ECON 300 Chp 11

Assume the economy is in equilibrium at Y1 = 0. Other things​ equal, an unexpected large increase in the price of oil will result in a movement from point​ ________ to point​ ________. A. B​; A B. A​; D C. A​; B D. A​; C

A. B​; A

What causes a movement along the Phillips curve with the output gap on the horizontal​ axis? A. Demand shocks. B. Supply shocks. C. Changes in expected inflation. D. Both A and B are correct.

A. Demand shocks.

If the inflation rate in 2013 was 2.5​ percent, and because of that people expect the inflation rate in 2014 will also be​ 2.5%, these people are said to have A. adaptive expectations. B. rational expectations. C. expectations of stagflation. D. expectations of supply shocks.

A. adaptive expectations.

An increase in the real interest rate in the United States will cause the dollar to​ ________ relative to other currencies and​ ________ net exports and real GDP. A. ​appreciate; reduce B. ​appreciate; increase C. ​depreciate; reduce D. ​depreciate; increase

A. appreciate; reduce

Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate. If the economy experiences a positive demand​ shock, the output gap will​ ________ and the inflation rate will​ ________. A. ​increase; increase B. ​increase; decrease C. ​decrease; increase D. ​decrease; decrease

A. increase; increase

Under a fixed exchange rate​ system, if the government decides to devalue its​ currency, net exports will​ ________ and the IS curve will shift to the​ ________. A. ​increase; right B. ​increase; left C. ​decrease; left D. ​decrease; right

A. increase; right

Assume the economy is in equilibrium at Y1​, where real GDP equals potential GDP. The economy experiences a positive demand​ shock, and the Fed responds by increasing real interest rates to bring real GDP and inflation back to their original levels. Other things​ equal, the​ Fed's response to the positive demand shock is best represented by a movement from A. point C to point D. B. point B to point D. C. point B to point A. D. point C to point A.

A. point C to point D.

Assume the economy is in equilibrium at Y1​ = 0. Other things​ equal, a negative demand shock such as the financial crisis of 2007−2009 would result in a movement from point​ ________ to point​ ________. A. A​; C B. A​; D C. A​; B D. B​; A

B. A​; D

What causes a movement along the Phillips curve with the output gap on the horizontal​ axis? A. Supply shocks. B. Demand shocks. C. Changes in expected inflation. D. Both A and B are correct. What causes the Phillips curve to​ shift? A. Changes in expected inflation. B. Supply shocks. C. Changes in the relationship between the output gap and cyclical unemployment. D. All of the above. E. Both A and B are correct.

B. Demand shocks. E. Both A and B are correct.

A decrease in the real interest rate outside of the United States will​ ________ the demand for the dollar and​ ________ the demand for foreign financial assets. A. ​decrease; increase B. ​increase; decrease C. ​decrease; decrease D. ​increase; increase

B. increase; decrease

Assume the economy is in equilibrium at Y1​, where real GDP equals potential​ GDP, and then the economy experiences a positive demand shock. Other things​ equal, the positive demand shock is best represented by​ a(n) A. upward shift of the Phillips curve. B. movement up along the Phillips curve. C. movement down along the Phillips curve. D. downward shift of the Phillips curve.

B. movement up along the Phillips curve.

Assume the economy is in equilibrium at Y1​ = 0. Other things​ equal, a surge in household wealth will result in a movement from point​ ________ to point​ ________. A. A​; D B. B​; A C. A​; C D. A​; B

C. A​; C

An increase in the real interest rate in the United States will cause net capital outflows to​ ________ and cause the dollar to​ ________ relative to other currencies. A. ​increase; appreciate B. ​decrease; depreciate C. ​decrease; appreciate D. ​increase; depreciate

C. decrease; appreciate

Positive demand shocks have a tendency to​ ________ real GDP relative to potential GDP and​ ________ the inflation rate. A. ​decrease; increase B. ​increase; decrease C. ​increase; increase D. ​decrease; decrease

C. increase; increase

With adaptive​ expectations, the expected inflation rate for the current year​ ________ the actual inflation rate for the previous year. A. is greater than B. is less than C. is equal to D. is unrelated to

C. is equal to

The Phillips curve will shift up with​ ________ or​ ________. A. a positive supply​ shock; an increase in expected inflation B. a negative supply​ shock; a decrease in expected inflation C. a positive supply​ shock; a decrease in expected inflation D. a negative supply​ shock; an increase in expected inflation

D. a negative supply​ shock; an increase in expected inflation

Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate. If the economy experiences a negative demand​ shock, the output gap will​ ________ and the inflation rate will​ ________. A. ​increase; increase B. ​decrease; increase C. ​increase; decrease D. ​decrease; decrease

D. decrease; decrease

A decrease in the real interest rate in the United States will cause the dollar to​ ________ relative to other currencies and​ ________ net exports and real GDP. A. ​appreciate; reduce B. ​appreciate; increase C. ​depreciate; reduce D. ​depreciate; increase

D. depreciate; increase

If the real interest rate in the United States​ increases, foreign investors will​ ________ their demand for U.S. dollars because they desire to​ ________ more U.S. financial assets. A. ​increase; sell B. ​decrease; buy C. ​decrease; sell D. ​increase; buy

D. increase; buy

The Phillips curve represents the​ trade-off between: A. real GDP and inflation. B. unemployment and interest rates. C. interest rates and real GDP. D. inflation and unemployment. Economists and policymakers initially believed that the Phillips curve represented a structural relationship in the economy because they believed basic behavior of households and​ firms, regarding inflation and​ unemployment, would remain unchanged over long periods of time.

