ECN 211 Exam 3

Which of the following shifts both the short-run and long-run aggregate supply right? Group of answer choices a. an increase in the actual price level b. an increase in the capital stock c. an increase in the expected price level d. None of the above is correct.

"An increase in the capital stock." Explanation: An increase in capital stock (e.g., more factories, machinery, or technology) boosts an economy's productive capacity, leading to a rightward shift in both the short-run aggregate supply (SRAS) and the long-run aggregate supply (LRAS).

Other things the same, when the price level falls, interest rates Group of answer choices a. fall, so firms increase investment. b. rise, so firms increase investment. c. rise, so firms decrease investment. d. fall, so firms decrease investment.

"fall, so firms increase investment." When the price level falls, it leads to a lower demand for money, which in turn lowers interest rates. Lower interest rates make borrowing cheaper for businesses, encouraging them to increase investment spending. This is known as the interest rate effect, which is one of the reasons why the Aggregate Demand (AD) curve slopes downward.

What is 1/P? And give an example of what $1 is valued at when P = $2 and P = $3.

1/P is the value of $1, measured in goods. Example: basket contains one candy bar. If P = $2, value of $1 is 1/2 candy bar If P = $3, value of $1 is 1/3 candy bar Inflation drives up prices and drives down the value of money.

This question is equivalent to three questions (12 POINTS). Partial credit is awarded. Select the correct answers from the drop-down menu. Suppose the tax rate on nominal interest income is 20% and does not change over time. Also assume the real interest rate remains constant. In year 1, the inflation rate is 4% and the nominal interest rate is 10%. In year 2, the inflation rate is 14%. The real interest rate in both years is (Answer) The nominal interest rate in year 2 is (Answer) . The after-tax nominal interest rate in year 1 is (Answer) . The after-tax nominal interest rate in year 2 is (Answer) The after-tax real interest rate in year 1 is (Answer) The after-tax real interest rate in year 2 is (Answer)

6 20 8 16 4 2

Recession

A decline in real GDP (standard measure of value for production of goods and services during a certain time period) that last 6 months or more.

The inflation tax a. is the revenue created when the government prints money. b. is like a tax on everyone who holds money. c. All of the above are correct. d. is an alternative to income taxes and government borrowing.

All of the above are correct.

An increase in expected inflation _______. a. shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is less favorable b. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is more favorable c. shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is more favorable d. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is less favorable Hide Feedback Correct

An increase in expected inflation _______. a. shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is less favorable

Policymakers can also influence aggregate demand using fiscal policy.

An increase in government purchases or a cut in taxes shifts the aggregate-demand curve to the right. A decrease in government purchases or an increase in taxes shifts the aggregate-demand curve to the left.

Which of the following shifts SRAS leftward? a. an increase in the actual price level b. an increase in the capital stock c. an increase in the expected price level d. None of the above is correct.

An increase in the expected price level because firms anticipate higher costs and reduce supply in the short run.

Which of the following policy actions shifts the aggregate-demand curve? Group of answer choicesAll of the above are correct.an increase in the money supplyan increase in government spendingan increase in taxes

An increase in the money supply 📈💰 The Federal Reserve increasing the money supply lowers interest rates. Lower interest rates encourage more investment (I) and consumption (C), shifting AD to the right. An increase in government spending 🏛️💵 shifs the curve to the right. Tax increase → AD shifts left ✅

Nominal variables + examples

Are measured in monetary units (e.g., nominal GDP, nominal interest rate).

Real variables + examples

Are measured in physical units (e.g., real GDP, real interest rate). Ex. 1.5 pizzas per DVD Relative prices are real variables, indicating the price of one good relative to another.

Money Supply (The total amount of wealth held in liquid form by individuals): What happens to the value of money as Price level increases?

As P (Price level) increases, the value of money decreases, necessitating more money to purchase goods and services.

What does the money supply demand diagram illustrate?

As the value of money rises, the price level falls. An increase in MS leads to a rise in P due to excess money supply, causing increased demand for goods.

Leftward shift in Aggregate Demand

At every price level, total quantity of goods and services demanded in the economy has decreased. - Higher interest rates (reducing investment and consumption). - Lower consumer and business confidence. - A decrease in wealth (e.g., falling housing or stock prices). - A stronger domestic currency (reducing net exports). - Lower government spending or higher taxes.

