Econ practice 11 and 12
A stagflation can turn into a cost-push inflation process when _______.
the quantity of money persistently increases
Along the long-run Phillips curve, _______.
the unemployment rate is constant at the natural unemployment rate
The new Keynesian cycle theory emphasizes the fact that today's money wage rates were negotiated at many past dates, which means that _____ rational expectations of the _____ price level influence the money wage rate and the position of the SAS curve.
past; current
he newest theory of the business cycle, known as real business cycle theory (or RBC theory), regards random fluctuations in _____ as the main source of economic fluctuations.
productivity
The impulse in RBC theory is _______.
the growth rate of productivity that results from technological change
The graph shows an economy that has no taxes or imports. AD0 is the aggregate demand curve when investment is $1.0 trillion, and AD1 is the aggregate demand curve when investment is $1.5 trillion. What is the size of the multiplier in the short run?
4
The price of oil falls unexpectedly and aggregate supply increases by $50 billion. What type of output gap appears? If the central bank responds to close the output gap, does Shell Island experience inflation or deflation? _____ gap appears and the central bank closes the output gap, aggregate demand _____ and a _____ is created.
An inflationary; decreases; cost-push deflation
The table shows the aggregate demand and short-run aggregate supply schedules of Shell Island in which potential GDP is $600 billion. The economy is at full-employment. The price of oil falls unexpectedly and aggregate supply increases by $50 billion. What type of output gap appears? If the central bank responds to close the output gap, does Shell Island experience inflation or deflation? _____ gap appears and the central bank closes the output gap, aggregate demand _____ and a _____ is created
An inflationary; decreases; cost-push deflation
The figure shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the economy of Tomorrowland. The economy is currently at point A. A cost-push rise in the price level will initially move the economy to point ______ and to point ______.
A cost-push rise in the price level will initially move the economy to point C and to point D. C is located up and to the left of point A D is above C but back located directly above A
If equilibrium expenditure changes by $50 billion that results from an increase in autonomous taxes by $80 billion, find the autonomous tax multiplier.
If equilibrium expenditure changes by $50 billion that results from an increase in autonomous taxes by $80 billion, the autonomous tax multiplier is $50/$80 = 0.625.
In ______ cycle theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in aggregate demand. In ______ cycle theory, fluctuations in both investment and consumption expenditure, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuations in aggregate demand.
Keynesian monetarist
Defenders of RBC theory claim all of the following except _______.
RBC theory is consistent with a negligible intertemporal substitution effect
The graph shows the economy's long-run aggregate supply, short-run aggregate supply, and aggregate demand curves. Draw an AD curve that shows the effect of an increase in the expected inflation rate. Label it. Draw an SAS curve that shows the effect of an increase in the money wage rate when the economy experiences expected inflation and returns to an full-employment equilibrium. Label it. Draw a point at the new long-run equilibrium.
SAS shifts upward and AD shifts rightward equilibrium point stays on the vertical LAS
Fed Pause Promises Financial Disaster The indication is that inflationary expectations have become entrenched and strongly footed in world markets. As a result, the risk of global stagflation has become significant. A drawn-out inflationary process always precedes stagflation, anathema to the so-called Phillips Curve. Following the attritional effect of inflation, the economy starts to grow below its potential. It experiences a persistent output gap, rising unemployment, and increasingly entrenched inflationary expectations. The graph shows an economy's short-run Phillips curve and long-run Phillips curve. Currently, the economy is at point A. Draw a short-run Phillips curve such that if the economy moves to this new curve, it will experience stagflation. Label it. Draw a point on the new SRPC1 curve such that when the economy moves from point A to this point, it experiences stagflation. Label it B.
SPRC 1 is moved up two entire units draw a point at (8,7) label it B
A change in the actual inflation rate brings a movement along the ______. A change in the expected inflation rate brings ______.
SRPC; a shift of the SRPC
The graph shows an economy's aggregate demand curve, short-run aggregate supply curve, long-run aggregate supply curve, and equilibrium. Draw the AD curve when it is correctly expected that the inflation rate will be 55 percent a year. Label it. Draw the SAS curve when a change to the money wage rate occurs that correctly anticipates the increase in aggregate demand. Label it. Draw a point at the new equilibrium.
