intermediate macroeconomics exam 3
who came up with the theory of liquidity preference?
John Maynard Keynes
a simple closed-economy model in which income is determined by expenditure
Keynesian cross
basic model of income determination takes fiscal policy and investment as exogenous fiscal policy has a multiplier effect on income
Keynesian cross
comes from liquidity preference theory when money demand depends positively on income shows all combinations of r and Y that equate demand for real money balances with supply
LM curve
graph of all combinations of r and Y that equate the supply and demand for real money balances
LM curve
Most weeks of unemployment are attributable to what?
a small number of long-term unemployed people
In the Keynesian-cross model, if the MPC equals 0.75, then a $2 billion increase in government spending increases planned expenditures by __________ and increases the equilibrium level of income by __________. a. $2 billion; $8 billion b. $0.75 billion, $1 billion c. $0.75 billion, $0.75 billion d. $1 billion; $4 billion
a. $2 billion; $8 billion
Short-term unemployment is most likely to be __________ unemployment, while long-term unemployment is most likely to be __________ unemployment. a. Structural; frictional b. Structural; the natural rate of c. The natural rate of; frictional d. Frictional; structural
d. Frictional; structural
By paying efficiency wages, firms contribute to higher unemployment because they: a. Increase the wage bill b. Make workers more productive c. Keep the wage below the equilibrium level d. Keep the wage above the equilibrium level
d. Keep the wage above the equilibrium level
Permitting a lower minimum wage for teenagers would likely: a. Raise teenage employment b. Raise teenage wages overall c. Prevent teenagers from getting job experience d. Raise unemployment among unskilled adults
d. Raise unemployment among unskilled adults
The labor-force participation rate is (rising/dropping).
dropping
In the long run, prices are __________. In the short run, prices are __________.
flexible; sticky
caused by the time it takes workers to search for a job (occurs even when wage are flexible and there are enough jobs to go around)
frictional unemployment
disseminate info about job openings to better match workers and jobs
government employment agencies
persons not in the labor force who want and are available for work and who have looked for a job but have not recently looked for work
marginally attached workers (discouraged workers are a part of this)
the combination of r and Y that simultaneously satisfies the equilibrium conditions in the goods and money markets
short-run equilibrium (where IS and LM cross)
policy actions aimed at reducing the severity of short-run economic fluctuations
stabilization policy (i.e., using monetary policy to combat the effects of adverse supply shocks)
if the unemployment rate is constant aka long-run equilibrium of the labor market
state-state condition
How is there unemployment from real wage rigidity?
If real wage is stuck above its equilibrium level, then there aren't enough jobs to go around. Aka, if there are more people willing to work than are hired at this wage, the gap in the graph is unemployment.
Why is the labor force participation rate declining? (5 reasons)
1. aging population (more retired people) 2. more disabled workers 3. weak demand for unskilled workers 4. high rates of opioid addiction 5. expanded availability of video games
What are two reasons for unemployment?
1. job search 2. wage rigidity
What are 3 reasons for wage rigidity?
1. minimum-wage laws 2. labor unions 3. efficiency wages
A favorable supply shock (raises/lowers) costs and prices.
lowers
The long-run aggregate supply curve is vertical because...
output depends on technology and factor supplies but not prices
The short-run aggregate supply curve is horizontal because...
prices are sticky at predetermined levels
help workers displaced from declining industries get skills needed for jobs in growing industries
public job training programs
An increase in money supply shifts the aggregate demand curve to the (left/right).
right
A policy will reduce the natural rate of unemployment only if it lowers _____ or increases _____.
s; f
changes in the composition of demand among industries or regions
sectoral shifts ex: more jobs repairing computers, less job repairing typewriters
exogenous changes in aggregate supply or demand temporarily push the economy away from full employment
shocks (i.e., a stock market crash causes consumers to cut back on spending)
In the __________-run, -prices are sticky -shocks can push output and employment away from their natural rates
short
The liquidity preference theory applies in the (long/short)-run.
