ECON 2010 Ch.32

What role can confidence and fear play in the economy?

Confidence and fear can shift the AD curve outward and inward, respectively.

Which statement is TRUE of the AD curve?

If the growth of the money supply decreases, ceteris paribus, then the AD curve will shift down and to the left.

If the rate of real growth is fixed by real factors, what will accompany changes in M and V?

If the rate of real growth is fixed by real factors, changes in M and V can change only the inflation rate.

Do any of the fundamental factors depend on the rate of inflation?

No, at least not in the long run.

Which of the following is correct?

Nominal GDP growth = inflation + real GDP growth

What happens in the long run after an increase in government spending growth?

The AD curve shifts back to its original position.

What is TRUE regarding the causes of the Great Depression?

The Great Depression was caused by a combination of real shocks and aggregate demand shocks.

In the graph, demonstrate the short-run effect of an increase in the growth rate of the money supply, assuming all else remains equal. What happens in the long run?

The SRAS curve shifts to the left, and the inflation rate increases, with no change in the growth rate

The national income spending identity can be expressed as:

Y = C + I + G + NX.

Can changes in the growth rate of the velocity of money create a recession?

Yes, if the change is negative and large enough.

Real shock

an event that changes the existing productivity and therefore changes the extent to which economic growth occurs

In the long-run version of the aggregate demand and aggregate supply model, a shift in the aggregate demand curve:

can change the inflation rate, but not the real growth rate.

You can think of velocity as:

how often money changes hands.

LRAS increases:

immigration leads to a larger workforce; the developmental of smart phone increases worker productivity

The aggregate demand curve shows combinations of:

inflation and real GDP growth.

What is a potential explanation for the stickiness of prices and wages in the short run?

menu costs

Wages for some workers do fall during a recession, but it is often:

only after the worker is fired and gets rehired elsewhere at a lower wage.

Which condition is mentioned in the textbook as an aggregate demand shock that contributed to the Great Depression?

pessimism following a stock market crash

Every economy has a(n) _______ given by the fundamental factors of growth.

potential growth rate

A decrease in the growth rate of the money supply causes a short-run departure from the long-run equilibrium because:

prices and wages are sticky.

The reason that changes in spending don't immediately flow into changes in inflation is that:

prices and wages are sticky.

In the 1920s, just prior to the start of the Great Depression:

real GDP per capita was growing at 3% per year, and there was no inflation.

The macroeconomic model that focuses on the effects of the many real shocks that continually hit the economy is known as the:

real business cycle model.

The AD curve is:

the combination of inflation rates and real growth rates that add up to a constant amount.

The AD curve will shift when there is a change in:

the money growth rate or the velocity growth rate.

By 1932, the growth rate in the United States was _______, and inflation was _______ .

−13%; −10%

What shifts the short-run aggregate supply curve?

A change in the expected rate of inflation

Why don't firms want to cut nominal wages?

Because they don't want to decrease worker morale

Changes to both the money supply and the velocity of money induce changes in aggregate demand. However, the long-run impacts of changes in these variables are different. How are the effects of an increase in the velocity of money and the effects of an increase in the money supply different?

Changes in the money supply can lead to permanent changes in aggregate demand, but changes in the velocity of money tend to have temporary changes in aggregate demand.

What can you say about inflation (𝜋) and expected inflation (𝐸𝜋) in the long run?

Inflation and expected inflation are equal in the long run.

Why is price inflation sometimes good in a recession?

Price inflation makes it easier for real wages to fall.

How do we show the short-run impact of an increase in spending growth in our aggregate demand and aggregate supply model?

The AD curve shifts to the right, and inflation and real growth both increase along the SRAS curve.

What impact does an increase in spending growth have on the aggregate demand curve?

The AD curve shifts up and to the right.

How does the aggregate demand and aggregate supply model return to long-run equilibrium after an increase in spending growth?

The SRAS curve shifts up and to the left as inflation expectations adjust.

The Solow growth curve has this shape because growth

does not depend on the rate of inflation.

When India's agricultural output falls, so does India's GDP. This is:

due in part to the fact that other parts of the Indian economy will suffer when farmers suffer.

Bank failures:

represent both a negative aggregate demand shock and a negative real shock.

The combination of inflation and real growth shown by the AD curve give:

the same level of nominal GDP growth.

If prices were rising at 5% per year during a recession, which of the following responses from firms would help facilitate the economic recovery, protect worker morale, AND reduce the firm's real labor costs?

A nominal wage increase of 3%

The dynamic aggregate demand (AD) curve is modeled as a downward-sloping line. Which of the statements is the best explanation for why the dynamic AD has this shape?

A proportional increase in inflation for every decrease in the growth rate is required to keep the growth in spending constant.

Which statement is TRUE of a recession?

A recession is a significant, widespread decline in real income and employment.

In the AD/SRAS model, what impact would a temporary decrease in aggregate demand have on the inflation rate and the growth rate in the short run?

A temporary decrease in AD reduces both the inflation rate and the growth rate in the short run.

In the graph, demonstrate the short-run effect of an increase in the growth rate of the money supply, assuming all else remains equal. What happens in the long run?

AD curve shifts up

Which of the following is the dynamic version of the quantity theory of money?

Growth in the money supply + growth in the velocity of money = inflation + real growth

Professor Tabarrok uses which rewritten version of the quantity theory of money to explain the aggregate demand curve?