Real Wage and calculation

Calculated as W / P Nominal Wage $15 P: Price level of g&s $5 15 / 5 = 3 units output per hour

Components of REAL GDP

Consumption Investments Net exports Government spending

The Exchange-Rate Effect: A lower price level reduces interest rates, leading to __________. This makes domestic goods cheaper for foreign buyers, increasing net exports and aggregate demand.

Currency depreciation.

Sticky-price theory of the short-run aggregate-supply curve

Curve slopes upward. It suggests that some prices (especially wages and the prices of goods/services) are slow to adjust to changes in economic conditions, leading to short-term fluctuations in output and employment.

Suppose the Fed announces that it is raising its target interest rate by 25 basis points, or 0.25 percentage points. To do this, the Fed will use open-market operations to decrease/increase the supply of/demand of money by selling bonds to/buying bonds from the public.

Decrease, supply of, selling bonds to The Fed controls interest rates by changing the money supply by using open-market operations to sell bonds to the public. When the Fed sells bonds to the public, the reserves in the banking system decrease, and banks' ability to lend money decreases. Aggregate demand graph (Price level & Output): This leads to lower consumer spending through the multiplier, the quantity of output demanded decreases at each price level. The decrease in the money supply and the correspondingly higher interest rate cause the aggregate demand curve to shift to the left.

Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to rise in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore fall , and the number of foreign products purchased by domestic consumers and firms (imports) will rise . Net exports will therefore fall , causing the quantity of domestic output demanded to fall . This phenomenon is known as the exchange rate effect.

Exchange Rate Effect

Which of the following would lead to a decrease in the multiplier effect of fiscal policy? Households save a higher fraction of income. Households borrow more to finance spending. Household save a lower fraction of income. The income tax rate decreases.

Households save a higher fraction of income. If the country is spending more then the money multiplier would increase, increasing GDP. If the country is saving more, it would lead to a decrease in the multiplier, reducing GDP.

If people have rational expectations, a monetary policy contraction that is announced and is credible could _______. a. reduce inflation but it would increase unemployment by an unusually large amount b. reduce inflation with little or no increase in unemployment c. increase inflation but it would decrease unemployment by an unusually large amount d. increase inflation with little or no decrease in unemployment

If a monetary policy contraction (such as reducing the money supply or raising interest rates) is announced and credible, people will anticipate lower inflation and adjust their behavior accordingly.

Suppose you've just inherited $6,000 from a relative. You're trying to decide whether to put the $6,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond. The opportunity cost of holding the inheritance as money depends on the interest rate on the bond. Interest Rate on Government Bond = 5% What is the opportunity cost?

If you invested $6,000 in a government bond that pays 5% per year, you would receive $300, in interest payments. Therefore, the opportunity cost of keeping your money in cash would be $300 per year.

According to the theory of liquidity preference, an increase in price level leads to?

Increases in interest rates, a higher interest rate reduces investment spending and thereby reduces the quantity of goods and services demanded. The downward-sloping aggregate-demand curve expresses this negative relationship between the price level and the quantity demanded.

Inflation Rate Equation

Inflation Rate = New Price Level − Old Price Level / (Old Price Level ) x 100

theory of liquidity preference

Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance

The short-run consequence of an increase in the personal income tax levied on households is best described by

Leading to a decrease in consumer spending. This reduction in consumption lowers aggregate demand, which in turn can lead to: Summary (Graph Interpretation) AD curve shifts left - Consumers have less income and decrease consumption. AS stays the same in the short run New equilibrium at a lower price level and lower output (real GDP)

Fisher Affect

Nominal interest rate = Real interest rate + Inflation rate The nominal interest rate adjusts one-for-one with changes in the inflation rate because a change in the money growth rate affects the inflation rate but not the real interest rate.

What happens when money supply increases?

Prices rise and there is now excess money supply but the same amount of goods and services available in the short run.

Quantity Theory of Money

Quantity of money directly determines the value of money.

Policymakers can influence aggregate demand using monetary policy: An increase in the money supply reduces/increases the equilibrium interest rate for any price level. Because a lower interest rate stimulates investment spending, the aggregate-demand curve shifts to the right/left?

