Macro HW
Suppose the *MPC is 0.60*. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?
$500 billion and $300 billion
If the *marginal propensity to consume is 0.75*, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by
$60 billion, but the effect would be larger if there were an investment accelerator.
The *long-run aggregate supply* curve shifts right if
All of the above are correct.
When the price level changes, which of the following *variables will change* and thereby cause a change in the aggregate quantity of goods and services demanded?
All of the above are correct.
Refer to the figure. The shift in the aggregate demand from AD2 to AD1 cannot be caused by:
An increase in the money demand
The aggregate demand and aggregate *supply graph* has
The price level on the vertical axis. The price level can be measured by the GDP deflator.
Say MPC is .8 and there is no crowding out effect. What would be the effect of a $400 tax cut versus a $400 increase in government spending on aggregate demand?
The spending increase would shift AD $400 more to the right than the tax cut.
Economists who are skeptical about the relevance of *"liquidity traps"* argue that
a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero.
Which of the following *shifts short-run aggregate-supply* curve to the right?
a decrease in price expectations
Which of the following both shift aggregate-demand curve to the right?
a decrease in taxes and at a given price level consumers feel more wealthy
Which of the following *shifts short-run, but not long-run* aggregate supply right?
a decrease in the expected price level
Which of the following shifts short-run aggregate-supply curve to the right?
a decrease in the expected price level
Which of the following would cause *investment spending to decrease* and aggregate demand to shift left?
a decrease in the money supply and the repeal of an investment tax credit.
Which of the following would decrease the price level?
a decrease in the money supply.
*Other things the same*, an increase in the amount of capital firms wish to purchase would initially shift
aggregate demand right.
*Refer to Pessimism*. Which curve shifts and in which direction?
aggregate demand shifts left
Refer to *Stock Market Boom 2015*. Which curve shifts and in which direction?
aggregate demand shifts right
Other things the same, when the government spends less, the initial effect is that
aggregate-demand curve shifts left.
If businesses in general decide that they have underbuilt and so now have too little capital, their response to this would initially shift
aggregate-demand curve to the right.
The quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level is shown on the
aggregate-demand curve.
"Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill."
agree
Which of the following events shifts *aggregate demand rightward*?
an increase in government expenditures, but not a change in the price level
The long- run aggregate supply curve is vertical. Which of the following would raise the quantity of output in the long run?
an increase in the capital stock, but not an increase in the price level
Which of the following would shift the long-run aggregate supply curve right?
an increase in the capital stock, but not an increase in the price level
Which of the following causes the short-run aggregate supply curve to shift left?
an increase in the price of oil
Suppose the demand for exports falls as a result of recession overseas. Other things constant, in the short run the U.S. economy will likely experience
an increase in unemployment.
*The equation: *quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents
an upward-sloping short-run aggregate supply curve
Which of the following did the Fed do during the *recession of 2008-2009*?
lowered the federal funds rate and purchased securities and loans
According to the theory of liquidity preference, an increase in the money supply causes the interest rate to
fall which increases investment spending.
*Other things the same*, when the price level falls, interest rates
fall, so firms increase investment
During recessions investment
falls by a larger percentage than GDP
Over time technological progress shifts the aggregate supply curve to the right making the inflation rate higher than otherwise
false
The larger the MPC, the smaller the multiplier.
false
Assume that Congress tries to balance the budget by cutting government spending. As a result, the aggregate demand (and output) decline. To stabilize the economy, the Fed should:
increase the money supply to reduce interest rates and increase aggregate demand
According to the wealth effect, one of the reasons for the slope of the aggregate demand curve is that falling prices
increase the value of money holdings so consumer spending increases.
Other things the same, if the price level is higher than expected, then some firms believe that the relative price of what they produce has
increased, so they increase production.
*If the Fed conducts open-market purchases*, the money supply
increases and aggregate demand shifts right.
