intermediate macroeconomics exam 3

who came up with the theory of liquidity preference?

John Maynard Keynes

a simple closed-economy model in which income is determined by expenditure

Keynesian cross

basic model of income determination takes fiscal policy and investment as exogenous fiscal policy has a multiplier effect on income

Keynesian cross

comes from liquidity preference theory when money demand depends positively on income shows all combinations of r and Y that equate demand for real money balances with supply

LM curve

graph of all combinations of r and Y that equate the supply and demand for real money balances

LM curve

Most weeks of unemployment are attributable to what?

a small number of long-term unemployed people

In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by __________ and increases the equilibrium level of income by __________. a. $2 billion; $8 billion b. $0.75 billion, $1 billion c. $0.75 billion, $0.75 billion d. $1 billion; $4 billion

a. $2 billion; $8 billion

Short-term unemployment is most likely to be __________ unemployment, while long-term unemployment is most likely to be __________ unemployment. a. Structural; frictional b. Structural; the natural rate of c. The natural rate of; frictional d. Frictional; structural

d. Frictional; structural

By paying efficiency wages, firms contribute to higher unemployment because they: a. Increase the wage bill b. Make workers more productive c. Keep the wage below the equilibrium level d. Keep the wage above the equilibrium level

d. Keep the wage above the equilibrium level

Permitting a lower minimum wage for teenagers would likely: a. Raise teenage employment b. Raise teenage wages overall c. Prevent teenagers from getting job experience d. Raise unemployment among unskilled adults

d. Raise unemployment among unskilled adults

The labor-force participation rate is (rising/dropping).

dropping

In the long run, prices are __________. In the short run, prices are __________.

flexible; sticky

caused by the time it takes workers to search for a job (occurs even when wage are flexible and there are enough jobs to go around)

frictional unemployment

disseminate info about job openings to better match workers and jobs

government employment agencies

persons not in the labor force who want and are available for work and who have looked for a job but have not recently looked for work

marginally attached workers (discouraged workers are a part of this)

the combination of r and Y that simultaneously satisfies the equilibrium conditions in the goods and money markets

short-run equilibrium (where IS and LM cross)

policy actions aimed at reducing the severity of short-run economic fluctuations

stabilization policy (i.e., using monetary policy to combat the effects of adverse supply shocks)

if the unemployment rate is constant aka long-run equilibrium of the labor market

state-state condition

How is there unemployment from real wage rigidity?

If real wage is stuck above its equilibrium level, then there aren't enough jobs to go around. Aka, if there are more people willing to work than are hired at this wage, the gap in the graph is unemployment.

Why is the labor force participation rate declining? (5 reasons)

1. aging population (more retired people) 2. more disabled workers 3. weak demand for unskilled workers 4. high rates of opioid addiction 5. expanded availability of video games

What are two reasons for unemployment?

1. job search 2. wage rigidity

What are 3 reasons for wage rigidity?

1. minimum-wage laws 2. labor unions 3. efficiency wages

A favorable supply shock (raises/lowers) costs and prices.

lowers

The long-run aggregate supply curve is vertical because...

output depends on technology and factor supplies but not prices

The short-run aggregate supply curve is horizontal because...

prices are sticky at predetermined levels

help workers displaced from declining industries get skills needed for jobs in growing industries

public job training programs

An increase in money supply shifts the aggregate demand curve to the (left/right).

right

A policy will reduce the natural rate of unemployment only if it lowers _____ or increases _____.

s; f

changes in the composition of demand among industries or regions

sectoral shifts ex: more jobs repairing computers, less job repairing typewriters

exogenous changes in aggregate supply or demand temporarily push the economy away from full employment

shocks (i.e., a stock market crash causes consumers to cut back on spending)

In the __________-run, -prices are sticky -shocks can push output and employment away from their natural rates

short

The liquidity preference theory applies in the (long/short)-run.

short

the unemployment resulting from real wage rigidity and job rationing

structural unemployment

shock that alters production costs, affects the prices that firms charge

supply shock (aka price shocks)

a graph of all combinations of r and Y that result in goods market equilibrium

the IS curve

What is the L(r) curve?

the demand for real money balances (M/P)^d = L(r)

the increase in income resulting from a $1 increase in G.

the government purchases multiplier

If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be: a. 0.02 b. 0.08 c. 0.10 d. 0.18

d. 0.18

Refer to Exhibit B: In this graph, assume that the economy starts at point A, and there is a favorable supply shock that does not last forever. In this situation, point _____ represents short run equilibrium, and point _____ represents long run equilibrium. a. B; C b. B; A c. E; D d. E; A

d. E; A

More frequent holidays for workers in Europe than in the United States contribute to: a. Higher employment-to-population ratios in Europe than in the United States b. Lower employment-to-population ratios in Europe than in the United States c. More hours worked per year by the average employed person in Europe than the average employed person in the United States d. Fewer hours worked per year by the average employed person in Europe than in the United States

d. Fewer hours worked per year by the average employed person in Europe than in the United States

In the short run... What happens to AD and output when there is an increase in money supply? a decrease?