The AD curve shifts rightward The SAS curve shifts upward the new equilibrium point is still found on the LAS line
Draw a curve that shows the effect of a rise in the price of food and a rise in the price of energy. Label it. Draw a point at the new equilibrium in the economy.
The SAS line moves upward and the equilibrium point is the cross between the SAS1 and AD0 and is no longer located on the vertical LAS
An economy has a fixed price level, no imports, and no income taxes. MPC is .8 and real GDP is $200 billion. Businesses increase investment by $2 billion. Calculate the multiplier and the change in real GDP. The multiplier is ________ The increase in real GDP is ______ billion.
The multiplier is 5 (because 1÷(1-.8) = 5) The increase in real GDP is $10 billion.
When real GDP is $4 trillion, aggregate planned expenditure is ___________ Autonomous expenditure is ___________ Induced expenditure is ___________
When real GDP is $4 trillion, aggregate planned expenditure is $3.6 trillion. Autonomous expenditure is $2.1 trillion. Induced expenditure is $1.5 trillion.
The multiplier is the amount by which _______________________ is magnified or multiplied to determine the change that it generates in _________________
a change in any component of autonomous expenditure equilibrium expenditure and real GDP
The quantity theory of money tells us that _______.
a change in the money growth rate brings an equal change in the inflation rate
A cost-push inflation begins with ______ as the result of an increase in the money wage rate or an increase in the money prices of raw materials.
a decrease in short-run aggregate supply
Deflation is _______.
a persistently falling price level
You observe that unplanned inventories are increasing. You predict that there will be _______.
a recession
An inflation that starts because _____ is called demand-pull inflation.
aggregate demand increases
Deflation occurs when _______.
aggregate demand increases at a persistently slower rate than aggregate supply
n a demand-pull inflation spiral, the economy moves from _____ to _____
an above full-employment equilibrium; a full-employment equilibrium
Which of the following events would NOT cause an expected inflation? A. an expected increase in exports B. an expected increase in the quantity of money C. an expected increase in taxes D. an expected increase in government expenditure
an expected increase in taxes
A demand-pull inflation begins with _______.
an increase in aggregate demand
Which of the following events might cause a cost-push inflation?
an increase in the money wage rate or an increase in the money prices of raw materials
If aggregate demand grows faster than potential GDP, ______ gap emerges and if it grows more slowly than potential GDP, ______ gap emerges.
an inflationary; a recessionary
The graph shows a short-run Phillips curve. Draw an arrow along the curve that shows the effect of an unexpected increase in inflation. Label it 1. Draw an arrow along the curve that shows the effect of an unexpected decrease in inflation. Label it 2.
arrow 1 points UP the curve arrow 2 points DOWN the curve
The multiplier is the amount by which the change in ______ expenditure is magnified or multiplied to determine the change in equilibrium expenditure and real GDP. For every dollar increase in ______ expenditure, the multiplier determines the increase in real GDP.
autonomous; autonomous
A multiplier is the amount by which a change in any component of _____ is magnified or multiplied to determine the change in _____ and _____ that it generates.
autonomous expenditure; equilibrium expenditure; real GDP
An increase in investment shifts the AE curve upward by an amount equal to the ______, and shifts the AD curve rightward by an amount equal to the ______.
change in investment; change in investment times the multiplier
An inflation that is kicked off by an increase in _____ is called cost-push inflation.
cost
High Food and Energy Prices Here to Stay On top of rising energy prices, a severe drought, bad harvests, and a poor monsoon season in Asia have sent grain prices soaring. Globally, this is the third major food price shock in five years.
cost push
Pakistan: Is it Cost-Push Inflation? With CPI already spiking 11.8 percent for the first ten months of the fiscal year, the average CPI inflation for the same period last year stood at 22.35 percent. Some economists insist the current bout of inflationary pressures is spawned by increasing prices of fuel, food, raw materials, transportation, construction materials, elimination of energy subsidies, etc as indicated by the spike in the wholesale price index (WPI), which rose 21.99 per cent in April from a year earlier. Pakistan is experiencing ______ inflation
cost push inflation
Tight Money Won't Slay Food, Energy Inflation It's important to differentiate between a general increase in priceslong dash—a situation in which aggregate demand exceeds their aggregate supplylong dash—and a relative price shock. For example, a specific shock to energy prices can become generalized if producers are able to pass on the higher costs. So far, global competition has made that difficult for companies, while higher input costs have largely been neutralized by rising labor productivity. Since 2003, core inflation has averaged less than 2 percent a year in the 30 major economies. History also suggests the Fed's gamble that slowing growth will shackle core inflation is a winning wager. The risk is that if U.S. consumers don't believe price increases will slow, growing inflation expectations may become self-fulfilling. The news clip refers to ______ inflation when it discusses rising production costs. "Rising labor productivity" can neutralize the effect on the inflation rate of "higher input costs" because ______
cost-push; it increases short-run aggregate supply and long-run aggregate supply with no slowdown in aggregate demand growth side note: "Slowing growth" can reduce inflationary pressure if aggregate demand growth slows.