Reduces Right

Study the graph

Refer to the figure above. Suppose the the economy begins in recession. What is the short-run result of an open market purchase of securities by the Federal Reserve? A movement from C to B

determining how each event impacts the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift An investment tax credit increases the rate at which firms acquire machinery and equipment. The government allows more immigration of working-age adults who find work. For environmental and safety reasons, the government requires that the country's nuclear power plants be permanently shut down.

Right Right Left

As the price level rises, the cost of borrowing money will ____ , causing the quantity of output demanded to ____ . This phenomenon is known as the ______ effect.

Rise Fall Interest Rate

Suppose now the government passes a law that significantly increases the minimum wage. This change in policy will cause the natural rate of unemployment to rise , which will: Not impact the long-run aggregate supply curve Shift the long-run aggregate supply curve to the right Shift the long-run aggregate supply curve to the left

Shift the long-run aggregate supply curve to the left

Following the price level increase while people have bonds at 9%. People need more money to buy things, but the amount of money available in the economy (set by the Fed) stays the same at first. Thus the higher price level causes the quantity of money demanded to increase at each interest rate, shifting the money demand curve to the right. What will people do with the bonds they've bought as price level rises? What will bond issuers do with interest rates to restore the money market?

Since people need more money, they start selling bonds to get cash. As more people sell bonds, bond issuers have to offer higher interest rates to attract buyers. This continues until the interest rate rises to 12%, balancing money demand and supply.

Study the graph

Suppose the economy begins in long-run equilibrium. The Federal Reserve has decided the inflation rate is too high and implements a contraction in the money supply. What best describes the path the economy takes as a result of the contraction in the money supply and the subsequent adjustment to a new long-run equilibrium? B to C to D

Study the graph

Suppose the relevant Phillips curve is curve II and the natural rate of unemployment is 4.5%. If the Federal Reserve decides to decrease the money supply and the effects are perfectly anticipated, then the economy most likely moves to point B

Tax cuts and aggregate demand

Tax cuts increase consumption spending, The quantity of output will be higher at each price level and shifts AD curve to the right.

Monetary neutrality

That changes in the money supply do not affect real variables in the long run. Leaves relative prices unchanged even if money supply doubles.

The quantity of money demanded decreases as the interest rate rises or falls?

The demand for money arises largely from its usefulness in making daily transactions. Since the opportunity cost of holding money rises as the interest rate rises, people will hold a smaller fraction of their assets as money when the interest rate is high—in other words, they demand less money at higher interest rates.

Suppose there is some hypothetical closed economy in which households spend $0.75 of each additional dollar they earn and save the remaining $0.25. What is the MPC and money multiplier?

The marginal propensity to consume (MPC) for this economy is 0.75 , and the spending multiplier for this economy is 4 . Multiplier 1 / 1 - MPC = 1 / 0/25 = 4

Velocity of money

The rate at which money changes hands (the number of transactions in which the average dollar is used) Ex. V = (P * Y) / M P = Price level $10 Y = Real GDP 3000 Pizzas M = Money Supply $10,000 Velocity = $30,000/$10,000 = 3 The average dollar was used in 3 transactions

Shoe leather costs

The resources wasted when inflation encourages people to reduce their money holdings Includes the time and transactions costs of more frequent bank withdrawals

Inflation tax

The revenue from printing money is the inflation tax: printing money causes inflation, which is like a tax on everyone who holds money.

Sacrifice Ratio

The sacrifice ratio quantifies the economic cost of reducing inflation, typically estimated at 5: for every 1% reduction in inflation, 5% of annual output is sacrificed.

Study the graph

The short-run consequence of an increase in the personal income tax levied on households is best described by graph: C

Study the graph

The unemployment rate was most likely greater than the natural rate at points B and C

Suppose the government in this economy decides to decrease government purchases by $250 billion. The decrease in government spending will lead to a decrease in income, creating an initial change in consumption equal to how much? . This decreases income yet again, leading to a second change in consumption equal to how much? . The total change in demand resulting from the initial change in government spending is how much?

Total Change in Demand = Initial Change in Spending × Multiplier = −$250 billion × 4 = −$1 trillion Each $1.00 decrease in spending leads to a $4.00 decrease in aggregate demand by way of the multiplier effect. In this case, when the government decreases purchases by $250 billion, aggregate demand initially falls by $250 billion. The decrease in government purchases decreases income by $250 billion, causing a first-round change in consumption equal to 0.75×(−$250) billion=−$187.5 billion. This decrease in consumption spending decreases income yet again, leading to a second-round change in consumption equal to 0.75 × (−$187.5) billion = −$140.6 billion. The aggregate demand curve shifts to the left by 1 trillion.

