econ 2

Inflation that occurs when total spending is greater than the economy's ability to produce output at the existing price level is

. Demand-pull inflation

The one quirk that labor markets have, which helps explain why unemployment goes up so much in a recession is that:

. Wages are flexible upward but "sticky" downward

the sum of MPC and MPS must always be

1

44. An increase in aggregate demand is most likely to be caused by

A decrease in the tax rates on household income

22. Unanticipated inflation tends to penalize:

A. People who save money in financial institutions

APC

APC=consumption/income

APS

APS=saving/income

If the unemployment rate for the United States economy rises from 7 to 11 percent during a year, we can conclude that

Actual GDP is less than potential GDP

50. The slope of the immediate-short-run aggregate supply curve is based on the assumption that

Both input and output prices are fixed

The change in real GDP resulting from an initial change in spending can be calculated by

C. Multiplying the multiplier by the initial change in spending

The foreign purchases effect on aggregate demand suggests that a:

C. Rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand

Some economists prefer to use the term business fluctuations rather than business cycles to describe the historical growth record in the United States because

Cycles imply regularity while fluctuations do not

57. If personal income taxes and business taxes increase, then this will:

Decrease aggregate demand and aggregate supply

The interest rate effect on aggregate demand indicates that a(n):

Decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending

When national income in other nations decreases, aggregate demand in our economy

Decreases because our exports will decrease

46. If the dollar depreciates in value relative to foreign currencies, then aggregate:

Demand increases

If the price of crude oil decreases, then this would most likely

Increase aggregate supply in the U.S.

What is an advantage of mild inflation according to some economists

It makes it easier for firms to adjust real wages downward as demand for their products falls

18. What are the primary effects of cost-push inflation

It reduces real output and redistributes a decreased level of real income

When the economy goes into a recession and firms require less labor, managers tend to

Lay off workers, and keep wages of remaining workers constant

marginal propensity to consume

MPC= change in consumption/ change in income

The expenditure multiplier concept of the aggregate-expenditures model

Magnifies the shifts of the aggregate demand curve

Generally speaking, the greater the MPS, the

Smaller would be the increase in income which results from an increase in consumption spending

MPC and MPS as Slopes

The MPC is the numerical value of the slope of the consumption schedule, and the MPS is the numerical value of the slope of the saving schedule. We know from the appendix to Chapter 1 that the slope of any line is the ratio of the vertical change to the horixontal change occasioned in moving from one point to another on that line.

The upward slope of the short-run aggregate supply curve is based on the assumption that:

Wages and other resource prices do not respond to price level changes

16. In what circumstances would lenders most benefit?

When there is an unanticipated decrease in inflation

shift real domestic output GDP to the right

a decrease in business taxes

shifting a graph of real GDP and price level up

an increase in national incomes abroad

which combination of factors best explain why the aggregate supply curve would shift?

business taxes and domestic resource availability

change in GDP

change in GDP=multiplier x initial change in spending

criss cross graph

depicts an economy in the short run

what would shift the investment demand curve down?

increasing business taxes

general sources of shocks that can cause business cycles include the following

irregular occurrence of innovations and productivity changes, monetary factors and financial instability, and political events, either domestic or global.

marginal propensity to save

mps=change in saving/change in income

multiplier=

multiplier= change in real GDP/initial change in spending

shortage in the economy

output demanded will decrease as price level rises

investment spending would most likely be influenced by changes in

profit expectations and degree of excess capacity

teachers union wanted raises

real income may fall if price increases are proportionately greater than the increases in nominal income

nominal interest rate formula

real interest rate+inflation premium(expected rate of inflation)

f businesses feel more optimistic about the state of the economy, then this change is likely to:

shift the investment demand curve to the right

wealth effect

shifts the consumption schedule upward and the saving schedule downward

important considerations for shifts in grafts

switching to real GDP, changes along schedules, simultaneous shifts, taxation, stability

nonincome determinants

wealth, borrowing, expectations, real interest rates.. most of all amount of disposable income

real interest rates

when real interest rates (those adjusted for inflation) fall, households tend to borrow more, consume more, and save less.