Macro HW 27, 29, 30, 32

When the government increases taxes on individuals, consumption _______ (increase or decrease) and the AD curve ________.(direction of shift)

decrease and shifts to the left explanation: HIgher taxes reduce income available for spending, reducing consumption and shifting the aggregate demand to the left.

Why is the short-run aggregate supply curve shaped the way it is? - Prices of inputs change more quickly than the prices of final goods and services. - Prices of inputs are all fixed by contracts in the short run. - Prices of final goods and services change more quickly than input prices. - Prices of final goods and services change more slowly than input prices.

Prices of final goods and services change more quickly than input prices. explanation: In the short run, the supply curve slopes upward, meaning that as the prices of final goods and services increase, firms are willing to produce more output. When the price level increases, input prices and wages do not all increase immediately. In other words, they are "sticky." Firms are going to earn more revenue because the prices of the final goods and services are higher. However, costs are rising more slowly because of sticky input prices and wages, so profit will rise and firms will have an incentive to increase production.

Everything else equal, which will have a larger effect on aggregate demand and GDP: a $100 million reduction in taxes or a $100 million increase in government spending? - The increase in government spending—the tax cut will cause an initial increase in consumption spending of less than $100 million. - The tax cut—the initial increase in consumption spending will be more than $100 million. - The impact will be the same—the tax cut will increase consumption spending by $100 million.

The increase in government spending—the tax cut will cause an initial increase in consumption spending of less than $100 million.

Country income per cap real GDP growth rate ANSONIA 5,000 7.0 Trumbull 7,500 4.5 Shelton 10,000 2.0 These countries ____________ converge to the same level of economic development given enough time.

WILL converge

When empirical evidence is applied to convergence theory, the results: - contradict convergence theory. - support convergence theory. - are non-existent. - are mixed.

are mixed

Is each of the following policies an example of expansionary or contractionary fiscal policy? Explain your answers in terms of the effect on aggregate demand. a. The government slashes funding for the Environmental Protection Agency, without changing any other spending. This is _________ fiscal policy that will shift aggregate demand to the _________. b. The government raises taxes on households making more than $250,000. This is _________ fiscal policy that will shift aggregate demand to the _________. c. The government decides to fill gaps in Medicare by making it available to more people. This is _________ fiscal policy that will shift aggregate demand to the _________.

a. contractionary left b. contractionary left c. expansionary right explanation: a. This is contractionary fiscal policy because it involves a reduction in government spending, directly lowering aggregate demand. b. This is contractionary fiscal policy because it increases taxes, indirectly lowering aggregate demand via consumption. c. This is expansionary fiscal policy because it increases government spending, which increases aggregate demand directly.

You decide to take $300 out of your piggy bank at home and place it in the bank. If the reserve requirement is 5 percent, how much can your $300 increase the amount of money in the economy?

5700 explanation: When you deposit the $300 into your bank, 5% of your deposit ($15) must be held on reserve and the rest ($285) can be lent out. When people take out loans and use the loan money to purchase goods and services, and the loan money is then redeposited into the banking system by the sellers of the goods and services, we have a multiplier process. Here the money multiplier equals 1/0.05 = 20, so your $300 can ultimately increase the money supply by $285 × 20 = $5,700. Note the increase in the money supply is $5,700 and not $6,000 because the $300 cash was part of the original money supply. When $300 cash is deposited into the bank, it can lead to the creation of $6,000 of deposits, but the amount of new money is only $5,700.

For every dollar that you deposit into a bank, the bank will tend to: - lend out every penny since almost all transactions are digital. - keep a portion of it and lend out the rest. - keep every penny as vault cash since it is such a small amount.

keep a portion of it and lend out the rest. explanation: The Fed requires banks to keep a certain proportion of their deposits as reserves. The proportion of demand deposits that a bank must keep on reserve is known as the required reserve ratio.

For each part below, determine whether the following actions will increase or decrease productivity, and name the component of productivity that each affects. IMPACT: INCREASE OR DECREASE COMPONENT: PHYSICAL CAPITAL, HUMAN CAPITAL, TECHNOLOGY, NATURAL RESOURCES A. The local government builds a new school. B. Teachers in the new school hold classes for young students. C. A manufacturer installs robots on its assembly line. D. A research team designs a more efficient system of irrigation. E. A soda company discovers a new source of underground water that can be used to make its products. F. A professor writes a new and improved economics textbook. G. A large number of people have less access to health care. H. A worker receives on-the-job training to be a mechanic.