In the short-run, an increase in aggregate supply leads to _____ price level and _____ in unemployment. a decrease / an increase a decrease / a decrease an increase / a decrease an increase / no change an increase / an increase

a decrease / a decrease In the short run, an increase in aggregate supply (AS) means that businesses can produce more goods and services at every price level. when supply increases, prices fall. Higher production requires more works which means lower unemployment.

Which of the following would be classified as fiscal policy? a. The federal government cuts taxes to stimulate the economy. b. The Federal Reserve cuts interest rates to stimulate the economy. c. The federal government passes laws restricting the use of dangerous chemical in food production. d. A state government passes laws regarding voting access. e. all of these

a. The federal government cuts taxes to stimulate the economy. Fiscal policy refers to changes in government spending and taxation to influence the economy.

Which of the following results in movement along the SRAS curve? Group of answer choices a. an increase in the actual price level b. an increase in the capital stock c. an increase in the expected price level d. None of the above is correct.

a. an increase in the actual price level Boosts an economy's productive capacity

According to the wealth effect, aggregate demand slopes downward because _______. a. lower prices increase the value of money holdings and consumer spending increases b. lower prices decrease the value of money holdings and consumer spending decreases c. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases d. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls

a. lower prices increase the value of money holdings and consumer spending increases

Policymakers are said to "accommodate" an adverse supply shock if they _______. a. respond to the adverse supply shock by increasing aggregate demand, which further raises prices b. respond to the adverse supply shock by decreasing short-run aggregate supply c. respond to the adverse supply shock by decreasing aggregate demand, which lowers prices d. fail to respond to the adverse supply shock and allow the economy to adjust on its own

a. respond to the adverse supply shock by increasing aggregate Policymakers "accommodate" an adverse supply shock (such as rising oil prices) by increasing aggregate demand through expansionary monetary or fiscal policy. This helps maintain output and employment but leads to a permanently higher price level (inflation).

Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on production. This is a demonstration of the _______. a. sticky-wage theory of the short-run aggregate-supply curve b. sticky-price theory of the short-run aggregate-supply curve c. misperceptions theory of the short-run aggregate-supply curve d. classical theory of the long-run aggregate-supply curve

a. sticky-wage theory of the short-run aggregate-supply curve

Money neutrality suggests that an increase in the money supply leads to _____ in price level and inflation and _____ in real GDP. no change / no change an increase / no change an increase / an increase a decrease / a decreases an increase / a decrease

an increase / no change

In the long-run, a. an increase in the price level increases the level of potential GDP. b. an increase in the price level reduces the aggregate quantity of GDP supplied. c. an increase in the price level increases the aggregate quantity of GDP supplied. d. an increase in the price level has no effect on the aggregate quantity of GDP supplied.

an increase in the price level has no effect on the aggregate quantity of GDP supplied. In the long run, the aggregate supply curve (LRAS) is vertical, meaning that the economy's potential GDP is determined by real factors such as technology, labor, and capital, not the price level.

Rightward shift in aggregate demand

at every price level, the total quantity of goods and services demanded has increased - Lower interest rates (encouraging borrowing and spending). - Increased consumer and business confidence. - Higher wealth (e.g., rising housing or stock prices). - A weaker domestic currency (boosting net exports). - Higher government spending or tax cuts.

Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increase in money growth will affect which of the following? Check all that apply. a. The quantity of physical capital b. The price level c. The level of technological knowledge d. The size of the labor force

b. The price level Money supply does not affect real variables in the long run

Suppose the Federal Reserve announces an expansion in the money supply. Households and firms act rationally by revising expectations to anticipate an increase in the inflation rate. As a result, a. inflation falls and the unemployment rate rises. b. inflation rises and the unemployment rate does not change very much. c. inflation rises and the unemployment rate increases. d. inflation rises and the unemployment rate falls.

b. inflation rises and the unemployment rate does not change very much.