short
the unemployment resulting from real wage rigidity and job rationing
structural unemployment
shock that alters production costs, affects the prices that firms charge
supply shock (aka price shocks)
a graph of all combinations of r and Y that result in goods market equilibrium
the IS curve
What is the L(r) curve?
the demand for real money balances (M/P)^d = L(r)
the increase in income resulting from a $1 increase in G.
the government purchases multiplier
If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be: a. 0.02 b. 0.08 c. 0.10 d. 0.18
d. 0.18
Refer to Exhibit B: In this graph, assume that the economy starts at point A, and there is a favorable supply shock that does not last forever. In this situation, point _____ represents short run equilibrium, and point _____ represents long run equilibrium. a. B; C b. B; A c. E; D d. E; A
d. E; A
More frequent holidays for workers in Europe than in the United States contribute to: a. Higher employment-to-population ratios in Europe than in the United States b. Lower employment-to-population ratios in Europe than in the United States c. More hours worked per year by the average employed person in Europe than the average employed person in the United States d. Fewer hours worked per year by the average employed person in Europe than in the United States
d. Fewer hours worked per year by the average employed person in Europe than in the United States
In the short run... What happens to AD and output when there is an increase in money supply? a decrease?
increase in money supply --> AD falls, output decreases decrease in money supply --> AD rises, output increases
In the long run... What happens to AD and output when there is an increase in money supply? a decrease?
increase in money supply --> AD falls, output stays the same decrease in money supply --> AD rises, but output stays the same
forecasts changes in economic activity 6-9 months into the future published monthly by the Conference Board used in planning by businesses and government, despite not being perfect
index of leading economic indicators (LEI index)
employed union workers whose interest is to keep wages high
insiders
the negative relationship between GDP and unemployment
Okun's law
Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the labor market were always in equilibrium, this would lead to: a. A lower real wage and a rise in unemployment b. A lower real wage and no change in unemployment c. A lower real wage and less unemployment d. No change in real wage or in unemployment
b. A lower real wage and no change in unemployment
In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy: a. Increases the amount of money in the economy b. Changes income, which changes consumption, which further changes income c. Is government spending and, therefore, more powerful than private spending d. Changes the interest rate
b. Changes income, which changes consumption, which further changes income
According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased: a. Increases b. Decreases c. Does not change d. May either increase or decrease
b. Decreases
When firms experience unplanned inventory accumulation, they typically: a. Build new plants b. Lay off workers and reduce production c. Hire more workers and increase production d. Call for more government spending
b. Lay off workers and reduce production
If the short run aggregate supply curve is horizontal and the long run aggregate supply curve is vertical, then a change in the money supply will change __________ in the short run and change __________ in the long run. a. Only prices; only output b. Only output; only prices c. Both prices and output; only prices d. Both prices and output; both prices and output
b. Only output; only prices
If the rate of separation is 0.02 and the rate of job finding is 0.08, but the current unemployment rate is 0.10, then the current unemployment rate is __________ the equilibrium rate, and in the next period it will move __________ the equilibrium rate. a. Above; toward b. Above; away from c. Below; toward d. Below; away from
c. Below; toward
Refer to Exhibit A: In this graph, initially the economy is at point E, with price P0 and output Ybar. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point _____, and then in the long run, to point _____. a. A; D b. D; A c. C; B d. B; C
c. C; B
The unemployment resulting when real wages are held above equilibrium is called __________ unemployment, while the unemployment that occurs as workers search for a job that best suits their skills is called __________ unemployment. a. Efficiency; inefficiency b. Efficiency; structural c. Frictional; efficiency d. Structural; frictional
d. Structural; frictional
In the model of the steady-state unemployment rate with a fixed labor force, the rate of job finding equals the percentage of the __________ who find a job each month, while the rate of job separation equals the percentage of the __________ who lose their job each month. a. Labor force; labor force b. Labor force; unemployed c. Employed; labor force d. Unemployed; employed
d. Unemployed; employed
workers who have given up on looking for a job and are considered out of the labor force
discouraged workers
"Full employment" means that unemployment equals...