A. INCREASE PHYSICAL CAPITAL B. INCREASE HUMAN CAPITAL C. INCREASE PHYSICAL CAPITAL D. INCREASE TECHNOLOGY E. INCREASE NATURAL RESOURCES F. INCREASE HUMAN CAPITAL G. DECREASE HUMAN CAPITAL H. INCREASE HUMAN CAPITAL

Productivity is defined as: - workers employed per hour. - output sold per hour. - workers per unit of output. - output produced per worker.

output produced per worker

Rising business optimism and confidence will cause a: - rightward shift of the aggregate demand curve. - leftward shift of the aggregate demand curve. - rightward shift of the aggregate supply curve. - leftward shift of the aggregate supply curve. Falling business optimism and confidence will cause a: - leftward shift of the aggregate demand curve. - rightward shift of the aggregate demand curve. - rightward shift of the aggregate supply curve. - leftward shift of the aggregate supply curve.

rightward shift of the aggregate demand curve. leftward shift of the aggregate demand curve.

Use the AD/AS model below to answer the following questions. In each case, assume the economy starts in long- and short-run equilibrium. a. Suppose a stock market crash reduces people's wealth. This will: - increase output and lower the price level. - reduce output and raise the price level. - increase output and raise the price level. - reduce output and lower the price level. Please enter Increase, Decrease, to return to initial value. b. Suppose the government takes no action to help the economy. Eventually, the price level ________ and output _______. c. Suppose, instead, the government decides to take action to help the economy.You can recommend: - raising taxes and/or raising spending. - cutting taxes and/or cutting spending. - cutting taxes and/or raising spending. - raising taxes and/or cutting spending. Please enter Increase, Decrease, to return to initial value. d. If the U.S. government makes the appropriate policy response, what happens to the price level and output in the long run.In the long run, the price level ________ and output __________.

- the graph would have a shift in the AD to the left a. reduce output and lower the price level. b. decrease and returns to its initial value c. cutting taxes and/or raising spending d. return to its initial value and return to its initial value explanation: a. A stock market crash reduces the real value of income and wealth, causing a reduction in consumption spending and a shift of the AD curve to the left. Output falls and the price level falls. b. In the long run, input prices and wages of workers will decrease, causing SRAS to shift to the right to move the economy back to long-run equilibrium at the previous level of output but a lower price level. c. Cutting taxes or raising government spending will shift AD back to the right. d. AD shifts back to the right. If exactly the right amount of government help is provided, the economy returns to long-run equilibrium at the same output and price level as before the crash.

Suppose the economy is in a recession and the president wants to stimulate production and create jobs. To do this, he has decided to increase government spending. Some of his economic advisors are suggesting the marginal propensity to consume (MPC) has a value of 0.9 and others are suggesting the value is 0.8. If the MPC has a value of 0.9, then the expenditure multiplier has a value of ____. If the MPC has a value of 0.8, then the expenditure multiplier has a value of _____. If the president believes the MPC has a value of 0.9, then he will choose to increase government spending by _______ the amount he would choose if he believed the MPC had a value of 0.8.

10 5 less than explanation: The expenditure multiplier is equal to 1/(1 - MPC). If the MPC has a value of 0.9, then the expenditure multiplier is equal to 10. If the MPC has a value of 0.8, then the expenditure multiplier is equal to 5. If the president believes the MPC has a value of 0.9, then he will choose to increase government spending by less than the amount he would choose if he believed the MPC had a value of 0.8. With an MPC of 0.9, any given increase in government spending will increase output (GDP) by a factor of 10, as opposed to a factor of 5 with an MPC of 0.8. Therefore, the change in government spending does not need to be as large.

Suppose the marginal propensity to consume is 0.80. The impact on GDP of a one-dollar increase in government spending is _____ . The impact on GDP of a one-dollar decrease in taxes is _____ .

5 4 explanation: The impact on GDP of a one-dollar increase in government spending is calculated as 1/(1 - MPC), or 5. This means a $1 increase in government spending will cause a $5 increase in GDP. The impact on GDP of a one-dollar decrease in taxes is calculated as MPC/(1 - MPC), or 4. This means a $1 decrease in taxes will cause a $4 increase in GDP.

If you were to advise the president of New Caprica on economic policy, how would you answer the following?Instructions: Enter your answers as whole numbers.a. Current output is $________ million, and potential output is $ ________ million. There is a ________ of output of $________ million. b. New Caprica is in a ______. c. The president should enact ________ fiscal policy.d. The aggregate demand curve would shift to the ________ if the president used contractionary fiscal policy.