Which of the following statements is true regarding the long-run aggregate-supply curve? The long-run aggregate-supply curve _______. a. shifts left when the natural rate of unemployment falls b. is vertical because an equal change in all prices and wages leaves output unaffected c. is positively sloped because price expectations and wages tend to be fixed in the long run d. shifts right when the government raises the minimum wage

b. is vertical because an equal change in all prices and wages leaves output unaffected

Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the _______. a. sticky-price theory of the short-run aggregate-supply curve b. misperceptions theory of the short-run aggregate-supply curve c. sticky-wage theory of the short-run aggregate-supply curve d. classical theory of the long-run aggregate-supply curve

b. misperceptions theory of the short-run aggregate-supply curve The misperceptions theory of the short-run aggregate supply (SRAS) curve suggests that firms and workers sometimes misinterpret changes in the overall price level as changes in relative prices. In this case, the price level falls, but suppliers only notice that the price of their specific product has dropped.

Suppose the economy is operating in a recession such as point B in the graph. If policymakers allow the economy to adjust to the long-run natural level on its own, _______. a. people will raise their price expectations and the short-run aggregate supply will shift left b. people will reduce their price expectations and the short-run aggregate supply will shift right c. people will reduce their price expectations and aggregate demand will shift right d. people will raise their price expectations and aggregate demand will shift left

b. people will reduce their price expectations and the short-run aggregate supply will shift right

According to the Phillips curve, in the short run, if policymakers choose an expansionary policy to lower the rate of unemployment, _______. a. the economy will experience a decrease in inflation b. the economy will experience an increase in inflation c. inflation will be unaffected if price expectations are unchanging d. none of the answer choices are correct Hide Feedback

b. the economy will experience an increase in inflation

The Phillips curve illustrates _______. a. the positive relationship between output and unemployment b. the trade-off between inflation and unemployment c. the positive relationship between inflation and unemployment d. the trade-off between output and unemployment

b. the trade-off between inflation and unemployment The Phillips curve shows an inverse relationship between inflation and unemployment in the short run. Unemployment is low, Inflation is high and vice versa.

Which of the following would lead to a shift in the short-run aggregate supply curve but no change in the long-run aggregate supply curve? a. An increase in the population. b. All would shift both the long-run aggregate supply and short-run aggregate supply curves. c. A decrease in the expected price level. d. An increase in the level of capital stock. e. An increase in the general level of technology.

c. A decrease in the expected price level. This shifts the Short-Run Aggregate Supply (SRAS) curve to the right because businesses temporarily increase production. However, it does not affect the Long-Run Aggregate Supply (LRAS) because in the long run, the economy's output is determined by real factors like labor, capital, and technology—not price expectations.

Along a short-run Phillips curve, _______. a. a higher rate of growth in output is associated with a lower unemployment rate b. a higher rate of growth in output is associated with a higher unemployment rate c. a higher rate of inflation is associated with a lower unemployment rate d. a higher rate of inflation is associated with a higher unemployment rate

c. a higher rate of inflation is associated with a lower unemployment rate. Conversely, low inflation and high unemployment.

If the Fed were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long-run result would be _______. a. an increase in the level of output b. a decrease in the unemployment rate c. an increase in the rate of inflation d. all of the answer choices

c. an increase in the rate of inflation

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and _______. a. decreases output b. increases unemployment c. decreases unemployment d. decreases inflation

c. decreases unemployment Y axis = Prices, X axis = U Increase in AD --> Increase in prices --> Decreasing unemployment

If, in the long run, people adjust their price expectations so that all prices and incomes move proportionately to an increase in the price level, then the long-run Phillips curve _______. a. is positively sloped b. is negatively sloped c. is vertical d. has a slope that is determined by how fast people adjust their price expectations

c. is vertical

A decrease in the price of foreign oil _______. a. shifts the long-run Phillips curve right, and the unemployment-inflation trade-off is more favorable b. shifts the long-run Phillips curve left, and the unemployment-inflation trade-off is less favorable c. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is more favorable d. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is less favorable Hide Feedback Correct

c. shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is more favorable

The misery index, which some commentators suggest measures the health of the economy, is a. the sum of the natural rate of unemployment and the actual rate of unemployment b. the sum of the growth rate of tax collections and the inflation rate c. the sum of the unemployment rate and the inflation rate d. the sum of the Phillips Curve and the minimum wage

c. the sum of the unemployment rate and the inflation rate The misery index = Unemployment Rate + Inflation Rate Higher values indicate greater economic pain because people are either out of work, facing rising costs, or both.