its natural rate (not zero)
An decrease in money supply shifts the aggregate demand curve to the (left/right).
left
In the __________-run... -prices are flexible -output and employment are always at their natural rates -the classical theory applies
long
Discouraged workers are counted as: a. Part of the labor force b. Out of the labor force c. Employed d. Unemployed
b. Out of the labor force
comes from Keynesian cross when planned investment depends negatively on interest rate shows all combinations of r and Y that equate planned expenditure with actual expenditure on goods and services
IS curve
the intersection of the IS and LM curves shows the unique point (Y, r) that satisfies equilibrium in both the goods and money markets
IS-LM model
Suppose that over the course of a year, 100 people are unemployed for 4 weeks each (the short-term unemployed), while 10 people are unemployed for 52 weeks each (the long-term unemployed). Approximately what percentage of the total spells of unemployment were attributable to the long-term unemployed? a. 9 percent b. 10 percent c. 43.5 percent d. 56.5 percent
a. 9 percent
Refer to Exhibit B: Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point: a. A b. B c. C d. D
a. A
Unions contribute to structural unemployment when collective bargaining results in wages: a. Above the equilibrium level b. Below the minimum wage c. Below the equilibrium level d. Above the level of unemployment compensation
a. Above the equilibrium level
Starting from long run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: a. Decreasing the money supply b. Increasing the money supply c. Decreasing the price level d. Increasing the price level
a. Decreasing the money supply
According to the quantity theory of money, when velocity is constant, if output is higher, __________ real balances are required, and for fixed M this means __________ P. a. Higher; lower b. Lower; higher c. Higher; higher d. Lower; lower
a. Higher; lower
If the short run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in __________ prices and __________ output in the short run. a. Higher; lower b. Lower; higher c. Higher; higher d. Lower; lower
a. Higher; lower
Holding output, Y, fixed, a reduction in the demand for money is the equivalent of a(n) __________ in velocity and will shift the aggregate demand curve to the __________. a. Increase; right b. Increase; left c. Decrease; right d. Decrease; left
a. Increase; right
If the short run aggregate supply curve is horizontal, then changes in aggregate demand affect: a. Level of output but not prices b. Prices but not level of output c. Both prices and level of output d. Neither prices nor level of output
a. Level of output but not prices
Okun's law is the __________ relationship between real GDP and the __________. a. Negative; unemployment rate b. Negative; inflation rate c. Positive; unemployment rate d. Positive; inflation rate
a. Negative; unemployment rate
According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium wages because worker __________ increases. a. Productivity b. Turnover c. Unionization d. Shirking
a. Productivity
Stabilization policy refers to policy actions aimed at: b. Equalizing incomes of household in the economy c. Maintaining constant shares of output going to labor and capital d. Preventing increases in the poverty rate
a. Reducing the severity of short run economic fluctuations
Which of the following policies were not adopted by the government in an attempt to reduce the natural rate of unemployment? a. Unemployment insurance b. Government employment agencies c. Public retraining programs d. The Illinois bonus program for unemployment insurance claimants who found jobs quickly
a. Unemployment insurance
Spells of unemployment end when the unemployed person finds a job or: a. Withdraws from the labor force b. Enters the labor force c. Runs out of unemployment insurance compensation d. Refuses to answer unemployment survey questions
a. Withdraws from the labor force
shows the relationship between price level and quantity of output demanded
aggregate demand curve
Starting from long run equilibrium, without policy intervention, the long run impact of a temporary adverse supply shock is the price as well: a. Be permanently higher, and output will be restored to the natural rate b. Return to the old level, and output will be restored to the natural rate c. Be permanently higher, and output will be permanently higher d. Return to the old level, but output will be permanently higher
b. Return to the old level, and output will be restored to the natural rate
Most spells of unemployment are __________-term, and most weeks of unemployment are attributable to __________-term unemployment. a. Short; short b. Short; long c. Long; long d. Long; short
b. Short; long
All of the following are reasons for frictional unemployment except: a. Workers have different preferences and abilities b. Unemployed workers accept the first job offer that they receive c. The flow of information is imperfect d. Geographic mobility takes time
b. Unemployed workers accept the first job offer that they receive
In a __________, the actual unemployment rate falls below the natural rate.
