econ
The multiplier effect amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effect. True False
True. The multiplier effect is the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending. The crowding-out effect is the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending. Therefore, the multiplier effect amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effect
A candidate for political office announces the following policies which, she says, economics clearly demonstrates will lead to higher output in the long run: 1. increase immigration from abroad 2. make trade more open between the US and other countries. a. 1 and 2 both shift long-run aggregate supply right. b. 1 and 2 both shift long-run aggregate supply left. c. 1 shifts long-run aggregate supply right, 2 shifts long-run aggregate supply left. d. 1 shifts long-run aggregate supply left, 2 shifts long-run aggregate supply right.
a
According to a 2009 article in The Economist, the multiplier effect and crowding-out effect would exactly offset each other when the economy is a. operating at full capacity. b. in recession. c. experiencing zero inflation. d. experiencing high rates of inflation.
a
An increase in government spending shifts aggregate demand a. to the right. The larger the multiplier is, the farther it shifts. b. to the right. The larger the multiplier is, the less it shifts. c. to the left. The larger the multiplier is, the farther it shifts. d. to the left. The larger the multiplier is, the less it shifts.
a
Check My Work During recessions investment a. falls by a larger percentage than GDP. b. falls by about the same percentage as GDP. c. falls by a smaller percentage than GDP. d. falls but the percentage change is sometimes much larger and sometimes much smaller.
a
Check My Work In October 2009, the official unemployment rate rose to a. 10%. b. 8%. c. 6% d. 4%
a
Check My Work Which of the following correctly expresses why the short-run aggregate-supply curve slopes upward?
a
The long-run aggregate supply curve shifts right if a. immigration from abroad increases. b. the capital stock increases. c. technology advances. d. All of the above are correct.
d
The theory of liquidity preference assumes that the nominal supply of money is determined by the a. level of real output only. b. interest rate only. c. level of real output and by the interest rate. d. Federal Reserve
d
When the dollar appreciates, U.S. a. net exports rise, which increases the aggregate quantity of goods and services demanded. b. net exports rise, which decreases the aggregate quantity of goods and services demanded. c. net exports fall, which increases the aggregate quantity of goods and services demanded. d. net exports fall, which decreases the aggregate quantity of goods and services demanded.
d
When the price level changes, which of the following variables will change and thereby cause a change in the aggregate quantity of goods and services demanded? a. the real value of wealth b. the interest rate c. the value of currency in the market for foreign exchange d. All of the above are correct.
d
Which of the following does not help explain the direction the quantity of aggregate goods demanded changes when the price level decreases? a. consumer wealth rises b. borrowing rises c. each dollar is worth more domestic goods d. the dollar appreciates relative to other currencies
d
Which of the following is correct? a. Economic fluctuations are easily predicted by competent economists. b. Recessions have never occurred very close together. c. Spending, income, and production do not fluctuate closely with real GDP. d. None of the above is correct.
d
or the U.S. economy, money holdings are a a. large part of household wealth, and so the interest-rate effect is large. b. large part of household wealth, and so the wealth effect is large. c. small part of household wealth, and so the interest-rate effect is small. d. small part of household wealth, and so the wealth effect is small.
d
When output rises, unemployment remains unchanged. rises by a large amount. falls. rises by a small amount.
falls. When a recession ends and real GDP starts to expand, the unemployment rate gradually declines.
Mark is having a policy debate with his cousin Gina. Gina points out that the political process is mostly responsible for the lag in implementing monetary policy fiscal policy both fiscal policy and monetary policy. neither fiscal policy nor monetary policy.
fiscal policy. The primary argument against active monetary and fiscal policy is that these policies affect the economy with a long lag. Monetary policy works by changing interest rates, which in turn influence investment spending, but many firms make investment plans far in advance. Therefore, most economists believe it takes at least six months for changes in monetary policy to have much effect on output and employment. In the case of fiscal policy, the lag is largely attributable to the political process. By the time the change in policy is passed and ready to implement, the condition of the economy may well have changed. Additional Resources
The theory of liquidity preference only attempts to explain the nominal interest rate. True False
False. The nominal interest rate is the interest rate as usually reported, and the real interest rate is the interest rate corrected for the effects of inflation. The theory of liquidity preference is trying to explain both interest rates by assuming that expected inflation is held constant.
