MACRO CH 12

If an economy is currently producing at point Ei, then the figure below shows a recessionary gap, which can be closed using contractionary fiscal policy.

False The figure shows an economy experiencing an inflationary gap, which occurs when the economy is operating above potential GDP. In this situation, unemployment is low, but inflationary rises in the price level are a concern. The Keynesian response would be contractionary fiscal policy, using tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. If aggregate demand was originally at ADi in the figure, so that the economy was experiencing inflationary rises in the price level, the appropriate policy would be for government to shift aggregate demand to the left, from ADi toward ADf, which reduces the pressure for a higher price level while the economy remains at full employment.

In which of the following ways can fiscal policy be used to correct an inflationary gap?

-decrease government spending to shift AD to the left -increase taxes to shift AD to the left

A government's response to correct an inflationary gap should be an increase in spending.

False When an inflationary gap occurs, the government should decrease spending to lower aggregate demand.

Suppose in 2010, a country's economy had reached potential output. Four years later, its GDP is 15% lower than what it had been at the full-employment level of output. What can the government do to reduce this recessionary gap?

Increase government spending. Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment, or direct increases in government spending that would shift the aggregate demand curve to the right.

The graph below shows an economy experiencing a recessionary gap. Using the Keynesian philosophy, identify the appropriate government response necessary to shift aggregate demand back to ADf.

The government can increase spending, which would shift the aggregate demand curve to the right.

How can an increase in the global price of copper cause stagflation?

The higher global price of copper causes aggregate supply to decline as copper is a widely used input in production.

In the AD-AS model, what change leads to the Stagflation phase of the Phillips curve?

a leftward shift of aggregate supply

How could a government reduce inflationary pressures within an economy?

increase taxes reduce government spending

If the economy below is at point Ei, then the figure below shows an economy experiencing a(n) __________, which can be closed by the government enacting ________ fiscal policy, such as __________.

inflationary; contractionary; decreasing government spending

The figure below shows an economy that is currently producing beyond its full employment output level at point Ei. This economy is experiencing a(n) __________ gap, which can be closed by ___________.

inflationary; decreasing government spending

The figure below shows an economy experiencing a(n) inflationary gap, which can be closed by shifting the aggregate demand curve ___________ and enacting ___________ fiscal policy.

left; contractionary

If the economy is currently producing at point Er, then the economy is experiencing a(n) _______ gap, which can be fixed by enacting fiscal policies that shift aggregate demand to the ______.

recessionary; right

A downward sloping Phillips curve that does not shift cannot explain _____________.

the double digit inflation accompanied by a decline in output, experienced in the 1970s

What is an appropriate government response to shift aggregate demand back to ADf?

-increase direct government spending -enacting tax cuts

Using the Keynesian philosophy, identify the appropriate government response necessary to shift aggregate demand back to ADf.

expansionary fiscal policy

An economy is currently producing at point Er. What policy should the government of the economy take?

-increase government spending -lowering taxes The figure shows an economy experiencing a recessionary gap. When aggregate demand shifts leftward, that indicates a recessionary gap. Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment, or direct increases in government spending that would shift the aggregate demand curve to the right. The appropriate policy would be for government to shift aggregate demand to the right from ADr to ADf, where the economy would be at potential GDP and full employment. The government can shift aggregate demand to the right by increasing spending or enacting tax cuts.

The figure below shows an economy experiencing a(n) inflationary gap, which can be closed by shifting the aggregate demand curve to the left and enacting contractionary fiscal policy. Which of the following are examples of contactionary fiscal policy?

-raising taxes -decreasing government spending The figure shows an economy experiencing an inflationary gap, which occurs when the economy is operating above potential GDP. In this situation, unemployment is low, but inflationary rises in the price level are a concern. The Keynesian response would be contractionary fiscal policy, using tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. If aggregate demand was originally at ADi in the figure, so that the economy was experiencing inflationary rises in the price level, the appropriate policy would be for government to shift aggregate demand to the left, from ADi toward ADf, which reduces the pressure for a higher price level while the economy remains at full employment.

Which of the following relating to the Phillips Curve is incorrect or has been called into question in the last half century?

