ch 6-9 Final review -

Which of the following will cause the aggregate supply curve to shift down? a an increase in firms' markup over labor costs b an increase in the expected price level c an increase in unemployment benefits d all of the above e none of the above

It is the decrease in the expected price level, or in the firm's markup or the unemployment benefits, that would shift the aggregate supply curve down. See section 7-1, pages 135 and 136. At a given level of output, and, correspondingly, at a given unemployment rate, the increase in the expected price level leads to an increase in wages, which leads in turn to an increase in prices. So, at any level of output, the price level is higher: The aggregate supply curve shifts up. In particular, instead of going through point A (where Y = Yn and P = Pe 2, the aggregate supply curve now goes through point A (where Y = Yn, P = Pe 2.) - This is determined by the labor Market

if Pe = P, then u is at the natural level

True

Assume that the economy starts at the natural level. Following a drop in unemployment benefits, in the final medium run equilibrium a output will be higher than in the initial medium-run equilibrium. Your answer b output will be the same as in the initial medium-run equilibrium. c output will be lower than in the initial medium-run equilibrium. d none of the above

a output will be higher than in the initial medium-run equilibrium. Your answer

Suppose a central bank implements a monetary contraction. Which of the following would we expect to occur in the short run? a a reduction in the nominal wage b the AD curve to shift to the right c the price setting curve to shift down d the wage setting curve to shift upward e the wage setting curve to shift downward

a reduction in the nominal wage

The natural level of employment (N) will increase when which of the following occurs? a an increase in the markup of prices over costs b a reduction in unemployment benefits c an increase in the actual unemployment rate d all of the above e none of the above

a reduction in unemployment benefits

The natural level of employment (N) will increase when which of the following occurs? a an increase in the markup of prices over costs b a reduction in unemployment benefits c an increase in the actual unemployment rate d all of the above e none of the above

a reduction in unemployment benefits As mentioned in Ch 6 - H5, a reduction in the unemployment benefits causes the wage set by wage setters to decrease. This shifts the wage-setting curve WS down, where the natural rate of unemployment, un, decreases. From the relationship for the natural level of employment, Nn, Nn = L(1 − un), we can see that a decrease in un implies and increase in Nn. See section 6-5, page 126.

When the economy is operating at a point where output is greater than the natural level of output, which of the following occurs? a the unemployment rate is less than the natural unemployment rate. b the price level is greater than the expected price level. c the price level will be higher next period than it is this period. d all of the above e none of the above

all of the above

When the economy is operating at a point where output is greater than the natural level of output, which of the following occurs? a the unemployment rate is less than the natural unemployment rate. b the price level is greater than the expected price level. c the price level will be higher next period than it is this period. d all of the above e none of the above

all of the above - Increases in the price level will lead to an increase in expected prices, increases in the expected price level lead, one for one, to an increase in the actual price level - Pe = p at yn, - unemployment depends negatively on output. - un = 1 - Yn/L, if Y here is increasing, U is decreasing

Suppose a liquidity trap situation exists. Which of the following is most likely to occur if taxes are cut? a no change in output and no change in the interest rate b an increase in output and an increase in the interest rate c an increase in output and little change in the interest rate Your answer d an increase in output and a reduction in the interest rate e none of the above

an increase in output and little change in the interest rate

Based on our understanding of the labor market model presented in Chapter 6, we know that a reduction in the markup will cause a an increase in the equilibrium real wage. b a reduction in the equilibrium real wage. c an increase in the natural rate of unemployment. d a reduction in the natural rate of unemployment and no change in the real wage. e none of the above

an increase in the equilibrium real wage. From the implied by the price-setting behavior of firms relationship for the real wage: W/P = 1/ (1+m), we see that a decrease in the markup, leads firms to decrease their prices given the wage they have to pay; equivalently, this leads to an increase in the equilibrium real wage.. See Figure 6-8, page 126.

For this question, assume that the Phillips curve equation is represented by the following equation: πt - πt-1 = (m + z) - αut. A reduction in the unemployment rate will cause an increase in the natural rate of unemployment. a a reduction in the markup over labor costs (i.e., a reduction in m). b an increase in the markup over labor costs. c an increase in the inflation rate over time. d a decrease in the inflation rate over time. e none of the above

an increase in the inflation rate over time.