A reduction in personal income taxes increases aggregate demand through an increase in private savings. True False
False. When the government cuts personal income taxes, it increases households' take-home pay. Households will save some of this additional income, but they will also spend some of it on consumer goods. Because a tax cut increases consumer spending, it shifts the aggregate-demand curve to the right.
Which of the following is true about liquidity preference theory? It supposes that the price level adjusts to bring money supply and money demand into balance. It is most relevant to the short run of interest rates. It does not refer directly to Keynes' theory concerning the effects of changes in money demand and supply on interest rates. It is most helpful in understanding the wealth effect.
It is most relevant to the short run of interest rates. Liquidity preference refers directly to Keynes' theory concerning the effect of changes in money demand and supply on interest rates. Therefore, it is most relevant to the short run and supposes that the interest rate adjusts to bring money supply and money demand into balance. This theory is most helpful in understanding the interest-rate effect.
Which of the following is true about the interest-rate effect? It depends on the idea that increases in interest rates increase the quantity of goods and services demanded. It is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve. It does not explain the slope of the aggregate-demand curve. It states that the interest rate is unrelated to the quantity of goods and services demanded.
It is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve. The interest-rate effect depends on the idea that decreases in interest rate increase the quantity of goods and services demanded. Of the three reasons why the aggregate-demand curve slopes downward (the wealth effect, the interest-rate effect, and the exchange-rate effect), the interest-rate effect is the most important reason, in the case of the United States, for the downward slope of the aggregate-demand curve.
How does the aggregate-demand curve shift when increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending which shifts the aggregate-demand curve to the left? The curve does not shift at all. The curve shifts to the right. The curve shifts to the left. The curve first shifts to the right and then shifts to the left.
The curve shifts to the left. Because of the uncertainty and pessimism, households and firms now want to buy a smaller quantity of goods and services for any given price level. The aggregate-demand curve shifts to the left.
Economists who are skeptical about the relevance of "liquidity traps" argue that a. a central bank continues to have tools to stimulate the economy, even after its interest rate target hits its lower bound of zero. b. a central bank continues to have the option of committing itself to future monetary contraction, even after its interest rate target hits its lower bound of zero. c. a central bank can greatly reduce the likelihood of a liquidity trap by setting the target rate of inflation at zero. d. while the concept of a liquidity trap is theoretically possible, nothing resembling a liquidity trap ever has been observed in the real world.
a
Fiscal policy is determined by a. the president and Congress and involves changing government spending and taxation. b. the president and Congress and involves changing the money supply. c. the Federal Reserve and involves changing government spending and taxation. d. the Federal Reserve and involves changing the money supply.
a
If the Fed conducts open-market purchases, the money supply a. increases and aggregate demand shifts right. b. increases and aggregate demand shifts left. c. decreases and aggregate demand shifts right. d. decreases and aggregate demand shifts left.
a
If the marginal propensity to consume is 0.75, and there is no investment accelerator or crowding out, a $15 billion increase in government expenditures would shift the aggregate demand curve right by a. $60 billion, but the effect would be larger if there were an investment accelerator. b. $60 billion, but the effect would be smaller if there were an investment accelerator. c. $45 billion, but the effect would be larger if there were an investment accelerator. d. $45 billion, but the effect would be smaller if there were an investment accelerator.
a
If the price level falls, the real value of a dollar a. rises, so people will want to buy more. b. rises, so people will want to buy less. c. falls, so people will want to buy more. d. falls, so people will want to buy less.
a
If the stock market crashes, then a. aggregate demand decreases, which the Fed could offset by purchasing bonds. b. aggregate demand decreases, which the Fed could offset by selling bonds. c. aggregate demand increases, which the Fed could offset by selling bonds. d. aggregate demand increases, which the Fed could offset by purchasing the money supply.
a
Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion? a. both the multiplier effect and the crowding-out effect b. the multiplier effect, but not the crowding-out effect c. the crowding-out effect, but not the multiplier effect d. neither the crowding out effect nor the multiplier effect
a
Other things the same, an increase in the amount of capital firms wish to purchase would initially shift a. aggregate demand right. b. aggregate demand left. c. aggregate supply right. d. aggregate supply left.
