unit 3 test

keynes law

"Demand creates its own supply."

says law

"Supply creates its own demand."

identify characteristics of the neoclassical zone in the AD/AS mode

- A small shift of aggregate demand to the left will have little impact on the output level. - The short-run aggregate supply curve slopes steeply upward

Which of the following are characteristics of the Keynesian zone in the AD/AS model?

- A small shift of aggregate demand to the right will have little impact on the price level - Cyclical unemployment is high - the short-run aggregate supply curve is relatively flat

neoclassical zone

- Since the equilibrium is near potential GDP, cyclical unemployment is low in this economy, although structural unemployment may remain an issue. - To increase GDP, aggregate supply must shift to the right. - Shifts of aggregate demand to the left or right have little effect on the level of unemployment. - Shifts of aggregate demand create pressures to change the price level

identify characteristics of the intermediate zone in the AD/AS model.

- The short-run aggregate supply curve slopes moderately upward. - Shifting aggregate demand affects real GDP - A small shift of aggregate demand to the right will increase the price level - a small shift of aggregate demand to the left will decrease the output level

false

Keyne's law states that supply creates its own demand, which can be illustrated by the AD/DS model

Keynesian zone

Keynesian zone, the portion of the SRAS curve on the far left that is relatively flat

A shift of aggregate demand to the right has the following effects:

Output moves closer to potential GDP. Unemployment is reduced. The price level is higher. There is upward pressure on inflation

A shift of aggregate demand to the left has the following effects:

Output moves further from potential GDP. Unemployment increases. The price level is lower. There is downward pressure on inflation.

If a new national health care program reduces labor costs by eliminating employer-sponsored health insurance, what's the expected result?

SRAS would shift right

short-run aggregate supply (SRAS) curve

The aggregate supply curve, which shows the positive short-run relationship between price level and real GDP if the prices of the inputs are held constant

Keynesian zone

The equilibrium level of real GDP is far below potential GDP. The economy is in recession. Cyclical unemployment is high. If aggregate demand shifts right or left, it will affect output level (and thus unemployment) but not price level. Since price level does not change much, inflationary pressures are not a concern

long-run aggregate supply (LRAS) curve

The vertical line of potential GDP, which shows no relationship between the price level of output and real GDP in the long run

natural rate of unemployment

We call this baseline level of unemployment that occurs year in and year out the natural rate of unemployment, and we determine it by how well the structures of market and government institutions in the economy lead to a matching of workers and employers in the labor market

Which of the following will cause the SRAS curve to shift right?

a decrease in the cost of imported goods

Which statement is correct about a shift of the aggregate supply curve to the right and productivity growth? Assume that aggregate demand remains unchanged. Select the best answer

a higher level of productivity shifts the aggregate supply curve to the right other things equal, an increase in the employment level shifts the aggregate supply curve to the right

false

a rise in the price level increases people's wealth

false

a shift of the aggregate demand curve in the Keynesian zone will affect only the level of output, while in the neoclassical zone, it will affect both the level of output and the price level

false

a shift of the aggregate demand curve to the left heads to a higher real GDP

true

a shift of the aggregate demand curve to the right can increase the level of output in the Keynesian zone and the price level in the neoclassical zone

true

a shift of the aggregate demand curve to the right usually means that the new equilibrium is closer to potential GDP

false

additional demand for money and credit will not influence interest rates

Consumer and business confidence can directly affect [blank]

aggregate demand

true

aggregate demand refers to the amound of total expenditure

Assume the following are true: - The index of consumer confidence drops ten points. - Business investment increases by three hundred billion dollars. - Government spending is cut by six hundred billion dollars. - There is no change in the net trade balance (exports minus imports) What is the net effect on aggregate demand? Select the best answer

aggregate demand will shift left

Assume the following are true: - The government enacts a three hundred billion-dollar tax cut. - Consumer spending drops by three hundred billion dollars. - Government spending is increased by six hundred billion dollars. - There is no change in the net trade balance (exports minus imports) What is the net effect on aggregate demand? Select the best answer

aggregate demand will shift right

false

aggregate supply refers to the total quantity of output a firm will produce and sell

true

among other things, results of elections can influence economic confidence

true

among others, a pessimistic prediction about the future by a prominent public figure can influence economic confidence

false

an increase in business confidence about the future of the economy leads to a shift of the aggregate demand curve to the left

