Macroeconomics Final

The labor-force participation rate is computed as:

(Labor Force ÷ Adult Population)

The Fed's response to a stock-market fall

- Increase money supply - Lower interest rates

The Fed's response to a stock-market boom

- Keep money supply lower - Keep interest rates higher

Increase in the interest rate affects money

- Raises the cost of holding money - Reduces the quantity of money demanded

The LRAS curve might shift

-Any change in natural rate of output -Changes in labor -Changes in capital -Changes in natural resources -Changes in technological knowledge

The AD curve might shift:

-Changes in consumption -Changes in investment -Changes in government purchases -Changes in net exports

A rise in price level Decreases the quantity of goods and services demanded because:

-Consumers are poorer -Higher interest rates -Currency appreciates

a fall in price level Increases quantity of goods and services demanded because:

-Consumers are wealthier -Interest rates fall -Currency depreciates

Price level & consumption (C): wealth effect

-Decrease in price level: increase real value of money, consumers are wealthier and spend more, increase in demand

Three key facts about economic fluctuations:

-Economic fluctuations are irregular and unpredictable -Most macroeconomic quantities fluctuate together -As output falls, unemployment rises

Higher aggregate-demand:

-Higher output & Higher price level -Lower unemployment & Higher inflation

Lower aggregate-demand:

-Lower output & Lower price level -Higher unemployment & Lower inflation

if The Fed decreases the money supply

-Money-supply curve shifts left -Interest rate increases -Decrease in quantity demanded of goods and services -Aggregate-demand curve shifts left

if The Fed increases the money supply,

-Money-supply curve shifts right -Interest rate falls -Increase in quantity demanded of goods and services -Aggregate-demand curve shifts right

Aggregate-supply curve

-Shows the quantity of goods and services That firms choose to produce and sell and each price level -upward sloping

Aggregate-demand curve

-Shows the quantity of goods and services That households, firms, the government, and customers abroad Want to buy at each price level. -Downward sloping

NAIRU: Non-Accelerating Inflation Rate of Unemployment

-another name for the natural rate of unemployment when inflation is constant -generally around 5-6% unemployment

Price level & net exports (NX): exchange-rate effect

-decrease in US price level: decrease interest rate, US dollar depreciates, stimulates net exports, increase demand

Price level & investment (I): interest-rate effect

-decrease in price level: decrease in interest rate, increase spending on investment goods, increase in quantity demanded

Advantages of unemployment insurance:

-government-controlled insurance program to reduce the hardship of unemployment -protects incomes when qualified workers are unemployed -benefits stop when a worker takes a new job or after twenty-six weeks

Disadvantages of unemployment insurance:

-increases frictional unemployment - unemployed devote less effort to job search

Okun's Law:

-the idea that changes in unemployment create greater-than-proportional changes in output

efficiency wage

-the minimum rate needed to retain good employees -increases unemployment

minimum wage

-the minimum rate that workers must be paid per hour for working a job -increases unemployment

When the price level changes, which of the following can cause a change in aggregate demand?

-the real value of wealth -the interest rate -the value of currency in the market for foreign exchange

Which of the following can explain the upward slope of the short-run aggregate supply curve?

-wages are slow to adjust to changing economic conditions -firms do not want to increase and decrease prices rapidly - unexpected price changes create uncertainty for households and firms

Three effects - explain why AD curve slopes downward:

-wealth effect -interest rate effect -exchange rate effect

natural rate of unemployment:

-when the level of unemployment approximates its long-run trend -determined by levels of frictional, structural, and institutionally induced unemployment -the rate of unemployment where inflation should be constant

The multiplier effect

Additional shifts in aggregate demand Result when expansionary fiscal policy increases income And thereby increases consumer spending

The short-run AS curve might shift:

Changes in labor, capital, natural resources, or technological knowledge

Misperceptions theory

Changes in the overall price level Can temporarily mislead suppliers About changes in individual markets and Changes in relative prices

Fed alters the money supply by

Changing the quantity of reserves in the banking system

If price level < expected

Firms have incentive to produce less output

Marginal propensity to consume, MPC

Fraction of extra income that consumers spend

Fiscal policy

Government policymakers Set the level of government spending and taxation

encouraged worker effect

If output increases and hiring begins: -people who were discouraged "re-enter" labor force when looking for a job becomes easier -someone not in the labor force is then counted in the labor force as unemployed -unemployment rate rises even though there are more jobs in the economy

