chapter 11
Which of the following statements best characterizes demand-pull and cost-push inflation?
Both are short run types of inflation
How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on profits?
Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.
Which of the following will increase both the short-run and long-run aggregate supply curves?
Younger workers in the labor force receive better and more training than their predecessors
According to Keynes, when there is excess capacity in an economy, the equilibrium level of real GDP per year is determined by
aggregate demand
Demand-pull inflation arises due to
an increase in money supply
Between early 2005 and late 2007, total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation. From a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were
an increase in the price level along with an increase in equilibrium real GDP
Suppose that the barrel price of petroleum decreased temporarily. The result of this would be best described by
an increase in the short-run aggregate supply curve only.
An increase in aggregate demand leads to _____________ gap
an inflationary
Given that the economy is currently in a long run equilibrium where SRAS = LRAS = AD real rate of interest decreases the economy would then experience
an inflationary gap
The resulting spending gap between early 2005 and late 2007 when total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation can best be described as
an inflationary gap
The Classical model assumes prices ________________ so that the aggregate supply curve is _______________ and the economy is always _____________________.
are flexible; vertical; at full employment
Suppose that aggregate demand were to increase due to a weaker dollar. Which of the following would be the result?
inflation only
Real GDP can be expanded in the short run because firms can use existing workers and capital equipment more ________________.
intensively
The model of long-run equilibrium
is the same as the Classical Model.
Since the modern Keynesian Model allows for some price response, the aggregate supply curve
is upward sloping
Say's Law fits best in the Classical Theory since this philosophy placed great importance on aggregate supply to determine the
level of output
Any change in factors influencing ___________-run output, such as _____________, capital, or ____________, will shift both the SRAS curve and the LRAS curve.
long; labor; technology
Inflation in an economy implies that
the average price level has increased over a stated period of time
Which of the following is true concerning shifts of the long-run aggregate supply curve?
An increase in the long-run aggregate supply curve is depicted as a rightward shift and an increase in real GDP
Which of the following would create cost-push inflation?
An increase in wages paid to workers
Which of the following will occur when aggregate supply remains stable but aggregate demand increases in the short run?
An inflationary gap is created
the classical model makes four major assumptions:
1) pure competition exists 2) wages and prices are flexible 3) people are motivated by self-interest 4) people can't be fooled by money illusion
The Keynesian Model was supported empirically by data from the decade of the
1930s
Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short run?
A recessionary gap is created
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If real rate of interest increases, which of the following is the best description of the outcome in the economy?
Aggregate demand decreases
An economy is currently in a long run equilibrium where SRAS = LRAS = AD. Suppose that real rate of interest decreases, which of the following is the best explanation of the outcome?
Aggregate demand increases
The extent to which real GDP responds to changes in the price level along the short-run aggregate supply curve is largely determined by
All of the above
Which of the following is the best example of uncounted production?
An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine parts.
Which of the following would create demand-pull inflation?
An increase in household income
In the Modern Keynesian Model the short run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on the capital input?
Existing machinery can be used longer hours.
The Modern Keynesian short-run aggregate supply curve is best described by which of the following statements?
It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.
Which of the following is a possible explanation for sticky prices?
Labor contracts cause wages to be fixed over the contract period
Which of the following is not one of the four major assumptions of the classical model?
People suffer from money illusion
What did Keynes mean when he said that prices are sticky?
Prices, especially the price of labor, are inflexible downward.
Which of the following best exemplifies Say's Law?
The production of a $4000 plasma TV set creates demand for other goods and services valued at $4000.
In the modern Keynesian Model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor input?
The workers are switched from uncounted production to counted production, thus enabling the firm to expand output as the price level expands.
Suppose that the value of the US dollar ($) yesterday was $1 = 4 seuros. Today the exchange rate changed such that $1 = 33 seuros. One can say that the
US $ depreciated.
Now that the macroeconomy is in a disequilibrium, what happens in the labor market?
Unemployment decreases, which increases wages.
Cost-push inflation arises due to
a decrease in the short-run aggregate supply curve
Suppose that the barrel price of petroleum increased temporarily. The result of this would be best described by
a decrease in the short-run aggregate supply curve only
According to the classical model, if the economy starts at full employment an increase in aggregate demand will cause all of the following to occur except
a decrease in wage rates
say's law
a dictum of economist J. B. Say that supply creates its own demand. producing goods and services generates the means and the willingness to purchase other goods and services
A depreciation of the U.S. dollar should result in
a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short-run aggregate supply curves
When aggregate demand decreases while aggregate supply is stable, _____________ gap can occur, defined as the difference between how much the economy could be producing if it were operating on its LRAS and the equilibrium level of real GDP
a recessionary
Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that real rate of interest increases, the new short run position of the economy finds itself in is termed
a recessionary gap
All of the following will shift the short-run aggregate supply and the long-run aggregate supply except for
a temporary change in input prices
In the labor market, full employment occurs at ________________ at which quantity demanded equals quantity supplied. That particular level of employment is associated with the full-employment level of real GDP per year.
