quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents

an upward-sloping short-run aggregate supply curve

Which of the following did the Fed do during the *recession of 2008-2009*?

lowered the federal funds rate and purchased securities and loans

According to the theory of liquidity preference, an increase in the money supply causes the interest rate to

fall which increases investment spending.

*Other things the same*, when the price level falls, interest rates

fall, so firms increase investment

During recessions investment

falls by a larger percentage than GDP

Over time technological progress shifts the aggregate supply curve to the right making the inflation rate higher than otherwise

false

The larger the MPC, the smaller the multiplier.

false

Assume that Congress tries to balance the budget by cutting government spending. As a result, the aggregate demand (and output) decline. To stabilize the economy, the Fed should:

increase the money supply to reduce interest rates and increase aggregate demand

According to the wealth effect, one of the reasons for the slope of the aggregate demand curve is that falling prices

increase the value of money holdings so consumer spending increases.

Other things the same, if the price level is higher than expected, then some firms believe that the relative price of what they produce has

increased, so they increase production.

*If the Fed conducts open-market purchases*, the money supply

increases and aggregate demand shifts right.

The misperceptions theory of the short-run aggregate supply curve says that the quantity of output supplied will decrease if the price level

increases by less than expected so that firms believe the relative price of their output has decreased.

The *multiplier effect* states that there are additional shifts in aggregate demand from fiscal policy, because it

increases income and thereby increases consumer spending.

Which component of real GDP fluctuates the most over the course of the business cycle?

investment

If the economy is initially at long-run equilibrium and aggregate demand expands, then in the long run the price level

is higher and output is the same as the original long-run equilibrium.

The *theory of liquidity* preference illustrates the principle that

monetary policy can be described either in terms of the money supply or in terms of the interest ra

The *interest rate* falls if

money demand shifts left or money supply shifts right.

When the *dollar appreciates*, U.S.

net exports fall, which decreases the aggregate quantity of goods and services demanded

Refer to the graph. Which of the following would lead to a shift in the aggregate demand from AD1 to AD2?

none of the above

According to a 2009 article in *The Economist*, the multiplier effect and crowding-out effect would exactly offset each other when the economy is

operating at full capacity.

According to *classical macroeconomic theory*,

output is determined by the supplies of capital and labor and the available production technol

As the *price level falls*

people are more willing to lend, so interest rates fall.

*Refer to Figure 34-1*. If the current interest rate is 2 percent,

people will sell more bonds, which drives interest rates up.

The misperceptions theory of the short-run aggregate supply curve says that output supplied will increase if the price level

is higher than expected so that firms believe the relative price of their output has increased.

As the *price level rises*

people will want to buy fewer bonds, so the interest rate rises.

Suppose the economy is initially in long-run equilibrium. Then suppose there is an increase in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and employment in the short run?

prices rise, employment rises

The aggregate demand and aggregate supply graph has the

quantity of output on the horizontal axis. Output is best measured by real GDP.

When comparing the slopes of the aggregate-demand and aggregate-supply curves to the slopes of demand and supply curves for specific goods and services, the explanations are

quite different for the aggregate curves from the specific market curves.

Refer to *Figure 33-1*. Line A is

real GDP

Which of the following, other things the same, would make the price level increase and real GDP decrease?

long-run aggregate-supply curve shifts to the left

*Sticky nominal wages* can result in

lower profits for firms when the price level is lower than expected.

The *Central Bank of Wiknam* increases the money supply at the same time the Parliament of Wiknam passes a new investment tax credit. Which of these policies shift aggregate demand to the right?

both the money supply increase and the investment tax credit

Imagine that the government increases its spending by *$75 billion*. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

both the multiplier effect and the crowding-out effect

Refer to *Stock Market Boom 2015*. In the short run what happens to the price level and real GDP?

both the price level and real GDP rise.

Which of the following adjusts to bring aggregate demand and aggregate supply into balance?

both the price level and the quantity of output

Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could

buy bonds to lower interest rates.

To decrease the federal funds rate, the Fed would

buy bonds, which increases the money supply.

To decrease the interest rate the Federal Reserve could

buy bonds. The fall in the interest rate would increase investment spending.