Assume the economy is initially operating at the natural level of output. Now suppose that individuals decide to reduce their desire to save. We know with certainty that which of the following will occur in the short run as a result of decreased desire to save? a greater investment b less investment c an increase in the nominal wage d higher output and lower investment e no change in the economy at all

an increase in the nominal wage A decrease in the desire to save, in the short run, increases the demand for goods, and therefore increases the output. Increased output puts pressures on prices, and leads to an increase in the nominal wages. See section 7-2. - An increase in the private saving rate—that is, lower consumption at the same level of disposable income—decreases demand and output in the short run

Suppose that increased international trade makes product markets more competitive in the U.S. Given this information, we would expect to observe which of the following? a an upward shift in the WS curve b a downward shift in the WS curve c an upward shift in the PS curve d a downward shift in the PS curve e none of the above

an upward shift in the PS curve

Based on the aggregate supply relation, an increase in current output will cause a a shift of the aggregate supply curve. b an increase in the current price level. Your answer c a change in the expected price level this year. d an increase in the expected price level and an upward shift of the AS curve. e an increase in the markup over labor costs.

b an increase in the current price level. We assume mark ups are constant

Based on the aggregate supply relation, an increase in current output will cause a a shift of the aggregate supply curve. b an increase in the current price level. c a change in the expected price level this year. d an increase in the expected price level and an upward shift of the AS curve. e an increase in the markup over labor costs.

b an increase in the current price level. Remember the first property of the AS relation: "Given the expected price level, an increase in output leads to an increase in the price level". This happens because an increase in output requires more workers to produce the extra output. Increasing employment reduces unemployment, which in turn increases wages (better condition for workers) and this is translated by firms into higher prices. See Section7-1, page 135.

Securitization can NOT help financial intermediaries a diversify their portfolios. b avoid bankruptcy. c attract more investors to buy and hold their securities. d decrease the cost of borrowing. e none of the above

b avoid bankruptcy.

Which of the following assumptions best characterized the assumption about how individuals formed expectations of inflation by the early 1970s? a expected inflation for the current year was smaller than the previous year's inflation rate. b expected inflation for the current year was approximately equal to the previous year's inflation rate. c expected inflation for the current year was less than the previous year's inflation rate. d expected inflation for the current year equal to the average inflation rate over the past five years. e expected inflation for the current year equal to the average inflation rate over the past ten years.

b expected inflation for the current year was approximately equal to the previous year's inflation rate. The evidence suggests, that by the mid-1970s, people expected this year's inflation rate to be the same as last year's inflation rate.

In the aggregate demand relation, an increase in the price level causes output to decrease because of its effect on a government spending. b the money market and, subsequently, investment. c the nominal wage. d firms' markup over labor costs. e the expected price level.

b the money market and, subsequently, investment. The increase in the price level, leads to a decrease in the real money stock. This monetary contraction, leads to an increase in the interest rate, which leads in turn to lower investment and lower demand for goods, reducing output. See section 7-2, page 137.

Since approximately 1970, the most stable Phillips-type relationship for the United States has been between which of the following? a the rate of inflation and the change in the unemployment rate b the unemployment rate and the change in the rate of inflation c the change in the unemployment rate and the change in the rate of inflation d the inverse of the unemployment rate and the rate of inflation e the unemployment rate and the rate of inflation

b the unemployment rate and the change in the rate of inflation

The price setting equation is represented by the following: P = (1+m)W. When there is perfect competition, we know that m will equal a W. b P. c 1. d W/P. e none of the above

c 1.

A reduction in the unemployment rate will tend to cause which of the following? a an increase in the separation rate b a reduction in the nominal wage c a reduction in the duration that one is unemployed d all of the above e none of the above

c a reduction in the duration that one is unemployed

A reduction in the unemployment rate will tend to cause which of the following? c a reduction in the duration that one is unemployed

c a reduction in the duration that one is unemployed

During the Great Depression, the actual unemployment rate in the U.S., and the natural rate apparently a increased; decreased b increased; remain unchanged c increased; increased as well d decreased; increased e decreased; remained unchanged

c increased; increased as well

The mortgage is said to be underwater when a the value of the house exceeds the value of the mortgage. b the house is flooded. c the value of the mortgage exceeds the value of the house. d all of the above e none of the above

c the value of the mortgage exceeds the value of the house.

In the wage-setting relation, the nominal wage tends to decrease when a the price level increases. b the unemployment rate decreases. c unemployment benefits decrease. d the minimum wage increases. e all of the above

c - unemployment benefits decrease.

Which of the followings is NOT a bank's assets? a reserves b loans c government bonds d checkable deposits e none of the above

checkable deposits The assets may be reserves (central bank money), loans to consumers, loans to firms, loans to other banks, mortgages, government bonds, or other forms of securities. The liabilities may be checkable deposits or borrowing from investors and other banks. so Liabilityies - borrowing, checkable deposits

When the economy is operating at a point where output is greater than the natural level of output, which of the following occurs? a the unemployment rate is less than the natural unemployment rate. b the price level is greater than the expected price level. c the price level will be higher next period than it is this period. d all of the above e none of the above

d all of the above From the analysis of the AS curve, we know that when output is above the natural level of output, the price level is higher than the expected price level, the price level wage setters expected when they set nominal wages. Hence, next time they set nominal wages, they are likely to revise their expectations upwards. Also, given the formula for unemployment rate, u = 1 - (Y/L), since output is greater than the natural level of output, the unemployment rate is less than the natural unemployment rate. See section 7-1, pages 134 and 135.

