ECN 102: Final MC Practice

The division of variables into real and nominal is a dichotomy assumed by

classical economists

A movement to the left along a given short-run Phillips curve could be caused by

expansionary monetary policy, but not a reduction in the natural rate of unemployment

The marginal propensity to consume (MPC) is defined as the fraction of

extra income that a household consumes rather than saves

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

increases income and thereby increases consumer spending

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

increasing the money supply, which lowers interest rates

Other things the same, a decrease in the U.S. interest rate

induces firms to invest more

If a central bank is independent,

its operations are not controlled by the political process

Contractionary monetary policy

leads to disinflation and makes the short-run Phillips curve shift left

The sacrifice ratio is the

number of percentage points annual output falls for each percentage point reduction in inflation

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,

production is less profitable and employment falls

Automatic stabilizers

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession

If aggregate demand shifts right then in the short run

firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left

Fiscal policy refers to the idea that aggregate demand is affected by changes in

government spending and taxes

If the Fed announced a policy to reduce inflation and people found it credible, the short-run Phillips curve would shift

left and the sacrifice ratio would fall

An increase in the expected price level shifts short-run aggregate supply to the

left, and an increase in the actual price level does not shift short-run aggregate supply

People choose to hold a larger quantity of money if

the interest rate falls, which causes the opportunity cost of holding money to fall

The government buys new weapons systems. The manufacturers of weapons pay their employees. The employees spend this money on goods and services. The firms from which the employees buy the goods and services [ay their employees. This sequence of events illustrates

the multiplier effect

Fiscal policy is determined by

the president and Congress and involves changing government spending and taxation

If aggregate demand shifts left, then in the short run

the price and real GDP both fall

Aggregate demand includes

the quantity of goods and services households, the firms, the government, and customer abroad want to buy

The term crowding-out effect refers to

the reduction in aggregate demand that results when a fiscal expansion causes the interest rate to increase

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

the short run, but not the long run

When production costs rise,

the short-run aggregate supply curve shifts to the left

When the Fed buys bonds

the supply of money increases and so aggregate demand shifts right.

If the economy starts at A, a decrease in the money supply moves the economy

to C in the long run

An example of an automatic stabilizer is

unemployment benefits

The aggregate supply curve is

vertical in the long run and slopes upward in the short run

If the stock market crashes, then

aggregate demand decreases, which the Fed could offset by increasing the money supply

From 2006 to 2008 there was a dramatic fall in the price of houses. If this fall made people feel less wealthy, then it would have shifted

aggregate demand left

In 1986, OPEC countries increased their production of oil. This caused

aggregate supply to shift right

Which of the following both shift aggregate demand left?

an increase in taxes and at a given price level consumers feel less wealthy

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

downward pressures on prices and wages

A period of relatively rising incomes and falling unemployment is called an

expansion

Most economists believe that classical theory describes the world

in the long run

When taxes increase, interest rates

increase, making the change in aggregate demand smaller

During recessions

workers are laid off, factories are idle, firms may find they are unable to sell all they produce

An economy has a current inflation rate of 7%. If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2, then how much annual output must be sacrificed in the transition?

6%

If the economy is in long-run equilibrium, then an adverse shift in aggregate supply would move the economy from

C to D

France has a higher natural rate of unemployment than the United States. This suggest that

France's Phillips curve is to right of that of the United States, possibly because they have more generous unemployment compensation

According to the classical model, which of the following would double if the quantity of money doubled?

both prices and nominal income

At the end of World War II many European countries were rebuilding and so were eager to buy capital goods from the UD and had rising incomes. We would expect that the rebuilding increased aggregate demand in

both the United States & Europe

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

To reduce the effects of crowding out caused by an increase in government expenditures, the Federal Reserve could

increase the money supply by buying bonds

Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire

increased consumption, which shifts the aggregate-demand curve right

Which of the following shifts aggregate demand to the right?

increases in the profitability of capital due perhaps to technological progress

An increase in the money supply will

reduce interest rates, increasing investment and aggregate demand

Disinflation is a

reduction in the rate of inflation, whereas deflation is a reduction in the price level

Stagflation exists when prices

rise and unemployment rises

An economic expansion caused by a shift in aggregate demand causes prices to

rise in the short run, and rise even more in the long run

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

rises, so people will want to buy more

If the Federal Reserve decided to raise interest rates, it could

sell bonds to lower the money supply

Recessions in Canada and Mexico would cause

the U.S. price level and real GDP to fall