Econ 343 Test 2

People expect their incomes will decrease next year. As a result, the ________ will shift ________.

Aggregate demand curve; leftward

The quantity of aggregate production at different rates of inflation is reflected by the

Aggregate supply curve

Factors that shift the long-run aggregate supply and potential GDP rightward include an increase in:

All of the answers in this question

Which of the following events will increase long-run aggregate supply?

An advance in technology

Suppose that the economy begins at a long-run equilibrium. Which of the following raises the price level and decrease real GDP in the short run?

An increase in the price of oil decreases aggregate supply

Which of the followings is NOT true about the word "autonomous" that economists use?

Changes in autonomous components are associated with shifts of a curve

Everything else held constant, an increase in financial frictions ________ aggregate ________.

Decrease: demand

An increase in expected inflation that increases the money wage rate (or other input prices):

Decreases the short-run aggregate supply

long-run and the short-run aggregate supply curves rightward

Decreases, decreases

Everything else held constant, an increase in net taxes ________ aggregate ________.

Decreases, demand

Everything else held constant, a decrease in government spending ________ aggregate ________.

Decreases; demand

Moving along a short-run aggregate supply curve, resource prices (and other input prices) ________, the money rate wage ________, and potential GDP ________.

Do not change; does not change; does not change

The short-run aggregate supply curve shifts to the right when

Expected inflation is lower

The aggregate demand curve is the total quantity of an economy's

Final goods and services demanded at different inflation rates

The aggregate supply curve is the total quantity of

Final goods and services offered for sale at different inflation rates

The short-run aggregate supply curve

Has a positive slope

A decrease in the inflationary expectations:

Increases the short-run aggregate supply

Everything else held constant, an autonomous (i.e. discretionary) expansionary monetary policy (i.e. lowering interest rates) ________ aggregate ________.

Increases: demand

Everything else held constant, a decrease in net taxes ________ aggregate ________.

Increases; demand

Everything else held constant, an expansionary monetary policy ________ aggregate ________

Increases; demand

The long-run aggregate supply ( LRAS) curve

Is vertical

________ economists believe that active help from fiscal and monetary policy is needed to insure that the economy is operating at full employment.

Keynesian

________ economists believe that the economy is self-regulating and will be at full employment as long as monetary policy is not erratic.

Monestarist

One assumption of the new classical model is that

People make rational expectations about aggregate demand

Everything else held constant, aggregate demand increases when

Planned investment spending increases

The long-run aggregate supply curve is vertical because

Potential GDP is independent of the inflation rate

In the long-run

Real GDP is equal to potential GDP

By itself, an increase in aggregate demand increases GDP by the least amount (or zero) in the ________.

Real business cycle theory

Which of the following is a criticism of real business cycle theory?

Real business cycle theory believes that productivity changes are caused by technology changes when in fact they are caused by changes in aggregate demand.

Suppose the economy is producing at potential GDP. An increase in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant.

SRAS curve shifts rightward

An increase in the amount of human capital ________ the short-run aggregate supply curve and ________ the long-run aggregate supply curve.

Shifts; shifts

Everything else held constant, a change in workers' expectations about inflation will cause ________ to change

Short-run aggregate supply

A fall in the money wage rate (or other input prices) shifts

The SRAS curve rightward but leaves the LRAS curve unchanged

The total quantity of an economy's final goods and services demanded at different inflation rates is

The aggregate demand curve

In the short-run

The aggregate supply curve is upward sloping

If the money wage rate and other resource prices do not change when the inflation rate increases by 10 percent, _______

There is movement along the short-run aggregate supply curve

At potential GDP

Unemployment is at its natural state

We can conclude that the aggregate demand curve is downward sloping (i.e. from the modern approach) and because of automatic FED policy:

a lower inflation rate causes the real interest rate to fall, and stimulates investment spending.

Employing the modern FED approach , aggregate demand curve is downward sloping because

a lower inflation rate causes the real interest rate to fall, and stimulates planned investment spending

Taken to its logical conclusion, the real business cycle theory (and New Classical Theory) proposes that:

actual GDP always equals potential GDP, making all unemployment voluntary.

The real business cycle theory proposes that::

aggregate demand shocks do NOT effect the business cycle

According to the new Keynesian theory,

all answers correct

Many Keynesian economists argue:

all of answers

According to many modern classical economists, the economic system that is most efficient is: (i.e. implying minimal regulations, small social safety net, and low tax rates) is:

also the most fair system to the poor and disadvantaged.

Everything else held constant, which of the following does NOT cause aggregate demand to increase?

an increase in taxes

Rational expectations are

based on all relevant information.

The monetarist school of thought:

believes that velocity is predictable making monetary policy effective

One way to derive aggregate demand is by looking at its four component parts, which are

consumer expenditures, planned investment spending, government spending, and net exports

One way to derive aggregate demand is by looking at its four component parts, which are

consumer expenditures, planned investment spending, government spending, and net exports.