Stagflation occurs when _______
costs increase
An unexpected increase in aggregate demand ______ rate, which is shown by ______ the short-run Phillips curve.
decreases unemployment and increases the inflation; a movement up along
Official: China May Face Heavy Inflation Pressure China is expected to face great inflationary pressure in the future due to higher costs and an abundant global money supply, a senior Chinese official said in an article published Tuesday. He said inflation in China is also the result of excessive global liquidity from loose monetary policies adopted by developed nations, China's lending expansion, and a pile-up of outstanding foreign exchange funds. China's consumer price index (CPI), a main gauge of inflation, rose 4.9 percent year on year in February, the same level as in January. The CPI data for March is scheduled to be released this week and is estimated to show a rise above 5 percent. Read the news clip, then answer the following question. China is experiencing a ______ inflation caused by ______.
demand-pull; loose monetary policy, which increases aggregate demand
In new classical cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate _____, determines the _____ and the position of the SAS curve.
demand; money wage rate
The government of Shell Island announces an increase in spending of $50 billion a year and the central bank will increase the quantity of money to pay for the spending. Does the economy go into a boom? Will there be inflation? The economy _____ into a boom, real GDP _____ billion, and _____ arises.
does not go; remains at $600; inflation
The U.S. long-run Phillips curve ______ when the expected inflation rate rises. The U.S. long-run Phillips curve ______ when the natural unemployment rate increases.
does not shift; shifts rightward
Iran Postpones Cutting Gasoline Subsidies Inflation is about 10 percent and the unemployment rate is about 14 percent. Earlier this month Iran's main audit body slammed the government's plan to scrap gasoline subsidies, warning that implementing such a reform might result in unrest. The government also intends to scrap subsidies on natural gas, which most Iranians use for cooking and heating, as well as electricity, but the new prices are still not known. However, in recent weeks some households have received electricity bills with nearly sevenfold price increases. The graph shows Iran's short-run Phillips curve and long-run Phillips curve when the natural unemployment rate is 10 percent and the expected inflation rate is 12 percent a year. Draw a point to show the current unemployment rate and inflation rate according to the news clip. Suppose Iran removes the subsidies and consumers don't know what the higher prices will be. Illustrate the most likely path of unemployment and inflation. Draw either an arrow along the SRPC showing the direction of change, or a new SRPC. Label it 1. Suppose instead that Iran removes the subsidies and announces the new prices so that consumers know what they are. Illustrate the most likely path of inflation and unemployment. Draw either an arrow along the SRPC showing the direction of change, or a new SRPC. Label it 2.
draw a point that is the cross section between the LRPC and SRPC draw a point at (14, 10) draw an arrow from (14, 10) up to the cross section of the LRPC and SRPC, label it 1 shift the SRPC upward and label it 2
According to RBC theory, the source of the business cycle is _______, which result mainly from _______.
fluctuations in productivity; fluctuations in the pace of technological change
The balanced budget multiplier equals the change in equilibrium expenditure and real GDP that results from equal changes in _____ divided by the change in government expenditure.
government expenditure and lump-sum taxes
Suppose that the business cycle in the United States is best described by RBC theory. An advance in technology increases productivity. The when-to-work decision depends on the real interest rate. The _____ the real interest rate, other things remaining the same, the _____ is the supply of labor today. RBC theorists believe the when-to-work effect is __________.