Which of the following will cause the SRAS curve to shift left?

an increase in the cost of imported goods

Which statement is correct about a shift of the aggregate supply curve to the left and productivity growth? Assume that aggregate demand remains unchanged. Select the best answer

an increase or a decrease in output per worker may shift the aggregate supply curve to the right or to the left, respectively

true

as gdp increases, some firms and industries start running into limits

true

at the far left of the aggregate supply curve, the level of output in the economy is far below potential GDP

false

both business and consumer confidence can be determined very precisely using the OECD specific survey measures

false

congress rarely passes tax cuts during recessions

A tax cut increases [blank] and shifts the AD curve right

consumption

When households experience a [blank] in wealth, savings may increase, and consumption may decrease.

decrease

Which statement about the aggregate supply (AS) curve is correct? Assume that aggregate demand remains unchanged

discovery of new mineral deposits might shift the AS curve to the right an increase in average wages is likey to cause a reduction in GDP for a recesion

Determine what type of good or service a dishwasher is

durable good

Determine what type of good or service boats are

durable good

Determine what type of good or service books are

durable good

In the intermediate zone, a shift of aggregate demand to the left causes output moves [blank] potential GDP.

further from

false

government spending has a very small share in aggregate demand, meaning changes in government spending amounting to several percent of overall GDP do not make much difference

In 2001, the U.S. economy experienced stagflation, which is characterized as a period of [blank] unemployment and high inflation

high

true

higher government spending causes the AD curve to shift to the right

false

if prices rise in the united states while remaining fixed in other countries, the quantity of exports sold will rise

false

in the AS curve's intermediate portion, the increase in real GDP in response to a rise in the price level is larger than in the leftward portion of the curve

Which statement is correct about the neoclassical zone

in this zone, shifts of the aggregate demand curve to the right or to the left will determine the price level but have little effect on the output level

Keynes' argued that a lack of demand in the economy as a whole leads to [blank] incentives for firms to produce

inadequate

disposable income

income after taxes

Which statement is supported by the AD/AS model when the macroeconomic equilibrium is far below the full employment level of GDP

inflationary pressure will increase if aggregate supply shifts left

Firm investment costs are [blank].

interest rates

Which aggregate demand component is most relevant to the following statement? Select the best answer. A company invests in manufacturing equipment to produce more goods

investments

Potential GDP

is the maximum amount of real GDP an economy can produce by fully employing its existing levels of labor, physical capital, technology, and legal institutions

When households experience a rise in wealth, they may be willing to consume a higher share of their income and save [blank]

less

Which statement is correct about growth and recession in the AD/AS diagram?

long run economic growth due to productivity increasing over time is represented by a gradual shift of the aggregate supply curve to the right factors that determine the speed of the long-term economic growth rate do not appear directly in the AD/AS diagram the AD/DS diagram might illustrate the results of continuous economic growth if the equilibrium level of real GDP is close to potential GDP

Macroeconomic goals of growth are low inflation and [blank] unemployment.

low

neoclassical zone

near-vertical portion on the right-hand side. here output is at or near potential GDP, the size of potential GDP pretty much determines the level of output in the economy

true

neither business nor consumer confidence about the future of the economy can be measured very precisely

stagflation

pattern of a leftward shift of SRAS leading to a stagnant economy with high unemployment and inflation

full-employment GDP

potential GDP

true

potential GDP depends mainly on the availability of production factors

true

potential gdp is sometimes also called full-employment gdp

Suppose there is a decrease in spending on durable consumption items. If the economy is initially in the intermediate zone of the economy, what will be the effects on the price level and output

price and quantity both decrease

Suppose there is a decrease in the level of social security payments. What will be the effect on the price level and output if the economy is initially in the Keynesian zone of the economy

price will basically remain constant, and quantity will decrease

Suppose there is an increase in income taxes. If the economy is initially in the Keynesian zone of the economy, what will be the effects on the price level and output?

