chapter 11

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Which of the following statements best characterizes​ demand-pull and​ cost-push inflation?

Both are short run types of inflation

How could one explain the shape of the upward sloping​ short-run aggregate supply curve by only focusing on​ profits?

Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.

Which of the following will increase both the​ short-run and​ long-run aggregate supply​ curves?

Younger workers in the labor force receive better and more training than their predecessors

According to​ Keynes, when there is excess capacity in an​ economy, the equilibrium level of real GDP per year is determined by

aggregate demand

​Demand-pull inflation arises due to

an increase in money supply

Between early 2005 and late​ 2007, total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation. From a​ short-run Keynesian​ perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were

an increase in the price level along with an increase in equilibrium real GDP

Suppose that the barrel price of petroleum decreased temporarily. The result of this would be best described by

an increase in the​ short-run aggregate supply curve only.

An increase in aggregate demand leads to _____________ gap

an inflationary

Given that the economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD real rate of interest decreases the economy would then experience

an inflationary gap

The resulting spending gap between early 2005 and late 2007 when total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation can best be described as

an inflationary gap

The Classical model assumes prices ________________ so that the aggregate supply curve is _______________ and the economy is always _____________________.

are flexible; vertical; at full employment

Suppose that aggregate demand were to increase due to a weaker dollar. Which of the following would be the​ result?

inflation only

Real GDP can be expanded in the short run because firms can use existing workers and capital equipment more ________________.

intensively

The model of​ long-run equilibrium

is the same as the Classical Model.

Since the modern Keynesian Model allows for some price​ response, the aggregate supply curve

is upward sloping

Say's Law fits best in the Classical Theory since this philosophy placed great importance on aggregate supply to determine the

level of output

Any change in factors influencing ___________-run ​output, such as _____________, capital, or ____________, will shift both the SRAS curve and the LRAS curve.

long; labor; technology

Inflation in an economy implies that

the average price level has increased over a stated period of time

Which of the following is true concerning shifts of the​ long-run aggregate supply​ curve?

An increase in the​ long-run aggregate supply curve is depicted as a rightward shift and an increase in real GDP

Which of the following would create​ cost-push inflation?

An increase in wages paid to workers

Which of the following will occur when aggregate supply remains stable but aggregate demand increases in the short​ run?

An inflationary gap is created

the classical model makes four major assumptions:

1) pure competition exists 2) wages and prices are flexible 3) people are motivated by self-interest 4) people can't be fooled by money illusion

The Keynesian Model was supported empirically by data from the decade of the

1930s

Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short​ run?

A recessionary gap is created

Suppose that an economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. If real rate of interest increases​, which of the following is the best description of the outcome in the​ economy?

Aggregate demand decreases

An economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. Suppose that real rate of interest decreases​, which of the following is the best explanation of the​ outcome?

Aggregate demand increases

The extent to which real GDP responds to changes in the price level along the​ short-run aggregate supply curve is largely determined by

All of the above

Which of the following is the best example of uncounted​ production?

An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine parts.

Which of the following would create​ demand-pull inflation?

An increase in household income

In the Modern Keynesian Model the short run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping​ short-run aggregate supply curve by only focusing on the capital​ input?

Existing machinery can be used longer hours.

The Modern Keynesian​ short-run aggregate supply curve is best described by which of the following​ statements?

It is very flat at low levels of real​ GDP; increases slightly as real GDP​ grows; and becomes very steep as real GDP surpasses full employment.

Which of the following is a possible explanation for sticky​ prices?

Labor contracts cause wages to be fixed over the contract period

Which of the following is not one of the four major assumptions of the classical​ model?

People suffer from money illusion

What did Keynes mean when he said that prices are​ sticky?

Prices, especially the price of​ labor, are inflexible downward.

Which of the following best exemplifies​ Say's Law?

The production of a​ $4000 plasma TV set creates demand for other goods and services valued at​ $4000.

In the modern Keynesian Model the​ short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor​ input?

The workers are switched from uncounted production to counted​ production, thus enabling the firm to expand output as the price level expands.

Suppose that the value of the US dollar​ ($) yesterday was​ $1 = 4 seuros. Today the exchange rate changed such that​ $1 = 33 seuros. One can say that the

US​ $ depreciated.

Now that the macroeconomy is in a​ disequilibrium, what happens in the labor​ market?

Unemployment decreases​, which increases wages.

​Cost-push inflation arises due to

a decrease in the​ short-run aggregate supply curve

Suppose that the barrel price of petroleum increased temporarily. The result of this would be best described by

a decrease in the​ short-run aggregate supply curve only

According to the classical​ model, if the economy starts at full employment an increase in aggregate demand will cause all of the following to occur except

a decrease in wage rates

say's law

a dictum of economist J. B. Say that supply creates its own demand. producing goods and services generates the means and the willingness to purchase other goods and services

A depreciation of the U.S. dollar should result in

a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and​ short-run aggregate supply curves

When aggregate demand decreases while aggregate supply is​ stable, _____________ gap can​ occur, defined as the difference between how much the economy could be producing if it were operating on its LRAS and the equilibrium level of real GDP

a recessionary

Suppose that an economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. Given that real rate of interest increases​, the new short run position of the economy finds itself in is termed

a recessionary gap

All of the following will shift the​ short-run aggregate supply and the​ long-run aggregate supply except for

a temporary change in input prices

In the labor​ market, full employment occurs at ________________ at which quantity demanded equals quantity supplied. That particular level of employment is associated with the​ full-employment level of real GDP per year.

