MACRO

Assume the economy of Country A is in long-run equilibrium. Which of the following will happen in the short run in Country A if one of its major trading partners, Country B, experiences a recession?

Aggregate demand will decrease and the price level will decrease. Correct. A recession in Country B will result in a decrease in income and a decrease in imports. Since Country B is a major trading partner of Country A, a decrease in imports in Country B will result in a decrease in Country A's exports. Therefore, aggregate demand in Country A will decrease and the price level will decrease.

If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping?

An increase in the price level will increase profits and production. Correct. With fixed nominal wages, an increase in the price level will increase profits, to which firms respond by hiring more workers and increasing production.

Which of the following explains the relationship between the price level and real output along the aggregate demand curve?

At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods. Correct. The three reasons the aggregate demand curve has a negative slope are the wealth effect, the interest rate effect, and the exchange rate effect. At a lower price level, domestic goods will become relatively cheaper compared to foreign goods, exports increase, and spending on domestic goods increases. This is the exchange rate effect.

Suppose a nation opened its borders to the free flow of workers from other nations. How would this event likely affect the long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation?

Both curves would shift to the right. Correct. The LRAS curve corresponds to the production possibilities curve (PPC) because they both represent maximum sustainable capacity. Maximum sustainable capacity is the total output an economy will produce over a set period of time if all resources are fully employed. More workers would mean both curves shift to the right.

Assume that stock prices and home values have increased, raising household wealth. At the same time, productivity increased due to new technology. What is the likely short-run impact on the economy?

Both the aggregate demand (AD) and the short-run aggregate supply (SRAS) curves shift right, resulting in a higher output level and indeterminate price level. Correct. The increase in stock and home prices increases wealth, which will result in an increase in consumer spending and shift the AD curve to the right. The rise in productivity decreases production costs, which will shift the SRAS curve to the right.

Assume an economy is currently at full employment. Which of the following best describes the long-run adjustments that will occur in the economy following a negative aggregate demand shock with no government intervention?

Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run. Correct. In the long run, wages and prices are flexible and will adjust to restore full employment. In this situation, the negative demand shock with no government intervention decreases aggregate demand, moving the economy to below full employment. Unemployment will impose downward pressure on nominal wages and prices, which will increase short-run aggregate supply until full employment is restored.

If the natural rate of unemployment exceeds the actual rate of unemployment, which of the following will occur in the long run in the absence of government intervention?

Nominal wages will increase. Correct. When the natural rate of unemployment exceeds the actual rate of unemployment, the economy is in an inflationary gap. Inflation will cause nominal wages and input prices to increase, and the short-run aggregate supply curve will shift to the left.

Suppose that the economy is in a recession. In the absence of government policy action to restore the economy to full employment, how will the economy adjust in the long run?

The SRAS2 curve shifts to the right as nominal wages decrease and full employment is restored. Correct. The economy is in recession. Therefore in the provided graph, the short-run macroeconomic equilibrium occurs where the SRAS2 curve intersects the AD1 curve. In the absence of policy action, the economy will self-correct in the long run. Nominal wages will fall and the SRAS2 curve will shift rightward until it restores the economy to full employment in the long run.

Suppose that the prices of labor and inputs to production are fixed in the short run but not in the long run. What is a consequence of this flexibility in the long run?

The long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run. Correct. In the long run, wages and input prices are flexible to automatically adjust to full employment. A consequence of flexible long-run prices and wages is the lack of a long-run trade-off between inflation and unemployment and a vertical long-run aggregate supply curve.

Which of the following is illustrated by the long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC)?

The maximum sustainable capacity Correct. Both the LRAS curve and the PPC represent maximum sustainable capacity.

Country X is currently in long-run macroeconomic equilibrium. If the country's economy experiences a significant increase in the price of energy, a major input in production, which of the following will occur in the short run?

The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment. Correct. An increase in energy prices increases the cost of production and causes the short-run aggregate supply curve to shift to the left. This will cause the actual rate of unemployment to go below the natural rate of unemployment.

Which of the following is true when an economy is operating at the intersection of the AD2 and SRAS2 curves?

The economy is in short-run and long-run equilibrium. Correct. The economy is in short-run and long-run equilibrium because the AD1 curve intersects the SRAS2 curve at the same point as the LRAS curve.

What is an automatic stabilizer?

It is a program or policy that counteracts the business cycle without any new government action required. Correct. Automatic stabilizers are changes in taxes and government spending that occur automatically to stimulate aggregate demand in a recession and curb aggregate demand in a potentially inflationary boom. Therefore, an automatic stabilizer is a program or policy that counteracts the business cycle without any new government action required.

The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand in Euroland?

There will be a rightward shift in the AD curve. Correct. Aggregate demand is the sum of four components: consumption spending (C), investment spending (I), government spending (G), and net exports. An increase in CC, II, G or net exports will increase AD. Therefore the increase in government spending will shift the AD curve to the right.

