ECON0110 - Test #5 (C20-22,18)

According to the theory of liquidity preference, an economy's interest rate adjusts

to balance supply and demand of money

A ten-year-old investment tax credit expires. Aggregate demand shifts...

Left (the amount of investment tax to be paid increases)

Stagflation is caused by a

leftward shift in the aggregate-supply curve.

With the economy in a recession because of inadequate aggregate demand, the government increases its purchases by $1,200. Suppose the central bank adjusts the money supply to hold the interest rate constant, investment spending remains unchanged, and the marginal propensity to consume is 2/3 . How large is the increase in aggregate demand?

3600

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

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

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

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.

As the price level falls, the purchasing power of households' real wealth will ____, causing the quantity of output demanded to ____. This phenomenon is known as the ____ effect.

As the price level falls, the purchasing power of households' real wealth will rise, causing the quantity of output demanded to rise . This phenomenon is known as the wealth effect.

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.

As the price level rises, the cost of borrowing money will rise , causing the quantity of output demanded to fall . This phenomenon is known as the interest rate effect.

A fall in prices increases the real value of consumers' wealth. Aggregate demand shifts...

Doesn't shift (the only thing that causes movement along the curve is the price)

For example, the ______ asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will ______ , and firms that rely on catalogs will respond by ______ the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the price level causes the quantity of output supplied to ______ the natural level of output in the short run.

For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will decrease , and firms that rely on catalogs will respond by lowering the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the price level causes the quantity of output supplied to fall short of the natural level of output in the short run.

What can shift LR aggregate supply curve?

LLCT

The U.S. exchange rate falls. Aggregate demand shifts...

Right (Because US goods will become cheaper in foreign markets)

Which of the following would shift the aggregate-demand curve to the left?

all of the above

The Fed's target for the federal funds rate

commits the Fed to set a particular money supply so that it hits the announced target.

If the central bank wants to contract aggregate demand, it can ____ the money supply and thereby ____ the interest rate.

decrease, increase

Suppose a wave of negative "animal spirits" overruns the economy, and people become pessimistic about the future. To stabilize aggregate demand, the Fed could _____ its target for the federal funds rate or Congress could _____ taxes.

decrease; decrease

A sudden increase in business pessimism shifts the aggregate-______ curve, leading to _______ output.

demand; lower

When the economy goes into a recession, real GDP ____ and unemployment _____.

falls; rises

Monetary policy affects the economy with a lag mainly because it takes a long time

for a change in interest rates to affect investment spending.

An increase in the aggregate demand for goods and services has a larger impact on output in the _____ run and a larger impact on the price level in the ___ run.

in the short run; in the long run

If the government wants to expand aggregate demand, it can ____ government purchases or ____ taxes.

increase; decrease

Recessions occur

irregularly

Which of the following is an example of an automatic stabilizer? When the economy goes into a recession,

more people become eligible for unemployment insurance benefits.

One reason the short-run aggregate-supply curve slopes upward is that a higher price level

reduces real wages if nominal wages are sticky.

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 ____ , which will shift the ______ to the _____.

rise; long run aggregate supply; left

If the central bank in the preceding question had instead held the money supply constant and allowed the interest rate to adjust, the change in aggregate demand resulting from the increase in government purchases would have been

smaller but still positive

According to classical macroeconomic theory and monetary neutrality, changes in the money supply affect

the GDP deflator

A change in which of the following would shift the short-run aggregate-supply curve but not the long-run aggregate-supply curve?

the expected price level

The aggregate-demand curve slopes downward because a fall in the price level causes

the interest rate to decline