Chapter 22 Hw Test #2

"The appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand in the United States." Is this statement true, false, or uncertain? (a) It is uncertain whether the appreciation of the dollar from 2012 to 2017 had a negative effect on aggregate demand because the appreciation of the U.S. dollar also affects the short-run aggregate supply curve and increases aggregate demand (b) the statement is false. An appreciation of the U.S. dollar increases net exports and according to aggregate demand and supply analysis, the aggregate demand curve shifts upward and to the right, thus increasing output. (c) The statement is true. an appreciation of the U.S. dollar decreases net exports and according to the aggregate demand and supply analysis, the aggregate demand curve shifts downward and to the left, thus reducing output.

(c) The statement is true. an appreciation of the U.S. dollar decreases net exports and according to the aggregate demand and supply analysis, the aggregate demand curve shifts downward and to the left, thus reducing output.

In many countries around the​ world, the population is aging and large segments of the population are retiring or close to retirement. What effect would this have on a​ country's long-run aggregate supply​ curve? What will happen to aggregate output as a​ result? A. The​ long-run aggregate supply curve of these countries is likely to shift to the right because of the reduction in the productive capacity of these countries. Aggregate output will decline as a resut. B. The​ long-run aggregate supply curve of these countries is likely to shift to the right because of an increase in the productive capacity of these countries. Aggregate output will increase as a resut. C. The​ long-run aggregate supply curve of these countries is likely to shift to the left because of the reduction in the productive capacity of these countries. Aggregate output will decline as a resut.

. The​ long-run aggregate supply curve of these countries is likely to shift to the left because of the reduction in the productive capacity of these countries. Aggregate output will decline as a resut. If the labor supply is reduced as a result of large portions of the population​ retiring, this reduces the productive capacity of the​ economy, resulting in a leftward shift of the​ long-run aggregate supply curve. All else​ equal, this will result in a decline in income in the country. Next Question

1. The inflation rate tends to​ increase, as expected inflation _________

1. Increases

2. The inflation rate tends to​ increase, as the unemployment gap __________

2. Decreases

3. The inflation rate tends to​ increase as the actual unemployment rate ____________

3. Decreases

4. The inflation rate tends to​ increase as the natural rate of unemployment __________

4. Increases

Okun's Law Equation

?

If huge budget deficits cause the public to think that there will be higher inflation in the future but have no effect on business or consumer​ optimism, what will happen to the position of the aggregate demand​ curve? A. Aggregate demand will not change. B. Aggregate demand will shift leftward. C. Aggregate demand will shift rightward. D. The effect on aggregate demand cannot be determined without further information.

A. Aggregate demand will not change.

Which of the following would not have enabled an activist government from pursuing the restoration of potential output and full employment after the negative demand​ shocks? A. An increase in the minimum wage. B. A decrease in taxes. C. An easing of monetary policy. D. An increase in government purchases.

A. An increase in the minimum wage. An increase in the minimum wage would have a negligible impact on AD given the small number of workers exposed to this wage.​ Additionally, as a cost of​ production, a higher minimum wage will adversely affect AS.

What factors led to a decrease in both the unemployment rate and the inflation rate in the​ 1990s? ​(Check all that​ apply.) A. Improved demographic factors, such as an increase in the average age of the workforce. B. The computer revolution, which caused rapid increases in productivity. C. The Volcker​ disinflation, which continued into the 1990s. D. An increase in interest rates by the Federal Reserve to prevent the economy from overheating. E. Changes in the health care industry, which greatly increased medical care costs relative to other goods and services.

A. Improved demographic factors, such as an increase in the average age of the workforce. B. The computer revolution, which caused rapid increases in productivity.

Suppose that the public believes that a newly announced​ anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the inflation rate in the short​ run? A. The inflation rate will fall and aggregate output will rise. B. Both the inflation rate and aggregate output will fall. C. The inflation rate will rise and aggregate output will fall. D. Both the inflation rate and aggregate output will rise.

A. The inflation rate will fall and aggregate output will rise.

The​ self-correcting mechanism describes how the economy eventually returns to the​ _______ regardless of where output is initially. A. natural rate level of output B. natural rate level of consumption C. real level of output D. real level of consumption

A. natural rate level of output The​ self-correcting mechanism describes how the economy eventually returns to the natural rate level of output regardless of where output is initially.

