Econ ch 12 & 13

The "ratchet effect" makes anti-inflationary policy

More difficult

A reduction in short-run aggregate demand likely causes a decline in real output, rather than the price level, because

Prices are inflexible downward

d. Employers are required to provide paid sick leave to part-time as well as full-time employees.

Supply decreases

Paying off an internally held debt would

not burden the economy as a whole.

In 2002, the annual price of oil was $24.36. As of late July 2006, the annual price of oil was $62.07. The percentage increase in real GDP from 2001 to 2005 was about 12.6 percent. This indicates that

oil prices increased faster than real GDP, but real GDP still grew at a healthy pace

A political business cycle is the concept that

politicians are more interested in reelection than in stabilizing the economy.

For a person who wants to preserve the size of government, the fiscal options for ending severe demand-pull inflation would include

reducing government spending, increasing taxes, or both.

The government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both.

Refinancing the public debt means

selling new bonds to retire maturing bonds.

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because

there are large amounts of unused capacity and idle human resources.

If public investment financed through borrowing complements private investment,

private borrowers may be willing to pay higher interest rates associated with financing the public debt.

Refinancing of the public debt might cause

higher interest rates that can lower investment and economic growth.

The problem of time lags in enacting and applying fiscal policy is that

in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed.

h. The spread of democracy around the world increases consumer confidence in the United States.

Demand increases

i. The United States enters into an arms race with China, resulting in a significant increase in military spending.

Demand increases

Consumers become more pessimistic about the economy.

Demand decreases

g. A stock market crash reduces people's wealth.

Demand decreases

Which of the following explains why the aggregate demand curve slopes downward?

The interest-rate effect, the real-balances effect, and the foreign purchases effect

An internally held debt is one in which the

bondholders live in the nation having the debt

The multiplier

causes an initial change in spending to generate an even larger change in the aggregate demand curve.

Expectations of a near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again

An upsloping aggregate supply curve weakens the multiplier effect because any increase in aggregate

demand will have both a price and an output effect

Paying off an externally held debt

may lower the dollar exchange rate.

The distinction between the absolute and relative sizes of the public debt is important because

the absolute size doesn't tell you about an economy's capacity to repay the debt

The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because a downsloping

single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed

j. A revolution in Iran results in a significant reduction in the world's supply of oil.

supply decreases

If the annual interest payments on the debt sharply increased as a percentage of GDP,

the government would have to use tax revenues or go deeper into debt.

Consider the following statement: "Although fiscal policy clearly is useful in combating the extremes of severe recession and demand-pull inflation, it is impossible to use fiscal policy to fine-tune the economy to the full-employment, noninflationary level of real GDP and keep the economy there indefinitely." This statement recognizes that

the impact of fiscal policy will affect the economy differently depending on the timing of the policy and the severity of the situation

The shape of the short-run aggregate supply curve is

upsloping, because wages adjust more slowly than the price level, increasing profits and output.

f. A hurricane destroys manufacturing plants.

Supply decreases

e. Government spending increases.

Demand increases

For a person who thinks the public sector is too large, the fiscal options for ending severe demand-pull inflation would include

A cut in government spending

Refinancing of the public debt might drive up real interest rates because

Government borrowing to finance the debt increases demand for funds and competes with private borrowing

What are the two ways to measure the public debt?

Its absolute dollar size and as a percentage of GDP

Technological changes enable workers to be more productive.

Supply increases

c. Manufacturing firms expect steel prices to decrease significantly.

Supply increases

k. A new computer chip is developed that is faster and cheaper than previous chips.

Supply increases

A full-strength multiplier applies to a decrease in aggregate demand when aggregate

Supply is horizontal

The long-run aggregate supply curve is vertical because the economy's potential output is determined by

the availability and productivity of real resources, not by the price level.

The crowding-out effect is

the reduction in investment spending caused by the increase in interest rates arising from an increase in government spending