higher; larger large
Getting a Raise: Why It's Not Happening Didn't get a raise this year? Blame inflation. American wages didn't budge last month, according to Labor Department data released Wednesday. And with inflation remaining at near zero, experts say it could be quite a while before many workers see their next raise. While stagnant prices are a boon for consumers on supermarket checkout lines, they can be hard on workers' bottom lines. Wages typically track inflation, soaring higher when prices take off. In fact, some say wages tend to feed inflation. That was the case in the 1970s, when wage growth picked up after prices soared. But pricing pressures are weaker today, with the consumer price index, a measure of inflation, unchanged in July from the previous month. Starting from a long-run equilibrium, _______. "Wages typically track inflation, soaring higher when prices take off." In this situation, the economy is experiencing _______ inflation. An economy experiences _______ inflation when "wages tend to feed inflation."
if the percentage change in the money wage rate equals the percentage change in the unemployment rate, the economy remains at full employment. demand-pull inflation demand pull inflation
The multiplier matters because we can use it to determine by how much we should change autonomous expenditure to ______.
increase real GDP by a given amount
Real Wages Fail to Match a Rise in Productivity For most of the last century, wages and productivitylong dash—the key measure of the economy's efficiencylong dash—have risen together, increasing rapidly through the 1950s and '60s and far more slowly in the 1970s and '80s. But in recent years, the productivity gains have continued while the pay increases have not kept up. In real business cycle theory, an increase in productivity ______ the demand for labor by more than it ______ the supply of labor. In the news clip, productivity gains exceed pay increases because the demand for labor ______ than the ______ in the supply of labor.
increase; increase increase by less; increase
The multiplier increases when the marginal propensity to consume _________- The multiplier increases when the marginal propensity to import ______ or the income tax rate ______.
increases decreases; decreases
Deflation can be ended by _______.
increasing the growth rate of the quantity of money
Real GDP increases by more than $5 billion because the increase in investment _______.
induces an increase in consumption expenditure
In monetarist cycle theory, fluctuations in both _____, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuation in aggregate demand.
investment and consumption expenditure
In Keynesian cycle theory, fluctuations in _____ driven by fluctuations in business confidence - summarized by the phrase "animal spirits" - are the main source of fluctuations in _____.
investment; aggregate demand
From the Fed's Minutes Members expected real GDP growth to be moderate over coming quarters and then to pick up very gradually, with the unemployment rate declining only slowly. With longer-term inflation expectations stable, members anticipated that inflation over the medium run would be at or below 2 percent a year. FOMC members are predicting that the U.S. economy ______.
is on a short-run Phillips curve to the right of the LRPC and will move leftward up along the SRPC
The multiplier is greater than 1 because the change in autonomous expenditure leads to _______.
more induced expenditure
An economy has a fixed price level, no imports, and no income taxes. MPC is 0.8, and real GDP is $150 billion. Businesses increase investment by $5 billion. Calculate the new level of real GDP and explain why real GDP increases by more than $5 billion. The new level of real GDP is ___________.
new level of real GDP is $175 billion because the increase was by 25 billion + the already 150 billion
In ______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve. In ______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve.
new classical; new Keynesian
Recession? Maybe. Depression? Get Real. The unemployment rate during the Great Depression peaked at nearly 25 percent in 1933, after an initial spike from 3 percent in 1929 to nearly 8.7 percent in 1930. The unemployment rate is just 5 percent, only up from 4.5 percent a year ago. Also during the Great Depression there was deflation, which is not happening today. Question 1) The inflation and unemployment trends during the Great Depression can be explained by a movement along the ______ Phillips curve that ______. Question 2) During 2008, the inflation rate increased and the unemployment rate increased. These events ______.
question 1). short-run; lowers the inflation rate and increases the unemployment rate question 2). cannot be explained by a movement along the SRPC because along this curve the inflation rate and unemployment rate move in opposite directions
An unexpected increase in exports increases aggregate demand by $50 billion. What happens to the price level and real GDP? Has Shell Island experienced inflation or deflation and what type of output gap does it now have? The price level _____ and real GDP _____ billion. Shell island has experienced _____ .
rises to 130; increases to $625; a one-time change in the price level and has an inflationary gap
If the natural unemployment rate increases, the long-run Phillips curve _______ and the short-run Phillips curve ______ The expected inflation rate _________
shifts rightward; shifts rightward does not change (point moves rightward but stays at the same Y coordinate)
A fall in the price level _______.