When inflation and inflation expectations adjust to move output to​ potential, this is an example of A. the​ self-correcting mechanism. B. the real business cycle theory. C. stabilization policy. D. autonomous monetary policy.

A. the​ self-correcting mechanism. When inflation and inflation expectations adjust to move output to​ potential, this is an example of the​ self-correcting mechanism.

A successful​ cost-push shock by workers means A. wage increases are higher than productivity​ growth, and the aggregate supply curve will shift up. B. wage increases are equal to productivity​ growth, and the aggregate demand curve will shift left. C. wage increases are higher than productivity​ growth, and the aggregate supply curve will shift down. D. wage increases are less than productivity​ growth, and the aggregate demand curve will shift right.

A. wage increases are higher than productivity​ growth, and the aggregate supply curve will shift up. A successful​ cost-push shock by workers means wage increases are higher than productivity​ growth, and the aggregate supply curve will shift up. OK

If huge budget deficits cause the public to think that there will be higher inflation in the​ future, what will happen to the position of the​ short-run aggregate supply​ curve? A. ​Short-run aggregate supply will shift leftward. B. ​Short-run aggregate supply will shift rightward. C. ​Short-run aggregate supply will not change. D. The effect on​ short-run aggregate supply cannot be determined without further information.

A. ​Short-run aggregate supply will shift leftward.

The four components of aggregate demand are A. ​consumption, planned​ investment, government​ spending, and net exports. B. ​consumption, planned​ investment, government​ spending, and exports. C. ​consumption, planned​ investment, government​ spending, and imports. D. ​consumption, planned​ investment, government​ spending, and net imports.

A. ​consumption, planned​ investment, government​ spending, and net exports.

"If prices and wages are perfectly​ flexible, then γ ​= 0 and changes in aggregate demand have a smaller effect on​ output." Is this statement​ true, false, or​ uncertain? Explain your answer. A. True. When γ ​= 0, the​ short-run aggregate supply curve becomes​ steeper, and thus the effects of changes in aggregate demand on output are smaller. B. False. As prices and wages become more​ flexible, γ becomes​ larger, and thus for a given aggregate demand​ shock, the effects on output are smaller. C. False. When prices and wages are perfectly​ flexible, γ becomes​ smaller, and thus for a given aggregate demand​ shock, the effects on output are always larger. D. Uncertain. The effect on output caused by changes in aggregate demand also depends on the size of the output gap.

B. False. As prices and wages become more​ flexible, γ becomes​ larger, and thus for a given aggregate demand​ shock, the effects on output are smaller.

If stagflation is bad​ (high inflation and high​ unemployment), does this necessarily mean that very low inflation and very low unemployment is​ good? ​(Select all that​ apply.) A. Yes. Low unemployment and low inflation are associated with rapid increase in wages and thus quality of life. B. No. Having too low of an inflation rate could mean that an adverse shock could result in a deflationary episode which can be particularly damaging. C. Yes. Extremely low levels of unemployment and inflation ensures that the economy is producing at potential output levels and that the economy is growing at a modest pace. D. No. If unemployment is too low relative to the natural rate of​ unemployment, future inflation risk could build even if the current inflation rate remains relatively low.

B. No. Having too low of an inflation rate could mean that an adverse shock could result in a deflationary episode which can be particularly damaging. D. No. If unemployment is too low relative to the natural rate of​ unemployment, future inflation risk could build even if the current inflation rate remains relatively low.

As the labor force becomes more productive over​ time, how does that affect the​ long-run aggregate supply​ curve? A. The LRAS curve does not change because​ long-run aggregate supply is determined only by the total amount of capital and labor supplied in the economy. B. The LRAS curve shifts to the right because the existing labor​ force, along with a given amount of capital and other​ resources, can produce more output. C. The LRAS curve shifts to the left because there is a decrease in structural unemployment and thus a decline in the natural rate of unemployment. D. The LRAS curve becomes steeper because a persistent output gap may occur.

B. The LRAS curve shifts to the right because the existing labor​ force, along with a given amount of capital and other​ resources, can produce more output.

Why are central banks so concerned about inflation​ expectations? A. Rising concerns about inflation may shift the aggregate demand​ curve, making inflation forecasts more unpredictable. B. When inflation expectations​ rise, the​ short-run aggregate supply curve shifts​ up, leading to higher actual inflation in the short run. C. Rising concerns about inflation may cause a number of price shocks to​ occur, making it harder for the central bank to stabilize inflation. D. When inflation expectations​ rise, the​ long-run aggregate supply curve shifts​ up, decreasing the natural level of unemployment.

