Econ Exam 3

The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the economy. A press release by the Board on June 28, 2011, stated: "The Conference Board Consumer Confidence Index, which had declined in May, decreased again in June. The Index now stands at 58.5 (1985 = 100), down from 61.7 in May." Using the AS-AD model, sketch a typical diagram showing two equilibrium points, from April to June. Label the vertical axis "Aggregate price level" and the horizontal axis "Real GDP." Assume that all other major macroeconomic factors remain unchanged. Based on your diagram, choose the correct statement.

A fall in consumer confidence leads to a leftward shift of the aggregate demand curve, resulting in a decrease in real GDP and in the price level.

Which statement is FALSE? A)A rise in the price level lowers real wealth and results in a lower level of consumer spending. B)A rise in the price level increases the demand for money, raises the interest rate, and reduces investment spending. C)A fall in the price level will generally lead to a rise in the level of aggregate output demanded. D)A fall in the price level will reduce the demand for money, raise the interest rate, and increase investment spending.

D

Suppose that the government increases spending without changing its taxes in an effort to shift the aggregate demand curve to the right, thereby increasing real GDP. To the extent that increased government borrowing causes interest rates to rise, the increase in aggregate demand will be less than policymakers expected when formulating the magnitude of their fiscal stimulus. The situation described above is known as the crowding-in effect. Is this statement true or false?

False

The 2009 American Recovery and Reinvestment Act was an example of an automatic stabilizer.

False

Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, consider the process by which the following economic event will move the economy from one long-run macroeconomic equilibrium to another. What are the short-run and long-run effects on the aggregate price level and aggregate output? The government lowers taxes, leaving households with more disposable income, with no corresponding reduction in government purchases.

In the short run, aggregate demand will shift to the right and in the long run aggregate supply will shift to the left. In the new equilibrium the level of output is the same as it was in the original equilibrium and the aggregate price level is higher.

Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, consider the process by which each of the following government policies will move the economy from one long-run macroeconomic equilibrium to another. In each case, what are the short-run and long-run effects on the aggregate price level and aggregate output? There is an increase in the quantity of money.

In the short run, aggregate demand will shift to the right; in the long run, short-run aggregate supply will shift to the left. In the new equilibrium the level of output is the same as it was in the original equilibrium and the aggregate price level is higher.

The government's budget surplus in Macroland has risen consistently over the past five years. Two government policy makers disagree as to why this has happened. Policy Maker One argues that a rising budget surplus indicates a growing economy; Policy Maker Two argues that it shows that the government is using contractionary fiscal policy. Which policy maker is correct?

It is impossible to determine whether or not either policy maker is correct.

Suppose that in Wageland all workers sign annual wage contracts each year on January 1. No matter what happens to prices of final goods and services during the year, all workers earn the wage specified in their annual contract. This year, prices of final goods and services fall unexpectedly after the contracts are signed. Answer the following question assuming that the economy starts at potential output. How will the quantity of aggregate output supplied respond to the fall in prices?

It will decrease.

Suppose that in Wageland all workers sign annual wage contracts each year on January 1. No matter what happens to prices of final goods and services during the year, all workers earn the wage specified in their annual contract. This year, prices of final goods and services fall unexpectedly after the contracts are signed. Answer the following question assuming that the economy starts at potential output. Compared to the initial response in the short run, what will happen to the quantity of aggregate output supplied when firms and workers renegotiate their wages?

It will increase.

The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the economy. A press release by the Board on June 28, 2011, stated: "The Conference Board Consumer Confidence Index, which had declined in May, decreased again in June. The Index now stands at 58.5 (1985 = 100), down from 61.7 in May." As an economist, is this news encouraging for economic growth?

No, because it is likely to result in less consumer spending.

For the following case, assess whether the size of the government's debt and the size of the budget deficit indicate potential problems for the economy. The government's debt is relatively low, but the government is running a large budget deficit as it builds a high-speed rail system to connect the major cities of the nation.

No, there are no potential problems.

stagflation

Stagflation is a combination of increasing unemployment and increasing inflation.

