ECON 112 Quizzes

The initial expectation of the price level in the economy is 100, where the aggregate demand curve is given by Y D = 105 − 0.05 P and the short run aggregate supply curve is Y S = Y N + 0.05 ( P − P E ) , where the natural level of output Y N = 100. Now suppose the oil price goes up and people are expecting inflation coming, leading to a new expected price P E ′ = 120. What is the new output level in short run according to the AD-AS model?

99.5 and the GDP decreases by 0.5%

Take the following information given for an economy: - When income is $10,000, consumption spending is $6,500 - When income is $11,000, consumption spending is $7,250 For this economy, an initial increase of $200 in net exports translates into a

$800 increase in aggregate demand in the absence of the crowding out effect

It is likely that a constitutional amendment that required the government always to run a balanced budget would

eliminate the economy's automatic stabilizers

Economic variables we are most interested in are

real variables, but we usually observe nominal variables

Changes in the interest rate

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

Investment is a

small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP

The AD-AS model of short-run economic fluctuations focuses on

the price level and real GDP

Assume the analysis of Friedman and Phelps is correct so that the following equation is valid Unemployment = natural rate of unemployment - a x (actual inflation-x) In this equation,

x is the expected rate of inflation

Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could

decrease the money supply, which will increase interest rates

(Refer to Figure 34-7) Suppose the spending multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is

$20 billion

(Refer to Figure 33-3) Starting from point B and assuming that aggregate demand is held constant, in the long run the economy is likely to experience a

Rising price level and falling level of output, as the economy moves to point A

An economist working for the Central Bank of Fredonia estimates a Phillips curve for Fredonia and reports the following points on the estimated curve. (Refer to Table 35-1) Which of the following statements is correct?

These points are consistent with the theoretical short-run Phillips curve, but not with the long-run Phillips curve.

In Flosserland, the Department of Finance is responsible for monetary policy. Flosserland has had an inflation rate of 25% for many years. (Refer to Scenario 35-2) Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but that it actually leaves inflation at 25%. Suppose that the public had expected that the Department of Finance would reduce inflation, but only to 20%. Then

Unemployment falls, but it would have fallen more if people had been expecting 12.5% inflation

Take the following information given for an economy: - When income is $10,000, consumption spending is $6,500 - When income is $11,000, consumption spending is $7,250 The marginal propensity to consume is

0.750

(Refer to Figure 35-4) Suppose the economy starts at 5% unemployment and 3% inflation and expected inflation remains at 3%. Which one of the following points could the economy move to in the short run if the Federal Reserve pursues a more expansionary monetary policy?

3% unemployment and 5% inflation

If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year, the sacrifice ratio is

5

(Refer to Figure 35-4) Suppose the economy starts at 5% unemployment and 5% inflation. If the Federal Reserve pursues a contractionary monetary policy, in the short run the economy moves to

7% unemployment and 3% inflation. In the long run the economy moves to 5% unemployment and 3% inflation

The following facts apply to the consumers. - Consumption spending is $6,720 when income is $8,000 - Consumption spending is $7,040 when income is $8,500 In response to which of the following events could aggregate demand increase by $1,500

A stock-market boom stimulates consumer spending by $550, and there is a crowding-out effect

According to the theory of liquidity preference,

An increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.

In 2009, Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate demand right?

Both the increased funding for states and tax cuts

A policy that lowered the natural rate of unemployment would shift

Both the short-run and the long-run Phillips curves to the left

If households view a tax cut as temporary, then the tax cut

Has less of an effect on aggregate demand than if households view it as permanent

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would

Increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate

During a recession, unemployment

Increases

According to the liquidity preference theory, an increase in the overall price level of 10 percent

Increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded

(Refer to Figure 33-4) The short-run equilibrium is defined by the given AD and SRAS curves. Which of the long-run aggregate-supply curves is consistent with a short-run economic expansion?

LRAS1

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have

Lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more US assets The increase in the demand for US assets would lower the financing cost of US firms. What would this change in the financing cost do to investment spending in the US?

Make it rise which by itself would increase US aggregate demand

People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs while it considers raising workers' wages and its tire price. What could best explain this?

Misperceptions theory

Which of the following describes the Volcker disinflation most accurately?

Much of the public did not believe that the Fed would keep money growth low, so unemployment rose more than it would have otherwise

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more US assets How would the change in the exchange rate affect US net exports and US aggregate demand?

Net exports would fall which by itself would decrease US aggregate demand

Which of the following is correct? - During recessions employment rises - Because of government policy the US has zero recessions in the last 25 years - Economic fluctuations are easy to predict - Over the business cycle investment fluctuates more than consumption

Over the business cycle investment fluctuates more than consumption

(Refer to Figure 33-2) A decrease in taxes would move the economy from Q to

P in the short run and O in the long run

If there is an adverse supply shock and the Federal Reserve responds by increasing the growth rate of the money supply, then in the short run the Federal Reserve's action

Raises inflation but lowers unemployment

In countries that have high minimum wages and require a lengthy and costly process to get permission to open a business

Reducing the minimum wage and the time and cost to open a business would both shift the long-run aggregate supply curve to the right

During recessions, taxes tend to

fall and thereby increase aggregate demand

(Refer to Figure 34-2) A decrease in Y from Y1 to Y2 is explained as follows:

An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2 and this increase in r causes Y to decrease from Y1 to Y2

Monetary policy affects the economy with a long lag, in part because

Changes in interest rates primarily influence investment spending, and firms make investment plans far in advance

According to liquidity preference theory, if there were a surplus of money, then

The interest rate would be above equilibrium and the quantity of money demanded would be too small for the equilibirum

Assume there is a multiplier effect with some crowding out effect. An increase in government expenditures raises aggregate demand more,

The larger the MPC and the weaker the influence of income on money demand