Hw #3

A decrease in government spending shifts _____ to the

AD, right

In a wage-price spiral, when higher wage demands and accommodative monetary policy follow each other, the wage increase is represented by a shift in _____ and the change in monetary policy is represented by a shift in

AS, AD.

Which of the following statements is true? Economists generally agree that A. the rate of inflation in the long run is determined primarily by growth in government spending. B. factors other than money growth may influence the inflation rate from one year to the next, but they are not likely to cause sustained inflation. C. the primary cause of inflation is increases in the money supply growth that exceed growth increases in aggregate demand. D. the major causes of inflation are declining productivity coupled with excessive spending.

B. factors other than money growth may influence the inflation rate from one year to the next, but they are not likely to cause sustained inflation.

What do economists mean by the term "sticky wage"?

It refers to a wage that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus in the labor market.

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates.

The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.

The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.

Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?

The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption.

How will a recession in the economies of our foreign trading partners affect U.S. aggregate demand?

U.S. aggregate demand will decrease.

Which of the following will increase the short-run aggregate supply?

a decrease in the price of capital

A Phillips curve implies

a negative relationship between inflation and unemployment.

In the long run, the output level is determined by

aggregate supply

Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and real GDP in the short run?

an increase in government transfer payments

Which of the following could cause continually rising prices in the LR?

an increasing money supply

In the long run, monetary growth

cannot affect the factors that determine the economy's unemployment rate.

What are the four sources of aggregate demand?

consumption, private investment, government purchases, and net exports

Inflation arising from a rise in the price of imported input goods like copper is an example of

cost-push inflation.

In the long run, a decrease in aggregate demand, all other things unchanged, will cause the price level to _______ and potential output to _______ .

decrease; remain stable

In general, economists believe that the Phillips curve is

downward sloping in the short run but vertical in the long run.

If output is below the natural rate, output will increase due to a _____ in wages, which leads _____ to shift to the right.

fall, AS

According to the AS-AD model, if workers demand higher wages, then equilibrium output and the equilibrium price level will fall in the short run.

false

In the long run, the major cause of inflation is excessive government spending.

false

An increase in investment will lead to ____ equilibrium output and a _____ equilibrium price level in the short run.

higher, higher

A decrease in oil prices will lead to ____ equilibrium output and a _____ equilibrium price level in the short run.

higher, lower

An economic analysis of the short run is useful to explain

how deviations of real GDP from potential output can and do occur.

The long run in macroeconomic analysis is a period

in which full wage and price flexibility and market adjustment have been achieved.

The short run in macroeconomic analysis is a period

in which wages and some other prices do not respond to changes in economic conditions.

All other things unchanged, a lower exchange rate

increases exports, decreases imports, increases net exports and aggregate demand.

In the long run, the price level is determined by

money supply.

The economy's potential output corresponds to the level of

natural employment.

An increase in which of the following would lead to decrease in equilibrium output and an increase in equilibrium prices?

negative supply shock

The long-run aggregate supply curve is vertical at

potential output.

All other things unchanged, an increase in exports relative to imports will

shift the aggregate demand curve to the right.

All other things unchanged, an increase in government spending will

shift the aggregate demand curve to the right.

Rising inflation means

that the price level is rising at an increasing rate.

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of

the aggregate demand and the short-run aggregate supply curves.

The vertical Phillips curve occurs in the long run because

the aggregate supply curve is vertical which means that changes in aggregate demand will not change unemployment.

In the long run, unemployment will be at the natural rate. This implies that

there is no relationship between unemployment and inflation and consequently, the Phillips curve is vertical.

A decrease in the money supply will shift the AD curve to the left.

true

According to the quantity theory of money, an increase in the supply of money would shift AD to the right.

true

An increase in the interest rate shifts AD to the left in the SR.

true

An increase in the prices of natural resources will lead to a decrease in short-run aggregate supply.

true

Long-run aggregate supply corresponds to the level of potential output.

true

Public policy to eliminate inflationary or recessionary gaps is called stabilization policy.

true

In the long run, the aggregate supply curve is

vertical