a wage rate
With stable aggregate demand, an abrupt shift inward in SRAS may lead to what is called __________ inflation
cost-push
After reading a recent best-seller documenting a growing population of low minus low−income elderly people who were ill minus ill−prepared for retirement, most residents of this country decide to increase their saving at any given interest rate.
decrease
Cost-push inflation is caused by persistent
decreases in short-run aggregate supply
If we assume that the economy is operating on a horizontal short-run aggregate supply curve, the equilibrium level of real GDP per year is completely ___________________
demand determined
With stable aggregate supply, an abrupt outward shift in AD may lead to what is called ___________ inflation
demand-pull
A stonger dollar contributes to inflation
false
Also, in the short run, when input prices are fixed, a higher price level means __________________ profits, which induce firms to hire more workers.
higher
The short-run Keynesian aggregate supply curve is
horizontal
Keynesians believe that the aggregate supply curve is
horizontal in the short run
One of the main conclusions of Say's Law was that
if people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs
If an excess quantity of labor is supplied at a particular wage level, the wage level
must be above equilibrium
The Keynesian model argues that prices are sticky. One reason supporting this argument is that
nominal wages are inflexible downwards
long run equilibrium
occurs at the intersection of AD and the long-run aggregate supply curve, LRAS
Short-run equilibrium
occurs at the intersection of the aggregate demand curve, AD, and the short-run aggregate supply curve, SRAS
In modern Keynesian theory, the short-run aggregate supply curve, SRAS, shows the relationship between the price level and real GDP without full adjustment or full information. It is upward sloping because it allows for ______________ price adjustment in the short run.
partial
Thus, according to the Keynesian model full employment is ______________________.
possible but not guaranteed
An important difference between the Classical Model and the Keynesian Model is that
prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in the Keynesian Model.
As the wage increases, the
quantity demanded of labor decreases, while the law of supply increases the number of workers seeking jobs.
The Keynesian model indicates that the economy will find an equilibrium however the economy will not always ______________________.
reach full employment
money illusion
reacting to changes in money prices rather than relative prices. if a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion
Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to
reduce their workforce
The horizontal short-run aggregate supply curve has been called the Keynesian short-run aggregate supply curve because Keynes believed that many prices, especially wages, would not be __________________ even when aggregate demand decreased.
reduced
During the rapid adjustment period (that results from the change in the AD curve), the economy will immediately tend toward a price level that ___________________ and a level of real GDP that ___________________ before quickly returning to full employment.
remains constant; increases
When saving is introduced into the model, equilibrium occurs in the credit market through changes in the interest rate such that desired ___________ equals desired _____________ at the equilibrium rate of interest.
saving; investment
Changes in factors of production that influence economic growth will
shift SRAS and LRAS
A short-lived change in production input prices will
shift SRAS but not LRAS
Given that the US dollar has depreciated the short-run aggregate supply in the United States should
shift to the left
Given that the US dollar has depreciated, the aggregate demand in the United States should
shift to the right
Any unanticipated shifts in aggregate demand or supply are called aggregate demand or aggregate supply
shocks
The existence of sticky prices causes the _____________________ to be horizontal.
short run aggregate supply
A temporary change in input prices will shift only the ____________ curve
sras
At the same time, a ___________ dollar will lead to lower net exports, causing the aggregate demand curve to shift inward. The equilibrium price level definitely falls, but the net effect on equilibrium real GDP depends on which shift is larger.
stronger
a ____________ dollar will reduce the cost of imported inputs, thereby causing SRAS to shift outward to the right.
stronger
Say's law asserts that
supply creates its own demand
The modern Keynesian Model assumes that
that prices respond to changes in aggregate demand but not fully.
Persistent inflation arises due to
the aggregate demand curve increasing by a larger proportion than the long-run aggregate supply curve
The long-run aggregate supply curve will not shift if there is a change in
the price level
The classical economists believed that the leakage of saving would be matched by the injection of business investment.
true
The level of employment in an economy determines its real GDP.
true
According to modern Keynesian analysis, the short-run aggregate supply curve is
upward sloping
In the classical model, because LRAS is __________________, the equilibrium level of real GDP is supply determined. Any changes in aggregate demand simply change the __________________.
vertical; price level
The lower the rate of interest, the ________ profitable it is to invest and the ________ the level of desired investment.
more; higher
As the dollar becomes stronger in international foreign exchange markets, the short-run aggregate supply curve will shift to the ________ and the aggregate demand curve will shift to the ________
right; left
If the prices were sticky, according to Keynes, this would then imply that the
short-run aggregate supply is horizontal