If inflation is higher than what was expected, debtors pay a higher real interest rate than they had anticipated. creditors pay a lower real interest rate than they had anticipated. creditors receive a lower real interest rate than they had anticipated. debtors receive a higher real interest rate than they had anticipated.

creditors receive a lower real interest rate than they had anticipated. When inflation is higher than expected: Debtors (borrowers) benefit They repay their loans with money that is worth less than expected. Meaning debtors pay a lower real interest rate. Creditors (lenders) lose Lenders receive payments that have lower purchasing power than expected. Since inflation is higher, the real interest rate earned is lower than expected.

Which of the following would not cause a shift in the long-run aggregate-supply curve? a. A change in the available labor b. A change in the available capital c. A change in the available technology d. A change in price expectations e. All of the answer choices shift the long-run aggregate-supply curve.

d. A change in price expectations Because price expectations primarily affect short-run aggregate supply (SRAS), not long-run aggregate supply (LRAS).

Which of the following would shift the long-run Phillips curve to the right? a. A decrease in aggregate demand b. A decrease in expected inflation c. An increase in aggregate demand d. An increase in the minimum wage

d. An increase in the minimum wage An increase in expected inflation can also shift the PC to the right

An earthquake destroys capital stock in an economy. The result is a. a rightward shift in the long-run aggregate supply curve. b. a leftward shift in the short-run aggregate supply curve and no change in the long-run aggregate supply curve. c. a rightward shift in the aggregate demand curve. d. a leftward shift in the long-run aggregate supply curve.

d. a leftward shift in the long-run aggregate supply curve. This means the economy can no longer produce as much output as it could before the disaster.

Which of the following would not lead to a decrease in aggregate demand and a leftward shift in the AD curve? a. a decrease in housing prices. b. an in increase in interest rate. c. an appreciation of the domestic currency. d. an increase in domestic price level. e. all of the above would increase aggregate demand and shift the AD curve leftward

d. an increase in domestic price level. This does not shift the AD curve; rather, it causes a movement along the AD curve because higher prices reduce the quantity of goods and services demanded.

According to the interest-rate effect, aggregate demand slopes downward because _______. a. lower prices increase the value of money holdings and consumer spending increases b. lower prices decrease the value of money holdings and consumer spending decreases c. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls d. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases

d. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases

Stagflation occurs when the economy experiences _______. a. falling prices and falling output b. falling prices and rising output c. rising prices and rising output d. rising prices and falling output

d. rising prices and falling output

The natural-rate hypothesis argues that _______. a. unemployment is always above the natural rate b. unemployment is always below the natural rate c. unemployment is always equal to the natural rate d. unemployment returns to its natural rate in the long run, regardless of the rate of inflation

d. unemployment returns to its natural rate in the long run, regardless of the rate of inflation

The natural level of output is the amount of real GDP produced _______. a. when there is no unemployment b. when the government has a balanced budget c. when the economy is at the natural level of consumption d. when the economy is at the natural rate of unemployment

d. when the economy is at the natural rate of unemployment

Scenarios that increase aggregate demand a. Expected rate of return on investment b. Incomes in other countries c. Consumer expectations about future profitability d. Government spending e. All of the above

e. Any type of spending that would lead to an increase in demand of goods and services. An increase in income in other countries means a demand for net exports.

If the sacrifice ratio is five, a reduction in inflation from 5 percent to 2 percent would require _______. a. a reduction in output of 5 percent b. a reduction in output of 10 percent c. a reduction in output of 25 percent d. a reduction in output of 2 percent e. a reduction in output of 15 percent

e. a reduction in output of 15 percent

Which of the following would lead to a decrease in aggregate demand and a leftward shift in the AD curve? a. a decrease in housing prices. b. an in increase in interest rate. c. an appreciation of the domestic currency. d. an increase in domestic price level. e. a,b,c

e. a,b,c a. A decrease in housing prices → Reduces household wealth, leading to lower consumer spending, which decreases aggregate demand (AD). b. An increase in interest rates → Makes borrowing more expensive, discouraging consumption and investment, reducing AD. c. An appreciation of the domestic currency → Makes exports more expensive and imports cheaper, reducing net exports and AD.