As the unemployment rate falls, a the proportion of the unemployed finding a job increases. b the separation rate increases. c the young and unskilled experience larger-than-average decreases in unemployment. d both A and C. Your answer e all of the above

d both A and C.

The aggregate demand curve will shift to the right when which of the following occurs? a a reduction in the money supply b a reduction in consumer confidence c a rise in the price level d a reduction in taxes e a decrease in the price level

d. a reduction in taxes The aggregate demand curve is drawn for given values of M, G, and T. Changes in monetary or fiscal policy, or in any other variable, other than the price level, that shift the IS or the LM curves, shift the aggregate demand curve.

Which of the following is one possible explanation for the change in the natural rate of unemployment in the United States during the 1970s? a contractionary fiscal policy b an increase in the proportion of labor contracts that were indexed c contractionary monetary policy d all of the above e none of the above

e none of the above

Answer this question using the AS/AD model presented in the textbook. Which of the following would cause a reduction in the natural level of output in the medium run? a a decrease in government spending b a decrease in the money supply c an increase in taxes d both A and C e none of the above

e none of the above The only things that can change the natural level of output are things that change the mark-up (m) and catch-all variable (z)

The natural rate of unemployment is the rate of unemployment a that occurs when the money market is in equilibrium. b that occurs when the markup of prices over costs is zero. c where the markup of prices over costs is equal to its historical value. d that occurs when both the goods and financial markets are in equilibrium. e none of the above

e - none of the above The natural rate of unemployment or the equilibrium unemployment rate, un, is such that the real wage chosen in wage setting is equal to the real wage implied by price setting when expectations about prices are done correctly (P e = P ): F(un,z) = 1/ (1+m). Section 6-5.

If efficiency wage theory is valid, we would expect a relatively low premium over the reservation wage when a the unemployment rate is high. b the job requires very little training. c workers can be easily monitored. d workers have few other options for employment in the area. e all of the above

e all of the above

The reservation wage is a the wage that an employer must pay workers to reduce turnover to a reasonable level. b the wage that ensures a laid-off individual will wait for re-hire, rather than find another job. c the lowest wage firms are allowed by law to pay workers d the wage offer that will end a labor-strike. e none of the above

e none of the above

exogenous is

given

An increase in consumer or investment confidence causes an

increase (rightward shift) of the aggregate demand curve

Which of the following will produce a shift to the right of the aggregate demand: Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. a increase in firm's mark-up. b increase in government spending. c contractionary money policy. d drop in the price level. e increase in taxes.

increase in government spending. It's not price level because a change in price level causes movement along the curve

Which of the following explains why the original Phillips curve relation disappeared or, as some economists have remarked, "broke down" in the 1970s? a individuals assumed the expected price level for the current year would be equal to the actual price level from the previous year. b individuals assumed that expected inflation would be zero c individuals changed the way they formed expectations of inflation. d monetary policy became contractionary. e more labor contracts became indexed to changes in inflation.

individuals changed the way they formed expectations of inflation.

An increase in expected price level

leads, one for one, to an increase in the actual price level.

Assume that expected inflation is based on the following: πet = θπt-1. An increase in θ will cause a an increase in the natural rate of unemployment. b a reduction in the natural rate of unemployment. c no change in the natural rate of unemployment. d inflation in period t to be more responsive to changes in unemployment in period t. e none of the above

no change in the natural rate of unemployment.

When a liquidity trap situation exists, the central bank can affect liquidity

that is, increase or decrease the money supply, but this liquidity falls intro a trap: the additional or reduced money is held by people at an unchanged interest rate, namely zero

The original Phillips curve implied or assumed that a the markup over labor costs was zero. b the expected rate of inflation would be zero. c the actual and expected rates of inflation would always be equal. d all of the above e none of the above

the expected rate of inflation would be zero.

At the current level of output, suppose the actual price level is greater than the price level that individuals expect (i.e., Pt> Pet). We know that a output is currently below the natural level of output. b the interest rate will tend to rise as the economy adjusts to this situation. c the nominal wage will tend to decrease as individuals revise their expectations of the price level. d the AS curve will tend to shift down over time. e none of the above

the interest rate will tend to rise as the economy adjusts to this situation.