Hw 5-7 Study guide

Say's Law argues that a given ____________________ must create an equivalent________________________ somewhere else in the economy.

value of supply; value of demand

What can cause a recessionary gap?

A decline in investment.

The statement that GDP = C + I + G + X - M is an identity, because ________________________________.

It is true according to the definition of GDP.

Does Keynes' law apply more accurately in the long run or the short run?

Keynes' law applies more accurately to the short run.

In an AD/AS model, the point where the economy has excess capacity is called the:

Keynesian zone of the AS curve

Which of the following must be present in order for the aggregate supply curve to form an upward slope?

fixed cost of inputs combined with rising prices for outputs

To a macroeconomist, a trade deficit is synonymous with which of the following?

outflow of financial capital.

The maximum quantity that an economy can produce, given its existing levels of labor, physical capital, technology, and institutions, is called:

potential GDP.

How would an increase in wealth affect the aggregate demand curve? Explain.

A higher price level leads to lower real wealth, which is the definition of wealth effect. Lower real wealth leads to decreased aggregate demand. That means AD curve shifts to the left.

According to the Keynesian framework, ________________________ may cause a recession, but not inflation.

A major trading partner's economic slowdown

According to the Keynesian framework, which of the following will not help a country to get out of a recession, but may help that country reduce inflation?

A decrease in military spending

Identify a factor that will lead to a decrease in aggregate planned expenditure.

A rise in interest rates

Identify a factor that is likely to reduce consumption expenditure in an economy.

A sharp fall in the stock market index

Does a trade surplus mean an overall inflow or an overall outflow of financial capital to an economy?

A trade surplus means an overall inflow of financial capital.

The Keynesian model is built on the importance of ______ as a cause of business cycles and a degree of wage and price rigidity.

Aggregate Demand

From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply and why?

Aggregate Demand. Because a decrease in Consumption, Investment, Government Spending, Exports, But increase in imports. And sticky wages.

A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of:

Aggregate demand.

According to neoclassical economists, economic output is primarily determined by ______ which fluctuates around the potential GDP in the long run.

Aggregate supply

Which of the following leads to an increase in aggregate demand?

An increase in income

Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in:

An increase in price level.

If exports and imports:

Are equal, then trade is balanced.

In order to shift the vertical supply curve to the left, which of the following would have to occur?

Breakdown of key market institutions

Which of the following represents a financial inflow into the U.S. economy?

Canadian investors buying real estate in Arizona.

In the Keynesian framework, most short-run fluctuations in GDP are due to:

Changes in aggregate demand.

____________________ will not cause a shift of the AS curve in a Keynesian framework.

Changes in output prices

What is the most common method of measuring flows of trade?

Comparing exports of goods, services, and financial capital between countries.

What are the components of the aggregate demand (AD) curve?

Consumption, investment, net exports and government spending.

From a macroeconomic perspective, if GDP economic indicators show a decline of 10% or more in a single year, then which of the following outcomes is most likely to result?

Deep economic recession.

Melanie decided to save 20% of her annual earnings for 10 years so she would have a down payment for a house. After 5 years, what change in the economy would cause an increase in the purchasing power of the funds she has managed to save?

Deflation

Whether the economy is in a recession is illustrated in the AD/AS model by how close the _____________________ is to the potential GDP line.

Equilibrium

The nominal interest rate is comprised of the real rate, plus an ____________.

Expected inflation factor.

Goods and services produced in one country that are then sold in other countries are called ____________.

Exports

From a macroeconomic perspective, a payment made by a foreign firm to a U.S. investor looks just like an:

Exports of a service.

The _____________ holds that a rise in price level will make domestic goods relatively more expensive, ____________ exports and _______________ imports.

Foreign price effect, discouraging; encouraging.

A country's current account balance refers to a broad measure of the balance of trade that includes:

Goods and services, international flow of income, and foreign aid.

At the outset of the 21st century, most global trade took the form of:

Goods, rather than services.

In which of the following situations does investment spending increase?

Government proposes to increase taxes on capital.

Suppose after five years of sluggish growth, the economy of the European Union picks up speed. What would be the likely impact on the U.S. trade balance, GDP, and employment?

Higher EU growth would increase demand for U.S. exports, reducing our trade deficit. The increased demand for exports would show up as a rightward shift in AD, causing GDP to rise (and the price level to rise as well). Higher GDP would require more jobs to fulfill, so U.S. employment would also rise.

In which of the following situations will consumption expenditure in an economy increase?

If consumers expect their income to increase in the near future

Explain the relationship between a current account deficit and the flow of funds.