60 80 a short Fall 20 recession expansionary left explanation: a. Current output is $60 million, found at the intersection of the current aggregate demand curve AD2 and the short-run aggregate supply curve SRAS. Potential output, found where the long-run aggregate supply curve LRAS intersects the aggregate demand curve (note that it doesn't matter which—any AD curve will intersect the LRAS at potential output), is $80 million. This leaves us with a shortfall of output of $80 million - $60 million = $20 million. b. Since current output is less than potential output, New Caprica is experiencing a recession. c. To correct the recession, the president should enact expansionary fiscal policy. d. Contractionary fiscal policy would reduce spending, shifting the AD curve leftward. This would further increase the shortfall between actual and potential GDP in New Caprica, making the current situation worse rather than better.

Which of the following defines the investment trade-off? - An increase in investment expenditure designed to boost future consumption. - An increase in consumption designed to increase investment. - A reduction in investment expenditure designed to boost current consumption. - A reduction in current consumption to pay for investment capital.

A reduction in current consumption to pay for investment capital.

For each growth rate below, use the rule of 70 to calculate how long it will take incomes to double. A. 4 percent B. 7 percent C. 2.5 percent D. 10 percent E. 3 percent

A. 17.5 B. 10.0 C. 28.0 D. 7.0 E. 23.3

Suppose the marginal propensity to consume (MPC) is either 0.75, 0.80, or 0.90. a. For each value of the MPC, calculate the impact of a one-dollar decrease in taxes on GDP. MPC IMPACT OF $1 DECREASE IN TAXES .75 A .80 B .90 C b. For each value of the MPC, calculate the impact on GDP of a $250 million decrease in taxes. MPC IMPACT ON GDP .75 D .80 E .90 F c. Which of the following best describes the relationship between the MPC and the impact of a change in taxes on GDP? - the larger the MPC, the larger the impact on GDP of a given change in taxes. - the larger the MPC, the smaller the impact on GDP of a given change in taxes. - the impact on GDP of a change in taxes does not depend on the size of the MPC. - it is impossible to say unless we know the tax rate.

A. 3 B. 4 C. 9 D. 750 E. 1000 F. 2250 the larger the MPC, the larger the impact on GDP of a given change in taxes. a. The impact of a one-dollar decrease in taxes is equal to MPC/(1 - MPC). MPCImpact of a one-dollar decrease in taxes 0.75 0.75/(1 - 0.75) = 3 0.80 0.8/(1 - 0.8) = 4 0.90 0.9/(1 - 0.9) = 9 b. The impact on GDP (or the change in GDP) = the change in taxes times the impact of a one-dollar change in taxes. Note that when taxes decrease, then GDP will increase. MPCImpact on GDP 0.75 3 × $250 = $750 0.80 4 × $250 = $1,000 0.90 9 × $250 = $2,250 c. The larger the value of the MPC, the larger the impact on GDP of a one-dollar change in taxes. This is because people spend a greater portion of any additional income.

SOLVE THE MISSING VALUES: NOM GDP POP INFLATION REAL GDP PER CAP SVEA 5% 3% A. -1% BONIFAY 2% 1% 0% B. CHAIRES C. 2% 7% 4% DRIFTON 5% 0% -1% D. ESTIFFAN. 7% E. 3% 3%

A. 3% B. 1% C.13% D. 6% E. 1%

Looking at the table: COUNTRY 2010 GDP PER CAP($) 2015 GDP PER CAP($) BOLIV 3,664 4,592 CHI 4,102 7,519 GHALA 2,007 2,615 ARTINIA 10,860 15,854 PLAZI 8,603 11,239 A. Which country had the highest level of per capita GDP in 2015? Ghala Chi Boliv Artinia Plazi B. Which country had the highest rate of growth in per capita GDP from 2010 to 2015? Artinia Chi Ghala Boliv Plazi C. Does per capita GDP in these countries appear to be converging? Yes, the countries with the lowest levels of per capita GDP have the highest rates of growth. Yes, the countries with the highest levels of per capita GDP have the highest rates of growth. No, the countries with the lowest levels of GDP per capita have the lowest rates of growth. No, the countries with the highest levels of per capita GDP have the lowest rates of growth.

A. ARTINIA B. CHI C. No, the countries with the lowest levels of GDP per capita have the lowest rates of growth.

If unemployment is high and spending is sluggish, what type of fiscal policy should be enacted? - Expansionary fiscal policy, which includes increases in government spending or decreases in taxes, which will shift AD to the right. - Expansionary fiscal policy, which includes decreases in government spending or increases in taxes, which will shift AD to the right. - Contractionary fiscal policy, which includes decreases in government spending or increases in taxes, which will shift AD to the left. - Contractionary fiscal policy, which includes increases in government spending or decreases in taxes, which will shift AD to the right.

Expansionary fiscal policy, which includes increases in government spending or decreases in taxes, which will shift AD to the right. explanation: In response to these recessionary conditions, the government would want to enact expansionary fiscal policy through increasing government spending or decreasing taxes. An increase in government spending would increase the "G" component of aggregate demand directly, whereas a decrease in taxes would affect "C" indirectly by changing disposable income. Successful expansionary fiscal policy would shift the AD curve to the right.

