Econ 104 Quiz 6 and Quiz 7
How many of the following will shift the AD curve right? -interest rates increase -population increase - G increase - T (taxes) increase - P increase
- population increase - G increase
How many postwar recessions were there and what was its average length?
-13 recessions -11 month average
Article Question: How many jobs were created and how did this number compare to the last two years and "historically?" Can you see this on the chart on the 2nd page of the article?
-236,000 jobs were added in March, the smallest gain in more than 2 years -This number is well-below the pandemic average and is one of the 3 lowest gains
Article Question: What sectors added jobs last month and which ones cut jobs?
-Restaurants, bars, hospitals and nursing homes drove employment growth by adding jobs -Construction, manufacturing, and retail all cut jobs in March
How many of the following shift the AD curve right? -US $ depreciates relative to the euro -foreign income increases -transfer payments increase -wealth increases -number of firms decreases -T (taxes) decreases -P increases
-US $ depreciates relative to the euro -foreign income increases -transfer payments increase -wealth increases -T (taxes) decreases
What shifts the AD curve?
-a change in price just follows along the curve, it does not shift the curve -changes in consumer spending shifts the curve
What is aggregate demand?
-all spending in an economy for different values of the price level (P)
What is the way the aggregate demand graph works?
-always downward sloping -as prices decrease, output/real GDP increases
What is the way the aggregate supply graph works?
-always upward sloping -as production increases, prices increase
What are oil shocks?
-common case of recessions -US has less access to oil, drastic increase in oil price ex: 1973 oil disruption due to Yom Kippur War, result was a severe recession in the U.S.
What are input prices?
-costs of production/purchased to make things -labor costs -cost of natural resources -intermediate goods
As P increases, real wealth __________, consumption ___________, aggregate demand ____________.
-decreases -decreases -decreases
What is fiscal shock?
-deficit reduction is a rare cause of recession -rapid changes in taxes or federal expenditures -deficit reduction did contribute to slow growth in the last expansion - had modest tax increases and some spending cuts
What will increase consumer spending (shifts the AD curve right)?
-increase number of firms -increase transfer payments -interest rates decrease -population increases -government spending increases -taxes decreases -wealth increases -value of dollar vs euro (exchange rate) decreases -good for consumers then it'll most likely shift right -the opposite of all of these would shift it left
What is government purchases?
-independent of taxes -broader concept: federal expenditures = G + transfers + interest payments (on the federal debt)
How long did the Great Depression last, unemployment rate, real GDP rate?
-last from 1929-1933 (48 months) -unemployment rate went from less than 5% to 25% -real GDP dropped 27%
Details of COVID Recession, length, unemployment rate, real GDP rate?
-lasted 2 months -unemployment rate went up 11% -real GDP drops 9%
What does real GDP measure and what is its symbol?
-measures spending, production, income -symbol- Y
What are the most common types of recessions?
-monetary policy -oil shocks
The price of labor increases, what is the effect on the AD and SRAS curves?
-no change in AD, SRAS shifts left -no change in AD b/c price of labor is an input price, so it has nothing to do with AD
What are the five causes of recessions?
-pandemic -financial shocks (banking system in trouble and lending falls) -oil shock (big oil price increase) -fiscal shock (to quickly balance the federal budget) -monetary policy shock (to reduce inflation)
What was the COVID recession?
-rapid decrease in C and I due to government lockdowns and voluntary consumer behaviors -much of the spending decline was due to consumer concerns
What shifts the SRAS curve?
-shifts right for increases in productivity or falling input prices (what is good for companies) -shifts left as input prices rise (what is bad for companies)
What is consumption?
-spending by households on goods and services -household disposable income
What is consumption's symbol and part of GDP?
-symbol - C - 69% of GDP
What is investment's symbol and part of GDP?
-symbol- I - 18% of GDP
Does the Fed have anything to do with recessions?
-the Fed appears to contribute to many recessions due to them raising interest rates -when attempting to reduce inflation, the Fed sometimes contributes to recessions
What is monetary policy shock?
-the Fed is the central bank of the U.S. and in charge of monetary policy 1.) very rapid growth and real GDP > potential GDP 2.) more inflation likely - more than the Fed's goal 3.) Fed slows economy with higher (raising) interest rates
What happened in this example? 5/27/2021: $1.22 bought 1 euro 4/11/2023: $1.09 bought 1 euro
-the U.S. dollar has gained value b/c the euro cannot buy as much now -the U.S. dollar has appreciated
Article Question: What was the unemployment rate in March? From the chart on the top of the third page of the article, how does the March rate compare to others in the past 50 years?
