Macro Ch.10,11,12,13

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _____, generating a _____ quantity of output demanded.

higher; greater

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.

higher; lower

Economic research shows that _____ in explaining international differences in living standards.

human capital is at least as important as physical capital

The LM curve, in the usual case:

slopes up to the right.

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

Balanced growth refers to the property where:

values of many variables within a country rise together in the steady state.

If the production function is Y = AK2/3 L1/3 in the land of Antegria, and the labor force increases by 3 percent, capital stock increases by 3 percent, and TFP grows by 3 percent, then the total output growth is _____ percent.

6

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 200 + 0.7 (Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

70

Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

A

Over the business cycle, investment spending _____ consumption spending

is more volatile than

In the Keynesian-cross model, actual expenditures equal:

GDP

d. Now place scenario A and scenario B in the appropriate category describing the Fed's proper response to an increase in the price of oil.

Increase money supply: Scenario B: Maintain output and employment only Leave the money supply unchanged: Scenario A: Maintain the price level only

c. A best seller titled Retire Rich convinces the public to increase the percentage of its income devoted to saving. To maintain income (Y), the Fed should ________the money supply.

Increase: Investment Decrease: Interest rate, consumption, income increase

a. From 2008 to 2009, the unemployment rate rose by b. Okun's law predicts that the percentage change in real GDP from 2008 to 2009 should be c. The actual percentage change in real GDP from 2008 to 2009 was

a. 3.5% b. -4% c. -2.6%

a. Prior to 2020, the most recent business cycle turning point was a _____________ in __________. b. Examples of contractions (recessions) since 1990 include:

a. trough, 2009 b. December 2007 to June 2009 July 1990 to March 1991

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

both Central Bank A and Central Bank B should increase the quantity of money.

The IS and LM curves together generally determine:

both income and the interest rate.

b. Now assume all shocks to the economy arise from exogenous changes in the demand for money. Assume a negative shock t the demand for money that shifts the LM curve by +$4 trillion for any given interest rate (r). First, adjust the LM curve to indicate this shock in both IS‐LM graphs below. Then move the equilibrium point to indicate the new equilibrium level of income (Y) for each policy. c. Which policy allows for a more stable output response to a shock that arises from a change in the demand for goods and services? d. Which policy allows for a more stable output response to a shock that arises from a change in the demand for money?

c. The fixed money supply policy d. The fixed interest rate policy

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of T will:

decrease equilibrium income by ΔT (MPC) / (1 - MPC).

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment _____, and this shifts the expenditure function _____, thereby decreasing income.

decreases; downward

d. Analysis of the influence of tax policy. First, alter the IS‐LM graph below to reflect the impact of a decrease in taxes (T). Next move the equilibrium point to indicate the new equilibrium. e. If money demand is a function of disposable income rather than national income, this does not alter the analysis of a tax cut. f. In this analysis, a decrease in taxes will always increase national income (Y).

e. False f. False

A study by economists on the relationship between firm management and productivity concludes that well-managed firms have all of these features EXCEPT:

higher bankruptcy rates

a. Suppose the government wants to raise investment but keep output (Y) constant. Adjust the IS‐LM graph below to reflect the necessary fiscal and monetary policy mix necessary to achieve this goal The Fed should _________ the money supply, and the government should increase _________

increase, taxes

According to the theory of liquidity preference, decreasing the money supply will _____ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will _____ nominal interest rates in the long run.

increase; decrease

Assume that the economy is initially at point A with aggregate demand given by AD . A shift in the aggregate demand curve to AD could be the result of either a(n) _____ in the money supply or a(n) _____ in velocity.

increase; increase

Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) _____ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _____.

increase; left

b. In the early 1980s, the U.S. government cut taxes and ran a budget deficit, while the Fed pursued a tight monetary policy. Lowering taxes increased income (Y) and ___________ in the money market, while decreasing the money supply increased the interest rate (r) and ___________ in the goods market.

increased money demand, decreased investment

Business cycles are:

irregular and unpredictable.

When firms experience unplanned inventory accumulation, they typically:

lay off workers and reduce production

Using the aggregate demand-aggregate supply (AD-AS) model, the economic downturn caused by Covid-19 can be BEST described by a:

leftward shift of LRAS and leftward shift of AD.

If the Fed accommodates an adverse supply shock, output falls _____, and prices rise _____.

less; more

The total output of an economy grows at 4 percent and the depreciation rate is 3 percent. Further, the capital stock is 6 times one year's GDP and the capital income is 30 percent of GDP. In this case, we can conclude that the economy is operating at a level of capital _____ than the Golden Rule and _____ saving will lead to more consumption in the long run.

more; decreasing

The IS-LM model is generally used:

only in the short run.

