Chapter 22 Hw Test #2
"The appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand in the United States." Is this statement true, false, or uncertain? (a) It is uncertain whether the appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand because the appreciation of the U.S. dollar also affects the short-run aggregate supply curve and increases aggregate demand (b) the statement is false. An appreciation of the U.S. dollar increases net exports and according to aggregate demand and supply analysis, the aggregate demand curve shifts upward and to the right, thus increasing output. (c) The statement is true. an appreciation of the U.S. dollar decreases net exports and according to the aggregate demand and supply analysis, the aggregate demand curve shifts downward and to the left, thus reducing output.
(c) The statement is true. an appreciation of the U.S. dollar decreases net exports and according to the aggregate demand and supply analysis, the aggregate demand curve shifts downward and to the left, thus reducing output.
In many countries around the world, the population is aging and large segments of the population are retiring or close to retirement. What effect would this have on a country's long-run aggregate supply curve? What will happen to aggregate output as a result? A. The long-run aggregate supply curve of these countries is likely to shift to the right because of the reduction in the productive capacity of these countries. Aggregate output will decline as a resut. B. The long-run aggregate supply curve of these countries is likely to shift to the right because of an increase in the productive capacity of these countries. Aggregate output will increase as a resut. C. The long-run aggregate supply curve of these countries is likely to shift to the left because of the reduction in the productive capacity of these countries. Aggregate output will decline as a resut.
. The long-run aggregate supply curve of these countries is likely to shift to the left because of the reduction in the productive capacity of these countries. Aggregate output will decline as a resut. If the labor supply is reduced as a result of large portions of the population retiring, this reduces the productive capacity of the economy, resulting in a leftward shift of the long-run aggregate supply curve. All else equal, this will result in a decline in income in the country. Next Question
1. The inflation rate tends to increase, as expected inflation _________
1. Increases
2. The inflation rate tends to increase, as the unemployment gap __________
2. Decreases
3. The inflation rate tends to increase as the actual unemployment rate ____________
3. Decreases
4. The inflation rate tends to increase as the natural rate of unemployment __________
4. Increases
Okun's Law Equation
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If huge budget deficits cause the public to think that there will be higher inflation in the future but have no effect on business or consumer optimism, what will happen to the position of the aggregate demand curve? A. Aggregate demand will not change. B. Aggregate demand will shift leftward. C. Aggregate demand will shift rightward. D. The effect on aggregate demand cannot be determined without further information.
A. Aggregate demand will not change.
Which of the following would not have enabled an activist government from pursuing the restoration of potential output and full employment after the negative demand shocks? A. An increase in the minimum wage. B. A decrease in taxes. C. An easing of monetary policy. D. An increase in government purchases.
A. An increase in the minimum wage. An increase in the minimum wage would have a negligible impact on AD given the small number of workers exposed to this wage. Additionally, as a cost of production, a higher minimum wage will adversely affect AS.
What factors led to a decrease in both the unemployment rate and the inflation rate in the 1990s? (Check all that apply.) A. Improved demographic factors, such as an increase in the average age of the workforce. B. The computer revolution, which caused rapid increases in productivity. C. The Volcker disinflation, which continued into the 1990s. D. An increase in interest rates by the Federal Reserve to prevent the economy from overheating. E. Changes in the health care industry, which greatly increased medical care costs relative to other goods and services.
A. Improved demographic factors, such as an increase in the average age of the workforce. B. The computer revolution, which caused rapid increases in productivity.
Suppose that the public believes that a newly announced anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the inflation rate in the short run? A. The inflation rate will fall and aggregate output will rise. B. Both the inflation rate and aggregate output will fall. C. The inflation rate will rise and aggregate output will fall. D. Both the inflation rate and aggregate output will rise.
A. The inflation rate will fall and aggregate output will rise.
The self-correcting mechanism describes how the economy eventually returns to the _______ regardless of where output is initially. A. natural rate level of output B. natural rate level of consumption C. real level of output D. real level of consumption
A. natural rate level of output The self-correcting mechanism describes how the economy eventually returns to the natural rate level of output regardless of where output is initially.