There were two major shocks to the U.S. economy in 2007, leading to the severe recession of 2007-2009. One shock was related to oil prices; the other was the slump in the housing market. This question analyzes the effect of these two shocks on GDP using the AD-AS framework. Sketch typical aggregate demand and short-run aggregate supply curves. Label the horizontal axis "Real GDP" and the vertical axis "Aggregate price level." Label the equilibrium point E1, the equilibrium quantity Y1, and equilibrium price P1. Based on your graph, choose the correct statement.

The SRAS curve is upward sloping and passes through Y1 at P1.

Determine whether the following government policies affect the aggregate demand curve or the short-run aggregate supply curve, and in which direction the appropriate curve would shift. To reduce the budget deficit, the government announces that households will pay much higher taxes beginning next year.

The aggregate demand curve would shift to the left.

There were two major shocks to the U.S. economy in 2007, leading to a severe economic slowdown. One shock was related to oil prices; the other was the slump in the housing market. This question analyzes the effect of these two shocks on GDP using the AD-AS framework. Sketch typical aggregate demand and short-run aggregate supply curves. Label the horizontal axis "Real GDP" and the vertical axis "Aggregate price level." Label the equilibrium point E1, the equilibrium quantity Y1, and equilibrium price P1. The Housing Price Index, published by the Office of Federal Housing Enterprise Oversight, calculates that U.S. home prices fell by an average of 3.0% in the 12 months between January 2007 and January 2008. Would the fall in home prices cause a supply shock or demand shock? On your diagram, illustrate the effect of this shock by shifting the appropriate curve. Label the new equilibrium point E2, the equilibrium quantity Y2, and equilibrium price P2. Based on your diagram, choose the correct statement.

The decrease in home prices causes the AD curve to shift left, resulting in a lower level of real GDP.

There were two major shocks to the U.S. economy in 2007, leading to a severe economic slowdown. One shock was related to oil prices; the other was the slump in the housing market. This question analyzes the effect of these two shocks on GDP using the AD-AS framework. Sketch typical aggregate demand and short-run aggregate supply curves. Label the horizontal axis "Real GDP" and the vertical axis "Aggregate price level." Label the equilibrium point E1, the equilibrium quantity Y1, and equilibrium price P1. For the increase in oil prices and the fall in the housing market, determine whether each will shift AS or AD and in which direction. Find the new equilibrium and label it E3. Compare the equilibrium points E1 and E3. What was the effect of the two shocks on real GDP and the aggregate price level (increase, decrease, or indeterminate)?

The effect on the aggregate price level is indeterminate but real GDP will definitely decrease.

The Conference Board publishes the Consumer Confidence Index (CCI) every month based on a survey of 5,000 representative U.S. households. It is used by many economists to track the state of the economy. A press release by the Board on June 28, 2011, stated: "The Conference Board Consumer Confidence Index, which had declined in May, decreased again in June. The Index now stands at 58.5 (1985 = 100), down from 61.7 in May." How should the government respond to this news? What are some policy measures that could be used to help neutralize the effect of falling consumer confidence?

The government could decrease taxes, increase its spending, or increase the money supply.

There were two major shocks to the U.S. economy in 2007, leading to a severe economic slowdown. One shock was related to oil prices; the other was the slump in the housing market. This question analyzes the effect of these two shocks on GDP using the AD-AS framework. Sketch typical aggregate demand and short-run aggregate supply curves. Label the horizontal axis "Real GDP" and the vertical axis "Aggregate price level." Label the equilibrium point E1, the equilibrium quantity Y1, and equilibrium price P1. Data taken from the Department of Energy indicate that the average price of crude oil in the world increased from $54.63 per barrel on January 5, 2007, to $92.93 on December 28, 2007. Would an increase in oil prices cause a demand shock or a supply shock? On your diagram, illustrate the effect of this shock by shifting the appropriate curve. Based on your diagram, choose the correct statement.

The increase in oil prices causes the SRAS curve to shift left, resulting in a higher price level and a lower level of real GDP.

In the short run, determine whether the following event causes a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the change. As a result of an increase in the value of the dollar in relation to other currencies, American producers now pay less in dollar terms for foreign steel, a major commodity used in production.