boom
The equilibrium of the Keynesian cross shows: a. Determination of equilibrium income and the interest rate in the short run b. Determination of equilibrium income and the interest rate in the long run c. Equality of planned expenditure and income in the short run d. Equality of planned expenditure and income in the long run
c. Equality of planned expenditure and income in the short run
Refer to Exhibit C: In this graph, if firms are producing at level Y1, then inventories will __________, inducing firms to __________ production. a. Rise; increase b. Rise; decrease c. Fall; increase d. Fall; decrease
c. Fall; increase
The government-purchases multiplier indicates how much __________ change(s) in response to a $1 change in government purchases. a. The budget deficit b. Consumption c. Income d. Real balances
c. Income
If a short run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will __________, and output will __________. a. Increase; increase b. Decrease; decrease c. Increase; decrease d. Decrease; increase
c. Increase; decrease
Which of the following is the best example of structural unemployment? a. Tim is looking for a job with flexible hours but has not been offered one yet. b. Vickie lost her job as a graphic artist at a movie studio because she did not have training in computer-generated animation. c. Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available. d. Fatima lost her job at a packing plant but has not looked intensively for a new job because she still has two months of unemployment insurance benefits left.
c. Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available.
When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is __________, and the aggregate demand curve shifts __________. a. Greater; inward b. Greater; outward c. Lower; inward d. Lower; outward
c. Lower; inward
Wage rigidity: a. Forces labor demand to equal labor supply b. Is caused by sectoral shifts c. Prevents labor demand and labor supply from reaching the equilibrium level d. Increases the rate of job finding
c. Prevents labor demand and labor supply from reaching the equilibrium level
Any policy aimed at lowering the natural rate of unemployment must either __________ the rate of job separation or __________ the rate of job finding. a. Reduce; reduce b. Increase; increase c. Reduce; increase d. Increase; reduce
c. Reduce; increase
Leading economic indicators are: a. The most popular economic statistics b. Data that are used to construct the consumer price index and the unemployment rate c. Variables that tend to fluctuate in advance of the overall economy d. Standardized statistics compiled by the National Bureau of Economic Research
c. Variables that tend to fluctuate in advance of the overall economy
the average rate of unemployment around which the economy fluctuates
natural rate of unemployment
The tax multiplier... is (positive/negative) is (greater than/less than) one is (larger than/smaller than) the govt spending multiplier
negative; greater than; smaller than
unemployed non-union workers who prefer equilibrium wages, so there would be enough jobs for them
outsiders
An adverse supply shock (raises/lowers) costs and prices.
raises
fraction of unemployed workers who find jobs
rate of job finding
fraction of employed workers who become separated from their jobs
rate of job separation
In a __________, the actual unemployment rate rises above the natural rate.
recession
the paradigm most mainstream economists and policymakers use to think about economic fluctuations and policies to stabilize the economy shows how the price level and aggregate output are determined shows how the economy's behavior is different in the SR and the LR
the model of aggregate demand and supply
basic model of interest rate determination takes money supply and price level as exogenous an increase in the money supply lowers the interest rate
theory of liquidity preference
simple theory in which the interest rate is determined by money supply and money demand
theory of liquidity preference
pays part of a worker's former wages for a limited time after the worker loses his/her job
unemployment insurance (UI)
The LRAS curve is __________. The SRAS curve is __________.
vertical; horizontal