When inflation and inflation expectations adjust to move output to potential, this is an example of A. the self-correcting mechanism. B. the real business cycle theory. C. stabilization policy. D. autonomous monetary policy.
A. the self-correcting mechanism. When inflation and inflation expectations adjust to move output to potential, this is an example of the self-correcting mechanism.
A successful cost-push shock by workers means A. wage increases are higher than productivity growth, and the aggregate supply curve will shift up. B. wage increases are equal to productivity growth, and the aggregate demand curve will shift left. C. wage increases are higher than productivity growth, and the aggregate supply curve will shift down. D. wage increases are less than productivity growth, and the aggregate demand curve will shift right.
A. wage increases are higher than productivity growth, and the aggregate supply curve will shift up. A successful cost-push shock by workers means wage increases are higher than productivity growth, and the aggregate supply curve will shift up. OK
If huge budget deficits cause the public to think that there will be higher inflation in the future, what will happen to the position of the short-run aggregate supply curve? A. Short-run aggregate supply will shift leftward. B. Short-run aggregate supply will shift rightward. C. Short-run aggregate supply will not change. D. The effect on short-run aggregate supply cannot be determined without further information.
A. Short-run aggregate supply will shift leftward.
The four components of aggregate demand are A. consumption, planned investment, government spending, and net exports. B. consumption, planned investment, government spending, and exports. C. consumption, planned investment, government spending, and imports. D. consumption, planned investment, government spending, and net imports.
A. consumption, planned investment, government spending, and net exports.
"If prices and wages are perfectly flexible, then γ = 0 and changes in aggregate demand have a smaller effect on output." Is this statement true, false, or uncertain? Explain your answer. A. True. When γ = 0, the short-run aggregate supply curve becomes steeper, and thus the effects of changes in aggregate demand on output are smaller. B. False. As prices and wages become more flexible, γ becomes larger, and thus for a given aggregate demand shock, the effects on output are smaller. C. False. When prices and wages are perfectly flexible, γ becomes smaller, and thus for a given aggregate demand shock, the effects on output are always larger. D. Uncertain. The effect on output caused by changes in aggregate demand also depends on the size of the output gap.
B. False. As prices and wages become more flexible, γ becomes larger, and thus for a given aggregate demand shock, the effects on output are smaller.
If stagflation is bad (high inflation and high unemployment), does this necessarily mean that very low inflation and very low unemployment is good? (Select all that apply.) A. Yes. Low unemployment and low inflation are associated with rapid increase in wages and thus quality of life. B. No. Having too low of an inflation rate could mean that an adverse shock could result in a deflationary episode which can be particularly damaging. C. Yes. Extremely low levels of unemployment and inflation ensures that the economy is producing at potential output levels and that the economy is growing at a modest pace. D. No. If unemployment is too low relative to the natural rate of unemployment, future inflation risk could build even if the current inflation rate remains relatively low.
B. No. Having too low of an inflation rate could mean that an adverse shock could result in a deflationary episode which can be particularly damaging. D. No. If unemployment is too low relative to the natural rate of unemployment, future inflation risk could build even if the current inflation rate remains relatively low.
As the labor force becomes more productive over time, how does that affect the long-run aggregate supply curve? A. The LRAS curve does not change because long-run aggregate supply is determined only by the total amount of capital and labor supplied in the economy. B. The LRAS curve shifts to the right because the existing labor force, along with a given amount of capital and other resources, can produce more output. C. The LRAS curve shifts to the left because there is a decrease in structural unemployment and thus a decline in the natural rate of unemployment. D. The LRAS curve becomes steeper because a persistent output gap may occur.
B. The LRAS curve shifts to the right because the existing labor force, along with a given amount of capital and other resources, can produce more output.
