Macroeconomics exam 5
A consumption tax that replaces an income tax
only taxes a household on the money it spends.
11. Other things the same, if technology increases, then in the long run
output is higher and prices are lower.
22. Eliminating double-taxation would likely
raise saving but primarily benefit people with higher incomes.
13. An increase in the expected price level shifts
the short-run aggregate supply curve to the left but does not affect the long-runaggregate supply curve
4. The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for
the slope of the aggregate-demand curve.
What is one of the primary reasons behind the upward-sloping shape of the short-runaggregate supply (SRAS) curve?
Sticky prices and wages
When a ten-year-old investment tax credit expires, what is the likely impact on the aggregatedemand (AD) curve?
The AD curve shifts leftward.
short-run Phillips curve
The Fed can reduce u-rate below the natural u-rateby making inflation greater than expected
The short-run Phillips curve shows the combinations of
unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve
Phillips curve equation
unemployment rate = natural rate of unemployment - a(actual inflation - expected inflation)
A favorable supply shock will cause
unemployment to fall and the short-run Phillips curve to shift left.
Milton Friedman and Edmund Phelps argued in the late 1960s that in the long run the Phillips curve is
vertical, which implies that monetary and fiscal policies cannot influence the level ofunemployment in the long run
9. The classical dichotomy and monetary neutrality are represented graphically by
a vertical long-run aggregate-supply curve.
The effects of the housing and financial crises could be shown by shifting
aggregate demand to the left
in the long run inflation and unemployment
are unrelated
Proponents of tax law changes to encourage saving would
argue that corporate tax rates should be decreased.
2. Other things the same, as the price level decreases it induces greater spending on
both net exports and investment.
5. A vertical long-run Phillips curve is consistent with
both the conclusion of Friedman and Phelps and the classical idea of monetary neutrality
According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they
decreased the money supply.
basis for the slope of the short-run Phillips curve is that when unemployment is high there are
downward pressures on prices and wages
movement to the left along a given short-run Phillips curve could be caused by
expansionary monetary policy, but not a reduction in the natural rate of unemployment.
5. An increase in household saving causes consumption to
fall and aggregate demand to decrease.
If the central bank decreases the money supply, in the short run, output
falls so unemployment rises
the inflation rate depends on
growth in the money supply
21. A reduction in the tax rate on income earned from past saving would
increase incomes over time
The Fed lowered interest rates in 2001 and 2002. This implies, other things the same, that the Fed
increased the money supply because it was concerned about unemployment.
6. When the Fed buys bonds the supply of money
increases and so aggregate demand shifts right.
According to traditional Keynesian analysis, if the economy is in a recession,
increases in government purchases are more effective than decreases in taxes
phillips curve
A curve that shows the short-run trade-off between inflation and unemployment
26. What does a leftward shift of the short-run aggregate supply (SRAS) curve indicate?
A decrease in real GDP
The Public Sector Net Borrowing is:
A measure of the government's budget position
Imagine that in the current year the economy is in long-run equilibrium.Then stock prices rise more than expected and stay high for some time.19.Refer to Scenario 34-2. Which curve shifts and in which direction?
Aggregate demand shifts right.
supply shock
An event that directly alters firms' costs and prices • Shifting the AS and PC curves
10. Which of the following would shift the long-run aggregate supply curve right?
An increase in the capital stock, but not an increase in the price level
Which of the following events could explain the shift of the aggregate-supply curve from AS1 to AS2?
An increase in the world price of oil
29. How does the wealth effect influence consumer spending and aggregate demand?
An increase in wealth leads to higher consumer spending and a rightward shift in theaggregate demand curve
A budget deficit is likely to:
Boost aggregate demand
In the short run what happens to the price level and real GDP?
Both the price level and real GDP rise.
President Barack Obama and Congress cut taxes and raised government expenditures during the 2008financial crisis. According to the aggregate supply and aggregate demand model, which of these policieswould tend to reduce unemployment?
Both the tax cut and the increase in government expenditures
Long Run Phillips Curve
Expectations catch up to reality, u-rate goes back tonatural u-rate whether inflation is high or low
1. Which of the following would not be directly included in aggregate demand?
Government's tax collections
What is the primary difference between the short-run aggregate supply (SRAS) and long-runaggregate supply (LRAS) curves?
SRAS represents short-term economic fluctuations, while LRAS represents long-term equilibrium
Suppose Americans become concerned about saving for retirement and, as a result, reduce their currentconsumption expenditures. Which of the following would you expect to occur as a result of this change?
In the short run, unemployment will increase and inflation will fall.
What is the primary reason the long-run aggregate supply (LRAS) curve is vertical?
It represents the economy's potential output
How does an increase in technological progress affect the long-run aggregate supply (LRAS)curve?
LRAS shifts rightward
What would the change in the interest rate created by foreigners wanting tobuy more U.S. assets do to investment spending in the United States?
Make it fall which by itself would decrease U.S. aggregate demand.
22. What happens when the aggregate demand (AD) curve shifts to the right in the short run?
Real GDP (Y) increases, and the price level (P) rises.
An increase in government expenditures may lead people to expect that in the future, taxes will riseand create greater distortions. By themselves, these changes in expectations lead people to
Reduce both consumption and investment
In a regressive tax system:
The average rate of tax falls as income increases
natural rate hypothesis
The claim that unemployment eventually returnsto its normal or "natural" rate, regardless of theinflation rate
Suppose the Fed decreased the growth rate of the money supply. Which of the following would belower in the long run?
The inflation rate, but not the natural rate of unemployment
Which of the following is not a determinant of the long-run level of real GDP?
The price level
When monetary and fiscal policymakers expand aggregate demand, which of the following costs tothe economy is incurred in the short run?
The price level increases.
How is the new long-run equilibrium different from the original one?
The price level is higher and real GDP is the same.
Suppose a tax cut affects aggregate demand and aggregatesupply. Which of the shifts raise the price level?
The shift of aggregate demand, but not the shift of aggregate supply
28. In the long run, what is the primary determinant of real GDP (Y)?
The stock of labor, capital, and technology
how can fiscal and monetary policy shift the aggregate demand curve
They can move an economy along the PC • The PC offers policymakers a menu of combinations of inflation and unemployment: • Low unemployment with high inflation • Low inflation with high unemployment• Anything in between
A decrease in taxes would move the economy from Y to
X in the short run and W in the long run.
Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things theyconsume have fallen by the same percentage. They may infer that the reward to working is temporarily
low and so supply a smaller quantity of labor.
3. The effect of an increase in the price level on the aggregate-demand curve is represented by
movement to the left along a given aggregate-demand curve.
The short-run effects of the housing and financial crisis are shown by
moving to the right along the short-run Phillips curve