The government decides to reduce income taxes due to a recession in the economy over the past nine months. The reduction in income taxes will effectively boost spending in the economy if: - Ricardian equivalence holds—people choose to save the majority of the extra income they now take home. - Ricardian equivalence does not hold—people choose to save the majority of the extra income they now take home. - Ricardian equivalence does not hold—people choose to spend the majority of the extra income they now take home. - Ricardian equivalence holds—people choose to spend the majority of the extra income they now take home.

Ricardian equivalence does not hold—people choose to spend the majority of the extra income they now take home. explanation: A reduction in income taxes will increase disposable income. If people decide to spend a portion of the increase in disposable income, then aggregate demand will increase and GDP will increase. The theory of Ricardian equivalence suggests that in some cases, people will choose not to spend any of the increase in disposable income and will instead save the extra income. They will choose to do this because they are forward looking and know that if the government reduces taxes and does not cut spending at the same time, then the government will have to borrow money to pay for the deficit (unless it had been running a surplus). This means that in the future, the government will have to increase taxes to pay off the debt. The evidence on whether Ricardian equivalence holds is mixed—often people spend a portion of any tax cut or rebate.

A country is in the midst of a recession with real GDP estimated to be $1.8 billion below potential GDP. The government's policy analysts believe the current value of the marginal propensity to consume (MPC) is 0.90. a. If the government wants real GDP to equal potential GDP, it should increase government spending by $ __________ billion. Alternatively, it could reduce taxes by $ __________ billion. b. Suppose that during the recession, people have become less confident and decide they will only spend 50% of any additional income. In this case, if the government increases spending by the amount calculated in part a, real GDP will end up __________ potential GDP by $ __________ billion. c. With the same decrease in consumer spending described in part b, if the government decreases taxes by the amount calculated in part a, then real GDP will end up __________ potential GDP by $__________ billion. d. Given your answers above, what can we conclude? - When the government changes spending or taxes, it is easy to predict the exact impact on real GDP. - If the government overestimates the value of the MPC, then its change in spending or taxes will be too large and real GDP will exceed potential GDP. - If the government overestimates the value of the MPC, then its change in spending or taxes will be too small and real GDP will fall short of potential GDP. - It is easy for the government to predict the value of the MPC prior to any changes in spending or taxes.

a. $.18 billion $.20 billion b. less than $1.44 billion c. less than $1.60 billion d. If the government overestimates the value of the MPC, then its change in spending or taxes will be too small and real GDP will fall short of potential GDP. explanation: a. The government wants to increase GDP by $1.8 billion. Given the MPC is equal to 0.90, the expenditure multiplier is equal to 1/(1 - 0.9), or 10. This means that for every one-dollar increase in government spending, GDP will increase by $10. Therefore, the necessary change in government spending is $1.8 billion/10, or $0.18 billion. A decrease in taxes will increase GDP indirectly by increasing disposable income and, therefore, consumption. The impact of a one-dollar decrease in taxes is equal to 0.90/(1 - 0.90), or 9. This means that for every one-dollar decrease in taxes, GDP will increase by $9. Therefore, the necessary change in taxes is $1.8 billion/9, or $0.20 billion. b. If the MPC is 0.50, then the impact of a one-dollar change in government spending is 1/(1 - 0.50), or 2. If the government increases spending by $0.18 billion, then GDP will increase by $0.36 billion. Therefore, GDP will still be less than potential by $1.8 billion - $0.36 billion, or $1.44 billion. c. If the MPC is 0.50, then the impact of a one-dollar decrease in taxes is 0.50/(1 - 0.50), or 1. If the government decreases taxes by $0.20 billion, then GDP will increase by $0.20 billion. Therefore, GDP will still be less than potential by $1.8 billion - $0.20 billion, or $1.60 billion.

For each of the following examples, state whether the activity would likely hinder or promote economic growth, and name a component of productivity each produces or reduces. Impact on ECON Grow Component of productivity hinder or promote H. CAP, P. CAP, TECH, NS a. Not requiring students to attend school. b. Granting patents on new inventions. c. Building a solid infrastructure system. d. Allowing local rivers and streams to become polluted.

a. hinder human capital b. promote technology c. promote physical capital d. hinder natural resources