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

by $30 billion

Other things constant, local governments replace their sales taxes with new taxes on interest, dividends, and capital gains. As a result

consumption spending rises and the aggregate demand curve shifts right

Other things the same, continued *increases in technology* lead to

continued increases in real GDP and continued decreases in the price level

The *quantity of money has no real impact *on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning

the long run, but not the short run

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

the multiplier effect

*Fiscal policy* is determined by

the president and Congress and involves changing government spending and taxation

The *vertical axis of the aggregate demand* and aggregate supply graph has the

the price level

*Refer to Optimism*. How is the new long-run equilibrium different from the original one?

the price level is higher and real GDP is the same.

An increase in government spending shifts aggregate demand

to the right. The larger the multiplier is, the farther it shifts.

Aggregate-demand curve shifts to the left if the money supply decreases.

true

An increase in consumer spending shifts the aggregate demand to the right

true

An increase in the money supply causes output to rise in the short run.

true

For the U.S. economy, the most important reason for the downward-slope of the aggregate demand curve is the interest-rate effect.

true

Most economists believe that *classical theory* describes the world in the long run but not in the short run.

true

Other things the same, an increase in the U.S. price level leads to an increase in the U.S. interest rate which leads to an appreciation of the dollar.

true

Stock prices often rise when the Fed lowers interest rates.

true

If *output is above its natural rate*, then according to sticky-wage theory

workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.

Which of the following is an example of a decrease in government purchases?​

​The government cancels an order for new military equipment.

Suppose the economy is in long-run equilibrium. If there is a decrease in the supply of labor as well as a decrease in the money supply, then we would expect that in the short run,

real GDP will fall and the price level might rise, fall, or stay the same.

If countries that imported goods and services from the United States recovered from recession, we would expect that U.S. net exports would

rise, making aggregate-demand curve shift to the right.

According to the theory of liquidity preference, an increase in the price level causes the interest rate to

rise. So the aggregate quantity of goods and services demanded falls.

People will want to buy *fewer bonds* and the interest rate will rise, as the price level

rises

If the *price level falls*, the real value of a dollar

rises, so people will want to buy more.

Other things the same, *continued technological progress* and continued increases in the money supply would unambiguously lead to

rising real GDP only

When the *Federal Reserve* increases the Federal Funds target rate, it achieves this target by

selling government bonds. This action will reduce investment and shift aggregate demand to the left.

*Refer to Figure 33-8*. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P3 and Y3 , then it must be the case that

short run aggregate supply has increased.

*Refer to Optimism*. In the long run, the change in price expectations created by optimism shifts

short-run aggregate supply left

The aggregate demand is described graphically as

sloping downward.

For the U.S. economy, *money holdings* are a

small part of household wealth, and so the wealth effect is small.

When prices and unemployment rise, such an event is sometimes called

stagflation

*Refer to Figure 34-1*. At an interest rate of 4 percent, there is an excess

supply of money equal to the distance between points a and b

Suppose workers *notice a fall in their nominal wage* but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is

temporarily low and so supply a smaller quantity of labor.

Refer to the figure. The shift in the aggregate demand from AD1 to AD2 is the result of:

the Fed decreases the money supply

The idea that *expansionary fiscal policy* has a positive affect on investment is known as

the investment accelerator.

*Shifts in the aggregate-demand curve* can cause fluctuations in

the level of output and in the level of prices

Most economists believe that *money neutrality* holds in

the long run

During periods of expansion, automatic stabilizers cause government expenditures

to fall and taxes to rise.

A *candidate for political office* announces the following policies which, she says, economics clearly demonstrates will lead to higher output in the long run: 1. increase immigration from abroad 2. make trade more open between the US and other countries.

1 and 2 both shift long-run aggregate supply right.

A *candidate for political office *announces the following policies which, she says, economics clearly demonstrates will lead to higher output in the long run: 1. decrease immigration from abroad 2. make trade more open between the U.S. and other countries.

1 shifts long-run aggregate-supply curve to the left, 2 shifts long-run aggregate-supply curve to the right

A fiscal stimulus was initiated by *President Obama* in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be

1.6 for government purchases and 1.0 for tax cuts

During the *2008-2009 unemployment rose* from about 4.4% to about

10%

In *October 2009*, the official unemployment rate rose to

10%

Suppose that the marginal propensity to consume is 3/4. What is the government expenditures multiplier?

