Module 5 ECON
Which of the following would not be directly included in aggregate demand?
Government's tax collections
From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel wealthier, then it would have shifted aggregate
demand right.
Which of the following shifts aggregate demand to the left?
a decrease in the money supply
If the stock market crashes, then
aggregate demand decreases, which the Fed could offset by purchasing bonds.
The price level rises in the short run if
aggregate demand shifts right or aggregate supply shifts left.
Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift
aggregate demand to the right.
The Federal Open Market Committee is
in charge of tax collection.
In the short run, open-market purchases
increase investment and real GDP, and decrease interest rates.
When the Fed buys government bonds, the reserves of the banking system
increase, so the money supply increases.
When the Fed increases the money supply, we expect
interest rates to fall and stock prices to rise.
Figure 34-1 Refer to Figure 34-1. If the current interest rate is 3.25 percent,
people will sell more bonds, which drives interest rates up.
Figure 34-5 Refer to Figure 34-5. An increase in taxes will
shift aggregate demand from AD2 to AD3.
The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for
the slope of the aggregate-demand curve.
If the MPC is 3/5 then the multiplier is
2.5, so a $100 increase in government spending increases aggregate demand by $2
If the multiplier is 3, then the MPC is
2/3
People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this?
Both sticky price theory and sticky wage theory
If households view a tax cut as temporary, then the tax cut
has less of an effect on aggregate demand than if households view it as permanent.
Which of the following is not a determinant of the long-run level of real GDP?
the price level
As the interest rate falls to equilibrium in the market for money,
the quantity of money demanded rises, which would reduce a surplus of money.
While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows:
"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. "
If the MPC is 0.50 and there are no crowding-out or accelerator effects, then an initial increase in aggregate demand of $95 billion will eventually shift the aggregate demand curve to the right by
$190 billion.
Figure 34-3 (a) The Money Market(b) The Aggregate Demand Curve Refer to Figure 34-3.Which of the following sequences (numbered arrows) shows the logic of the interest-rate effect on the slope of aggregate demand?
3, 2, 1, 4
Scenario 33-2 Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2.Which curve shifts and in which direction?
Aggregate demand shifts left.
Which of the following shifts the long-run aggregate supply curve to the left?
An increase in the price of imported natural resources and an increase in trade restrictions
Figure 33-2 Refer to Figure 33-2. If the economy is in long-run equilibrium, a favorable shift in short-run aggregate supply curve would move the economy from
O to P.
Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could
decrease the money supply, which will increase interest rates.
Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.
If taxes
decrease, then consumption increases, and aggregate demand shifts rightward.
Figure 33-2 Refer to Figure 33-2. If the economy is at O and there is a reduction in aggregate demand, in the short run the economy
moves to R.
Scenario 33-2 Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2. In the long run, the change in price expectations created by the reduction of federal government purchases
short-run aggregate supply right.
Other things the same, automatic stabilizers tend to
raise expenditures during recessions and lower expenditures during expansions.
A tax cut shifts the aggregate demand curve the farthest if
the MPC is large and if the tax cut is permanent.
Figure 34-2 (a) The Money Market(b) The Aggregate Demand Curve Refer to Figure 34-2. A decrease inYfromY1toY2is explained as follows:
An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.
Which of the following correctly explains the crowding-out effect?
An increase in government expenditures increases the interest rate and so reduces investment spending.
Which of the following is an example of crowding out?
An increase in government spending increases interest rates, causing investment to fall.
Scenario 33-2 Imagine that in the current year the economy is in long-run equilibrium. Then the federal government reduces its purchases of goods by 50%. Refer to Scenario 33-2. In the short run what happens to the price level and real GDP? Correct Answer
Both the price level and real GDP fall.
Figure 33-2 Refer to Figure 33-2. A decrease in taxes would move the economy from Q to
P in the short run and O in the long run
Figure 33-5 Refer to Figure 33-5. Suppose the economy starts at Point R. If aggregate demand increases from AD2 to AD3, then in the short run the economy moves to
Point O.
Figure 33-5 Refer to Figure 33-5. If the economy starts at Point R, then a recession occurs at
Point P.
Figure 33-5 Refer to Figure 33-5. Suppose the economy starts at Point R. If there is areductionin aggregate demand, then in the long run the economy moves to
Point S.
Figure 33-7 Refer to Figure 33-7. If the economy starts at point O, a short-run fall in output would be consistent with a movement to point
R.
If expected inflation is constant and the nominal interest rate decreases by 4 percentage points, then the real interest rate
decreases by 4 percentage points.
The wealth effect along an aggregate-demand curve stems from the idea that a higher price level
decreases the real value of households' money holdings.