shifts the AE curve upward and brings a movement down along the AD curve
The U.S. short-run Phillips curve ______ when the expected inflation rate rises. The U.S. short-run Phillips curve ______ when the natural unemployment rate increases.
shifts upward; shifts rightward
In mainstream business cycle theory, the money wage rate is
sticky
______ bring business cycle turning point ______ is triggered by a decrease in autonomous expenditure and ______ is triggered by an increase in autonomous expenditure.
swings in autonomous expenditure recession; expansion
When it becomes obvious to everyone that the deflation is not going to occur, _______.
the money wage rate rises and the short-run aggregate supply curve returns to its original position
The short-run Phillips curve is a curve that shows the relationship between the _____ rate and _____ when _____ and the _____ remain constant.
inflation; the unemployment rate; the natural unemployment rate; expected inflation rate
The long-run Phillips curve is the relationship between _____ and _____ when the economy is at full employment. The long-run Phillips curve is a _____ line at the _____ unemployment rate.
inflation; unemployment; vertical; natural
Stagflation Is Back. Here's How to Beat It Three decades ago, in a bleak stretch of the 1970s, an economic phenomenon emerged... stagflation. ... leading many to argue that the world had reached its limits of growth and prosperity. ... Fortunately, there is a better way forward than we took after 1974. We need to adopt coherent national and global technology policies to address critical needs in energy, food, water, and climate change. ... There is certainly no shortage of promising ideas, ... Solar power ... high-mileage automobiles (like plug-in hybrids with advanced batteries), green buildings, carbon capture, cellulose-based ethanol, safe nuclear power, and countless other technologies on the horizon can reconcile a world of growing energy demands with increasingly scarce fossil fuels and rising threats of human-made climate change. As for food supplies, new drought-resistant crop varieties have the potential to bolster global food security in the face of an already changing climate. New irrigation technologies can help impoverished farmers move from one subsistence crop to several high-value crops year round. ... The analysis of macroeconomic performance in the news clip reflects the ______ business cycle theory because it discusses ______.
real; factors that change potential GDP
The level of disposable income at which all disposable income is consumed is_______
$100 million (where the CF and the 45 degree line cross intersect)
An economy has no imports and no taxes. The marginal propensity to save is 0.5 A ______ increase in autonomous expenditure increases equilibrium expenditure by $60 billion. The multiplier is ______.
$30 billion; 2.00
If the trend rate of change of velocity is 1 percent a year, potential GDP grows by 4 percent a year, and the money growth rate is 2 percent a year, what is the trend inflation rate?
-1 percent a year
Unanticipated deflation does all of the following EXCEPT _______. A. redistributes income B. lowers real GDP C. increases the velocity of circulation Your answer is correct.D. diverts resources from production
. increases the velocity of circulation
The table gives you information about the economy of Bluebird Island. What is the marginal propensity to consume? Disposable consumption income expenditure 0 50 100 125 200 200 300 275
.75
An economy with no income taxes or imports has a marginal propensity to consume of 0.75. The multiplier in the long run is _______.
0
The multiplier equals In an economy with no imports and no taxes, the slope of the AE curve equals the MPC, so the multiplier equals
1 ÷(1−Slope of AE curve). 1 ÷(1−MPC). equilibrium expenditure ÷ autonomous expenditure
An economy is at potential GDP and the price level is 100 in the figure. If aggregate demand unexpectedly increases, the inflation rate is ______.
3 percent In the graph, the aggregate demand curve shifts rightward from AD0 to AD1. Real GDP increases and the price level rises from 100 to 103103. The inflation rate, which is calculated as the percentage change in the price level is [(103−100) divided by ÷100] times ×100, which is 3 percent a year.
The table gives the aggregate expenditure schedule. Equilibrium expenditure is equal to _______.
3 trillion
Suppose that the velocity of circulation of money is constant and real GDP is growing at a constant 2 percent a year. To achieve an inflation target of 3 percent a year, the central bank grows the quantity of money at _____ percent a year. Deflation will be created if the growth rate of the quantity of money is _______.
5 percent less than 2 percent a year
The mainstream business cycle theory is that ______ grows at a steady rate while ______ grows at a fluctuating rate.
potential GDP; aggregate demand
The graph shows China's long-run aggregate supply, short-run aggregate supply, and aggregate demand curves. Draw a curve that illustrates an initial one-time rise in China's price level. Label it C1. Draw a curve to show the money wage rate response that returns the economy to its long-run equilibrium. Label it C2. Draw a point at the new long-run equilibrium.