-the unemployment rate in March was 3.5% -this rate is among the lowest in the past 50 years, only in 2020 and the 1970's was it this low
What is a financial shock?
-too much debt and cannot be repaid -banks fail from bad loans -lending plummets -decrease in C and decrease in I
How many of the following could not be directly measured by P or Y? -expansions -inflation -unemployment rate -deflation -recessions -federal funds rate -disinflation
-unemployment rate -federal funds rate
What is the equilibrium point?
-where aggregate demand = aggregate short run supply -where the two graphs meet -our economy is always moving towards this point
What two-step strategy should you use for every question?
1.) ask every question "if this would happen, would this affect spending (AD) or production (SRAS)?" 2.) draw the graph and use made-up numbers to try out and then see which way this shifts the curve
What is the current Price Level?
129.5
How much does real GDP typically grow during expansions?
2-4% per year
What is the average length of an expansion?
50 month average (12-128)
What causes a recession?
An abrupt external change or "shock" throws the economy off its normal growth
What are the components of aggregate demand and its equation?
C - consumption I - investment G - government purchases NX - net exports (exports - imports) AD = C + I + G + NX
Recessions are best defined as periods of slow growth in the economy. True False
False b/c there's no growth in a recession
___ is not part of disposable income. -income -T -G -transfers
G
What is government purchase's symbol and part of GDP?
G 18% of GDP
What is net exports' symbol and part of GDP?
NX negative 3% of GDP
What is the symbol for Price Level?
P
Which of the following is the best example of an institution? -McDonald's -Peace -The Pennsylvania State University -a crane used to build a building
Peace
What would be the best explanation if the economy saw rising incomes and deflation? -AD shifted right -AD shifted left -SRAS shifted right -SRAS shifted left
SRAS shifted right b/c prices go down b/c of deflation
Article Question: What is the likely impact of this report on future actions by the Fed? Also, what has the Fed been doing for the past year and why?
The Fed has been raising interest rates in an effort to slow investment, spending and hiring to combat inflation
Article Question: Did the labor market "cool" or "speed up"?
The U.S. economy has slowed and the labor market has cooled
What do we mean by "costs" in this part of the course? -The value of real GDP. -The average price of all final goods and services. -What households pay for things they purchase. -What businesses pay for things they purchase.
What businesses pay for things they purchase.
What does the Y (x-axis) mean for the AD graph?
Y means demand/spending key word in problems says "spending rises" = dealing with AD graph
What is the Y-axis and X-axis of the AD and SRAS graphs?
Y-axis = price level X-axis = output/real GDP
What is a depression?
a severe recession; no agreed upon definition
Why do recessions occur? -the economy runs out of resources like capital or labor -a sudden, negative event occurs -the Fed cuts interest rates -taxes decline
a sudden, negative event occurs
In the years since World War II, how long was the average recession? -less than 6 months -about a year -about a year and a half -about two years
about a year
What is SRAS?
aggregate supply
Which of the following is likely to increase the Natural Rate of Unemployment? -a phone app connects applicants with job openings -the government provides free training for every citizen -college becomes more expensive
college becomes more expensive b/c this makes the average person less skilled and increase structural unemployment
The dollar appreciates so NX _________ , so AD shifts _______
decreases left
In our recent graphs, we have P on the vertical axis and Y on the horizontal axis. In an expansion with deflation, the economy would be moving ___ . -down and to the right -down and to the left -up and to the left -up and to the right.
down and to the right
Which way does the equilibrium point shift if more productive workers are hired? -up and to the right -up and to the left -down and to the right -down and to the left
down and to the right
How often do "regular" recessions occur?
every 5-10 years
What is net exports?