Keynes's theory

Interest rate adjusts To bring money supply and money demand into balance

Model of aggregate demand (AD) & aggregate supply (AS)

Most economists use it to explain short-run fluctuations in economic activity

Sticky-wage theory

Nominal wages are slow to adjust to changing economic conditions

Sacrifice ratio

Number of percentage points of annual output Lost in the process of reducing inflation by 1 percentage point

The crowding-out effect

Offset in aggregate demand Results when expansionary fiscal policy raises the interest rate Thereby reduces investment spending

Recession

Period of declining real incomes and rising unemployment

Sticky-price theory

Prices of some goods & services are Slow to adjust to changing economic conditions

If interest rate < equilibrium

Quantity of money people want to hold is More than quantity supplied

If interest rate > equilibrium

Quantity of money people want to hold less than quantity supplied

Deflation

Reduction in the price level

Disinflation

Reduction in the rate of inflation

in the short run, increase in prices

Tends to raise the quantity of goods and services supplied

in the short run, decrease in prices

Tends to reduce quantity of goods and services supplied

exchange-rate effect

a lower price level causes the real exchange rate to depreciate which stimulates spending on net exports

Wealth effect

a lower price level increases real wealth which stimulates spending on consumption

interest-rate effect

a lower price level reduces the interest rate, which stimulates spending on investment

If improved confidence in policy makers makes people more optimistic about the future:

aggregate demand should shift right

At first, an increase in government spending primarily shifts:

aggregate demand to the right

A decrease in the availability of an important major resource such as oil shifts:

aggregate supply left

labor force

all workers employed and unemployed

unemployed

all workers who do not have jobs but want one

underground employed

all workers who work in the underground economy are not counted in the labor force or employed

part-time worker

all workers who work less than a full-time job are counted as employed

Which of the following results in higher inflation and higher unemployment in the short run?

an adverse supply shock such as an increase in the price of oil

Which of the following shifts aggregate demand to the right?

an increase in profits due to technology

workers

anyone able to work (16 years +, not disabled, institutionalized, or military)

employed

anyone who worked

Automatic stabilizers:

are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession

The natural unemployment rate includes

both frictional and structural unemployment

People hold money primarily because it:

can directly be used to buy goods and services

Monetary neutrality

changes in the monetary supply affect nominal variables but do not affect real variables

Which of the following suggests that an increase in government spending can decrease investment spending and cause aggregate-demand to shift to the left?

crowding-out effect

union membership issue

declining membership with reduction in manufacturing

An increase in the minimum wage:

decreases the quantity of labor demanded but increases the quantity of labor supplied

In the long run, the level of output:

depends on supply-side factors and available technology

in the long run, inflation...

depends primarily upon the money supply growth rate

structural unemployment

due to available workers not matching available jobs

cyclical unemployment

due to business cycles; when unemployment differs from its natural rate

frictional unemployment

due to workers changing jobs

underground economy

economic activity, legal or illegal, not counted by government

what is an explanation for the existence of structural unemployment?

efficiency wages, minimum-wage laws, unions

discrimination

electing an employee based on some predetermined criteria, whether legal or illegal

During a recession the economy experiences:

falling employment and income

If price level > expected

firms have incentive to produce more output

Right-to-work laws:

give workers in a unionized firm the right to choose whether to join the union

productivity

goods produced per labor hour

Fiscal policy is affected by changes in which of the following?

government spending

Most economists believe that money neutrality holds:

in the long run but not the short run

According to the Phillips curve, policymakers would reduce unemployment but raise inflation if they:

increased the money supply

Other things the same, a decrease in the U.S. interest rate:

induces firms to invest more

Federal funds rate

interest rate banks charge one another for short term loans

With respect to its impact on aggregate demand for the U.S. economy, which of the following is the most important?

interest-rate effect

Which expenditure component of real GDP fluctuates the most over the course of the business cycle?

investment

The position of the long-run aggregate supply curve:

is determined by resource and technology limits

the theory of efficiency wages explains why

it may be in the best interest of firms to offer wages that are above the equilibrium level

Which of the following is not an explanation for the existence of structural unemployment?

job search

Efficiency wages, minimum-wage laws, and unions all:

keep wages above the equilibrium level, causing a surplus of labor

if capital stock increases, AS curve shifts?

left

if expected price level increases AS curve shifts?