a
Sticky nominal wages can result in a. lower profits for firms when the price level is lower than expected. b. a decrease in real wages when the price level is lower than expected. c. a short-run aggregate-supply curve that is vertical. d. a long-run aggregate-supply curve that is upward-sloping.
a
Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is a. temporarily low and so supply a smaller quantity of labor. b. temporarily low and so supply a larger quantity of labor. c. temporarily high and so supply a smaller quantity of labor. d. temporarily high and so supply a larger quantity of labor.
a
The Central Bank of Wiknam increases the money supply at the same time the Parliament of Wiknam passes a new investment tax credit. Which of these policies shift aggregate demand to the right? a. both the money supply increase and the investment tax credit b. the money supply increase but not the investment tax credit c. the investment tax credit but not the money supply increase d. neither the investment tax credit nor the money supply increase
a
The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. In the short run what happens to the price level and real GDP? a. both the price level and real GDP rise. b. both the price level and real GDP fall. c. the price level rises and real GDP falls. d. the price level falls and real GDP rises
a
The Stock Market Boom of 2015 Imagine that in 2015 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. Refer to Stock Market Boom 2015. Which curve shifts and in which direction? a. aggregate demand shifts right b. aggregate demand shifts left c. aggregate supply shifts right d. aggregate supply shifts left.
a
The aggregate demand and aggregate supply graph has the a. quantity of output on the horizontal axis. Output is best measured by real GDP. b. quantity of output on the horizontal axis. Output is best measured by nominal GDP. c. quantity of output on the vertical axis. Output is best measured by real GDP. d. quantity of output on the vertical axis. Output is best measured by nominal GDP.
a
The equation: quantity of output supplied = natural rate of output + a(actual price level - expected price level), where a is a positive number, represents a. an upward-sloping short-run aggregate supply curve b. a vertical short-run aggregate supply curve c. a downward-sloping aggregate demand curve d. None of the above is correct.
a
The theory of liquidity preference illustrates the principle that a. monetary policy can be described either in terms of the money supply or in terms of the interest rate. b. monetary policy can be described either in terms of the exchange rate or the interest rate. c. monetary policy must be described in terms of the money supply. d. monetary policy must be described in terms of the interest rate.
a
To decrease the interest rate the Federal Reserve could a. buy bonds. The fall in the interest rate would increase investment spending. b. buy bonds. The fall in the interest rate would decrease investment spending. c. sell bonds. The fall in the interest rate would increase investment spending d. sell bonds. The fall in the interest rate would decrease investment spending
a
Which of the following is an example of a decrease in government purchases? a. The government cancels an order for new military equipment. b. The Federal Reserve sells government bonds. c. The government increases personal income taxes. d. The government decreases unemployment insurance benefit payments.
a
The aggregate demand is described graphically as a. sloping downward. b. a vertical line. c. a horizontal line. d. sloping upward
a
Which of the following policy actions does NOT shift the aggregate-demand curve? a decrease in taxes open-market operations by the Fed an increase in government spending a change in the price level
a change in the price level. Fiscal policy such as a decrease in taxes or an increase in government spending shifts the aggregate-demand curve. Similarly, monetary policy such as the Fed conducting open-market operations also shifts the aggregate-demand curve. Because the aggregate demand curve represents the relationship between the price level and the quantity of output, a change in the price level causes a movement along the aggregate-demand curve.
Which of the following would cause prices and real GDP to fall in the short run? short-run aggregate-supply curve shifts to the left short-run aggregate-supply curve shifts to the right aggregate-demand curve shifts to the left aggregate-demand curve shifts to the right
aggregate-demand curve shifts to the left. When the aggregate-demand curve shifts left, prices and real GDP fall in the short run.
Which of the following is NOT an automatic stabilizer? an increase in money supply unemployment benefits the welfare system the U.S. tax system
an increase in money supply. Automatic stabilizers are changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action. Some examples of automatic stabilizers include the unemployment compensation system, the federal income tax, and the welfare system. Additional Resources
As recessions begin, employment rises and income falls. and income both rise. falls and income rises. and income both fall.
and income both fall. When real GDP falls in a recession, income falls. Unemployment rises; therefore, employment falls.
Changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into a recession are called time lags. automatic stabilizers. the crowding-out effect. stabilization policies.
automatic stabilizers. Automatic stabilizers are changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action. Stabilization policies are enacted by the government or Fed and may result in time lags.
As the price level falls a. people are more willing to lend, so interest rates rise. b. people are more willing to lend, so interest rates fall. c. people are less willing to lend, so interest rates fall. d. people are less willing to lend, so interest rates rise.
b
If output is above its natural rate, then according to sticky-wage theory a. workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve right. b. workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left. c. workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve right. d. workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve left.
b
Other things the same, as the price level rises, a. the interest rate rises causing aggregate demand to shift. b. the interest rate rises causing a movement along a given aggregate-demand curve. c. the interest rate falls causing aggregate demand to shift. d. the interest rate falls causing a movement along a given aggregate-demand curve.
b
Other things the same, continued technological progress and continued increases in the money supply would unambiguously lead to a. rising prices only. b. rising real GDP only. c. rising prices and rising real GDP. d. neither rising prices nor rising real GDP.
b
Other things the same, if the money supply rises by 2% and people were expecting it to rise by 5%, then some firms have a. higher than desired prices, which increases their sales. b. higher than desired prices, which depresses their sales. c. lower than desired prices, which increases their sales. d. lower than desired prices, which depresses their sales.
b
Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. Which curve shifts and in which direction? a. aggregate demand shifts right b. aggregate demand shifts left c. aggregate supply shifts right. d. aggregate supply shifts left.
b
Refer to Figure 33-1. Line A is a. investment spending. b. real GDP. c. unemployment rate. d. CPI
b
Refer to Figure 33-8. Suppose the economy starts at Z. If changes occur that move the economy to a new short run equilibrium of P3 and Y3 , then it must be the case that a. short run aggregate supply has decreased. b. short run aggregate supply has increased. c. aggregate demand has increased. d. aggregate demand has decreased.
b
Refer to Figure 33-9. Suppose the economy starts where LRAS = AD1 = SRAS1. A decrease in short-run aggregate supply would be consistent with the movement to a. P1, Y1. b. P2, Y1. c. P1, Y2. d. P3, Y2.
b
Refer to Figure 34-1. If the current interest rate is 2 percent, a. there is an excess supply of money. b. people will sell more bonds, which drives interest rates up. c. as the money market moves to equilibrium, people will buy more goods. d. All of the above are correct.
b
Scenario 34-2. The following facts apply to a small, imaginary economy. • Consumption spending is $6,720 when income is $8,000. • Consumption spending is $7,040 when income is $8,500. Refer to Scenario 34-2. In response to which of the following events could aggregate demand increase by $1,500? a. A stock-market boom stimulates consumer spending by $300, and there is an operative crowding-out effect. b. A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect. c. An economic boom overseas increases the demand for U.S. net exports by $550, and there is no crowding-out effect. d. An economic boom overseas increases the demand for U.S. net exports by $300, and there is no crowding-out effect
b
Suppose there were a large decline in net exports. If the Fed wanted to stabilize output, it could a. buy bonds to raise interest rates. b. buy bonds to lower interest rates. c. sell bonds to raise interest rates. d. sell bonds to lower interest rates.
b
The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change a. in the price level and output. b. in the price level, but not output. c. in output, but not the price level. d. in neither the price level nor output.
b
Which of the following did the Fed do during the recession of 2008-2009? a. lowered the federal funds rate and sold securities and loans b. lowered the federal funds rate and purchased securities and loans c. raised the federal funds rate and sold securities and loans d. raised the federal funds rate and purchased securities and loans
b
Which of the following shifts short-run, but not long-run aggregate supply right? a. a decrease in the actual price level b. a decrease in the expected price level c. a decrease in the capital stock d. an increase in the money supply
b
Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase? a. the crowding-out effect b. the multiplier effect c. the exchange-rate effect d. the interest-rate effec
b
Which of the following would shift the long-run aggregate supply curve right? a. both an increase in the capital stock and an increase in the price level b. an increase in the capital stock, but not an increase in the price level c. an increase in the money supply, but not an increase in the capital stock d. neither an increase in the money supply nor an increase in the capital stock
b
n which case can we be sure real GDP rises in the short run? a. government purchases increase and taxes rise. b. government purchases increase and taxes fall. c. government purchases decrease and taxes rise. d. government purchases decrease and taxes fall.
