econ 202 exam 4

When looking at a graph of aggregate demand, which of the following is correct?

The variable on the vertical axis is nominal; the variable on the horizontal axis is real

T or F Although monetary policy cannot reduce the natural rate of unemployment, other types of government policies can

True

T or F Unexpectedly high inflation reduces unemployment in the short run, but as inflation expectations adjust the unemployment rate returns to its natural rate

True

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for:

the slope of the aggregate-demand curve

According to the long-run Phillips curve, in the long run monetary policy influences:

the inflation rate but not the unemployment rate

Which of the following shifts the long-run aggregate supply curve to the left?

An increase in the price of imported natural resources and an increase in trade restrictions

T or F Just as the aggregate-demand curve slopes downward only in the short run, the trade-off between inflation and unemployment holds only in the long run

True

Suppose that the consumption increases at current prices, and answer the following questions: what will happen to the AD (aggregate demand) curve? Then what will happen to the SRAS (short-run aggregate supply) curve? and explain why? Assuming no other curves change, what would happen to the long-run equilibrium levels of the price (P) and output (Y) (increase, decrease, or stay the same)?

a. AD shifts to the right b. SRAS will shift to the left. The shift in AD will rise the P and Y, and over time, Pe which is the expected price level will also increase, making the SRAS curve shift to the left c. Long-run equilibrium price increases, but long-run equilibrium output remains the same

T or F An increase in the money supply causes long-run output to rise (LRAS)"

false

Which of the following would cause stagflation?

Aggregate supply shifts left

The Aggregate Demand & Aggregate Supply model in Chapter 20 predicts that actual output (Y) in the short run depends on three variables and one parameter: Yn = natural rate of output P = price level Pe = expected price level a = parameter measuring how much Y responds to unexpected changes in P Using the AD&AS model formula, do the following: (a) derive the value of actual output Y; (b) derive the output gap and then convert it to a percentage of Yn.

(a) Y = Yn + a (P-Pe) (b) Output gap = (Y - Yn) / Yn

Which of the following would shift the long-run aggregate supply curve right?

An increase in the capital stock, but not an increase in money supply

Other things constant, which of the following would reduce unemployment and raise inflation?

Businesses become more optimistic about the future of the economy

T or F An increase in the natural rate of unemployment shifts the long-run Phillips curve to the right.

False

T or F The sacrifice ratio is the percentage point increase in the unemployment rate created in the process of reducing inflation by one percentage point

False

Suppose Americans become concerned about saving for retirement and, as a result, reduce their current consumption expenditures. Which of the following would you expect to occur as a result of this change?

In the short run, unemployment will increase and inflation will fall

In 2009, Congress passed legislation providing states with funds to build roads and bridges. It also instituted tax cuts. Which of these shifts aggregate supply rightwards?

Neither the increased funding for states nor the tax cuts

Suppose expected inflation and actual inflation are both low, and unemployment is at its natural rate. If the Fed then pursues an expansionary monetary policy, which of the following results would be expected in the short run?

The economy would move up and to the left along a given short-run Phillips curve

A policy that raised the natural rate of unemployment would shift

both the short-run and the long-run Phillips curves to the right

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they

decreased the money supply

From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel wealthier, then it would have shifted aggregate:

demand rightwards

The initial impact of an increase in an investment tax credit is to shift aggregate

demand rightwards

If U.S. speculators gained greater confidence in foreign economies so that they wanted to move more of their wealth into foreign countries, the dollar would

depreciate which would cause aggregate demand to shift right

If the Fed wants to reverse the effects of an adverse supply shock on unemployment, it should

increase the money supply growth rate, which raises the inflation rate

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be default. This would lead to U.S. net exports

increasing which would increase aggregate demand.

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

more profitable and output rise

In the long run, policy that changes aggregate demand changes:

only the price level

From 2008-2009 the Federal Reserve created a very large increase in the money supply. According to the short-run Phillips curve this policy should have

raised inflation and reduced unemployment

The theory by which people optimally use all available information when forecasting the future is known as

rational expectations

An increase in the natural rate of unemployment shifts the short-run Phillips curve to the _____. If the central bank sees the increase in the unemployment rate, but thinks the natural rate has remained the same and so wants to reduce unemployment, it would ________ the money supply growth rate. If it maintains this money supply growth rate, eventually the short run Phillips curve will shift _____ and unemployment will be _____.

right, increase, right, higher (return to its new natural rate)

If inflation expectations rise, the short-run Phillips curve shifts:

right, so that at any inflation rate output is lower in the short run than before

An adverse supply shock causes inflation to

rise and the short-run Phillips curve to shift right

The short-run relationship between inflation and unemployment is often called:

the Philips curve

T or F According to classical dichtonomy, a change in the money supply changes only nominal variables in the long run

true

T or F Increased uncertainty and pessimism about the future of the economy leads firms to desire less investment spending which shifts the aggregate-demand curve to the left

true

T or F The aggregate demand and aggregate supply model helps us to understand both short-run economic fluctuations and how the economy moves from the short to the long run.

true

T or F The exchange-rate effect is the idea that a higher U.S. price level causes the value of the dollar to increase in foreign exchange markets, and this effect contributes to the downward slope of the aggregate-demand curve

true

If the economy is at the point where the short-run Phillips curve intersects the long-run Phillips curve, then:

unemployment equals the natural rate and expected inflation equals actual inflation