AD moves to the right: C1 SAS moves upward; C2 equilibrium point stays on the vertical SAS
The graph shows the U.S. economy's aggregate demand curve, short-run aggregate supply curve, long-run aggregate supply curve, and equilibrium in 1970. Draw the AD curve when it is correctly expected that the price level will be 3030. Label it. Draw the SAS curve when a change to the money wage rate occurs that correctly expects the increase in aggregate demand. Label it. Draw a point at the new equilibrium. If "pricing pressures are weaker today," compared to the 1970s, then the expected inflation rate in the 1970s was _______ today.
AD shifts right and SAS Shifts up, equilibrium point/price level remains on the vertical LAS line but it is lies at the coordinate (4 , 30) higher than it is today
Choose the statement about the long-run Phillips curve that is incorrect.
An unexpected increase in aggregate demand shifts the long-run Phillips curve rightward.
The combination of a rising _____ and decreasing _____ is called stagflation.
price level; real GDP
Choose the statement that is incorrect about the Eurozone economy. A. The tradeoff between inflation and unemployment became worse as the short-run Phillips curve shifted rightward. B. A rise in the expected inflation rate shifts the short-run Phillips curve rightward. C. The small rise in inflation brings a movement up along the short-run Phillips curve. D. The large increase in the natural unemployment rate shifts the short-run Phillips curve and the long-run Phillips curve rightward.
B. A rise in the expected inflation rate shifts the short-run Phillips curve rightward.
Starting at point A, the initial effect of a cost-push inflation is a move to point ______. As a cost-push inflation spiral proceeds, it follows the path ______
B; E, G, I From point A, it goes left right left right
The graph shows China's aggregate demand curve, short-run aggregate supply curve, and the long-run aggregate supply curve. Draw a curve that shows the effect of an increase in the quantity of money. Label it C1. Draw a curve that shows the money wage rate response that returns the economy to potential GDP. Label it C2. Draw a curve that shows the effect of an increase in the quantity of money. Label it C3. Draw a curve that shows the money wage rate response that returns the economy to potential GDP. Label it C4. Draw a point at the new price level and real GDP.
C1- AD shifts to the right C2- SAS shifts upwards/leftward C3- AD shifts right C4- SAS shifts up/left final equilibrium point is still on LAS vertical line
Starting at point A, the initial effect of a demand-pull inflation is a move to point ______. As a demand-pull inflation spiral proceeds, it follows the path ______.
C; E, H, I from point A it goes right left right left
Eurozone Unemployment Hits Record High As Inflation Rises Unexpectedly Eurozone unemployment rose to 10.7 percent. At the same time, Eurozone inflation unexpectedly rose to 2.7 percent a year, up from the previous month's 2.6 percent a year. A very high unemployment rate can be accounted for by the Phillips curve model by all of the following EXCEPT_______. A. a rightward shift of the long-run Phillips curve if the natural unemployment rate increases B. a rightward shift of the short-run Phillips curve if the natural unemployment rate increases C. a movement down along the short-run Phillips curve if there is no change in the natural unemployment rate D. a movement up along the long-run Phillips curve if the natural unemployment rate increases
D. a movement up along the long-run Phillips curve if the natural unemployment rate increases
Suppose the business cycle in the United States is best described by RBC theory. An advance in technology increases productivity.Draw a demand for loanable funds curve. Label it DLF0. Draw a supply of loanable funds curve. Label it SLF0. Draw a point at the equilibrium quantity of loanable funds and real interest rate. Label it 1. Draw a curve that shows the effect of the increase in productivity. Label it. Draw a point at the new equilibrium quantity of loanable funds and real interest rate. Label it 2.
DLF0 and SLF0 make an X on the graph DLF1 is on the X, just more upward and to the right
Planned saving + Planned consumption expenditure = ______.
Disposable income
A demand-pull rise in the price level will initially move the economy to point _______ and to point _______.
E when aggregate demand increases; D when the money wage rate rises
Starting at point A, the initial effects of an expected inflation is a movement to point ______. As an expected inflation proceeds, it follows the path ______.