b
The interest rate falls if a. either money demand or money supply shifts right. b. money demand shifts right or money supply shifts left. c. either money demand or money supply shifts left. d. money demand shifts left or money supply shifts right.
d
A fiscal stimulus was initiated by President Obama in response to the economic downturn of 2008-2009. At that time, the president's economists estimated the multiplier to be a. 3.2 for government purchases and 2.0 for tax cuts. b. 2.4 for government purchases and 1.4 for tax cuts. c. 1.6 for government purchases and 1.0 for tax cuts. d. 1.6 for government purchases and 0.4 for tax cuts.
c
According to classical macroeconomic theory, a. the price level is sticky in the short run and it plays only a minor role in the short-run adjustment process. b. for any given level of output, the interest rate adjusts to balance the supply of, and demand for, money. c. output is determined by the supplies of capital and labor and the available production technology. d. All of the above are correct.
c
According to classical macroeconomic theory, changes in the money supply affect a. real GDP and the price level. b. real GDP but not the price level. c. the price level, but not real GDP. d. neither the price level nor real GDP.
c
Check My Work The quantity of money has no real impact on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning a. both the short run and the long run. b. the short run, but not the long run. c. the long run, but not the short run. d. neither the long run nor the short run.
c
During the 2008-2009 unemployment rose from about 4.4% to about a. 6% b. 8% c. 10% d. 12%
c
Fiscal policy affects the economy a. only in the short run. b. only in the long run. c. in both the short and long run. d. in neither the short nor the long run.
c
If the MPC = 4/5, then the government purchases multiplier is a. 5/4. b. 4/5. c. 5. d. 20.
c
In the short run, an increase in the money supply causes interest rates to a. increase, and aggregate demand to shift right. b. increase, and aggregate demand to shift left. c. decrease, and aggregate demand to shift right. d. decrease, and aggregate demand to shift left.
c
Other things the same, when the price level falls, interest rates a. rise, so firms increase investment. b. rise, so firms decrease investment. c. fall, so firms increase investment. d. fall, so firms decrease investment.
c
Refer to Figure 34-1. At an interest rate of 4 percent, there is an excess a. demand for money equal to the distance between points a and b. b. demand for money equal to the distance between points b and c. c. supply of money equal to the distance between points a and b. d. supply of money equal to the distance between points b and c.
c
Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this a. it is only necessary that long-run aggregate supply shifts right over time. b. it is only necessary that aggregate demand shifts right over time. c. both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must be shifting farther. d. None of the above cases would produce rising prices and growing real GDP over time.
c
Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right? a. $300 billion and $180 billion b. $300 billion and $300 billion c. $500 billion and $300 billion d. $500 billion and $500 billion
c
The aggregate demand and aggregate supply graph has a. the price level on the horizontal axis. The price level can be measured by the GDP deflator. b. the price level on the horizontal axis. The price level can be measured by real GDP. c. the price level on the vertical axis. The price level can be measured by the GDP deflator. d. the price level on the vertical axis. The price level can be measured by GDP.
c
The idea that expansionary fiscal policy has a positive affect on investment is known as a. monetary policy. b. crowding out. c. the investment accelerator. d. the multiplier.
c
The multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it a. reduces investment and thereby increases consumer spending. b. increases the money supply and thereby reduces interest rates. c. increases income and thereby increases consumer spending. d. decreases income and thereby increases consumer spending
c
When the Federal Reserve increases the Federal Funds target rate, it achieves this target by a. purchasing government bonds. This action will reduce investment and shift aggregate demand to the right. b. purchasing government bonds. This action will increase investment and shift aggregate demand to the right. c. selling government bonds. This action will reduce investment and shift aggregate demand to the left. d. selling government bonds. This action will increase investment and shift aggregate demand to the left.
c
When the price level falls a. the interest rate rises, so the quantity of goods and services demand rises. b. the interest rate rises, so the quantity of goods and services demand falls. c. the interest rate falls, so the quantity of goods and services demand rises. d. the interest rate falls, so the quantity of goods and services demand falls.
c
When the price level falls, people want to a. hold more money and the quantity of aggregate goods and services demanded increases. b. hold more money and the quantity of aggregate goods and services demanded decreases. c. hold less money and the quantity of aggregate goods and services demanded increases. d. hold less money and the quantity of aggregate goods and services demanded decreases.