Choose from: medium of exchange store of value unit of account Imagine you own a lawn-mowing business. Identify the main function of money exhibited in each situation below. a. You swipe your debit card to purchase gasoline for your lawn mower: b. You stuff your earnings from mowing lawns into a piggy bank: c. You pay your friend Cornelius $5 to help you mow lawns: d. You calculate your net earnings for the year on your tax return: e. You determine how much value your new lawn mower has added to your business:

a. medium of exchange b. store of value c. medium of exchange d. unit of account e. unit of account explanation: When money is exchanged for a good or service, it is being used as a medium of exchange. When we calculate values in dollar terms, we are using money as a unit of account. When we save dollars for a later use, we are using money as a store of value.

choose from the following: Which tool of monetary policy is most likely being described by each of the following statements? Open-market operations Changing the reserve requirement Discount window policy a. It's the major way the Federal Reserve System enacts monetary policy: b. This tool is good for emergency situations that require major, large-scale action: c. This tool goes through the Federal Reserve's role as lender of last resort: d. This tool is best for everyday monetary policy: e. A major disadvantage of this tool is that it requires that banks want to borrow from the Fed: f. Even if they aren't interested in buying, selling, or borrowing from the Fed, changes in this tool may inconvenience bank managers:

a. open-market operations b. changing the reserve requirements c. discount window policy d. open-market operations e. discount window policy f. changing the reserve requirement

In the graph, the SRAS and Demand are normal, LRAS is to the LEFT a. This economy is _______. b. The correct monetary policy in this situation is___________. c. This correct monetary policy will cause the price level to ______.

a. overheating b. contractionary c. decrease explanation: a. Output is above potential, so the economy is overheating. b. Contractionary monetary policy will cool down spending and stave off inflation. c. Prices will decrease. When the Federal Reserve pursues contractionary monetary policy, it will sell some of its government bonds in an open-market sale. This will decrease reserves in the banking system and interest rates will rise. The increase in interest rates will reduce spending and the aggregate demand curve will shift to the left.

Use the AD/AS model below to answer the following questions. In each case, assume the economy starts in long- and short-run equilibrium. a. Suppose a revolution in Iran results in a significant reduction in the world's supply of oil. This will: - reduce output and raise the price level. - increase output and raise the price level. - reduce output and lower the price level. - increase output and lower the price level. Please enter Increase, Decrease, to return to initial value. b. Suppose the government takes no action to help the economy. Eventually, the price level ________ and output ___________. c. Suppose, instead, the government decides to take action to help the economy because they are worried about a high level of unemployment.You can recommend: - raising taxes and/or cutting spending. - cutting taxes and/or cutting spending. - doing nothing. - raising taxes and/or raising spending. - cutting taxes and/or raising spending. Please enter Increase, Decrease, to return to initial value. d. If the U.S. government makes the appropriate policy response, what happens to the price level and output in the long run. In the long run, the price level ________ and output ___________.

a. the SRAS would shift to the left -reduce output and raise the price level b. returns to initial value and returns to initial value c. cutting taxes and/or raising spending d. increase and returns to initial level explanation: a. A reduction in the world supply of oil will increase oil prices and production cost, shifting the SRAS curve to the left. Output falls and the price level rises. b. In the long run, world oil supplies will adjust and return to their previous level. The reduction in oil prices shifts the SRAS curve to the right to move the economy back to long-run equilibrium at the previous level of output and price level. c. Raising taxes or cutting government spending will shift AD to the left, leading to a further drop in output but a reduction in the price level. Cutting taxes or raising government spending will shift AD to the right, leading to a further increase in the price level but an increase in output and, therefore, a reduction in the level of unemployment. Unlike recessions caused by shifts in AD, government responses to recessions caused by shifts in AS can't cure all of the problems at the same time. d. AD shifts to the right. This shift will lead to an increase in the price level and output will return to its long-run initial value.

Which of the following events would directly cause the long-run aggregate supply curve (LRAS) to shift? (are the following supposed to be checked or unchecked?) a. To stimulate the economy, the Federal Reserve drastically cuts interest rates. uncheckedCorrect b. A major breakthrough in energy technology enables power companies to generate power 40 percent more efficiently.checkedCorrect c. A civil war erupts in a small country which results in major death and destruction.checkedCorrect d. An unusually cool summer in the Midwest causes poor yields in the corn crop.

a. unchecked b. checked c. checked d. unchecked explanation: A reduction in interest rates may increase consumption or investment spending, but it will not directly affect the long-run aggregate supply curve (LRAS). This is because it does not directly change the potential output of the economy. A major increase in the efficiency of power generation would shift the LRAS to the right because the increased efficiency increases the long-run potential output. A destructive civil war would destroy lives and property, which would reduce potential output. Therefore, the LRAS would shift left. A poor crop yield would cause a temporary price increase to inputs of many products and shift the short-run aggregate supply curve. However, since the unfavorable weather is not expected to continue, the long-run capacity to produce is not affected.

