HW 5 Macro study
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Which curve shifts and in which direction?
a. aggregate demand shifts right
The equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents
a. an upward-sloping short-run aggregate supply curve
The Central Bank of Wiknam increases the money supply at the same time the Parliament of Wiknam passes a new investment tax credit. Which of these policies shift aggregate demand to the right?
a. both the money supply increase and the investment tax credit
Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?
a. both the multiplier effect and the crowding-out effect
Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the short run what happens to the price level and real GDP?
a. both the price level and real GDP rise.
During recessions investment
a. falls by a larger percentage than GDP.
If the Fed conducts open-market purchases, the money supply
a. increases and aggregate demand shifts right.
Sticky nominal wages can result in
a. lower profits for firms when the price level is lower than expected.
According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is
a. operating at full capacity.
The aggregate demand and aggregate supply graph has the
a. quantity of output on the horizontal axis. Output is best measured by real GDP.
If the price level falls, the real value of a dollar
a. rises, so people will want to buy more.
Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is
a. temporarily low and so supply a smaller quantity of labor.
An increase in government spending shifts aggregate demand
a. to the right. The larger the multiplier is, the farther it shifts.
Which of the following is an example of a decrease in government purchases?
a. The government cancels an order for new military equipment.
The aggregate demand is described graphically as
a. sloping downward.
Economists who are skeptical about the relevance of "liquidity traps" argue that
a. a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.
The theory of liquidity preference illustrates the principle that
a. monetary policy can be described either in terms of the money supply or in terms of the interest rate.
Fiscal policy is determined by
a. the president and Congress and involves changing government spending and taxation.
Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Which curve shifts and in which direction?
b. aggregate demand shifts left
Which of the following would shift the long-run aggregate supply curve right?
b. an increase in the capital stock, but not an increase in the price level
Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could
b. buy bonds to lower interest rates.
In which case can we be sure real GDP rises in the short run?
b. government purchases increase and taxes fall.
Other things the same, if the money supply rises by 2% and people were expecting it to rise by 5%, then some firms have
b. higher than desired prices, which depresses their sales.
The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change
b. in the price level, but not output.
If the current interest rate is 2 percent, (and equilibrium is 3 percent)
b. people will sell more bonds, which drives interest rates up.
Other things the same, continued technological progress and continued increases in the money supply would unambiguously lead to
b. rising real GDP only.
Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P3 and Y3 , then it must be the case that
b. short run aggregate supply has increased.
Other things the same, as the price level rises,
b. the interest rate rises causing a movement along a given aggregate-demand curve.
Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?
b. the multiplier effect
Which of the following did the Fed do during the recession of 2008-2009?
b. lowered the federal funds rate and purchased securities and loans
If output is above its natural rate, then according to sticky-wage theory
b. workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.
Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this
c. both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther.
In the short run, an increase in the money supply causes interest rates to
c. decrease, and aggregate demand to shift right.
Other things the same, when the price level falls, interest rates
c. fall, so firms increase investment.
When the price level falls, people want to
c. hold less money and the quantity of aggregate goods and services demanded increases.
The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it
c. increases income and thereby increases consumer spending.
At an interest rate of 4 percent, there is an excess
c. supply of money equal to the distance between points a and b.
When the price level falls
c. the interest rate falls, so the quantity of goods and services demand rises.
The idea that expansionary fiscal policy has a positive affect on investment is known as
c. the investment accelerator.
The quantity of money has no real impact on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning
c. the long run, but not the short run.
The aggregate demand and aggregate supply graph has
c. the price level on the vertical axis. The price level can be measured by the GDP deflator.
According to classical macroeconomic theory, changes in the money supply affect
c. the price level, but not real GDP.
According to classical macroeconomic theory,
c. output is determined by the supplies of capital and labor and the available production technology.
When the Federal Reserve increases the Federal Funds target rate, it achieves this target by
c. selling government bonds. This action will reduce investment and shift aggregate demand to the left.
In October 2009, the official unemployment rate rose to
10%
If the MPC = 4/5, then the government purchases multiplier is
5
A candidate for political office announces the following policies which, she says, economics clearly demonstrates will lead to higher output in the long run: 1. increase immigration from abroad 2. make trade more open between the US and other countries.
a. 1 and 2 both shift long-run aggregate supply right.
Suppose the economy starts where LRAS = AD1 = SRAS1. A decrease in short-run aggregate supply would be consistent with the movement to
P2, Y1.
If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by
a. $60 billion, but the effect would be larger if there were an investment accelerator.
During the 2008-2009 unemployment rose from about 4.4% to about
c. 10%
Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?
a. Raise both taxes and expenditures by $80 billion dollars.
If the stock market crashes, then
a. aggregate demand decreases, which the Fed could offset by purchasing bonds.
Other things the same, an increase in the amount of capital firms wish to purchase would initially shift
a. aggregate demand right.
To decrease the interest rate the Federal Reserve could
a. buy bonds. The fall in the interest rate would increase investment spending.
The following facts apply to a small, imaginary economy. • Consumption spending is $6,720 when income is $8,000.• Consumption spending is $7,040 when income is $8,500. In response to which of the following events could aggregate demand increase by $1,500?
b. A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.
Which of the following shifts short-run, but not long-run aggregate supply right?
b. a decrease in the expected price level
As the price level falls
b. people are more willing to lend, so interest rates fall.
Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?
c. $500 billion and $300 billion
A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be
c. 1.6 for government purchases and 1.0 for tax cuts.
Which of the following would cause investment spending to decrease and aggregate demand to shift left?
c. a decrease in the money supply and the repeal of an investment tax credit.
Which of the following events shifts aggregate demand rightward?
c. an increase in government expenditures, but not a change in the price level
Fiscal policy affects the economy
c. in both the short and long run.
The long-run aggregate supply curve shifts right if
d. All of the above are correct.
When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded?
d. All of the above are correct.
The theory of liquidity preference assumes that the nominal supply of money is determined by the
d. Federal Reserve.
Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
d. by $30 billion
Other things the same, continued increases in technology lead to
d. continued increases in real GDP and continued decreases in the price level.
The interest rate falls if
d. money demand shifts left or money supply shifts right.
When the dollar appreciates, U.S.
d. net exports fall, which decreases the aggregate quantity of goods and services demanded.
As the price level rises
d. people will want to buy fewer bonds, so the interest rate rises.
Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. In the long run, the change in price expectations created by optimism shifts
d. short-run aggregate supply left.
For the U.S. economy, money holdings are a
d. small part of household wealth, and so the wealth effect is small.
Which of the following does not help explain the direction the quantity of aggregate goods demanded changes when the price level decreases?
d. the dollar appreciates relative to other currencies
Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. In the long run, the change in price expectations created by optimism shifts
d. the price level is higher and real GDP is the same.
During periods of expansion, automatic stabilizers cause government expenditures
d. to fall and taxes to rise.
Shifts in the aggregate-demand curve can cause fluctuations in
d. the level of output and in the level of prices.
The idea that a decrease in the price level raises the real value of households' money holdings, which increases consumer spending and the quantity of goods and services demanded is known as
d. the wealth effect.
Which of the following is correct? a. Economic fluctuations are easily predicted by competent economists. b. Recessions have never occurred very close together. c. Spending, income, and production do not fluctuate closely with real GDP. d. None of the above is correct.
d. None of the above is correct
Which of the following correctly expresses why the short-run aggregate-supply curve slopes upward?
quantity of output supplied = Natural rate of output + a(actual price level - expected price level)