left

if natural rate of unemployment increases, AS curve shifts?

left

if there is a wave of pessimism, AD curve shifts?

left, short-run output and price levels fall

All else equal, if the interest rate rises, people should be expected to hold:

less money

If households view a tax cut as temporary, then the tax cut has:

less of an affect on aggregate demand than if households view it as permanent

offshoring jobs issue

manufacturing jobs moving offshore have not been made up by energy, construction, and service sectors- may be temporary loss

The logic of the multiplier effect suggests that increases in government spending:

may increase spending on other components of GDP

Which of the following is not a cause of frictional unemployment?

minimum-wage laws

The interest rate falls if:

money demand shifts left or money supply shifts right

For U.S. economy the interest rate effect is?

most important

During recessions, automatic stabilizers tend to make the government's budget:

move toward deficit

In the short run, unemployment and inflation are:

negatively related

Cyclical unemployment is caused by

neither frictional nor structural unemployment

Josh is a full-time college student who is not working or looking for a job. The Bureau of Labor Statistics counts Josh as

neither in the labor force nor unemployed

According to classical macroeconomic theory, changes in the money supply affect

nominal variables, but not real variables

If the minimum wage increased, then at any given rate of inflation:

output would be lower and unemployment would be higher

who is not included in the Bureau of Labor Statistics' "employed" category?

people who are looking for work

encouraged worker

persons who don't have a job but continue looking for work are counted as unemployed

discouraged worker

persons who don't have a job who stop looking for work are not counted in the labor force; and therefore, are not employed

Stagflation exists when:

prices rise and output falls

in the short run changes in money supply can temporarily

push real GDP away from its long-run trend

In the long run, an increase in the money supply:

raises prices and leaves unemployment unchanged

Which of the following is most commonly used to monitor short-run changes in economic activity?

real GDP

The model of aggregate demand and aggregate supply explains the relationship between:

real GDP and the price level

Changes in money supply do not effect

real GDP, unemployment, or other real variables

Unemployment insurance:

reduces search effort which raises unemployment

Increase in consumer spending shifts the AD curve to the?

right

Increase in government purchases shifts the AD curve to the?

right

Increase in investment shifts the AD curve to the?

right

Increase in net exports shifts the AD curve to the?

right

if quantity of labor increases, AS curve shifts?

right

if there is New technology, for given labor, capital and natural resources, AS curve shifts?

right

if there is a new discovery of a natural resource, AS curve shifts?

right

If policymakers increase aggregate demand, then in the short run the price level:

rises and unemployment falls

Most economists use the aggregate demand and aggregate supply model primarily to analyze:

short-run fluctuations in the economy

If the central bank decreases the money supply, then in the short run prices:

should fall and unemployment should rise

If policymakers raise government expenditures, then in the short run prices:

should rise and unemployment should fall

If the central bank increases the money supply, in the short run, output:

should rise causing unemployment to fall

Phillips curve

shows the short-run trade-off Between inflation and unemployment

For the U.S. economy, money holdings are a:

small part of household wealth, and so the wealth effect is small

minimum wage, efficiency wages, and unions increase:

structural employment

Minimum wages create unemployment in markets when they create a:

surplus of labor

Size of the spending multiplier depends on

the MPC; A larger MPC = larger multiplier

The short-run relationship between inflation and unemployment is often called:

the Phillips curve

The Phillips curve is criticized on the grounds that:

the Phillips curve does not apply in the long run

full employment

the level of employment when the economy reaches the natural rate of unemployment; generally around 94-95% employment

Which of the following is not a determinant of the long-run level of real GDP?

the price level

If in the long run, people eventually adjust their expectations so that actual and expected inflation are the same, then policymakers can exploit a tradeoff between inflation and unemployment in:

the short run but not in the long run

in the short run output responds...

to changes in the aggregate demand for goods and services

An adverse supply shock will cause output

to fall and prices to rise

Which of the following typically rises during a recession?

unemployment

unemployment rate equation

unemployment rate = # of unemployed ÷ (# of employed + # of unemployed)

In the long run, unemployment and inflation are:

unrelated

hysteresis

when the expected natural rate of unemployment changes due to past unemployment levels

Changes in monetary policy Aimed at contracting aggregate demand

• Decreasing the money supply • Raising the interest rate

Changes in monetary policy Aimed at expanding aggregate demand

• Increasing the money supply • Lowering the interest rate