In the short run, when consumer confidence falls: - short-run aggregate supply will shift to the left, reducing equilibrium GDP and increasing the price level. - short-run aggregate supply will shift to the right, increasing equilibrium GDP and reducing the price level. - aggregate demand will shift to the right, increasing equilibrium GDP and the price level. - aggregate demand will shift to the left, reducing equilibrium GDP and the price level. In the long run: - higher wages and prices of inputs increase the cost of production, so aggregate demand will shift to the left. - higher wages and prices of inputs increase the cost of production, so the short-run aggregate supply will shift to the left. - lower wages and prices of inputs reduce the cost of production, so aggregate demand will shift to the right. - lower wages and prices of inputs reduce the cost of production, so the short-run aggregate supply will shift to the right.

aggregate demand will shift to the left, reducing equilibrium GDP and the price level. lower wages and prices of inputs reduce the cost of production, so the short-run aggregate supply will shift to the right. explanation: In the short run, when consumer confidence falls, aggregate demand will shift to the left, reducing equilibrium GDP and the price level. In the long run, the lower price level resulting from reduced aggregate demand will lower wages and input prices. Firms will have an incentive to further reduce prices of goods and services, causing the price level to fall. A lower price level increases the real value of income and wealth, causing spending to rise. The short-run aggregate supply curve shifts to the right, causing real GDP to return to its long-run (or potential) value at a lower price level.

Money contributes to economic activity and allows for a more complex society than barter does because: - barter requires a central manager to determine who has what you want and who wants what you have. - there are many international currencies and this requires a complex system of exchange rates. - barter is inefficient. Each time you want to make a trade you have to find a partner who has something you want and wants what you have to offer. - money is managed by a central bank and can be increased or decreased to influence economic activity.

barter is inefficient. Each time you want to make a trade you have to find a partner who has something you want and wants what you have to offer. explanation: In an economy without money, goods and services are traded directly via barter. But, barter is inefficient. Each time you want to make a trade you have to find a partner who has something you want and wants what you have to offer. Money acts as a medium of exchange (we can trade it for goods and services), a unit of account (we can use it to measure relative value), and a store of value (we can use it to store up purchasing power over time and spend it when and on what we like).

Aggregate demand consists of: - consumption, investment, government spending, and net exports. - consumption, investment, and government spending. - consumption, government spending, and net exports. - consumption and investment. Please answer negative or positive for the first blank and increase or decrease for the second. There is a _________ relationship between aggregate demand and the price level because when the price level rises, planned aggregate expenditure will __________, causing firms to ____________ production of goods and services.

consumption, investment, government spending, and net exports. negative, decrease, decrease

The best fiscal policy for a country suffering from high inflation is: - contractionary fiscal policy, which includes increasing taxes or decreasing spending. - expansionary fiscal policy, which includes increasing taxes or decreasing spending. - expansionary fiscal policy, which includes decreasing taxes or increasing spending. - contractionary fiscal policy, which includes decreasing taxes or increasing spending.

contractionary fiscal policy, which includes increasing taxes or decreasing spending. explanation: Contractionary fiscal policy, which reduces aggregate demand, is the appropriate response. To do this, the government can increase taxes (reducing disposable income, affecting GDP indirectly) or decrease spending (with a direct effect on GDP).

"Base" money consists of: - currency in circulation and bank reserves. - currency in circulation. - everything in M1. - bank reserves and demand deposits. The money multiplier measures: - the change in base money. - the change in the money supply caused by a change in base money. - the amount of money printed by the Federal Reserve. - the change in base money caused by a change in the amount of bank loans.

currency in circulation and bank reserves. the change in the money supply caused by a change in base money. explanation: Base money (hard money) consists of currency in circulation and reserves held by banks at the Federal Reserve. To conduct monetary policy, the Fed changes the amount of base money in the economy in order to change the level of the money supply. The money multiplier measures the change in the money supply caused by a change in base money. The money multiplier is defined as 1/reserve ratio. If the reserve ratio is 10%, then the money multiplier is 1/0.1, or 10. This means a $5 increase in the money base can lead to a $50 increase in the money supply as banks make more loans.

In the short-run aggregate demand and supply model, one important difference between monetary and fiscal policy is that monetary policy: - influences aggregate supply but fiscal policy influences aggregate demand. - has longer lags than fiscal policy, so fiscal policy may impact the economy more quickly than monetary policy. - has shorter lags than fiscal policy, so monetary policy may impact the economy more quickly than fiscal policy. - influences aggregate demand but fiscal policy influences aggregate supply.

has shorter lags than fiscal policy, so monetary policy may impact the economy more quickly than fiscal policy. explanation: Both fiscal and monetary policy will shift the aggregate demand curve: rightward for expansionary policy and leftward for contractionary policy. Just as with fiscal policy, a rightward shift of the AD curve from expansionary monetary policy will increase prices and output in the short run, and a leftward shift from contractionary policy will reduce prices and output. One important difference between monetary and fiscal policy has to do with the lag between implementing policy and the shift of the AD curve. Monetary policy tends to have shorter lags because it does not require such a broad consensus from so many people to be enacted. The members of the Board of Governors are not popularly elected so they do not need to consider voters the same way that Congress and the President do. This means that the effects on prices and output from monetary policy may be felt more quickly than those from fiscal policy.