Why are central banks so concerned about inflation expectations? A. Rising concerns about inflation may shift the aggregate demand curve, making inflation forecasts more unpredictable. B. When inflation expectations rise, the short-run aggregate supply curve shifts up, leading to higher actual inflation in the short run. C. Rising concerns about inflation may cause a number of price shocks to occur, making it harder for the central bank to stabilize inflation. D. When inflation expectations rise, the long-run aggregate supply curve shifts up, decreasing the natural level of unemployment.
B. When inflation expectations rise, the short-run aggregate supply curve shifts up, leading to higher actual inflation in the short run.
Which of the following will not cause the aggregate demand curve to shift? A. a change in autonomous monetary policy B. tightness in the labor market C. a change in government spending D. a decrease in financial frictions
B. tightness in the labor market A change in government spending, a decrease in financial frictions, and a change in autonomous monetary policy shift the AD curve.
Changes in the following variables will cause a shift of the long-run aggregate supply curve: A. short-term capital, short-term labor, and available technology. B. total capital, total labor, and available technology. shocks. C. expected inflation, output gap, and price (supply) D. expected inflation, total labor, and price (supply) shocks.
B. total capital, total labor, and available technology. shocks.
The financial crisis that began in August 2007 in the United States: A. resulted in chronic slow growth for China, since aggregate demand fell for China and has yet to recover. B. had very little effect on the Chinese economy, indicating that China is relatively recession-proof. C. caused a collapse of China's exports and the Chinese government used a fiscal stimulus package to restore economic activity. D. caused a collapse of China's imports and the Chinese government used a monetary stimulus package to restore economic activity.
C. caused a collapse of China's exports and the Chinese government used a fiscal stimulus package to restore economic activity.
The three components of short-run aggregate supply are A. inflation, output gap, and price (supply) shock. B. inflation, price gap, and output (supply) shock. C. expected inflation, output gap, and price (supply) shock. D. expected inflation, price gap, and output (supply) shock.
C. expected inflation, output gap, and price (supply) shock.
Inflation expectations affect A. the short-run aggregate demand curve, but not the long-run demand curve. B. the long-run aggregate supply curve, but not the short-run supply curve. C. the short-run aggregate supply curve, but not the long-run supply curve. D. the long-run aggregate demand curve, but not the short-run demand curve.
C. the short-run aggregate supply curve, but not the long-run supply curve.
Which of the following shifts the aggregate demand curve? A. An increase in inflation B. An increase in expected inflation C. An increase in productivity D. An increase in the autonomous real interest rate
D. An increase in the autonomous real interest rate (interest sensitive components of AD)
What basic relationship does the long-run Phillips curve describe? A. It indicates the unemployment rate tends to decrease as the inflation rate increases. B. It indicates inflation will move toward its natural rate regardless of the unemployment rate. C. It indicates the unemployment rate tends to increase as the inflation rate increases. D. It indicates unemployment will move toward its natural rate regardless of the inflation rate.
D. It indicates unemployment will move toward its natural rate regardless of the inflation rate.
Suppose the inflation rate remains relatively constant, and output decreases and the unemployment rate increases. This is possible if: A. both the aggregate supply and demand curves shift horizontally to the right by the same amount. B. the aggregate supply curve shifts to the left and the aggregate demand curve shifts to the right. C. the aggregate supply curve shifts to the left and the aggregate demand curve remains the same. D. both the aggregate supply and demand curves shift horizontally to the left by the same amount.
D. both the aggregate supply and demand curves shift horizontally to the left by the same amount.
The short-run aggregate supply curve slopes upward because an increase in output relative to potential output: A. induces aggregate demand to increase, increasing inflation. B. leads to unstable markets and higher inflation. C. causes markets to have excess supplies, putting upward pressure on inflation. D. creates tight labor and product markets that cause inflation to rise.
D. creates tight labor and product markets that cause inflation to rise.
The aggregate demand curve describes the relationship between A. the real interest rate and the quantity of aggregate output demanded. B. the inflation rate and the real interest rate. C. the inflation rate and the quantity of output produced. D. the inflation rate and the quantity of aggregate output demanded.