a wage rate

With stable aggregate​ demand, an abrupt shift inward in SRAS may lead to what is called __________ inflation

cost-push

After reading a recent​ best-seller documenting a growing population of low minus low−income elderly people who were ill minus ill−prepared for​ retirement, most residents of this country decide to increase their saving at any given interest rate.

decrease

Cost-push inflation is caused by persistent

decreases in​ short-run aggregate supply

If we assume that the economy is operating on a horizontal​ short-run aggregate supply​ curve, the equilibrium level of real GDP per year is completely ___________________

demand determined

With stable aggregate​ supply, an abrupt outward shift in AD may lead to what is called ___________ inflation

demand-pull

A stonger dollar contributes to inflation

false

​Also, in the short​ run, when input prices are​ fixed, a higher price level means __________________ ​profits, which induce firms to hire more workers.

higher

The​ short-run Keynesian aggregate supply curve is

horizontal

Keynesians believe that the aggregate supply curve is

horizontal in the short run

One of the main conclusions of​ Say's Law was that

if people supply goods in order to then demand​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs

If an excess quantity of labor is supplied at a particular wage​ level, the wage level

must be above equilibrium

The Keynesian model argues that prices are sticky. One reason supporting this argument is that

nominal wages are inflexible downwards

long run equilibrium

occurs at the intersection of AD and the​ long-run aggregate supply​ curve, LRAS

Short-run equilibrium

occurs at the intersection of the aggregate demand​ curve, ​AD, and the​ short-run aggregate supply​ curve, SRAS

In modern Keynesian​ theory, the ​short-run aggregate supply​ curve, SRAS​, shows the relationship between the price level and real GDP without full adjustment or full information. It is upward sloping because it allows for ______________ price adjustment in the short run.

partial

Thus, according to the Keynesian model full employment is ______________________.

possible but not guaranteed

An important difference between the Classical Model and the Keynesian Model is that

prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in the Keynesian Model.

As the wage increases​, the

quantity demanded of labor decreases​, while the law of supply increases the number of workers seeking jobs.

The Keynesian model indicates that the economy will find an equilibrium however the economy will not always ______________________.

reach full employment

money illusion

reacting to changes in money prices rather than relative prices. if a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion

Since the nominal wage is deemed​ inflexible, a decrease in aggregate demand causes firms to

reduce their workforce

The horizontal​ short-run aggregate supply curve has been called the Keynesian​ short-run aggregate supply curve because Keynes believed that many​ prices, especially​ wages, would not be __________________ even when aggregate demand decreased.

reduced

During the rapid adjustment period​ (that results from the change in the AD​ curve), the economy will immediately tend toward a price level that ___________________ and a level of real GDP that ___________________ before quickly returning to full employment.

remains constant; increases

When saving is introduced into the​ model, equilibrium occurs in the credit market through changes in the interest rate such that desired ___________ equals desired _____________ at the equilibrium rate of interest.

saving; investment

Changes in factors of production that influence economic growth will

shift SRAS and LRAS

A​ short-lived change in production input prices will

shift SRAS but not LRAS

Given that the US dollar has depreciated the​ short-run aggregate supply in the United States should

shift to the left

Given that the US dollar has​ depreciated, the aggregate demand in the United States should

shift to the right

Any unanticipated shifts in aggregate demand or supply are called aggregate demand or aggregate supply

shocks

The existence of sticky prices causes the _____________________ to be horizontal.

short run aggregate supply

A temporary change in input prices will shift only the ____________ curve

sras

At the same​ time, a ___________ dollar will lead to lower net​ exports, causing the aggregate demand curve to shift inward. The equilibrium price level definitely​ falls, but the net effect on equilibrium real GDP depends on which shift is larger.

stronger

a ____________ dollar will reduce the cost of imported​ inputs, thereby causing SRAS to shift outward to the right.

stronger

Say's law asserts that

supply creates its own demand

The modern Keynesian Model assumes that

that prices respond to changes in aggregate demand but not fully.

Persistent inflation arises due to

the aggregate demand curve increasing by a larger proportion than the​ long-run aggregate supply curve

The​ long-run aggregate supply curve will not shift if there is a change in

the price level

The classical economists believed that the leakage of saving would be matched by the injection of business investment.

true

The level of employment in an economy determines its real GDP.

true

According to modern Keynesian​ analysis, the​ short-run aggregate supply curve is

upward sloping

In the classical​ model, because LRAS is __________________, the equilibrium level of real GDP is supply determined. Any changes in aggregate demand simply change the __________________.

vertical; price level

The lower the rate of​ interest, the​ ________ profitable it is to invest and the​ ________ the level of desired investment.

​more; higher

As the dollar becomes stronger in international foreign exchange​ markets, the​ short-run aggregate supply curve will shift to the​ ________ and the aggregate demand curve will shift to the​ ________

​right; left

If the prices were​ sticky, according to​ Keynes, this would then imply that the

​short-run aggregate supply is horizontal


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