B. When inflation expectations​ rise, the​ short-run aggregate supply curve shifts​ up, leading to higher actual inflation in the short run.

Which of the following will not cause the aggregate demand curve to​ shift? A. a change in autonomous monetary policy B. tightness in the labor market C. a change in government spending D. a decrease in financial frictions

B. tightness in the labor market A change in government​ spending, a decrease in financial​ frictions, and a change in autonomous monetary policy shift the AD curve.

Changes in the following variables will cause a shift of the long-run aggregate supply​ curve: A. ​short-term capital,​ short-term labor, and available technology. B. total capital, total labor, and available technology. shocks. C. expected inflation, output gap, and price (supply) D. expected​ inflation, total​ labor, and price​ (supply) shocks.

B. total capital, total labor, and available technology. shocks.

The financial crisis that began in August 2007 in the United​ States: A. resulted in chronic slow growth for​ China, since aggregate demand fell for China and has yet to recover. B. had very little effect on the Chinese​ economy, indicating that China is relatively​ recession-proof. C. caused a collapse of​ China's exports and the Chinese government used a fiscal stimulus package to restore economic activity. D. caused a collapse of​ China's imports and the Chinese government used a monetary stimulus package to restore economic activity.

C. caused a collapse of​ China's exports and the Chinese government used a fiscal stimulus package to restore economic activity.

The three components of​ short-run aggregate supply are A. ​inflation, output​ gap, and price​ (supply) shock. B. ​inflation, price​ gap, and output​ (supply) shock. C. expected​ inflation, output​ gap, and price​ (supply) shock. D. expected​ inflation, price​ gap, and output​ (supply) shock.

C. expected​ inflation, output​ gap, and price​ (supply) shock.

Inflation expectations affect A. the​ short-run aggregate demand​ curve, but not the​ long-run demand curve. B. the​ long-run aggregate supply​ curve, but not the​ short-run supply curve. C. the​ short-run aggregate supply​ curve, but not the​ long-run supply curve. D. the​ long-run aggregate demand​ curve, but not the​ short-run demand curve.

C. the​ short-run aggregate supply​ curve, but not the​ long-run supply curve.

Which of the following shifts the aggregate demand​ curve? A. An increase in inflation B. An increase in expected inflation C. An increase in productivity D. An increase in the autonomous real interest rate

D. An increase in the autonomous real interest rate (interest sensitive components of AD)

What basic relationship does the​ long-run Phillips curve​ describe? A. It indicates the unemployment rate tends to decrease as the inflation rate increases. B. It indicates inflation will move toward its natural rate regardless of the unemployment rate. C. It indicates the unemployment rate tends to increase as the inflation rate increases. D. It indicates unemployment will move toward its natural rate regardless of the inflation rate.

D. It indicates unemployment will move toward its natural rate regardless of the inflation rate.

Suppose the inflation rate remains relatively​ constant, and output decreases and the unemployment rate increases. This is possible​ if: A. both the aggregate supply and demand curves shift horizontally to the right by the same amount. B. the aggregate supply curve shifts to the left and the aggregate demand curve shifts to the right. C. the aggregate supply curve shifts to the left and the aggregate demand curve remains the same. D. both the aggregate supply and demand curves shift horizontally to the left by the same amount.

D. both the aggregate supply and demand curves shift horizontally to the left by the same amount.

The​ short-run aggregate supply curve slopes upward because an increase in output relative to potential​ output: A. induces aggregate demand to​ increase, increasing inflation. B. leads to unstable markets and higher inflation. C. causes markets to have excess​ supplies, putting upward pressure on inflation. D. creates tight labor and product markets that cause inflation to rise.

D. creates tight labor and product markets that cause inflation to rise.

The aggregate demand curve describes the relationship between A. the real interest rate and the quantity of aggregate output demanded. B. the inflation rate and the real interest rate. C. the inflation rate and the quantity of output produced. D. the inflation rate and the quantity of aggregate output demanded.