increase in money supply --> AD falls, output decreases decrease in money supply --> AD rises, output increases

In the long run... What happens to AD and output when there is an increase in money supply? a decrease?

increase in money supply --> AD falls, output stays the same decrease in money supply --> AD rises, but output stays the same

forecasts changes in economic activity 6-9 months into the future published monthly by the Conference Board used in planning by businesses and government, despite not being perfect

index of leading economic indicators (LEI index)

employed union workers whose interest is to keep wages high

insiders

the negative relationship between GDP and unemployment

Okun's law

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the labor market were always in equilibrium, this would lead to: a. A lower real wage and a rise in unemployment b. A lower real wage and no change in unemployment c. A lower real wage and less unemployment d. No change in real wage or in unemployment

b. A lower real wage and no change in unemployment

In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy: a. Increases the amount of money in the economy b. Changes income, which changes consumption, which further changes income c. Is government spending and, therefore, more powerful than private spending d. Changes the interest rate

b. Changes income, which changes consumption, which further changes income

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased: a. Increases b. Decreases c. Does not change d. May either increase or decrease

b. Decreases

When firms experience unplanned inventory accumulation, they typically: a. Build new plants b. Lay off workers and reduce production c. Hire more workers and increase production d. Call for more government spending

b. Lay off workers and reduce production

If the short run aggregate supply curve is horizontal and the long run aggregate supply curve is vertical, then a change in the money supply will change __________ in the short run and change __________ in the long run. a. Only prices; only output b. Only output; only prices c. Both prices and output; only prices d. Both prices and output; both prices and output

b. Only output; only prices

If the rate of separation is 0.02 and the rate of job finding is 0.08, but the current unemployment rate is 0.10, then the current unemployment rate is __________ the equilibrium rate, and in the next period it will move __________ the equilibrium rate. a. Above; toward b. Above; away from c. Below; toward d. Below; away from

c. Below; toward

Refer to Exhibit A: In this graph, initially the economy is at point E, with price P0 and output Ybar. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point _____, and then in the long run, to point _____. a. A; D b. D; A c. C; B d. B; C

c. C; B

The unemployment resulting when real wages are held above equilibrium is called __________ unemployment, while the unemployment that occurs as workers search for a job that best suits their skills is called __________ unemployment. a. Efficiency; inefficiency b. Efficiency; structural c. Frictional; efficiency d. Structural; frictional

d. Structural; frictional

In the model of the steady-state unemployment rate with a fixed labor force, the rate of job finding equals the percentage of the __________ who find a job each month, while the rate of job separation equals the percentage of the __________ who lose their job each month. a. Labor force; labor force b. Labor force; unemployed c. Employed; labor force d. Unemployed; employed

d. Unemployed; employed

workers who have given up on looking for a job and are considered out of the labor force

discouraged workers

"Full employment" means that unemployment equals...

its natural rate (not zero)

An decrease in money supply shifts the aggregate demand curve to the (left/right).

left

In the __________-run... -prices are flexible -output and employment are always at their natural rates -the classical theory applies

long

Discouraged workers are counted as: a. Part of the labor force b. Out of the labor force c. Employed d. Unemployed

b. Out of the labor force

comes from Keynesian cross when planned investment depends negatively on interest rate shows all combinations of r and Y that equate planned expenditure with actual expenditure on goods and services

IS curve

the intersection of the IS and LM curves shows the unique point (Y, r) that satisfies equilibrium in both the goods and money markets

IS-LM model

Suppose that over the course of a year, 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total spells of unemployment were attributable to the long-term unemployed? a. 9 percent b. 10 percent c. 43.5 percent d. 56.5 percent

a. 9 percent

Refer to Exhibit B: Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point: a. A b. B c. C d. D

a. A

Unions contribute to structural unemployment when collective bargaining results in wages: a. Above the equilibrium level b. Below the minimum wage c. Below the equilibrium level d. Above the level of unemployment compensation

a. Above the equilibrium level

Starting from long run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: a. Decreasing the money supply b. Increasing the money supply c. Decreasing the price level d. Increasing the price level

a. Decreasing the money supply

According to the quantity theory of money, when velocity is constant, if output is higher, __________ real balances are required, and for fixed M this means __________ P. a. Higher; lower b. Lower; higher c. Higher; higher d. Lower; lower

a. Higher; lower

If the short run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in __________ prices and __________ output in the short run. a. Higher; lower b. Lower; higher c. Higher; higher d. Lower; lower

a. Higher; lower

Holding output, Y, fixed, a reduction in the demand for money is the equivalent of a(n) __________ in velocity and will shift the aggregate demand curve to the __________. a. Increase; right b. Increase; left c. Decrease; right d. Decrease; left

a. Increase; right

If the short run aggregate supply curve is horizontal, then changes in aggregate demand affect: a. Level of output but not prices b. Prices but not level of output c. Both prices and level of output d. Neither prices nor level of output

a. Level of output but not prices

Okun's law is the __________ relationship between real GDP and the __________. a. Negative; unemployment rate b. Negative; inflation rate c. Positive; unemployment rate d. Positive; inflation rate

