ECON Exam 4

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

When taxes decrease, interest rates

increase, making the change in aggregate demand smaller.

Other things the same, which of the following responses would we expect from an increase in U.S. interest rates?

your aunt puts more money in her savings account

In 2009, Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?

Both the increased funding for states and the tax cuts

Closely watched indicators such as the inflation rate and unemployment are released each month by the

Bureau of Labor Statistics.

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?

With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.

Proponents of rational expectations argued that the sacrifice ratio

could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

In 1980, the combination of inflation and unemployment the U.S. was experiencing

followed two supply shocks that were triggered by the Organization of Petroleum Exporting Countries.

Fiscal policy affects the economy

in both the short and long run.

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases

When the Fed buys bonds the supply of money

increases and so aggregate demand shifts right.

When there is an excess supply of money,

people will try to get rid of money causing interest rates to fall. Investment increases.

Critics of stabilization policy argue that

policy affects aggregate demand with a lag, and the effects on aggregate demand are long-lived.

The process of the investment accelerator involves

positive feedback from aggregate demand to investment.

If policymakers expand aggregate demand, then in the long run

prices will be higher and unemployment will be unchanged.

From 2008-2009 the Federal Reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have

raised inflation and reduced unemployment.

An increase in the money supply will

reduce interest rates, increasing investment and aggregate demand.

By raising aggregate demand more than anticipated, policymakers

reduce unemployment temporarily.

Disinflation is defined as a

reduction in the rate of inflation.

If taxes fall, then aggregate demand shifts

right, making unemployment lower than otherwise.

The short-run relationship between inflation and unemployment is often called

the Phillips curve.

The economy will move to a point on the short-run Phillips curve where unemployment is higher if

the inflation rate decreases.

If the Fed increases the money supply,

the interest rate decreases, which tends to raise stock prices.

Sticky wages leads to a positive relationship between the actual price level and the quantity of output supplied in

the short run, but not the long run.

The short-run Phillips curve shows the combinations of

unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.

If there is an increase in the price of oil, then

unemployment rises. If the central bank tries to counter this increase, inflation rises.

Monetary policy

can be described either in terms of the money supply or in terms of the interest rate.

Which of the following would cause stagflation?

Aggregate supply shifts left

Suppose Americans become optimistic about the future of the economy and, as a result, increase their current consumption expenditures. Which of the following would you expect to occur as a result of this change?

In the short run, unemployment will decrease and inflation will rise.

Which of the following policies would be advocated by someone who wants the government to follow an active stabilization policy when the economy is experiencing severe unemployment?

Increase government expenditures

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.

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left.

Opponents of active stabilization policy

believe that the political process creates lags in the implementation of fiscal policy.

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

decrease the money supply, which will increase interest rates.

Suppose a decrease in interest rates causes fallingunemployment and rising output. To counter this, the Federal Reserve would

decrease the money supply.

Suppose there is a tax decrease. To stabilize output, the Federal Reserve could

decrease the money supply.

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they

decreased the money supply

An unfavorable supply shock will cause

dont know: NOT-unemployment to rise and the short-run Phillips curve to shift left. thinking?: unemployment to rise and the short-run Phillips curve to shift right.

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will

fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

During recessions, taxes tend to

fall and thereby increase aggregate demand.

If the unemployment rate is below the natural rate, then

inflation is greater than expected. As inflation expectations are revised the short-run Phillips curve will shift right.

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied.

Suppose the central bank pursues an unexpectedly tight monetary policy. In the short-run the effects of this are shown by

moving to the right along the short-run Phillips curve.

Shifts in aggregate demand affect the price level in

both the short and long run.

In the long run, policy that changes aggregate demand changes

only the price level.

Other things the same, if technology increases, then in the long run

output is higher and prices are lower.

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would

rise which by itself would increase aggregate demand

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

the slope of the aggregate-demand curve