4

If the *MPC = 4/5*, then the government purchases multiplier is

5

If the marginal propensity to consume is .60, the government increases expenditures by $300 billion and crowding out equals $100 billion, how much does aggregate demand shift by?

650 billion

During the *last half of 2012*, the U.S. unemployment rate was above the natural rate and real GDP growth was low. Which of the following is the most likely unemployment rate for this time period?

8 percent

*Refer to Scenario 34-2.* In response to which of the following events could aggregate demand increase by $1,500?

A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.

The *theory of liquidity* preference assumes that the nominal supply of money is determined by the

Federal Reserve

If the price level increases

Investment demand decreases and interest rates increase

*Refer to the figure*. Real GDP is represented by

Line A only

The Great Recession of 2008-2009 could have been the result of

Losses in the financial market which caused AD to shift to the left.

Which of the following is correct?

None of the above is correct.

*Refer to Figure 33-9.* Suppose the economy starts where LRAS = AD1 = SRAS1. A decrease in short-run aggregate supply would be consistent with the movement to

P2, Y1.

Which of the following *correctly expresses* why the short-run aggregate-supply curve slopes upward?

Quan of output supplied= natural rate of output+ a( actual price - expected price)

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?

Raise both taxes and expenditures by $80 billion dollars.

If the *stock market crashes*, then

aggregate demand decreases, which the Fed could offset by purchasing bonds

The *Central Bank of Wiknam* decreases the money supply at the same time the Parliament of Wiknam repeals a new investment tax credit. Which of these policies shifts aggregate-demand curve to the left?

both the money supply decrease and the investment tax credit repeal

Suppose that there is a decrease in the costs of production that shifts the short-run *aggregate-supply curve right*. If there is no policy response, then eventually

because unemployment is low, wages will be bid up and short-run aggregate-supply curve will shift left.

Since the *end of World War II*, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this

both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther.

Which of the following *rises during expansions*?

both employment and consumer spending

The belief by most economists that real and nominal variables are essentially determined separately in the long run is characteristic of the ________ model.

classical

Suppose there is an increase in net exports. To stabilize output the government could

decrease government expenditures. The smaller the multiplier, the more it would need to decrease expenditures. decrease government

A decrease in a *supply of oil* could ____

decrease long-run aggregate-supply.

In the *short run*, an increase in the money supply causes interest rates to

decrease, and aggregate demand to shift right

The aggregate-demand curve shows that an increase in the price level

decreases the real value of goods and services demanded in the economy.

When U.S. net exports rise, which increases the aggregate quantity of goods and services demanded, the dollar must have

depreciated

When the price level rises

firms will spend less on new business buildings and business equipment and households will want to spend less building new homes.

Which of the following would be included in aggregate demand?

firms' purchases of newly produced machinery

Which of the following shifts aggregate demand to the right?

government purchases increase

In which case can we be sure *real GDP rises* in the short run?

government purchases increase and taxes fall

Other things the same, if the *money supply rises by 2%* and people were expecting it to rise by 5%, then some firms have

higher than desired prices, which depresses their sales

When the *price level falls*, people want to

hold less money and the quantity of aggregate goods and services demanded increases.

*Fiscal policy* affects the economy

in both the short and long run.

The *long-run aggregate supply curve* shows that by itself a permanent change in aggregate demand would lead to a long-run change

in the price level, but not output

Which of the following does not help *explain the direction the quantity of aggregate goods* demanded changes when the price level decreases?

the dollar appreciates relative to other currencies

When the *price level falls*

the interest rate falls, so the quantity of goods and services demand rises

Other things the same, as the price level rises,

the interest rate rises causing a movement along a given aggregate-demand curve

Refer to the graph. Which one represents the long-run equilibrium?

the intersection of AD1 and AS.

Suppose the economy is in long-run equilibrium. In a short span of time, there is a large emigration of skilled workers, a *major depletion of oil fields*, and a major new regulation limiting electricity production. In the short run, we would expect

the price level to rise and real GDP to fall.

According to *classical macroeconomic theory*, changes in the money supply affect

the price level, but not real GDP.

Most economists believe that real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its persistent trend in

the short run

*The idea* that a decrease in the price level raises the real value of households' money holdings, which increases consumer spending and the quantity of goods and services demanded is known as

the wealth effect.