E; I initial effects of an inflation is movement STRAIGHT UP THE LAS LINE with NO movement side to side
Choose the statement about real business cycle theory that is incorrect. A. The impulse in RBC theory is generated mainly by the process of research and development. B. Productivity fluctuations are correlated with real GDP fluctuations. C. Economists have not been able to isolate the RBC theory impulse. Your answer is correct.D. The impulse in RBC theory is the growth rate of productivity that results from technological change.
Economists have not been able to isolate the RBC theory impulse.
Stagflation is anathema to the Phillips curve
FALSE
Choose the statement that is incorrect. A. A one-time fall in the price level occurs either because aggregate demand decreases or because short-run aggregate supply increases. B. In a deflation, the inflation rate is positive but decreasing in consequent years. C. In a deflation, the price level persistently falls. D. A one-time fall in the price level occurs when there is an increase in capital that increases potential GDP.
In a deflation, the inflation rate is positive but decreasing in consequent years.
Deflation in Japan arose because _______.
Japan's money stock did not grow fast enough to accommodate the growth of potential GDP and a trend rise in velocity.
In ______ cycle theory, animal spirits are the main source of fluctuations in aggregate demand. In ______ cycle theory, fluctuations in both investment and consumption expenditure, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuations in aggregate demand.
Keynesian; monetarist
Which of the following equations is incorrect?
MPC + MPS = ΔYD
Debate on Causes of Joblessness Grows What is the cause of the high unemployment rate? One side says there is not enough government spending. The other says it's a structural problemlong dash—people who can't move to take new jobs because they are tied down to burdensome mortgages or firms that can't find workers with the requisite skills to fill job openings. ______ cycle theory would say that the rise in unemployment is not cyclical but is a change in the natural unemployment rate.
Real business cycle theory
In an economy without taxes and imports, an increase in investment of $50 billion increases equilibrium expenditure by $100 billion. What are the values of the multiplier and the slope of the AE curve?
The multiplier is 2.0 and the slope of the AE curve is 0.5
Choose the statement that is incorrect. A. A one-time fall in the price level is not deflation. Your answer is not correct.B. During a period of deflation, the inflation rate is negative. C. An economy experiences deflation when it has a persistently falling price level. D. The price level falls if aggregate supply increases at a persistently slower rate than aggregate demand.
The price level falls if aggregate supply increases at a persistently slower rate than aggregate demand.
incorrect, 12.4 Test B 5 Choose the correct statement. A. The long-run Phillips curve shifts leftward when the expected inflation rate falls. B. The long-run Phillips curve shifts rightward when the inflation rate rises. C. The long-run Phillips curve shifts rightward when the expected inflation rate rises. Your answer is not correct.D. The long-run Phillips curve shifts rightward when the natural unemployment rises and leftward when the natural unemployment rate falls.
The long-run Phillips curve shifts rightward when the natural unemployment rises and leftward when the natural unemployment rate falls.
Choose the correct statement about the U.S. short-run Phillips curve.
We can interpret U.S. inflation and unemployment data in terms of a shifting short-run Phillips curve, which sometimes shifts upward and sometimes shifts downward.
A rise in the price of oil creates _______.
a one time cost-push rise in the price level
The best forecast available, which is based on all the relevant information is called _______.
a rational expectation
Equilibrium expenditure is the level of aggregate expenditure that occurs when ______. Choose the correct statement.
aggregate planned expenditure equals real GDP The level of aggregate expenditure that occurs where the AE curve intersects the 45degrees° line is equilibrium expenditure.
You observe that unplanned inventories are decreasing. You predict that there will be _______.
an expansion
The multiplier is the amount by which a change in ______ expenditure is magnified or multiplied to determine ______. To calculate the multiplier, we divide ______ by ______.
autonomous; the change in equilibrium expenditure and real GDP the change in equilibrium expenditure; the change in autonomous expenditure
In real business cycle theory, all of the following events can be sources of fluctuation in productivity except _______.
changes in the growth rate of money
If an income tax is introduced in this economy, the multiplier _______.
decreases
If the government increases its expenditure on goods and services and as a result, the money wage rate increases, the economy has experienced _______.