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.

only output; only prices

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then

output and employment will increase in the short run.

In the short run, a favorable supply shock causes:

prices to fall and output to rise.

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____.

prices; output

In this graph, if firms are producing at level Y3, then inventories will _____, inducing firms to _____ production.

rise; decrease

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

the government-spending multiplier is larger than the tax multiplier.

a. The central bank increases the money supply.

Increases: Investment, consumption, income Decreases: Interest Rate

a. After the invention of a new high speed computer chip, many firms decide to upgrade their computer systems To maintain income (Y), the Fed should ________the money supply.

Increases: consumption, income, interest rate, investment decrease

In the Keynesian-cross model, if the MPC equals 0.75, then a $3 billion decrease in taxes increases planned expenditures by _____ and increases the equilibrium level of income by _____.

$2.25 billion; $9 billion

Assume that the money demand function is (M / P) = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1,600

According to the Keynesian-cross analysis, if the marginal propensity to consume is 0.6 and government expenditures and autonomous taxes are both increased by 100, equilibrium income will rise by:

100

The total capital stock of an economy increases by 10 units and the total labor increases by 50 units. The marginal product of capital and labor are 50 and 10, respectively. If there is no TFP growth, the total output will increase by _____ units.

1000

If the contribution of capital to growth in output is 1.5 percent, the contribution of labor is 0.5 percent, and the Solow residual growth is equal to 1 percent, then total output must be growing at:

3 percent

b. A wave of credit card fraud increases the frequency with which people make transactions in cash. To maintain income (Y), the Fed should _______the money supply.

Increases: interest rate Decreases: consumption, income, investment increase

b. The government increases government purchases.

Increases: Interest rate, consumption, income Decreases: Investment

d. The government increases government purchases and taxes by equal amounts

Increases: Interest rate, income Decreases: investment, consumption

c. The government increases taxes.

Increases: Investment Decreases: Interest rate, consumption, income

When capital increases by ΔK units, output increases by:

MPK × ΔK units.

Which one of these is a reason why many economists are skeptical about industrial policies?

Measuring externalities from different sectors is quite hard.

Increase money supply:

Scenario A: Maintain the price level only Scenario B: Maintain output and employment only

An economy begins in long-run equilibrium. Then a change in government regulations allows banks to start paying interest on checking accounts. Recall that the money stock is the sum of currency and demand deposits, including checking accounts, so this regulatory change makes holding money more attractive. a. As a result of this regulatory change, The demand for money __________ , and the velocity of money ________. b.If the Fed keeps the money supply constant, in the short run, the price level will __________, and output will _________ . In the long run, the price level will ___________, and output will _________. c. If the goal of the Fed is to stabilize the price level, the Fed should __________ the money supply in response to this regulatory change. d. . If the goal of the Fed is to stabilize output, the Fed should ______________ the money supply in response to this regulatory change.

a. increases, decrease b.remain unchanged, decrease, decrease, return to its original level c. increase d. increase

a. Consider real GDP. During the recession, real GDP declined by___________ billion. b. During the recession, which of the four components declined, and which increased? Place each category of expenditure in the appropriate category. c. Of the components that declined, which declined the most, measured in billions of dollars?

a. $646,046 b. Decreased: consumption, investment Increased: Government purchases, Net exports c. investment

Suppose an economy described by the Solow model is in a steady state with population growth n of 1.8 percent per year and technological progress g of 1.8 percent per year. Total output and total capital grow at 3.6 percent per year. Suppose further th the capital share of output is 1/3 . a.Using the growth-accounting equation to divide output growth into three sources—capital, labor, and total factor productivity—determine how much output growth can be attributed to each source. (Indicate your answer to the tenths place.) Contribution of capital: Contribution of labor: Contribution of total factor productivity growth: b. The results ____________ the data shown in Table 11-1 in the text for the United States for 1960-2022. (Let the criterion for "matching" be within 2 or 3 tenths of a percent for each estimate.)