The misperceptions theory of the short-run aggregate supply curve says that the quantity of output supplied will decrease if the price level
increases by less than expected so that firms believe the relative price of their output has decreased.
The *multiplier effect* states that there are additional shifts in aggregate demand from fiscal policy, because it
increases income and thereby increases consumer spending.
Which component of real GDP fluctuates the most over the course of the business cycle?
investment
If the economy is initially at long-run equilibrium and aggregate demand expands, then in the long run the price level
is higher and output is the same as the original long-run equilibrium.
The *theory of liquidity* preference illustrates the principle that
monetary policy can be described either in terms of the money supply or in terms of the interest ra
The *interest rate* falls if
money demand shifts left or money supply shifts right.
When the *dollar appreciates*, U.S.
net exports fall, which decreases the aggregate quantity of goods and services demanded
Refer to the graph. Which of the following would lead to a shift in the aggregate demand from AD1 to AD2?
none of the above
According to a 2009 article in *The Economist*, the multiplier effect and crowding-out effect would exactly offset each other when the economy is
operating at full capacity.
According to *classical macroeconomic theory*,
output is determined by the supplies of capital and labor and the available production technol
As the *price level falls*
people are more willing to lend, so interest rates fall.
*Refer to Figure 34-1*. If the current interest rate is 2 percent,
people will sell more bonds, which drives interest rates up.
The misperceptions theory of the short-run aggregate supply curve says that output supplied will increase if the price level
is higher than expected so that firms believe the relative price of their output has increased.
As the *price level rises*
people will want to buy fewer bonds, so the interest rate rises.
Suppose the economy is initially in long-run equilibrium. Then suppose there is an increase in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and employment in the short run?
prices rise, employment rises
The aggregate demand and aggregate supply graph has the
quantity of output on the horizontal axis. Output is best measured by real GDP.
When comparing the slopes of the aggregate-demand and aggregate-supply curves to the slopes of demand and supply curves for specific goods and services, the explanations are
quite different for the aggregate curves from the specific market curves.
Refer to *Figure 33-1*. Line A is
real GDP
Which of the following, other things the same, would make the price level increase and real GDP decrease?
long-run aggregate-supply curve shifts to the left
*Sticky nominal wages* can result in
lower profits for firms when the price level is lower than expected.
The *Central Bank of Wiknam* increases the money supply at the same time the Parliament of Wiknam passes a new investment tax credit. Which of these policies shift aggregate demand to the right?
both the money supply increase and the investment tax credit
Imagine that the government increases its spending by *$75 billion*. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?
both the multiplier effect and the crowding-out effect
Refer to *Stock Market Boom 2015*. In the short run what happens to the price level and real GDP?
both the price level and real GDP rise.
Which of the following adjusts to bring aggregate demand and aggregate supply into balance?
both the price level and the quantity of output
Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could
buy bonds to lower interest rates.
To decrease the federal funds rate, the Fed would
buy bonds, which increases the money supply.
To decrease the interest rate the Federal Reserve could
buy bonds. The fall in the interest rate would increase investment spending.
Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?
by $30 billion
Other things constant, local governments replace their sales taxes with new taxes on interest, dividends, and capital gains. As a result
consumption spending rises and the aggregate demand curve shifts right
Other things the same, continued *increases in technology* lead to
continued increases in real GDP and continued decreases in the price level
The *quantity of money has no real impact *on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning
the long run, but not the short run
Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?
the multiplier effect
*Fiscal policy* is determined by
the president and Congress and involves changing government spending and taxation
The *vertical axis of the aggregate demand* and aggregate supply graph has the
the price level
*Refer to Optimism*. How is the new long-run equilibrium different from the original one?
the price level is higher and real GDP is the same.
An increase in government spending shifts aggregate demand
to the right. The larger the multiplier is, the farther it shifts.