If more monies are flowing out of the country (for example, to pay for imports) it will make the current account more negative or less positive, and if more monies are flowing into the country, it will make the current account less negative or more positive

Describe the mechanism by which supply creates its own demand

In order to supply goods, suppliers must employ workers, whose incomes increase as a result of their labor. They use this additional income to demand goods of an equivalent value to those they supply.

What is likely to happen if inflation is expected to decrease?

Interest rates are likely to fall

Which of the following is likely to happen if the aggregate demand of a country increases?

Interest rates are likely to increase

If a Phillips curve shows that unemployment is high and inflation is low in the economy, then that economy:

Is producing at a point where output is more than potential GDP.

What is the shape of the long-run neoclassical Phillips curve?

It is a vertical line at the natural rate of unemployment.

The theory of _____________________ holds that people will use all information available to them to form the most accurate possible expectations about the future.

Rational expectations

Write down the national savings and investment identity.

S + (M - X) = I + (G - T)

Which of the following represents the national savings and investment identity - Supply of financial capital = Demand for financial capital - expressed in algebraic terms?

S+(M-X) = I + (G-T)

Briefly explain why the SRAS curve is initially horizontal in the Keynesian model

Since the economy is producing an output far below potential GDP, it is easy to increase production in response to a small price change.

Which of the following will strongly influence a nation's level of trade?

Size of its economy, its geographic location, and its history of trade.

_________________ results when an economy experiences high unemployment and high inflation at the same time.

Stagflation

When an economy is experiencing higher real interest rates, business firms will most likely be discouraged from investing in:

Tangible and/or intangible capital.

If aggregate supply is vertical, what role does aggregate demand play in determining output? In determining the price level?

The aggregate Demand doesn't affect the quantity of output.

According to neoclassical economists, what will be the impact of a surge in export sales on an economy in the long run?

The aggregate price level in the economy will rise, but there will be no change in the economy's real GDP

Which of the following is likely to happen if inflation is expected to decrease?

The central bank is likely to engage in an expansionary monetary policy

Which of the following does not determine consumption expenditure?

Unexpected inflation.

Define the terms "merchandise trade balance" and "current account balance."

The merchandise trade balance measures only imports and exports of goods. The current account balance includes trade in goods, services, payments on foreign investments, and investments, and unilateral transfers.

To put it another way, the neoclassical view of unemployment tends to focus on how public policy can be adjusted to reduce_____________.

The natural rate of unemployment.

What happens when a positive demand shock leads to an increase in aggregate demand in an economy?

The public expects inflation to increase

If inflation is expected to decrease, _____.

The public may anticipate a recession

Which of the following is likely to happen when a negative supply shock leads to a decrease in aggregate supply in an economy?

The public will expect the central bank to engage in contractionary monetary policy

Suppose domestic investment increases, and there is no change in the amount of domestic private and public saving. Using the national savings and investment identity, show what happens to the size of the trade deficit.

The trade deficit must increase. To put it another way, this increase in investment must be financed by an inflow of financial capital from abroad.

What does the long-run neoclassical Phillips curve indicate?

There exists no tradeoff between inflation and unemployment in the long run

The term _____________ describes circumstances where a country's exports exceed its imports.

Trade Surplus

From a macroeconomic perspective, an economic transaction in the form of a financial investment is synonymous with which of the following?

Trade in the financial capital market

Which of the following represents a financial outflow from the U.S. economy?

U.S investors buying foreign assets in Germany.

Which of the following is a building block of neoclassical economics?

Wages and prices will adjust in a flexible manner

The _________________ means that a higher price level leads to lower real wealth.

Wealth Effect

In macroeconomics, _____________________ denotes the relationship between the total quantity of goods and services and the price level for output.

aggregate demand (AD)

Consumption, investment, government spending, exports, and imports are:

all components of aggregate demand.

Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?

because when a recession takes place, wages tend to stay the same, which keeps price of goods up there as well, while many employers can not afford this so it leads to lay offs

When the economy of a country is operating close to its full capacity:

cyclical unemployment is close to zero.

If the price level of what firms produce is rising across an economy, but the costs of production are constant, then:

higher profits will induce expanded production.

As the aggregate price level in an economy rises, ____________________.

interest rates increase

Why is productivity growth considered to be the most important factor in the AD/ASAD/AS model?

it shifts the AS curve in the long-term

What is the Keynesian prescription for recession? For inflation?

recession- policies would have to shift to the right for AD, like tax cuts for consumers, and business to stimulate consumption and investment. inflation- AD must be shifted to the left by using tax increases or government spending cuts.

Economic production has fallen to less than full potential due to inadequate incentives for firms to produce. The duration of this economic condition will likely be:

short-term