a. 1.2%, 1.2%, 1.2% b. match

a. If investment does not depend on the interest rate, the LM curve is horizontal. b. If investment does not depend on the interest rate, the IS curve is vertical. c. If money demand does not depend on the interest rate, the IS curve is horizontal. d. If money demand does not depend on the interest rate, the LM curve is vertical. e. If money demand does not depend on income, the LM curve is horizontal. f. If money demand is extremely sensitive to the interest rate, the LM curve is horizontal g. Suppose the government wants to change the level of output. If the LM curve is horizontal, then h. Again, suppose the government wants to change the level of output. If the IS curve is vertical, then

a. False b. True c. False d. True e. True f. True g. monetary policy is ineffective, whereas fiscal policy is highly effective. h. monetary policy is completely ineffective, whereas fiscal policy is highly effective

a. If some of the men started working outside the home, so that the labor force increased by 5 percent, measured output would ________ , labor productivity (defined as output per worker) would __________ , and total factor productivity would __________. b. In year 1, the capital stock was 6, the labor input was 3, and output was 12. In year 2, the capital stock was 7, the labor input was 4, and output was 14. Between the two years, factor productivity ___________

a. rise by 1.67%, fall by 3.33%, be unaffected b. fell by 5.6%

a. Using the data, sort the countries by income group. Note that each country will be classified in a group. b. The data show that _________ countries have lower ___________ growth (1% or lower annually). This is consistent with the implications of the Solow model c. In general, the Solow model suggests that countries with _________ saving have higher ___________. However, the data presented in the table appear to be ____________ with that prediction. ___________ has a saving rate similar to those of high-income countries but a much lower per capita income. d. In thinking about how outcomes predicted by the Solow model compare with real world data, which of the following statements is most accurate?

a. High Income: Japan, Germany Upper middle income: Ecuador Lower middle income: Kenya, Phillipines Low income: Haiti b. high-income, population c. higher, income per capita, inconsistent, Ecuador d. The Solow model can help explain some of the differences in income per person across countries, but it does not account for factors such as government corruption, wars/conflicts, topography, or access to foreign investment, which may also affect income per person

Suppose the Fed reduces the money supply by 4 percent. Assume the velocity of money (V) is constant. a. What happens to the aggregate demand (AD) curve? b. What happens to output and the price level in the short run and long run? In the short run, the price level decreases by ___________ percent c. In the short run, output decreases by _________ percent d. In the long run, output will ultimately decrease by ___________ percent e. In the long run, the price level will decrease by _________ percent f. Consider your answers to the above questions. What happens to unemployment in the short run and in the long run, according to Okun's law? In the short run, unemployment increases by ____________ percent g. In the long run, unemployment increases by ___________ percent

a. The AD curve shifts to the left b. 0% c. 4% d. 0% e. 4% f. -0.5% e. 0%

The amount of education the typical person receives varies substantially among countries. Suppose you were to compare one country, called Gilder, with a highly educated labor force with another country, called Florin, with a less educated labor force. Assume that education only affects the level of the efficiency of labor. Also, assume that the countries are otherwise the same: they have the same population growth, the same saving rate, the same depreciation rate, and the same rate of technological progress. Both countries are described by the Solow model and are in their steady states. Answer the following questions about Gilder and Florin. a. Which country will have a higher growth of total income? b. Which country will have the higher level of income per worker? c. Which country will have a higher real rental price of capital? d. d. How will the real wage differ in Gilder and Florin?

a. The growth of total income will be equal b. Gilder c. They will have the same real rental price of capita d. The wage per effective worker will be the same in both countries, but the wage per unit of labor will be higher in Gilder.

On Macro Island, a closed economy described by the Keynesian cross, consumers spend two-thirds of their disposable income Investment, government purchases, and taxes are each equal to $300. a. What is equilibrium income? b. What is the value of the government-purchases multiplier (GPM)? c. What is the value of the tax multiplier (TM)? d. If the government wants to change equilibrium income to $1,500, by how much must it change government purchases? (Use a negative sign to indicate a decrease, if warranted.) e. If the government wants to change equilibrium income to $1,500, by how much must it change taxes? (Use a negative sign to indicate a decrease, if warranted.)

a. Y=$1200 b. GPM=3 c. TM=-2 d. $100 e. $-150

a. Solve for Y as a function of r, the exogenous variables G and T, and the model's parameters a, b, c, and d. b. The higher the value of d, the _______ the IS curve. c.. A $100 ________ will create bigger horizontal shift in the IS curve. d. Solve for r as a function of Y, M, and P and the parameters e and f. e. The higher the value of f, the __________ is the LM curve. f. The higher the value of e, the __________ is the LM curve.

a. Y=a-bT+c-dr+G/1-b b. flatter c. increase in government purchases d. eY-(M/P)/f units f. flatter e. steeper

On Macro Island, the demand for money is determines by (M/P)^d= 200 − 20𝑟. The price level P is 3. a. A higher interest rate _________ the quantity of money demanded. b. If the central bank wants to set the interest rate to 5 percent, it should set a money supply of _________ c. If the central bank wants to set the interest rate to 4 percent, it should set a money supply of ______ d. This example illustrates that to reduce the interest rate, the central bank must the _________ money supply.