Time lags can impede the effectiveness of fiscal policy. Select the source of the time lag for each of the following situations. implementation lag formulation lag information lag The parliament in a European country passes a massive infrastructure development appropriation to stimulate the economy. However, the engineering firms in the country become backlogged with the extra work. Congress passes a tax cut bill to help stimulate the economy, but the president vetoes the bill because he favors spending increases over tax cuts. In September, the Bureau of Labor Statistics revises the unemployment numbers from July. Congress passes a fiscal policy bill that sends block grants to states for economic development. However, some of the state legislatures cannot agree on how to allocate the money, so the funds sit idle in a special account.

implementation lag formulation lag information lag formulation lag explanation: In this first case, the policy has been passed and the money allocated, but the capacity of the engineering firms in the country is preventing timely implementation of the policy. This is an implementation lag. The case where Congress passes a fiscal policy bill but the president vetoes it would be a case of formulation lag because the delay is caused by the inability of the policy makers to agree on the appropriate policy. The revision of the July unemployment statistics in September is a case of information lag. Information that was not available earlier became available to make the unemployment numbers more accurate. However, policy makers may have already started formulating policy based on the first set of statistics. Depending on the magnitude of the revision of the statistics, they may need to revise their plans, thus causing a delay. However, since the delay was caused by delayed information, this would be considered information lag. The last case would be considered a formulation lag. Even though the U.S. Congress has passed a fiscal policy bill and allocated money to the states, implementation cannot begin because disagreement among lawmakers at the state level is causing a delay in finalizing the formulation of the policy.

Changes in reserve requirements to conduct monetary policy in the United States: - requires the approval of Congress. - is not a good idea because this tool is powerful and makes it difficult for bank managers to plan for the future. - is the policy typically followed by the Federal Reserve. - is not a good idea because it takes a long time to work, whereas other tools are much quicker.

is not a good idea because this tool is powerful and makes it difficult for bank managers to plan for the future. explanation: The major disadvantage of using changes in reserve requirements to conduct monetary policy is that they are too powerful. A small percentage change in the reserve requirement results in a massive change in reserves, making this tool of monetary policy inappropriate for day-to-day maintenance. Also, frequently changing the reserve requirement makes it difficult for bank managers to plan for the future and manage funds as they like. Congress does not need to approve the decisions made by the Federal Reserve when they conduct monetary policy. The Fed typically uses open-market operations to conduct monetary policy.

Using the liquidity-preference model, the Federal Reserve can react to the threat of exceedingly high inflation via monetary policy by shifting the supply of money to the: right with contractionary monetary policy, decreasing the interest rate and lowering the equilibrium quantity of money. left with contractionary monetary policy, increasing the interest rate and raising the equilibrium quantity of money. right with expansionary monetary policy, increasing the interest rate and lowering the equilibrium quantity of money. left with contractionary monetary policy, increasing the interest rate and lowering the equilibrium quantity of money.

left with contractionary monetary policy, increasing the interest rate and lowering the equilibrium quantity of money. explanation: When inflation is the major threat, the Fed can shift the supply of money to the left with contractionary monetary policy. The intended effect is to increase the interest rate and lower the equilibrium quantity of money. This will cause a leftward shift of the AD curve and a decrease in output and the price level.

The actual money multiplier observed in the economy is _________ the theoretical money multiplier (which is calculated by taking 1 divided by the reserve ratio).

less than explanation: The theoretical money multiplier is the maximum factor at a given reserve requirement by which an additional deposit into the banking system will be multiplied to increase the money supply in the economy. It assumes that all excess reserves will be loaned out and that all money loaned out will be re-deposited back into the banking system. However, since people tend to hold some amount of cash and banks sometimes hold excess reserves, this assumption does not hold exactly. Since that cash outside the banks and the excess reserves are not being multiplied, the actual money multiplier in the economy will be somewhat less than the theoretical one.