The growth rate of M + the growth rate of V = inflation + real growth

Which of the following is correct of money supply?

The money supply growth rate can be changed permanently, but changes in the growth rate of velocity are always temporary.

What impact will a decrease in export growth have on the AD curve?

There will be a decrease in aggregate demand.

Which event would cause a change in the growth rate of the velocity of money?

a change in the growth rate of consumption

Which event would cause a change in the growth rate of the velocity of money?

a change in the growth rate of net exports

Which would cause the LRAS to shift left?

a major, destructive flood

An increase in the growth rate of nominal GDP would be displayed in our model as:

a parallel shift of the AD curve outward.

What was the most significant cause of the Great Depression?

a series of negative aggregate demand shocks

What do the points on a particular AD curve have in common?

a specified rate of spending growth

Each of the following caused a real shock that contributed to the Great Depression EXCEPT:

a stock market crash.

The long-run aggregate supply curve is:

a vertical line.

The short-run aggregate supply curve is:

an upward-sloping curve that intersects the aggregate demand curve and the long-run aggregate supply curve.

Wages that are "sticky":

are stuck where they are and fail to adjust downwards in a recession.

How would a negative real shock be represented in the AS/AD model?

as a leftward shift of the long-run aggregate supply curve that reduces growth and increases inflation

Which would cause the LRAS to shift left?

bad weather

As pessimism grew following the stock market crash of 1929:

bank depositors began to worry about banks failing, and they rushed to withdraw their money.

Real shocks to one area of the economy:

can be amplified and transmitted to other areas of the economy.

In a manufacturing economy, when the oil supply is reduced:

capital and labor become less productive.

Professor Tabarrok suggests that the most important thing to understand about the AD curve is that:

changes in spending growth can shift the AD curve.

According to the AD model, a change in the growth rate of spending, or nominal GDP, can come from:

changes in the growth rate of the money supply or changes in the growth rate of the velocity of money.

Which event is mentioned in the textbook as a real shock that contributed to the Great Depression?

economic policy mistakes

menu cost

firms' costs associated with changing their prices

slow growth rate

given flexible prices and the existing productivity and therefore changes the extent to which economic growth occurs

Which of the following is NOT given in the video as an example of a real shock?

high inflation

The key to a country's economic growth is combining _______ with _______.

human and physical capital; ideas and good institutions

Changes in the growth rate of the velocity of money can't permanently shift the AD curve because:

in the long run, the inflation rate is determined by the money supply growth rate.

An increase in spending increases nominal and real wages, but as prices rise:

real wages begin to fall.

Between 1929 and 1933, _______ dropped by 75%.

investment spending

When Economist Truman Bewley surveyed managers about their employment decisions during a recession, he found that:

it is easier to fire some workers and leave the wages of the other workers unchanged.

In the early 1930s, the Federal Reserve caused the largest _______ in U.S. history by _______ 30%.

negative aggregate demand shock; allowing the money supply to plunge

If inflation is slow to change after an increase in the growth rate of spending, then:

real growth must increase.

Sticky wages:

slow economic recoveries and increase the costs that unemployed workers bear.

Sticky wages II:

slow the recovery process after a recession.

The adjustment back to a long-run equilibrium after a sudden decrease in aggregate demand:

takes a long time, during which the economy is not growing much and many people are unemployed.

As a result of "money illusion," people:

tend to be more upset by a decrease in their nominal wage than by a decrease in their real wage.

One explanation given in the video for the fluctuations of an economy's real growth rate around its potential growth rate is:

that there are often shocks to the key growth factors.

In the aggregate demand and aggregate supply model, an increase in the growth rate of the velocity of money differs from an increase in money supply growth rate in that:

the AD curve will eventually shift back to its original position after an increase in velocity growth.

What other name does Professor Tabarrok give to the economy's long-run potential growth rate?

the Solow growth rate

If the government decides to increase spending on defense:

the aggregate demand curve will shift out temporarily.

If the AD curve shifts to the left as a result of a decrease in the money supply growth rate:

the economy will temporarily depart from its long-run growth rate.

The vertical axis in the AD-AS model shows:

the economy's inflation rate.

The long-run aggregate supply curve shows:

the economy's potential growth rate if all is going well.

The horizontal axis in the AD-AS model shows:

the economy's real GDP growth rate.

The position of the SRAS curve depends on:

the expected rate of inflation.

If the growth rate of velocity changes:

the growth rate of C, I, G, or NX must change.

Another way to describe the growth rate of spending is:

the growth rate of nominal GDP

The first shock that set off the Great Depression was:

the stock market crash of 1929.

Suppose the growth rate of the money supply is 5% per year and the velocity of money is constant. In this case:

the sum of inflation and the real growth rate must be 5%.

The economy's normal, long-run growth rate is shown in the AD-AS model as:

the vertical LRAS curve.

The Great Depression was:

the worst recession in U.S. history.

AD decreases:

there is a decrease in the velocity of money and money supply

Professor Cowen says that _______ is one of the biggest personal and social costs of a recession.

unemployment

The SRAS curve is:

upward sloping.

business fluctuations

variations in the growth rate from the long-run rate of economic growth

Economic models like the AD-AS model tell us:

what to expect if we know what is happening.

nominal wage confusion

when workers respond, not to the purchasing power of their wage, but to the face value of their wage or salary