The change in the interest rate found in the previous task will lead to a fall/rise in residential and business spending, which will cause a increase/decrease in the quantity of output demanded in the economy.

fall & decrease The higher interest rate discourages households and businesses from borrowing to finance residential and business investment. Investment spending falls, leading to a decrease in the quantity of goods and services demanded in the economy. The higher interest rate means a higher return on saving. This discourages consumption spending, which also leads to a decrease in the quantity of goods and services demanded in the economy. Graph effect: Higher price level leads to a lower Output and movement up the aggregate demand curve.

If the economy is producing below the natural rate of output in the short-run, wages and input prices will eventually ____ and ____ will increase, returning the economy to long-run equilibrium. fall / short-run aggregate supply rise / aggregate demand rise / short-run aggregate supply fall / long-run aggregate supply fall / aggregate demand

fall / short-run aggregate supply

Suppose an economy is experiencing a period of high inflation. The government and central bank announce a contractionary policy to reduce the rate of inflation. The Phillips curve predicts a(n) ____ in unemployment. If households and firms believe the policy to be credible and revise their expectations to expect lower inflation, the change in unemployment would be ____ than if households and firms maintain their previous expectations. decrease / less increase / less decrease / greater increase / greater

increase / less A contractionary policy (e.g., reducing the money supply or raising interest rates) decreases aggregate demand. Low demand = slow growth and high unemployment. If households and firms believe the policy is credible and expect lower inflation, they adjust wages and prices accordingly. Reduces shock to unemployment and transitions more smoothly to lower inflation.

The Interest-Rate Effect: A lower price level leads to

lower interest rates, which encourages more investment and consumption spending, increasing aggregate demand.

The Federal Reserve controls ____ and influences ____ with the intention of influencing ____ . money demand / tax rates / government spending money supply / government spending / price level money supply / interest rates / aggregate supply money demand / interest rates / investment money supply / interest rates / investment

money supply / interest rates / investment The Federal Reserve (Fed) primarily controls the money supply. By manipulating the money supply, the Fed influences interest rates, which, in turn, affect investment decisions in the economy.

In classical economic theory, prices and wages are flexible, and changes in the price level do not affect real output in the long run. The classical model assumes that output is determined by _______.

output is determined by supply-side factors (like labor, capital, and technology), rather than changes in demand.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, production is less profitable and employment falls. production is more profitable and employment falls. production is more profitable and employment rises. production is less profitable and employment rises.

production is more profitable and employment rises.

In the long run, a sudden increase in government spending returns to the natural level of output, and any increase in demand will eventually

push up prices without affecting output in the long term

Policymakers can influence aggregate demand using monetary policy: A decrease in the money supply raises/decreases the equilibrium interest rate for any price level and shifts the aggregate-demand curve to the left/right?

raises, left

Money Demand (Negatively related to the value of money and positively related to price level): What factors affect money demand?

real income, interest rates, and the availability of ATMs.

Relative-price variability rises with inflation, leading to an improved allocation of resources. falls with inflation, leading to an improved allocation of resources. falls with inflation, leading to a misallocation of resources. rises with inflation, leading to a misallocation of resources.

rises with inflation, leading to a misallocation of resources. There's an increase in price variability when inflation rises, businesses make inefficient decisions, leading to a misallocation of resources.

multiplier effect

the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

Which of the following accounts for about two-thirds of the decline in output during a recession? the decline in investment spending. the decline in government purchases. the decline in total consumption spending. the decline in net exports.

the decline in investment spending.

crowding-out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

The Wealth Effect: When the price level decreases...

the real value of money increases, making consumers feel wealthier and encouraging more consumption, increasing aggregate demand.

fiscal policy

the setting of the levels of government spending and taxation by government policymakers

A favorable supply shock, like a decrease in the price of oil, would cause the short-run Phillips curve to shift to the right and no change in the trade-off between unemployment and inflation. the short-run Phillips curve to shift to the right and a less-favorable trade-off between unemployment and inflation. the short-run Phillips curve to shift to the left and a more favorable trade-off between unemployment and inflation. a movement up and along the short-run Phillips curve .

the short-run Phillips curve to shift to the left and a more favorable trade-off between unemployment and inflation.

The Phillips curve suggests that in the short-run, unemployment and inflation are negatively/inversely related. unemployment and inflation are positively/directly related. unemployment and inflation are unrelated.

unemployment and inflation are negatively/inversely related.