D. inflation and unemployment.

Assume the economy is in equilibrium at Y1​, where real GDP equals potential GDP. The economy experiences a positive demand​ shock, and the Fed responds by increasing real interest rates to bring real GDP and inflation back to their original levels. Other things​ equal, the positive demand shock is best represented by an initial movement from A. point D to point C. B. point D to point B. C. point A to point B. D. point A to point C.

D. point A to point C.

Once the Phillips curve has shifted​ up, the economy is​ ________ because​ ________. A. better​ off; every unemployment rate becomes associated with a higher inflation rate B. better​ off; every inflation rate becomes associated with a lower unemployment rate C. worse​ off; every unemployment rate becomes associated with a lower inflation rate D. worse​ off; every inflation rate becomes associated with a higher unemployment rate

D. worse​ off; every inflation rate becomes associated with a higher unemployment rate

What is the equation for the output gap Phillips​ curve? A. πt= πet − a(Ut−UN) − st B. πt= πet − bYt − st C. πt= πet + a(Ut−UN) + st D. πt= πet + bYt − st A negative supply shock will​ cause: A. movement down along the​ Philip's curve. B. an upward shift of the output gap Philips curve. C. movement up along the​ Philip's curve. D. a downward shift of the output gap Philips curve.

D. πt= πet + bYt − st B. an upward shift of the output gap Philips curve.

Positive supply shocks can have a tendency to​ ________ costs of production and​ ________ the inflation rate. A. ​decrease; increase B. ​increase; increase C. ​increase; decrease D. ​decrease; decrease

D. ​decrease; decrease

Under a fixed exchange rate​ system, if the government decides to increase the fixed exchange​ rate, net exports will​ ________ and the IS curve will shift to the​ ________. A. ​decrease; right B. ​increase; right C. ​increase; left D. ​decrease; left

D. ​decrease; left

What causes the Phillips curve to​ shift? A. Supply shocks. B. Changes in expected inflation. C. Changes in the relationship between the output gap and cyclical unemployment. D. All of the above. E. Both A and B are correct.

E. Both A and B are correct.

Proponents of​ supply-side policies that aim to stimulate productivity through tax cuts and work incentives argue that changes in the individual and corporate tax codes and cuts in capital gains taxes set the stage for productivity gains during the 1990s. The graph to the right shows an economy that is in equilibrium at point A. What effect would an increase in productivity have on the Phillips​ curve? Using the line drawing​ tool, draw a new Phillips curve that shows the effect of an increase in productivity. Properly label your curve. Carefully follow the instructions​ above, and only draw the required object. What effect would the productivity increase have on​ inflation? The productivity increase would decrease inflation.

decrease

China experienced many negative effects of the U.S. recession of 2007−2009. Like the United​ States, China was faced with higher oil prices. Unlike the U.S.​ case, housing prices in China did not fall.​ However, China's exports fell sharply as the recession lowered incomes in the United States and other trading partners. The two graphs to the right assume that China was producing at potential GDP prior to the recession. Using the ​IS-MP model and the Phillips​ curve, show the effects of the recession in China. ​1.) Using the line drawing​ tool, show the effects of the higher oil prices and decrease in exports in China. Properly label any curves that you draw. ​2.) Using the point drawing​ tool, plot the new equilibrium point in the ​IS-MP model. Label this point BIS. ​3.) Using the point drawing​ tool, plot the new equilibrium point in the Phillips curve model. Label this point BPC. Carefully follow the instructions​ above, and only draw the required objects. What is the effect on real GDP and​ inflation? Real GDP decreases and the inflation rate changes in an indeterminate way.

decreases, changes in an indeterminate way

Suppose that the economy is known to be producing at potential output. In other​ words, the output gap is zero. The two graphs to the right show the economy in equilibrium using the ​IS-MP model and the Phillips curve. Now suppose that the government increases spending due to a war. Show the effect on output and inflation using both of the graphs. ​1.) Using the line drawing​ tool, show how the increase in government spending affects the​ economy, all other things being equal. Properly label any curves that you draw. ​2.) Using the point drawing​ tool, plot the new equilibrium point in the ​IS-MP model. Label this point BIS. ​3.) Using the point drawing​ tool, plot the new equilibrium point in the Phillips curve model. Label this point BPC. Carefully follow the instructions​ above, and only draw the required objects. What effect would the increase in government spending have on output and​ inflation? The increase in government spending would increase output and increase inflation.

increase, increase

Explain how the equilibrium real interest​ rate, net capital​ outflows, and the level of net exports are determined in an open economy. Complete the table below by selecting the phrase from the right​ (labeled A through​ F) that completes each of the statements on the left. Do this by inserting the appropriate letter​ (A, B,​ etc.) into each​ statement's response box.​ Note: a letter may be used more than once. 1. In an open economy the equilibrium real interest rate is set by ... 2. Given the real interest​ rate, the relative attractiveness of domestic assets is​ determined, and this sets the level of ... 3. ​Finally, net exports become determined since they​ are, by​ definition, equal to ...

the intersection of the IS and MP curves. net capital outflows. net capital outflows.