Macro notes

The relationship between the quantity of goods and services supplied and the price level is called:

aggregate supply.

According to classical theory, national income depends on ______, while Keynes proposed that ______ determined the level of national income. fiscal policy; monetary policy

aggregate supply; aggregate demand

In the long run, the level of output is determined by the:

amounts of capital and labor and the available technology.

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 ______.

increase; decrease

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

increases; increases

Planned expenditure is a function of:

national income and planned investment, government spending, and taxes. Planned expenditure, AE = C+I+G

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.

negative; price level

The IS curve generally determines:

neither income nor the interest rate.

Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy.

neither the quantity of output nor the price level

Alan Blinder's survey of firms found that the typical firm adjusts its prices:

once or twice a year.

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government:

output will rise in the short run and prices will rise in the long run.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.

output; prices

In the short run an adverse supply shock causes:

prices to rise and output to fall.

An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output.

raises; and may also lower

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

When drawn on a graph with Y along the horizontal axis and PE along the vertical axis, the line showing planned expenditure rises to the:

right with a slope less than one.

Stagflation occurs when prices ______ and output ______.

rise; falls

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.

Along any given IS curve:

both government spending and tax rates are fixed.

The aggregate demand curve tells us possible:

combinations of P and Y for a given value of M.

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.

Alan Blinder's survey of firms found that the theory of price stickiness accepted by the most firms was:

coordination failure.

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

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

The Keynesian cross shows:

equality of planned expenditure and income in the short run. Income, Y = AE (Planned expenditure) where planned expenditure is: AE = C+I+G in a closed economy.

Most economists believe that prices are:

flexible in the long run but many are sticky in the short run.

In the Keynesian-cross model, actual expenditures equal:

GDP.

A supply shock does not occur when:

The Fed increases the money supply

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:

decreasing the money supply.

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.

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

downward and to the left.

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves farther to the right.

downward; flatter

The long run refers to a period:

during which prices are flexible.

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.

higher; lower

Most economists believe that the classical dichotomy:

holds approximately in the long run but not at all in the short run.

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

in the long run, but not in the short run.

When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

is vertical. The long run AS curve is independent of prices. This is because the amount of output in the long run depends on the amount of resources that the economy has: capital, labor and technology, not the price of those goods and services.

John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on:

low aggregate demand.

Along an aggregate demand curve, which of the following are held constant?

the money supply and velocity

All of the following are suggested by the results of Alan Blinder's survey of firms except:

there is only one theory of price stickiness.

The short-run aggregate supply curve is horizontal at:

a fixed price level. In the immediate short run, prices are fixed, and so producers supply as much of those goods and services and people would wish to buy. Hence the short run AS curve is perfectly elastic in the immediate short run.