In an economy where wages and prices are sticky, which of the following will happen as a result of an increase in the price level?

There will be an upward movement along the short-run aggregate supply curve and real output will increase. Correct. The increase in the price level results in an upward movement along the short-run aggregate supply curve to a higher real output level.

Which of the following represents an appropriate fiscal policy for the given economic conditions?

A contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap. Correct. A contractionary fiscal policy reduces aggregate demand and is used to control inflation when there is an inflationary gap.

According to the expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar change in autonomous expenditures will result in which of the following?

A greater-than-one-dollar increase in aggregate demand for goods and services Correct. A one-dollar change in autonomous expenditure leads to a greater-than-one-dollar increase in aggregate demand for goods and services.

Using the disposable income and consumption data in the table above, calculate the value of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS).

MPC=0.60 , MPS=0.40 Correct. The marginal propensity to consume is the change in consumption spending divided by the change in disposable income. The sum of the marginal propensity to consume and marginal propensity to save is equal to one. The change in consumption spending is $600 and the change in disposable income is $1,000. Therefore, the marginal propensity to consume is $600/$1,000=0.6 and the marginal propensity to save is 1−0.6=0.4

The government of Olympia is considering a fiscal policy action to slow the economy and curb inflation. If the marginal propensity to consume is 0.8, which of the following responses correctly identifies a policy action that would help the government achieve its goals and the impact of that action on Olympia's real gross domestic product (GDP)?

Decreasing government spending by $10 billion decreases real GDP by a maximum of $50 billion. Correct. Decreasing government spending helps the government slow the economy and curb inflation, and it decreases real GDP. The maximum change in real GDP is equal to the change in spending multiplied by the spending multiplier. The spending multiplier =1/(1−MPC)=1/(1−0.8)=5, and government spending decreased by $10 billion. Therefore, real GDP will decrease by a maximum of $50 billion.

Which of the following is true about the equilibrium real output in the aggregate demand-aggregate supply (AD-AS) model in the short run?

Equilibrium real output can be above, equal to, or below full employment. Correct. Short-run equilibrium in the (AD-AS) model occurs when the aggregate demand and short-run aggregate supply curves intersect. This can occur below, above or at the long-run aggregate supply curve. Therefore equilibrium real output can be below, above, or at full employment in the short run.

Suppose an economy is operating above full employment. Which of the following fiscal policy actions and resulting changes in aggregate demand will move the economy back towards full employment?

Increasing taxes, which will shift the AD curve leftward. Correct. The economy is operating above full employment. Increasing taxes will shift the AD curve leftward, moving the economy back towards full employment.

Which of the following best describes the aggregate demand curve?

It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels. Correct. The aggregate demand curve describes the relationship between the price level and quantity of goods and services demanded by households, firms, the government, and the rest of the world.

Which of the following accurately describes the state of the macro-economy if it is operating at the intersection of the AD1 and SRAS2 curves?

It is operating below full employment and is in a short-run but not a long-run equilibrium. Correct. Short-run equilibrium in the AD-AS model occurs when the aggregate demand and short-run aggregate supply curves intersect. This can occur below, above or at the long-run aggregate supply curve. Therefore, equilibrium real output can be below, above, or at full employment in the short run. In the graph the short-run equilibrium depicted by the AD1, and SRAS2 curves is below full employment.

The imposition by the United States of a tariff on imported steel from the European Union will likely have what impact on the short-run aggregate supply (SRAS) curve in the United States?

It will cause the SRAS curve to shift leftward. Correct. The tariff will increase the costs of production and shift the (SRAS) curve to the left.

Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion?

Real output will increase by a maximum of $400 billion. Correct. Real output will increase by a maximum of $400 billion. The maximum change in real output is determined by multiplying the spending multiplier by the amount of the change in government spending. The spending multiplier is equal to (1/(1−MPC=)= 1/(1-.75)=4 Therefore, real output will increase by a maximum of $100 billion×4=$400 billion.

Which of the following best explains how income taxes can moderate a business cycle during an expansion?

Tax payments increase automatically as gross domestic product (GDP) rises, which dampens consumption spending. Correct. During an expansion, aggregate demand increases, resulting in higher income. Because taxes are based on personal income and corporate profits, a rise in aggregate demand results in an increase in tax payments, which dampens consumption spending.

How will automatic stabilizers affect the economy during a recession?

They will shift the aggregate demand curve to the right, increasing real output. Correct. Automatic stabilizers are changes in taxes and government spending that occur automatically to stimulate aggregate demand in a recession and curb aggregate demand in a potentially inflationary boom. During a recession, income taxes fall and transfer payments rise, which will shift the aggregate demand curve to the right and increase real output.