Aggregate-demand curve shifts to the left if the money supply decreases.
true
An increase in consumer spending shifts the aggregate demand to the right
true
An increase in the money supply causes output to rise in the short run.
true
For the U.S. economy, the most important reason for the downward-slope of the aggregate demand curve is the interest-rate effect.
true
Most economists believe that *classical theory* describes the world in the long run but not in the short run.
true
Other things the same, an increase in the U.S. price level leads to an increase in the U.S. interest rate which leads to an appreciation of the dollar.
true
Stock prices often rise when the Fed lowers interest rates.
true
If *output is above its natural rate*, then according to sticky-wage theory
workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.
Which of the following is an example of a decrease in government purchases?
The government cancels an order for new military equipment.
Suppose the economy is in long-run equilibrium. If there is a decrease in the supply of labor as well as a decrease in the money supply, then we would expect that in the short run,
real GDP will fall and the price level might rise, fall, or stay the same.
If countries that imported goods and services from the United States recovered from recession, we would expect that U.S. net exports would
rise, making aggregate-demand curve shift to the right.
According to the theory of liquidity preference, an increase in the price level causes the interest rate to
rise. So the aggregate quantity of goods and services demanded falls.
People will want to buy *fewer bonds* and the interest rate will rise, as the price level
rises
If the *price level falls*, the real value of a dollar
rises, so people will want to buy more.
Other things the same, *continued technological progress* and continued increases in the money supply would unambiguously lead to
rising real GDP only
When the *Federal Reserve* increases the Federal Funds target rate, it achieves this target by
selling government bonds. This action will reduce investment and shift aggregate demand to the left.
*Refer to Figure 33-8*. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P3 and Y3 , then it must be the case that
short run aggregate supply has increased.
*Refer to Optimism*. In the long run, the change in price expectations created by optimism shifts
short-run aggregate supply left
The aggregate demand is described graphically as
sloping downward.
For the U.S. economy, *money holdings* are a
small part of household wealth, and so the wealth effect is small.
When prices and unemployment rise, such an event is sometimes called
stagflation
*Refer to Figure 34-1*. At an interest rate of 4 percent, there is an excess
supply of money equal to the distance between points a and b
Suppose workers *notice a fall in their nominal wage* but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is
temporarily low and so supply a smaller quantity of labor.
Refer to the figure. The shift in the aggregate demand from AD1 to AD2 is the result of:
the Fed decreases the money supply
The idea that *expansionary fiscal policy* has a positive affect on investment is known as
the investment accelerator.
*Shifts in the aggregate-demand curve* can cause fluctuations in
the level of output and in the level of prices
Most economists believe that *money neutrality* holds in
the long run
During periods of expansion, automatic stabilizers cause government expenditures
to fall and taxes to rise.
A *candidate for political office* announces the following policies which, she says, economics clearly demonstrates will lead to higher output in the long run: 1. increase immigration from abroad 2. make trade more open between the US and other countries.
1 and 2 both shift long-run aggregate supply right.
A *candidate for political office *announces the following policies which, she says, economics clearly demonstrates will lead to higher output in the long run: 1. decrease immigration from abroad 2. make trade more open between the U.S. and other countries.
1 shifts long-run aggregate-supply curve to the left, 2 shifts long-run aggregate-supply curve to the right
A fiscal stimulus was initiated by *President Obama* in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be
1.6 for government purchases and 1.0 for tax cuts
During the *2008-2009 unemployment rose* from about 4.4% to about
10%
In *October 2009*, the official unemployment rate rose to
10%
Suppose that the marginal propensity to consume is 3/4. What is the government expenditures multiplier?
4
If the *MPC = 4/5*, then the government purchases multiplier is
5
If the marginal propensity to consume is .60, the government increases expenditures by $300 billion and crowding out equals $100 billion, how much does aggregate demand shift by?
650 billion
During the *last half of 2012*, the U.S. unemployment rate was above the natural rate and real GDP growth was low. Which of the following is the most likely unemployment rate for this time period?