D. the inflation rate and the quantity of aggregate output demanded.

The aggregate supply curve describes the relationship between A. the real interest rate and planned investment. B. the real interest rate and the quantity of aggregate output supplied. C. the inflation rate and the real interest rate. D. the inflation rate and the quantity of aggregate output supplied.

D. the inflation rate and the quantity of aggregate output supplied.

An upward shift in aggregate supply ultimately causes A. the inflation rate to rise and output to remain unchanged. B. the inflation rate to rise and output to rise. C. the inflation rate to fall and output to rise. D. the inflation rate to remain unchanged and output to remain unchanged.

D. the inflation rate to remain unchanged and output to remain unchanged.

The aggregate demand curve slopes downward because a rise in inflation​ leads: A. the monetary policy authorities to impose credit controls. B. the fiscal policy authorities to impose contractionary fiscal measures. C. consumers and businesses to increase autonomous expenditures. D. the monetary policy authorities to raise real interest rates.

D. the monetary policy authorities to raise real interest rates.

The​ long-run aggregate supply curve​ is: A. ​upward-sloping because the output an economy can produce increases as does the inflation rate in the long run. B. ​upward-sloping because changes in​ labor, capital, and technology​ (not the inflation​ rate) change the output an economy can produce over the long run. C. vertical because the output an economy can produce increases as does the inflation rate in the long run. D. vertical because changes in​ labor, capital, and technology​ (not the inflation​ rate) change the output an economy can produce over the long run.

D. vertical because changes in​ labor, capital, and technology​ (not the inflation​ rate) change the output an economy can produce over the long run. (independent of inflation)

Which of the following factors would not cause an increase in aggregate​ demand? A. A decrease in taxes. B. An increase in the money supply. C. A depreciation of the dollar. D. A wave of investor optimism. E. A decrease in the price level.

E. Decrease in PL is movement ALONG AD curve

Which of the following describes a reason why the​ long-run Phillips curve relationship differs from the​ short-run relationship?

In the long​ run, expected inflation is taken into account when making work and hiring decisions.

Does the factor affect AD? Foreign economies crash​, producing a substantial drop in net exports.

L

Does the factor affect AD? Actual output falls below potential​ output, eliminating ​"tightness" in resource markets.

No

Does the factor affect AD? The prospect of worsening inflation induces the Federal Reserve to tighten monetary policy.

No

Does the factor affect AD?\ The government rescinds ​ill-advised regulations that hamper the​ economy's overall efficiency.

No

In what ways is the Volcker disinflation considered a​ success? What are the negative aspects of​ it?

The Volcker disinflation was successful in bringing inflation down with contractionary policies; however, these policies resulted in two recessions and a significant increase in unemployment

According to the​ expectations-augmented Phillips​ curve, which of the following factors determines the rate of​ inflation? A. The difference between the unemployment rate and the natural rate of unemployment. B. Expected inflation. C. The degree of tightness in the labor market. D. All of the above are correct.

The difference between the unemployment rate and the natural rate of unemployment. Expected inflation. The degree of tightness in the labor market. D. All of the above are correct.

if unemployment is above natural rate of unemployment, what will happen to inflation and output?

When the unemployment rate is above the natural rate of unemployment, there is slack in the labor market and output is below potential. This causes the short-run aggregate supply curve to shift downward, leading to lower inflation and higher output over time, until the economy reaches a long-run equilibrium.

Does the factor affect AD? Consumer pessimism spreads as the media reports disappointing news about the economy.

Yes, Left

Does the factor affect AD? The government allows previously enacted tax cuts to​ expire, resulting in much higher taxes for households.

Yes, Left

Does the factor affect AD? The Federal Reserve autonomously loosens monetary policy.

Yes, Right

Does the factor affect AD? War breaks​ out, forcing the government to substantially enhance defense expenditures.

Yes, left

Does the factor affect AD? Optimism within the business community induces a surge in planned business expenditures.

Yes, right

Inflation ________ when the unemployment rate is greater than the natural rate of unemployment.

falls

Stagflation

high inflation and high unemployment

Suppose that the White House decides to sharply increase military spending without decreasing government spending in other areas. This measure​ would, all else​ constant, cause aggregate demand to:

increase

The​ self-correcting mechanism works its​ "magic" primarily through the linkage running from the

labor market to the product market via changes in the rate of change in production costs.

Whether positive or​ negative, supply shocks that ultimately make output and inflation different are (permanent/temporary)

permanent