The Phillips Curve always reflects a negative relationship between unemployment and inflation. During the 1960s, economists argued that a nation could choose low inflation and high unemployment, or high inflation and low unemployment, or anywhere in between. Economies could use fiscal and monetary policy to move up or down the Phillips curve as desired. However, when policymakers tried to exploit the tradeoff between inflation and unemployment, the result was an increase in both inflation and unemployment. We should interpret a downward-sloping Phillips curve as valid for short-run periods of several years, but over longer periods, when aggregate supply shifts, the downward-sloping Phillips curve can shift so that unemployment and inflation are both higher. FEEDBACK

The table below represents the relationship between unemployment rate and inflation rate in the United States. Year 1985 1988 199119941997 UNMPLYMT Rate 1.0% 2.0% 5.0% 9.0% 14.0% Inflation Rate 10.0% 6.0% 3.0% 2.0% 1.0%

The Phillips Curve shows the tradeoff between unemployment and inflation, demonstrating that if one is higher, the other must be lower. If the government attempts to reduce inflation, unemployment will rise, or if the government attempts to reduce unemployment, inflation will rise. When plotting points for the Phillips curve, unemployment rate is plotted as the x-variable and inflation rate as the y-variable. To draw a Phillips curve based off of the table above, plot the points for each year with unemployment as the x-coordinate and inflation as the y-coordinate, then connect the points.

The table below represents the relationship between unemployment rate and inflation rate in the United States. Year 1970 1980 1990 2000 2010 UNPLYMT Rate 1.0% 2.0% 4.0% 6.0% 9.0% Inflation Rate 7.0% 5.0% 3.0% 2.0% 1.0%

The Phillips Curve shows the tradeoff between unemployment and inflation, demonstrating that if one is higher, the other must be lower. If the government attempts to reduce inflation, unemployment will rise, or if the government attempts to reduce unemployment, inflation will rise. When plotting points for the Phillips curve, unemployment rate is plotted as the x-variable and inflation rate as the y-variable. To draw a Phillips curve based off of the table above, plot the points for each year with unemployment as the x-coordinate and inflation as the y-coordinate, then connect the points.

Stagflation is an unhealthy combination of high unemployment and high inflation, often caused by a rise in input prices.

True

An unchanging Phillips curve is valid for both the long run and the short run.

True A downward-sloping Phillips curve as valid for short-run periods of several years, but over longer periods, the downward-sloping Phillips curve can shift so that unemployment and inflation are both higher or both lower.

Using the Keynesian philosophy, in order to increase aggregate demand back to the full employment level of output, the government of this economy ought to cut taxes to stimulate consumption and therefore increase aggregate demand.

True When aggregate demand shifts leftward, that indicates a recessionary gap. Keynesian macroeconomics argues that the solution to a recession is expansionary fiscal policy, such as tax cuts to stimulate consumption and investment, or direct increases in government spending that would shift the aggregate demand curve to the right. The appropriate policy would be for government to shift aggregate demand to the right from ADr to ADf, where the economy would be at potential GDP and full employment. The government can shift aggregate demand to the right by increasing spending or enacting tax cuts.

Suppose the economy is initially in long-run equilibrium in the AS/AD model. If a major trading partner of the United States experiences rapid economic growth, this cause a(n) inflationary gap the government can correct for using tax increases or government spending cuts to shift AD to the left.

True When the trading partner experiences major growth, it is likely to spend more on exports. This will cause an increase in AD in the United States. If AD increases when an economy is already in long-run equilibrium, an inflationary gap occurs. he Keynesian response would be contractionary fiscal policy, using tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. FEEDBACK

What kind of conditions can lead to stagflation?

Workers have just received wage increases that reflect expectations of future inflation. A few months later, however, prices rise faster than expected. A military conflict results in a sharp and unexpected rise in the cost of oil.

An economy is currently producing beyond its full employment output level at point Ei. Raising taxes and decreasing government spending can be used to close this _____________.

inflationary gap The figure shows an economy experiencing an inflationary gap, which occurs when the economy is operating above potential GDP. In this situation, unemployment is low, but inflationary rises in the price level are a concern. The Keynesian response would be contractionary fiscal policy, using tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level, but very little reduction in output or very little rise in unemployment. If aggregate demand was originally at ADi in the figure, so that the economy was experiencing inflationary rises in the price level, the appropriate policy would be for government to shift aggregate demand to the left, from ADi toward ADf, which reduces the pressure for a higher price level while the economy remains at full employment.

If the economy below is currently producing at point Ei, then the economy is experiencing a(n) _____________ gap, which can be fixed by using _________.

inflationary; contractionary fiscal policy The figure shows an economy experiencing an inflationary gap, which occurs when the economy is operating above potential GDP. In this situation, unemployment is low, but inflationary rises in the price level are a concern. The Keynesian response would be contractionary fiscal policy, using tax increases or government spending cuts to shift AD to the left. The result would be downward pressure on the price level and reduction in real GDP. If aggregate demand was originally at ADi in the figure, so that the economy was experiencing inflationary rises in the price level, the appropriate policy would be for government to shift aggregate demand to the left, from ADi toward ADf, which reduces the pressure for a higher price level while the economy remains at full employment.