D. the inflation rate and the quantity of aggregate output demanded.
The aggregate supply curve describes the relationship between A. the real interest rate and planned investment. B. the real interest rate and the quantity of aggregate output supplied. C. the inflation rate and the real interest rate. D. the inflation rate and the quantity of aggregate output supplied.
D. the inflation rate and the quantity of aggregate output supplied.
An upward shift in aggregate supply ultimately causes A. the inflation rate to rise and output to remain unchanged. B. the inflation rate to rise and output to rise. C. the inflation rate to fall and output to rise. D. the inflation rate to remain unchanged and output to remain unchanged.
D. the inflation rate to remain unchanged and output to remain unchanged.
The aggregate demand curve slopes downward because a rise in inflation leads: A. the monetary policy authorities to impose credit controls. B. the fiscal policy authorities to impose contractionary fiscal measures. C. consumers and businesses to increase autonomous expenditures. D. the monetary policy authorities to raise real interest rates.
D. the monetary policy authorities to raise real interest rates.
The long-run aggregate supply curve is: A. upward-sloping because the output an economy can produce increases as does the inflation rate in the long run. B. upward-sloping because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run. C. vertical because the output an economy can produce increases as does the inflation rate in the long run. D. vertical because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run.
D. vertical because changes in labor, capital, and technology (not the inflation rate) change the output an economy can produce over the long run. (independent of inflation)
Which of the following factors would not cause an increase in aggregate demand? A. A decrease in taxes. B. An increase in the money supply. C. A depreciation of the dollar. D. A wave of investor optimism. E. A decrease in the price level.
E. Decrease in PL is movement ALONG AD curve
Which of the following describes a reason why the long-run Phillips curve relationship differs from the short-run relationship?
In the long run, expected inflation is taken into account when making work and hiring decisions.
Does the factor affect AD? Foreign economies crash, producing a substantial drop in net exports.
L
Does the factor affect AD? Actual output falls below potential output, eliminating "tightness" in resource markets.
No
Does the factor affect AD? The prospect of worsening inflation induces the Federal Reserve to tighten monetary policy.
No
Does the factor affect AD?\ The government rescinds ill-advised regulations that hamper the economy's overall efficiency.
No
In what ways is the Volcker disinflation considered a success? What are the negative aspects of it?
The Volcker disinflation was successful in bringing inflation down with contractionary policies; however, these policies resulted in two recessions and a significant increase in unemployment
According to the expectations-augmented Phillips curve, which of the following factors determines the rate of inflation? A. The difference between the unemployment rate and the natural rate of unemployment. B. Expected inflation. C. The degree of tightness in the labor market. D. All of the above are correct.
The difference between the unemployment rate and the natural rate of unemployment. Expected inflation. The degree of tightness in the labor market. D. All of the above are correct.
if unemployment is above natural rate of unemployment, what will happen to inflation and output?
When the unemployment rate is above the natural rate of unemployment, there is slack in the labor market and output is below potential. This causes the short-run aggregate supply curve to shift downward, leading to lower inflation and higher output over time, until the economy reaches a long-run equilibrium.
Does the factor affect AD? Consumer pessimism spreads as the media reports disappointing news about the economy.
Yes, Left
Does the factor affect AD? The government allows previously enacted tax cuts to expire, resulting in much higher taxes for households.
Yes, Left
Does the factor affect AD? The Federal Reserve autonomously loosens monetary policy.
Yes, Right
Does the factor affect AD? War breaks out, forcing the government to substantially enhance defense expenditures.
Yes, left
Does the factor affect AD? Optimism within the business community induces a surge in planned business expenditures.
Yes, right
Inflation ________ when the unemployment rate is greater than the natural rate of unemployment.
falls
Stagflation
high inflation and high unemployment
Suppose that the White House decides to sharply increase military spending without decreasing government spending in other areas. This measure would, all else constant, cause aggregate demand to:
increase
The self-correcting mechanism works its "magic" primarily through the linkage running from the
labor market to the product market via changes in the rate of change in production costs.
Whether positive or negative, supply shocks that ultimately make output and inflation different are (permanent/temporary)
permanent