price will basically remain constant, and quantity will decrease

Which elements are shown in the AD/AS model

real GDP long run aggregate supply whether economy is in recession short-run aggregate supply how shifts in demand affect inflation in the short run

What would be the most likely result of a tax increase during a recession

real GDP will decrease

News of recession and troubles in the economy will make consumers [blank] consumption

reduce

Aggregate supply (AS)

refers to the total quantity of output (i.e. real GDP) firms will produce and sell

Which statement is correct for unemployment and its presentation on the AD/AS diagram

relatively high cyclical unemployment arises when the output is substantially to the left of potential GDP on the AD/AS diagram the AD/AS Diagram does not show separately the factors that determine the natural rate of unemployment

In the AD/AS diagram, long-run economic growth that is due to productivity increases over time will cause the vertical line representing potential GDP to gradually shift [blank] over time

right

In the short run, GDP [blank] as an economy expands out of recession

rises

In the intermediate zone, unemployment decreases when AD [blank].

shifts right

aggregate supply curve

shows the total quantity of output that firms will produce and sell at each price level

The aggregate demand curve

shows the total spending on domestic goods and services at each price level.

In the early 1990s, the U.S. economy experienced [blank], which is characterized as a period of high unemployment and high inflation

stagflation

If both SRAS and LRAS shift right, are the following statements likely to be true? Select the best answer. Statement 1: Production profits drop Statement 2: The equilibrium output level goes up

statement 2 is likely to be true but not statement 1

Which statement about inflationary pressures and the AD/AS diagram is correct?

the AD/AS diagram can be used to analyze a shift in the shift in the price level but not to determine which factors will cause inflation to vanish or continue in the future inflationary pressures can occur if aggregate demand continues to shift right when the economy is already at or near potential GDP

false

the ability of industries to produce is limited only by the price level

which statement is correct about the Keynesian zone

the aggregate demand curve crosses this portion of the SRAS curve at an equilibrium point, then the equilibrium level of real GDP is expected to be far below potential GDP in the economy, and such a gap in this zone will be greater than in others

If many holiday gifts are purchased in December, in which direction does the aggregate demand curve shift, and which component is affected?

the aggregate demand curve shifts right because consumption increases

An oil and gas company hires highly-skilled petroleum engineers and experiences a drastic increase in productivity.

the aggregate supply curve shifts right due to productivity

false

the aggregate supply curve shows how producers as a group will respond to a decrease in aggregate demand

false

the aggregate supply curve slopes down

true

the government increased retirement payments, which led to a shift of the aggregate demand curve to the right

true

the government renovated transportation infrastructure, which led to a shift of the aggregate demand curve to the right

true

the news of an upcoming recession raised concerns among the population that expected income will decline in the near future, which led to a shift of the aggregate demand curve to the left

true

the potential GDP line shows that at some point, higher prices cannot encourage additional output

false

the price level is the percentage change in prices over time

false

the prices for labor do not influence firms' decisions about what quantity to supply

false

unlike changes in consumer confidence about the economy's future, changes in business confidence do not influence the AD curve

intermediate zone

we might expect unemployment and inflation to move in opposing directions

aggregate demand/aggregate supply (AD/AS) model

we need a model that indicates what determines total supply and total demand for the economy and how total demand and total supply interact at the macroeconomic level

which of the three factors that affect aggregate demand is depicted? Select the best answer. A rise in price level reduces people's wealth, causing a decrease in consumption spending

wealth effect

false

when the economy is at the far left of the aggregate supply curve, a relative small increase in the prices of outputs that business sell, assuming there is no rise in input prices, encourages a slight surge in the quantity of aggregate supply

false

while tax policy can shift the AD curve by affecting consumption spending, it cannot change investment demand