a. decreases b. $300 c. $360 d. increase

a. Consider the graph of the Keynsian cross below. The consumption curve has the intercept C and the slope c. What happens equilibrium income when the society becomes more thrifty, as represented by a decline in C ? b. What happens to equilibrium saving? Equilibrium saving ____________ c. The paradox of thrift, as illustrated here, is that although thriftiness increases, ____________ d. This paradox not arise in the classical model of Chapter 4 because equilibrium income in the classical model is determined only by ________

a. see graph b. remains unchanged c. savings does not change d. capital, labor and, technology

a. How does this type of tax system change the way consumption responds to changes in GDP? The effect of an increase in income on consumption is __________ b. In the Keynesian cross, how does this tax system alter the government-purchases multiplier? The government-purchases multiplier becomes _________ c. In the IS-LM model, how does this tax system alter the slope of the IS curve? A given reduction in the interest rate now has a _________ impact on real output, making The IS curve __________

a. smaller b. smaller c. smaller, steeper

a. Output Y equals labor productivity Y/L multiplied by the labor force L: Y=Y/L x L. Using the mathematical trick in the hint, we can rewrite this as ___________, which can be rearranged as ____________ b. Substituting the equation you obtained in part a into the growth accounting equation yields: c. Using the trick in the hint (though moving in the opposite direction), we can express the term in brackets as _______________ . Substitution of this expression into the equation you obtained in part b yields the result we were seeking.

a. ΔY/L=(ΔY/L)/(Y/L)+ΔL/L, (ΔY/L)/(Y/L)=ΔY/L-ΔL/L b. (ΔY/L)/(Y/L)=α[ΔK/K-ΔL/L]+ΔA/A c. Δ(K/L)/(K/L)

One of the main hypotheses of the real business cycle theory is that recessions are caused by:

adverse technology shocks.

a. Adjust the IS‐LM graph below to show the short‐run effects on the interest rate (r) and national income (Y) of an increase in the money supply. b. Consider the short‐run impact on each of the economic variables listed above. Place each variable in its correct category of "increased," "decreased," or "unchanged." c. Given your answer in part a, how will the IS‐LM graph adjust to reflect the long‐run effects on the interest rate (r) and national income (Y) of an increase in the money supply. d. Consider the long‐run impact on each of the economic variables listed above relative to their initial levels before the money supply was increased. Place each variable in its correct category of "increased," "decreased," or "unchanged,"

b. Increased: consumption, national income, investment, real money balances Decreased: interest rate Unchanged: price level c. The LM curve will shift back to its initial position. d. Increased: price level Unchanged: (the rest of the options)

a. Analyze the impact of government purchases. First, alter the IS‐LM graph below to reflect the impact of an increase in government purchases. Next, move the equilibrium point to indicate the new equilibrium. b. If money demand is a function of disposable income rather than national income, this does not alter the analysis of an increase in government purchases. c. In this analysis, an increase in government purchases will always increase national income (Y).

b. True c. True

If the government's tax revenue is less than what it spends, then the government runs a budget _____, which represents _____ public saving.

deficit; negative

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

The economic response to the overnight reduction in the French money supply by 20 percent in 1724:

confirmed that money is not neutral in the short run because both output and prices dropped.

Labor hoarding refers to:

continuing to employ workers during a recession to ensure they will be available in the recovery.

The version of Okun's law studied in Chapter 11 assumes that with no change in unemployment, real gross domestic product (GDP) normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:

decrease by 1 percent.

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

demand for real balances per unit of output.

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

a. An exogenous decrease in the velocity of money.

see graph

a. The Fed increases the money supply.

see graph

b. A bumper crop drives down food prices.

see graph

b. An exogenous increase in the price of oil.

see graph

c. Computer hackers cause malfunctions among ATMs, increasing money demand and decreasing the velocity of money

see graph

d. A newly elected anti-business president imposes burdensome regulations, driving up firms' costs. The Fed decides to accommodate the shock.

see graph

Based on the graph, if the interest rate is r3, then people will _____ bonds, and the interest rate will _____.

sell; rise

Prescott interpreted fluctuations in the Solow residual as evidence that:

technology shocks are an important source of short-run economic fluctuations.

Along an IS curve all of these are always true EXCEPT:

the demand for real balances equals the supply of real balances

The LM curve shows combinations of _____ that are consistent with equilibrium in the market for real money balances.

the interest rate and the level of income

The IS curve shifts when any of the following economic variables change EXCEPT:

the interest rate.

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

Measures of average workweeks and building permits for new housing units are included in the index of leading indicators, because shorter workweeks tend to indicate _____ future economic activity and increased permits for new units tend to indicate _____ future economic activity

weaker; stronger