exports - imports
A recession often includes periods of growing real GDP. true false
false
An increase in P has the same effect on the AD curve as an increase in G. true false
false
The key way that a depression is different from a recession is that in a depression there is deflation. true false
false
Which is the correct order of events when monetary policy is being used to increase employment? -federal funds rate declines --> spending on items like new cars, new houses and new capital increase --> other interest rates decline --> firms hire more workers -other interest rates decline --> federal funds rate declines --> spending on items like new cars, new houses and new capital increase --> firms hire more workers -federal funds rate declines --> other interest rates decline --> spending on items like new cars, new houses and new capital increase --> firms hire more workers -federal funds rate declines --> other interest rates decline --> spending on items like new cars, new houses and new capital increase --> firms hire more workers -federal funds rate declines --> other interest rates decline --> firms hire more workers --> spending on items like new cars, new houses and new capital increase
federal funds rate declines --> other interest rates decline --> spending on items like new cars, new houses and new capital increase --> firms hire more workers
What was the Great Depression?
financial collapse with 1/3 of the banks failing (doors shut) led to economic collapse
Which are the least common causes of recessions in the postwar era? -oil, financial, and pandemic shocks -financial, fiscal, and monetary policy shocks -fiscal, financial, and pandemic shocks -oil, fiscal, and pandemic shocks
fiscal, financial, and pandemic shocks
As the value of the dollar versus foreign currencies falls or as foreign income rises, NX ________.
grows
What is the household disposable income equation?
household disposable income = income - taxes + transfer payments recieved
As disposable income increases, consumption __________.
increases
As interest rates decrease, consumption ___________.
increases
As interest rates decrease, investment __________.
increases
As taxes on investments decrease, investment __________.
increases
As the number of firms increase, investment ____________.
increases
As the population increases, consumption ____________.
increases
As wealth increases, consumption _________.
increases
If foreign income rises, NX __________
increases
The dollar depreciates so NX _________ , so AD shifts _________
increases right
Which of the following is FALSE about the dual mandate? -it is part of monetary policy -Congress set up the dual mandate -it is part of fiscal policy -it gives the Fed direction
it is part of fiscal policy
How was the Covid Recession unusual? -it was short -it was deep -it was both short and deep
it was both short and deep
If consumer spending declines the AD curve shifts _______
left
Article Question: From the chart on the bottom of p. 6, employees in which sector saw real wage increases at some points over the last year or two?
leisure and hospitality workers saw real wages increase over the past few years
When P increases, in the short run, costs rise ________ (than P increase), profits _________ and production (Y) ___________. -less, rise, falls -more, fall, rises -less, fall, falls -more, rise, rises -less, rise, rises
less, rise, rises
If both transfer payments received and interest rates increased, then consumption would__________.
might rise, might fall, or stay the same
Say that both G and T grow. The AD curve then ___. -would be sure to shift right -would be sure to shift left -might shift right or might shift left
might shift right or might shift left
The Fed cuts interest rates. For the same P, there would be __________ spending and the AD curve ____________. -more, shifts right -more, shifts left -more, move up along the curve -less, down along the curve
more, shifts right
When G rises, how does the AD curve move?
moves to the right
According to the AD-SRAS model what would happen to production of goods and services if prices fell?
production would fall
IF consumer spending increases the AD curve shifts __________
right
There is a rapid move to raise federal taxes (T) and/or cut federal expenditures. As a result, the federal budget deficit would _________ and private (household and firm) spending would _________.
shrink, shrink
According to the AD-SRAS model what would happen to spending if prices rose?
spending would fall
Based on what happened in the years since the end of World War II (1945), which is most likely to lead to a recession? -the Fed lowering interest rates -the Fed raising interest rates -a pandemic -a financial shock
the Fed raising interest rates
What is Price Level?
the average prices in the entire economy (all goods) -measure with GDP deflator -CPI moves similarly
What is aggregate supply?
total measure of production in the economy at various price levels
When P rises, how does the AD curve move?
up and to the left
Which way does the equilibrium point shift if the price of intermediate goods increased? -up and to the right -up and to the left -down and to the right -down and to the left
up and to the left
Which way does the equilibrium point shift if the exchange rate decreases? -up and to the right -up and to the left -down and to the right -down and to the left
up and to the right
Income is... Wealth is...
what you earn what you own
Say that both interest rates fell and that the U.S. dollar depreciated against foreign currencies. The AD curve then ___. -would be sure to shift right -would be sure to shift left -might shift right or might shift left
would be sure to shift right
If the price of final goods and services (P) increases then ___. -the SRAS curve shifts right -the SRAS curve shifts left -you move down along the SRAS curve -you move up along the SRAS curve
you move up along the SRAS curve