Demand-pull inflation persists because of

continuing increases in the quantity of money.

A decrease in foreign incomes

decreases aggregate demand in the United States

Everything else held constant, a decrease in investment expenditure ________ aggregate ________.

decreases, demand

Everything else held constant, an increase in financial frictions ________ aggregate ________.

decreases, demand

Everything else held constant, an increase in net taxes ________ aggregate ________.

decreases, demand

When talking about aggregate supply, it is necessary to

distinguish between long-run aggregate supply and short-run aggregate supply

When talking about aggregate supply, it is necessary to

distinguish between long-run aggregate supply and short-run aggregate supply.

Keynes used the term "animal spirits" to represent

fluctuations in business confidence from irrational behavior and its effect on economic investment

According to the real business cycle theory, technological change

happens at an uneven pace.

According to the Ricardo-Barro effect,

households increase their personal saving when governments run budget deficits.

monetarists the main cause of economic fluctuations is changes in

inappropriate monetary policy

The monetarist school of thought:

includes all of the answers in this question.

Which of the following shift the LRAS curve rightward?

increase in education level

According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________.

increase; decrease

A decrease in the inflationary expectations:

increases the short-run aggregate supply.

Everything else held constant, an increase in government spending ________ aggregate ________.

increases, demand

in the "legacy" (i.e. Keynesian) approach to aggregate demand, the interest rate effect on aggregate demand

is one reason that the aggregate demand curve has a negative slope (slopes downward)

Sticky prices and wages are a property of the__________ school of thought.

keynesian

Which school of thought holds the policy is effective in both the long-run and short-run?

keynesian

If decision makers become so pessimistic that all new money injected into the economy by the FED becomes hoarded and not loaned out or spent, we are in a:

liquidity trap

A major technological advance shifts the

long-run and the short-run aggregate supply curves rightward

The short-run aggregate supply curve is upward sloping because

marginal costs rise with increased output so firms have to receive higher prices to justify their increase in output

Adaptive expectations are a property of the__________ school of thought.

monetarist

The long-run aggregate supply curve is a vertical line passing through

natural-rate of output

Which theory distinguishes between expected and unexpected fluctuations in aggregate demand and asserts that only unexpected changes can affect real GDP?

new classical cycle theory

"Current economic parameters are determined by past rational expectations" is a property of the__________ school of thought.

new keynesian

Monetary policy is considered time-inconsistent because

policymakers are tempted to pursue discretionary policy that is more expansionary in the short run to solve the unemployment problem while ignoring the effects on inflation.

Aggregate supply describes the behavior of

producers

Real business cycle theory says that the factor leading to the business cycle is changes in

productivity

The Employment Act of 1946 states that it is the responsibility of the federal government to

promote full employment

Which school of thought holds the policy is not effective in both the long-run and short-run if policy is anticipated?

rational expectations-new classical

"If policy is anticipated, there is no short-run" is a property of the__________ school of thought.

rational expectations/new classical

Which theory fundamentally denies demand-side economic shocks?

real business cycle theory

The Keynesian explanation of the business cycle rests on several concepts, including

rigid money wage rates (i.e. sticky prices and wages).

The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall

shifted the aggregate demand curve to the left.

Economists who believe tax policy has a big effect on employment and potential GDP are called

supply siders

If a tax cut increases people's labor supply, then

tax cuts increase potential GDP

Everything else held constant, aggregate demand increases when

taxes cut

The real business cycle theory asserts that changes in ________ lead to changes in ________.

technology; productivity

The aggregate supply curve shows the relationship between

the inflation rate and the level of aggregate output supplied.

According to the original Keynesian school, the primary source of the business cycle is:

the instability of investment and consumption spending by investors and consumer

According to the original Keynesian school, the primary source of the business cycle is:

the instability of investment and consumption spending by investors and consumers

The short-run aggregate supply curve is upward sloping because

the money wage rate (and other input prices) remains constant so the higher prices from inflation makes it profitable for firms to expand production.

Moving along the short-run aggregate supply curve, ________.

the money wage rate, and the prices of other resources remain constant

Suppose that following an expected decline in the price level, workers immediately renegotiate their money wage rates to match the fall in prices. This behavior is most consistent with

the new classical cycle theory

New Keynesian economists believe that ________ is influenced by ________.

today's money wage rate; yesterday's rational expectations of the price level

The rational expectations/new classical theory argues that the primary factor leading to business cycles are

unexpected changes in aggregate demand.

The real business cycle (RBC) theory assets that the impact on real GDP of technological change is

usually positive but occasionally negative

Keynes used the term "animal spirits" to represent

volatile investment spending arising from fluctuations in business confidence.

In the new Keynesian model

wages and prices are assumed to be sticky with respect to expected changes in the price level.