MC: POSITIVE OR NEGATIVE OR NO What is the relationship between the price level and the following components of aggregate demand. a. There is a _____ relationship between the price level and consumption. b. There is a _______ relationship between the price level and investment. c. There is _______ relationship between the price level and government spending. d. There is a _______ relationship between the price level and net exports.

negative negative no negative explanation: a. Negative relationship: An increase in the price level will reduce the real value of income and wealth and, therefore, consumption spending falls. b. Negative relationship: When the price level increases, interest rates also tend to increase, leading to a decrease in investment spending because it is more expensive for firms to borrow. c. No effect: A change in the price level has no direct effect on government spending. d. Negative relationship: An increase in the price level causes domestic goods to be relatively more expensive than imports, leading to an increase in import spending and a decrease in net export spending.

The monetary policy tool most frequently used by the Federal Reserve is: - open-market operations. - changes in the discount rate. - changes in the money supply. - changes in the required reserve ratio. This tool is the best choice in most circumstances because it is performed on: - a daily basis, doesn't inconvenience bank managers, and doesn't require banks to take loans from each other. - an annual basis, doesn't inconvenience bank managers, and doesn't require banks to take loans from the Fed. - an annual basis, doesn't inconvenience the Fed, and doesn't require banks to take loans from the Fed. - a daily basis, doesn't inconvenience bank managers, and doesn't require banks to take loans from the Fed.

open-market operations. a daily basis, doesn't inconvenience bank managers, and doesn't require banks to take loans from the Fed. explanation: Open-market operations (the buying and selling of government bonds to and from banks) are the primary way the Federal Reserve System enacts monetary policy. Open-market operations are performed on a daily basis, which allows policy to change direction or magnitude without it looking like the Federal Reserve has made a mistake, enhancing the Fed's credibility. Open-market operations don't inconvenience bank managers the way that changing reserve requirements would and they don't require banks to take loans from the Fed as changing the discount rate for policy does.

It is possible for a nation's government to run a budget deficit in some years but not have national debt if the economy initially had a(an): - surplus smaller than the deficit. - surplus at least as large as the deficit. - expansionary fiscal policy in place. - contractionary fiscal policy in place.

surplus at least as large as the deficit. explanation: The correct answer lies in the distinction between a budget deficit (the excess of government spending over taxes in some year) versus national debt (the total of all budget deficits and surpluses). It is indeed possible for a nation to run a budget deficit in some year without national debt—for example, if the economy started with a surplus at the beginning of the year and the year's deficit is less than or equal to the national surplus.

Whenever AD or AS shifts and puts the economy out of long-run equilibrium, AS has a natural tendency to shift in such a way as to bring the economy back into long-run equilibrium. If the economy always eventually comes back to long-run equilibrium, the reason that the government even tries to implement policies to bring the economy into equilibrium is that: - politicians feel that it will be advantageous to take some action. - businesses expect the government to take some action. - the appropriate government response can eliminate the long-run effect on prices and can speed up the process of reducing unemployment. - the appropriate government response can eliminate the short-run effect on prices but does little to speed up the process of reducing unemployment.

the appropriate government response can eliminate the long-run effect on prices and can speed up the process of reducing unemployment. explanation: There are two reasons. First, when AD shifts the economy experiences a short-run change in output and both a short-run and long-run change in prices. The appropriate government response can eliminate the long-run shift in prices. Second, negative shifts in AS or AD cause a reduction in output and a corresponding increase in unemployment. The natural return to full unemployment may take a long time and government action can speed up the process to reduce suffering.

Fiscal policy is subject to a time lag when: - lawmakers generally agree on the necessary policy. - the gap between legislation and implementation is small. - the Federal Reserve bank interferes. - the current state of the economy is unclear.

the current state of the economy is unclear explanation: Lags in the policy-making process come from three main sources:1. Understanding what the current economic situation is. (You can't see out of the front of the bus, and the speedometer is three blocks delayed.) 2.The process of deciding on and passing legislation. (If the president is the bus driver, lawmakers in Congress are the arguing passengers.) 3. The time it takes for the policy to affect the economy. (Once you push the gas or the brakes, it still takes several blocks until the braking or acceleration engages.)

a. If the amount of time a person is eligible for unemployment compensation is reduced from 26 weeks to 4 weeks, people will have an incentive to quickly find a new job. true or false b. This occurs because unemployment compensation is an important automatic stabilizer for the economy. true or false

true true explanation: a. True. If a person is only eligible for unemployment compensation for 4 weeks, then he or she will need to quickly find a new job. b. True. If people receive unemployment compensation when they lose their jobs, then their spending does not fall by as much as it would if they received no compensation.

The long-run aggregate supply curve is represented by a _______ line because in the long-run, output __________ changes in the price level.

vertical and is independent of explanation: The long-run aggregate supply curve is vertical at the level of potential output, or the productive capacity of the economy. Price changes do not change the productive capacity, so potential output is independent of price level changes. The vertical line represents a fixed potential output regardless of price.