c
Which of the following events shifts aggregate demand rightward? a. an increase in government expenditures or a decrease in the price level b. a decrease in government expenditures or an increase in the price level c. an increase in government expenditures, but not a change in the price level d. a decrease in the price level, but not an increase in government expenditures
c
Which of the following would cause investment spending to decrease and aggregate demand to shift left? a. a decrease in the money supply and an investment tax credit. b. the repeal of an investment tax credit and an increase in the money supply. c. a decrease in the money supply and the repeal of an investment tax credit. d. an investment tax credit and an increase in the money supply.
c
As the price level rises a. people will want to buy more bonds, so the interest rate rises. b. people will want to buy fewer bonds, so the interest rate falls. c. people will want to buy more bonds, so the interest rate falls. d. people will want to buy fewer bonds, so the interest rate rises.
d
During periods of expansion, automatic stabilizers cause government expenditures a. and taxes to fall. b. and taxes to rise. c. to rise and taxes to fall. d. to fall and taxes to rise.
d
Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift? a. by $90 billion b. by $60 billion c. by $20 billion d. by $30 billion
d
Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. How is the new long-run equilibrium different from the original one? a. both price and real GDP are higher b. both price and real GDP are lower. c. the price level is the same and GDP is higher. d. the price level is higher and real GDP is the same.
d
Optimism Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. In the long run, the change in price expectations created by optimism shifts a. long-run aggregate supply right. b. long-run aggregate supply left. c. short-run aggregate supply right. d. short-run aggregate supply left
d
Other things the same, continued increases in technology lead to a. continued increases in the price level and real GDP. b. continued decreases in the price level and real GDP. c. continued increases in real GDP and continued increases in the price level. d. continued increases in real GDP and continued decreases in the price level.
d
Shifts in the aggregate-demand curve can cause fluctuations in a. neither the level of output nor the level of prices. b. the level of output, but not in the level of prices. c. the level of prices, but not in the level of output. d. the level of output and in the level of prices.
d
The idea that a decrease in the price level raises the real value of households' money holdings, which increases consumer spending and the quantity of goods and services demanded is known as a. the interest-rate effect. b. the exchange-rate effect. c. the theory of liquidity preference. d. the wealth effect
d
A change in weather patterns that makes farming more difficult would ____ decrease long-run aggregate supply. increase long-run aggregate supply. increase aggregate demand. have no impact on long-run aggregate supply.
decrease long-run aggregate supply. A change in weather can create more or less favorable growing conditions, impacting total output for all price levels. If farming is more difficult, then the long-run aggregate supply decreases.
Which of the following policies would Keynes's followers support when a decrease in business optimism shifts the aggregate-demand curve away from long-run equilibrium? decrease government expenditures decrease taxes sell bonds to the public decrease the money supply
decrease taxes. If business optimism dampens, this would cause the aggregate-demand curve to shift to the level. Followers of Keynes would argue that aggregate demand needs to be stimulated. A decrease in government expenditures, the selling of bonds to the public, and a decrease of the money supply, cause aggregate demand to shift further to the left. However, a decrease in taxes causes aggregate demand to increase, which would counteract the effect of a decline in business optimism.
The aggregate-demand curve shows that an increase in the price level decreases the real value of goods and services demanded in the economy. decreases the dollar value of goods and services demanded in the economy. increases the dollar value of goods and services demanded in the economy. increases the real value of goods and services demanded in the economy.
decreases the real value of goods and services demanded in the economy. An increase in the price level decreases the quantity of goods and services demanded in the economy.
Which of the following, other things the same, would make the price level increase and real GDP decrease? long-run aggregate-supply curve shifts to the right long-run aggregate-supply curve shifts to the left aggregate-demand curve shifts to the right aggregate-demand curve shifts to the left
long-run aggregate-supply curve shifts to the left. If the long-run aggregate-supply curve shifts left while the aggregate-demand curve does not change, the new equilibrium will have an increased price level and a decreased real GDP.