a. Negative; unemployment rate

According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium wages because worker __________ increases. a. Productivity b. Turnover c. Unionization d. Shirking

a. Productivity

Stabilization policy refers to policy actions aimed at: b. Equalizing incomes of household in the economy c. Maintaining constant shares of output going to labor and capital d. Preventing increases in the poverty rate

a. Reducing the severity of short run economic fluctuations

Which of the following policies were not adopted by the government in an attempt to reduce the natural rate of unemployment? a. Unemployment insurance b. Government employment agencies c. Public retraining programs d. The Illinois bonus program for unemployment insurance claimants who found jobs quickly

a. Unemployment insurance

Spells of unemployment end when the unemployed person finds a job or: a. Withdraws from the labor force b. Enters the labor force c. Runs out of unemployment insurance compensation d. Refuses to answer unemployment survey questions

a. Withdraws from the labor force

shows the relationship between price level and quantity of output demanded

aggregate demand curve

Starting from long run equilibrium, without policy intervention, the long run impact of a temporary adverse supply shock is the price as well: a. Be permanently higher, and output will be restored to the natural rate b. Return to the old level, and output will be restored to the natural rate c. Be permanently higher, and output will be permanently higher d. Return to the old level, but output will be permanently higher

b. Return to the old level, and output will be restored to the natural rate

Most spells of unemployment are __________-term, and most weeks of unemployment are attributable to __________-term unemployment. a. Short; short b. Short; long c. Long; long d. Long; short

b. Short; long

All of the following are reasons for frictional unemployment except: a. Workers have different preferences and abilities b. Unemployed workers accept the first job offer that they receive c. The flow of information is imperfect d. Geographic mobility takes time

b. Unemployed workers accept the first job offer that they receive

In a __________, the actual unemployment rate falls below the natural rate.

boom

The equilibrium of the Keynesian cross shows: a. Determination of equilibrium income and the interest rate in the short run b. Determination of equilibrium income and the interest rate in the long run c. Equality of planned expenditure and income in the short run d. Equality of planned expenditure and income in the long run

c. Equality of planned expenditure and income in the short run

Refer to Exhibit C: In this graph, if firms are producing at level Y1, then inventories will __________, inducing firms to __________ production. a. Rise; increase b. Rise; decrease c. Fall; increase d. Fall; decrease

c. Fall; increase

The government-purchases multiplier indicates how much __________ change(s) in response to a $1 change in government purchases. a. The budget deficit b. Consumption c. Income d. Real balances

c. Income

If a short run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will __________, and output will __________. a. Increase; increase b. Decrease; decrease c. Increase; decrease d. Decrease; increase

c. Increase; decrease

Which of the following is the best example of structural unemployment? a. Tim is looking for a job with flexible hours but has not been offered one yet. b. Vickie lost her job as a graphic artist at a movie studio because she did not have training in computer-generated animation. c. Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available. d. Fatima lost her job at a packing plant but has not looked intensively for a new job because she still has two months of unemployment insurance benefits left.

c. Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is __________, and the aggregate demand curve shifts __________. a. Greater; inward b. Greater; outward c. Lower; inward d. Lower; outward

c. Lower; inward

Wage rigidity: a. Forces labor demand to equal labor supply b. Is caused by sectoral shifts c. Prevents labor demand and labor supply from reaching the equilibrium level d. Increases the rate of job finding

c. Prevents labor demand and labor supply from reaching the equilibrium level

Any policy aimed at lowering the natural rate of unemployment must either __________ the rate of job separation or __________ the rate of job finding. a. Reduce; reduce b. Increase; increase c. Reduce; increase d. Increase; reduce

c. Reduce; increase

Leading economic indicators are: a. The most popular economic statistics b. Data that are used to construct the consumer price index and the unemployment rate c. Variables that tend to fluctuate in advance of the overall economy d. Standardized statistics compiled by the National Bureau of Economic Research

c. Variables that tend to fluctuate in advance of the overall economy

the average rate of unemployment around which the economy fluctuates

natural rate of unemployment

The tax multiplier... is (positive/negative) is (greater than/less than) one is (larger than/smaller than) the govt spending multiplier

negative; greater than; smaller than

unemployed non-union workers who prefer equilibrium wages, so there would be enough jobs for them

outsiders

An adverse supply shock (raises/lowers) costs and prices.

raises

fraction of unemployed workers who find jobs

rate of job finding

fraction of employed workers who become separated from their jobs

rate of job separation

In a __________, the actual unemployment rate rises above the natural rate.

recession

the paradigm most mainstream economists and policymakers use to think about economic fluctuations and policies to stabilize the economy shows how the price level and aggregate output are determined shows how the economy's behavior is different in the SR and the LR

the model of aggregate demand and supply

basic model of interest rate determination takes money supply and price level as exogenous an increase in the money supply lowers the interest rate

theory of liquidity preference

simple theory in which the interest rate is determined by money supply and money demand

theory of liquidity preference

pays part of a worker's former wages for a limited time after the worker loses his/her job

unemployment insurance (UI)

The LRAS curve is __________. The SRAS curve is __________.

vertical; horizontal