8 percent
*Refer to Scenario 34-2.* In response to which of the following events could aggregate demand increase by $1,500?
A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.
The *theory of liquidity* preference assumes that the nominal supply of money is determined by the
Federal Reserve
If the price level increases
Investment demand decreases and interest rates increase
*Refer to the figure*. Real GDP is represented by
Line A only
The Great Recession of 2008-2009 could have been the result of
Losses in the financial market which caused AD to shift to the left.
Which of the following is correct?
None of the above is correct.
*Refer to Figure 33-9.* Suppose the economy starts where LRAS = AD1 = SRAS1. A decrease in short-run aggregate supply would be consistent with the movement to
P2, Y1.
Which of the following *correctly expresses* why the short-run aggregate-supply curve slopes upward?
Quan of output supplied= natural rate of output+ a( actual price - expected price)
Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?
Raise both taxes and expenditures by $80 billion dollars.
If the *stock market crashes*, then
aggregate demand decreases, which the Fed could offset by purchasing bonds
The *Central Bank of Wiknam* decreases the money supply at the same time the Parliament of Wiknam repeals a new investment tax credit. Which of these policies shifts aggregate-demand curve to the left?
both the money supply decrease and the investment tax credit repeal
Suppose that there is a decrease in the costs of production that shifts the short-run *aggregate-supply curve right*. If there is no policy response, then eventually
because unemployment is low, wages will be bid up and short-run aggregate-supply curve will shift left.
Since the *end of World War II*, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this
both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther.
Which of the following *rises during expansions*?
both employment and consumer spending
The belief by most economists that real and nominal variables are essentially determined separately in the long run is characteristic of the ________ model.
classical
Suppose there is an increase in net exports. To stabilize output the government could
decrease government expenditures. The smaller the multiplier, the more it would need to decrease expenditures. decrease government
A decrease in a *supply of oil* could ____
decrease long-run aggregate-supply.
In the *short run*, an increase in the money supply causes interest rates to
decrease, and aggregate demand to shift right
The aggregate-demand curve shows that an increase in the price level
decreases the real value of goods and services demanded in the economy.
When U.S. net exports rise, which increases the aggregate quantity of goods and services demanded, the dollar must have
depreciated
When the price level rises
firms will spend less on new business buildings and business equipment and households will want to spend less building new homes.
Which of the following would be included in aggregate demand?
firms' purchases of newly produced machinery
Which of the following shifts aggregate demand to the right?
government purchases increase
In which case can we be sure *real GDP rises* in the short run?
government purchases increase and taxes fall
Other things the same, if the *money supply rises by 2%* and people were expecting it to rise by 5%, then some firms have
higher than desired prices, which depresses their sales
When the *price level falls*, people want to
hold less money and the quantity of aggregate goods and services demanded increases.
*Fiscal policy* affects the economy
in both the short and long run.
The *long-run aggregate supply curve* shows that by itself a permanent change in aggregate demand would lead to a long-run change
in the price level, but not output
Which of the following does not help *explain the direction the quantity of aggregate goods* demanded changes when the price level decreases?
the dollar appreciates relative to other currencies
When the *price level falls*
the interest rate falls, so the quantity of goods and services demand rises
Other things the same, as the price level rises,
the interest rate rises causing a movement along a given aggregate-demand curve
Refer to the graph. Which one represents the long-run equilibrium?
the intersection of AD1 and AS.
Suppose the economy is in long-run equilibrium. In a short span of time, there is a large emigration of skilled workers, a *major depletion of oil fields*, and a major new regulation limiting electricity production. In the short run, we would expect
the price level to rise and real GDP to fall.
According to *classical macroeconomic theory*, changes in the money supply affect
the price level, but not real GDP.
Most economists believe that real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its persistent trend in
the short run
*The idea* that a decrease in the price level raises the real value of households' money holdings, which increases consumer spending and the quantity of goods and services demanded is known as
the wealth effect.