Steve is having a policy debate with his brother Brian. He points the fact that business firms make investment plans far in advance. This is a lag problem associated with fiscal policy. monetary policy. both monetary policy and fiscal policy. neither monetary policy nor fiscal policy.
monetary policy. The primary argument against active monetary and fiscal policy is that these policies affect the economy with a long lag. Monetary policy works by changing interest rates, which in turn influence investment spending, but many firms make investment plans far in advance. Therefore, most economists believe it takes at least six months for changes in monetary policy to have much effect on output and employment. In the case of fiscal policy, the lag is largely attributable to the political process. By the time the change in policy is passed and ready to implement, the condition of the economy may well have changed.
Suppose the economy is in long-run equilibrium. If there is a decrease in the supply of labor as well as a decrease in the money supply, then we would expect that in the short run, the price level will rise, and real GDP might rise, fall, or stay the same. real GDP will rise and the price level might rise, fall, or stay the same. real GDP will fall and the price level might rise, fall, or stay the same. the price level will fall, and real GDP might rise, fall, or stay the same.
real GDP will fall and the price level might rise, fall, or stay the same. The decrease in the supply of labor will shift the short-run aggregate-supply curve to the left, causing real GDP to fall and the price level to rise. The decrease in the money supply will shift the aggregate-demand curve to the left, causing real GDP to fall and the price level to fall. The final price level will depend on the relative strength of the two shifts.
During recessions, changes in investment spending are the biggest contributor to changes in retail sales. personal income. consumer spending. real GDP.
real GDP. In a recession, much of the decline in real GDP is attributable to reductions in investment spending.
Historical evidence for the U.S. economy indicates that changes in investment over the business cycle are the biggest cause of changes in profits. auto sales. real GDP. consumer spending.
real GDP. In a recession, much of the decline in real GDP is attributable to reductions in investment spending.
An increase in U.S. net exports would shift U.S. aggregate demand rightward. In an attempt to stabilize the economy, the government could increase expenditures. rightward. In an attempt to stabilize the economy, the government could decrease expenditures. leftward. In an attempt to stabilize the economy, the government could decrease expenditures. leftward. In an attempt to stabilize the economy, the government could increase expenditures.
rightward. In an attempt to stabilize the economy, the government could decrease expenditures. An increase in U.S. net exports shifts U.S. aggregate demand to the right. This would cause the level of output in the economy to rise. If the government wants to stabilize output, it could decrease expenditures which would shift aggregate demand leftward and return output to its previous level.
If countries that imported goods and services from the United States recovered from recession, we would expect that U.S. net exports would fall, making aggregate-demand curve shift to the right. rise, making aggregate-demand curve shift to the left. fall, making aggregate-demand curve shift to the left. rise, making aggregate-demand curve shift to the right.
rise, making aggregate-demand curve shift to the right. When major trading partners recover from recession, they start buying U.S. goods again, net exports rise, and the aggregate-demand curve shifts to the right.
If money demand shifted to the left and the Federal Reserve desired to return the interest rate to its original value, it could sell bonds to increase the money supply. sell bonds to decrease the money supply. buy bonds to increase the money supply. buy bonds to decrease the money supply
sell bonds to decrease the money supply. If the money-demand curve shifted to the left, this lowers the interest rate. In order to return the interest rate to its original value, the Fed would need to conduct an open-market operation that decreases the money supply since that will put upward pressure on the equilibrium interest rate. This occurs when the Fed sells bonds to the public.
A decrease in the price level makes consumers feel wealthier, so they purchase more. This logic helps explain why the aggregate-demand curve is vertical. slopes upward. slopes downward. is horizontal.
slopes downward. A decrease in the price level raises the real value of money, makes consumers wealthier, and encourages them to spend more. This increase in consumption spending means a larger quantity of goods and services demanded, making the aggregate-demand curve slope downward.
Imagine two economies that are identical except that, for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $1,500 billion. It follows that real GDP, but not the price level, is higher in country B. real GDP and the price level are higher in country B. neither the price level or real GDP is higher in country B. the price level, but not real GDP is higher in country B.
the price level, but not real GDP is higher in country B. If two economies were identical except that one had more money in circulation, real GDP would be identical in both economies, but the price level would be higher in the economy with more money.
The classical view that money does not matter is sometimes described by the saying, "Money is a veil." camouflage." smoke screen." mask."
veil. The classical view that money does not matter is sometimes described by the saying, "Money is a veil."