This results in a rightward shift of the short-run aggregate supply curve.

An economy is in long-run macroeconomic equilibrium, with output at Yp, when the following aggregate demand shock occurs: Firms come to believe that a recession in the near future is likely. What kind of gap (inflationary or recessionary) will the economy face after the shock, and what type of fiscal policies would help move the economy back to potential output?

This will cause a recessionary gap; an expansionary policy should be used.

For the following case, assess whether the size of the government's debt and the size of the budget deficit indicate potential problems for the economy. The government's debt is relatively low, but the government is running a budget deficit to finance the interest payments on the debt.

Yes, there are potential problems.

A fall in the value of the dollar against other currencies makes U.S. final goods and services cheaper to foreigners even though the U.S. aggregate price level stays the same. As a result, foreigners demand more American aggregate output. Your study partner says that this represents a movement down the aggregate demand curve because foreigners are demanding more in response to a lower price. You, however, insist that this represents a rightward shift of the aggregate demand curve. Who is right?

You are right.

Your study partner is confused by the upward-sloping short-run aggregate supply curve and the vertical long-run aggregate supply curve. How would you explain this? Choose the correct statement.

Your study partner is confused by the upward-sloping short-run aggregate supply curve and the vertical long-run aggregate supply curve. How would you explain this? Choose the correct statement.

Suppose that a presidential candidate who promised large personal income tax cuts is elected. Which outcome is MOST likely?

a decrease in short-run aggregate supply

Which factor will shift the short-run aggregate supply curve to the RIGHT?

a widespread decrease in commodity prices

Raising taxes shifts the _____ curve to the _____.

aggregate demand left

The only government policy that has a DIRECT effect on the aggregate demand curve

changing the level of government purchases of final goods and services.

The aggregate demand curve is negatively sloped in part because of the impact of interest rates on

consumption and investment spending.

A decrease in the money supply is likely to cause a(n) _____ in borrowing, a(n) _____ interest rates and a(n) _____ in aggregate demand.

decrease; increase; decrease

The three consequences of the decline in demand during the Great Depression were _____ prices, _____ output, and a surge in unemployment.

falling; increasing

The short run in macroeconomic analysis is a period:

in which many production costs can be taken as fixed.

As a result of a decrease in the value of the dollar in relation to other currencies, U.S. imports decrease and exports increase. Consequently, there is a(n):

increase in aggregate demand.

According to the interest rate effect, an increase in the price level causes people to _____ their money holdings, which _____ interest rates and _____ investment spending

increase; increases; decreases

Aggregate demand will NOT increase when:

interest rates increase

Discretionary fiscal policy may fail to stabilize the economy or may even make the economy less stable because of:

lags in deciding on and implementing a policy change.

The economic slump in the 1970s looked different from the slump at the beginning of the Great Depression because it was...

largely caused by events in the Middle East that led to sudden cuts in world oil production and soaring prices for oil.

Suppose that the stock market crashes, which causes a large decrease in the value of many households' financial assets. The most likely outcome is a _____ the aggregate demand curve.

leftward shift of

The aggregate demand curve would NOT shift to the left as a result of:

lower labor productivity.

Profit per unit equals:

price per unit minus cost per unit

Examples of fiscal policy do NOT include:

reducing the interest rate by increasing the money supply.

An increase in government spending, all other things unchanged, will cause the aggregate demand curve to:

shift to the right.

In Wageland, all workers sign an annual wage contract each year on January 1. In late January, a new computer operating system is introduced that increases labor productivity dramatically. As Wageland moves from one short-run macroeconomic equilibrium to a new equilibrium:

the level of aggregate output will increase and the aggregate price level will fall.

The aggregate supply curve shows the relationship of prices to:

the quantity of output producers are willing to provide.

Nominal wages are "sticky" because

wages are slow to rise in the short run when there are labor shortages and slow to fall even when there is significant level of unemployment.

The short-run aggregate supply curve is positively sloped because:

wages are sticky.

When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This, the _____ effect, is a reason the _____ curve slopes _____.

wealth; aggregate demand; downward