Money and Banking Ch.17 Quiz
Assume that the economy is initially in equilibrium at potential GDP. Suppose that there is a decrease in income in Europe that causes a decrease in demand for U.S.-produced goods. Use an AD-AS graph to show the effect of the decline in income in Europe on output and the price level in the United States in the short run and in the long run. 1.) Using the line drawing tool, show the effect of the decline in income in Europe on output and the price level in the United States in the short run. Properly label your curve. 2.) Using the point drawing tool, plot the economy's new short-run equilibrium. Label the point 'E2'. 3.) Using the line drawing tool, show the long-run adjustment that occurs as a result of the decline in income in Europe. Properly label your curve. 4.) Using the point drawing tool, plot the economy's new long-run equilibrium. Label the point 'E3'. Carefully follow the instructions above, and only draw the required objects.
1.) Shift AD to the left (AD2) 2.) Label E2 where AD2 and SRAS1 meet 3.) Shift SRAS1 to the right (SRAS2) 4.) Label E3 where SRAS2 and LRAS meet
If the long-run aggregate supply curve shifts, does the short-run aggregate supply curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.) A. No B. Yes Part 2 If the short-run aggregate supply curve shifts, does the long-run aggregate supply curve also have to shift? (Hint: Consider the factors that shift each curve and determine whether these factors also shift the other curve.) A. Yes B. No
B. Yes B. No
During the Covid-19 pandemic, an opinion column on barrons.com observed that: "Among the unique characteristics of what is happening today are the coincidence of large supply- and demand-side shocks." Briefly explain what was causing the aggregate supply shock. A. The supply shock was caused by rising inflation and reduced output caused by the Covid-19 pandemic. B. The supply shock was caused by consumers wanting to buy fewer goods and services during the Covid-19 pandemic. C. The supply shock was caused by the shutdown and closures of many businesses due to the Covid-19 pandemic. D. All of the above are factors that explain what was causing the aggregate supply shock. Part 2 Briefly explain what was causing the aggregate demand shock. A. The demand shock was caused by a reduction in consumer and business incomes as well as a decline in net exports. B. The demand shock was caused by a reduction in the willingness of banks to lend to consumers and businesses. C. The demand shock was caused by the expansionary policies that the Fed pursued to combat the effects of the large supply shock. D. All of the above are factors that explain what was causing the aggregate demand shock. Part 3 Is an aggregate supply shock always accompanied by an aggregate demand shock? A. Yes, aggregate supply and aggregate demand shocks always necessarily occur together. When one curves shifts, the other must shift as well. B. Yes, a supply shock shifts the short-run aggregate supply curve, causing the price level to change, and this new price causes demand to shift as well. C. No, there can never be a shift in both the short-run aggregate supply and aggregate demand curves. Only one curve can shift at a time. D. No, a supply shock shifts the short-run aggregate supply curve, resulting in a movement along the aggregate demand curve, not a shift.
C. The supply shock was caused by the shutdown and closures of many businesses due to the Covid-19 pandemic. A. The demand shock was caused by a reduction in consumer and business incomes as well as a decline in net exports. D. No, a supply shock shifts the short-run aggregate supply curve, resulting in a movement along the aggregate demand curve, not a shift.
According to an article on bloomberg.com, when Yale economist Truman Bewley asked an executive at a manufacturing firm: "Why do you lay so many people off rather than reducing pay?" the executive answered "to get the misery out the door." Briefly explain the executive's reasoning. The executive must believe that ________. A. all workers are unhappy during a recession and firing some workers helps get some of the negativity out of the firm B. there is a trend among large firms to move away from using volatile labor to using more technology instead C. cutting wages for everyone causes unhappy workers, while laying off some workers keeps morale high for those who get to keep their jobs D. the firm prefers to randomly fire workers to signal to remaining employees that they should work harder to avoid being laid off in the future Part 2 How does this belief among business executives about the effects of wage cuts affect the short-run aggregate supply curve? This means that wage levels ________ when there are shocks in the economy. This causes the short-run aggregate supply curve to be ________. A. are slow to adjust to their ideal levels; upward sloping B. are quick to adjust to their ideal levels; downward sloping C. converge across similar industries; horizontal D. overadjust past their ideal levels; vertical
C. cutting wages for everyone causes unhappy workers, while laying off some workers keeps morale high for those who get to keep their jobs A. are slow to adjust to their ideal levels; upward sloping
[Related to the Chapter Opener] As we discussed in the opening to this chapter, Jesse Rothstein of the University of California, Berkeley has found that, beginning in 2005, each successive age cohort of college graduates has experienced a lower employment-population ratio. Is it likely that this result is caused by hysteresis? Explain your answer. A. No, this is the result of a lifestyle choice in which college graduates are choosing to delay starting their work careers. B. No, the persistently low employment-population ratio is the result of insufficient aggregate supply, not hysteresis. C. No, this is due to firms changing their hiring preferences from college graduates toward cheaper, less-qualified labor. D. Yes, at least partially, as recent college graduates saw their skills diminish over time, scarring their chances of obtaining employment.
D. Yes, at least partially, as recent college graduates saw their skills diminish over time, scarring their chances of obtaining employment.
[Related to the Apply the Concept: "Does the Recovery from the Great Depression Show the Limits to Monetary Policy?"] Economist Robert Gordon has written the following: During 1939, more than any other year in the dismal Depression decade, the American economy exhibited every evidence of slipping into a low-employment trap. Prices were on a plateau, with no tendency to decline, despite high unemployment. What does Gordon mean by "a low-employment trap"? (Hint: Think about Gordon's explanation for the high unemployment rate in 1939, as discussed in the Apply the Concept.) By "a low-unemployment trap," Gordon is referring to ________. A. any monetary or fiscal policy—whether expansionary or contractionary—that makes employment levels fall B. a steady decline in the number of new jobs available due to a lack of business dynamism C. a situation of low employment that results from overly aggressive monetary policy actions D. a situation of low employment that will not be removed by the normal market forces of lower wages and prices Part 2 Why might the fact that prices were not declining despite high unemployment lead Gordon to conclude that the economy was in a low-employment trap? To answer this question, determine which of the following factors led Gordon to draw this conclusion. Factors Leading to Gordon's Conclusion of a Low-Employment Trap Factor or Not a Factor? The United States was suffering from hysteresis due to insufficient aggregate demand. _______________________▼ The United States was suffering from hysteresis due to insufficient aggregate supply. _______________________▼ Increasing tax rates caused employers to hire fewer workers than they otherwise would. _______________________▼ The persistently low employment was due to workers suffering from labor scarring. _______________________▼ The persistently low employment represented an excess supply of labor. _______________________▼ Hysteresis was preventing the economy from automatically returning to equilibrium. _______________________▼
D. a situation of low employment that will not be removed by the normal market forces of lower wages and prices Factor Not a factor Not a Factor Factor Not a factor Factor