demand-pull rise in the price level
Draw a short-run Phillips curve. Label it SRPC1. Draw a point at the expected inflation rate and the natural unemployment rate. Label it 1. Draw the short-run Phillips curve if the expected inflation rate rises by 10 percent a year. Label it SRPC2. Draw a point at the expected inflation rate and the natural unemployment rate. Label it 2
draw first SPRC1 with an intersection with the LRPC at 5 SPRC2 is shifted upward and intersects with the vertical LRLC at 15
A rational expectation is a forecast that results from the use of all the relevant data and _____.
economic science
The government expenditure multiplier equals the change in _____ that results from a change in government expenditure divided by the change in government expenditure.
equilibrium expenditure and real GDP
The consequences of deflation include all of the following EXCEPT _______. A. falling real wage rates for workers with long-term wage contracts This is the correct answer.B. redistribution of income and wealth C. employers hire fewer workers D. a decrease in real GDP and employment
falling real wage rates for workers with long-term wage contracts
An economy at a full-employment equilibrium experiences an increase in aggregate demand. The unemployment rate ______ its natural rate, and to return to the long-run equilibrium, the money wage rate begins to ______.
falls below; rise
When costs increase and the Fed wants to return the economy to full employment, the Fed responds by ______ the quantity of money. If the Fed continually responds to successive increases in costs, a ______ inflation evolves.
increase; cost-push
In an expansion, an increase in the rate of technological change _______ investment demand. The real interest rate _______.
increases; rises
Consumption expenditure minus imports, which varies with real GDP, is called _______.
induced expenditure
If aggregate planned expenditure exceeds real GDP, then _______.
inventories decrease, and as real GDP increases a movement up along the AE curve occurs
If aggregate planned expenditure is less than real GDP, then ______
inventories increase, and as real GDP decreases a movement down along the AE curve occurs
A decrease in the marginal propensity to import _______, everything else remaining the same.
makes the multiplier larger
An increase in income taxes _______, everything else remaining the same.
makes the multiplier smaller
In ______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve. In ______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve.
monetarist keynesian
If inflation is expected, _______.
neither a cost-push inflation nor a demand-pull inflation occur
According to mainstream business cycle theory, ______ grows at a steady rate and ______ grows at a fluctuating rate.
potential GDP; aggregate demand
An increase in investment shifts the AE curve _______ and the AD curve _______.
upward; rightward
According to RBC theory, the main source of economic fluctuations is a decrease in ______ The effect of this decrease is ________________. in investment demand, _______________ in the demand for loanable funds, and _______________ in the real interest rate _______________ in the demand for labor, ______________ in the supply of labor ______________ in employment _______________ in real wage rate
productivity growth decrease decrease decrease decrease decrease decrease decrease
In real business cycle theory, _______ are the main source of economic fluctuations.
random fluctuations in productivity
The main criticisms of RBC theory include all of the following except ______.
real business cycle theory relies too heavily the role of money in the economy to make its predictions
Stagflation is a combination of a ______ in the price level and ______ in real GDP.
rises: a decrease
In RBC theory, the lower the real interest rate, other things remaining the same, the ______ today.
smaller is the supply of labor
An economy is at potential GDP when it experiences an increase in costs. The economy experiences _______.
stagflation
The marginal propensity to import is equal to _______.
the change in imports divided by the change in real GDP, other things remaining the same
When inflation is correctly anticipated, ______
the economy remains at full employment
Along the short-run Phillips curve, ______
the expected inflation rate and the natural unemployment rate are constant
According to mainstream business cycle theory, _______.
the money wage rate is sticky and consequently if aggregate demand grows faster than potential GDP, an inflationary gap emerges
A cost-push rise in the price level can arise from an increase in _______.
the money wage rate or money prices of raw material
When aggregate demand unexpectedly increases, ______.
the natural unemployment rate does not change
If the natural unemployment rate increases and the expected inflation rate remains constant, then _____
the long-run Phillips curve shifts rightward and the short-run Phillips curve shifts rightwar
If the expected inflation rate increases and the natural rate of unemployment remains constant, then _______.
the short-run Phillips curve shifts upward and the long-run Phillips curve does not shift
A rational expectation _______.
will often turn out to be wrong, but no other forecast that could have been made with the information available could do better
For a given increase in aggregate demand, the steeper the slope of the short-run aggregate supply curve, the ______ is the increase in the price level and the ______ is the multiplier effect on real GDP in the short run
larger; smaller
A movement ______ along the short-run Phillips curve occurs when there is an ______ increase in aggregate demand.
up; unexpected
