Macro econ assignemnt 7

Which of the points in the below graph are possible long run equilibriums?[

A and C

Suppose the price of crude oil falls substantially. Which of the following is the most likely effect of the decrease in fuel prices on the economy?

A decrease in the equilibrium price level and an increase in equilibrium real GDP.

In the above figure, assume the economy is in equilibrium at point d. Then the Fed decreases the money supply so that the new aggregate demand curve is AD 1. In the long run, the new price level will be

100.

During the 1990-91 recession, consumers decided to decrease consumption to repay a larger portion of household debt. What happened?

Aggregate demand declined, resulting in lower levels of real output and employment.

In the above figure, if we start at AD 1 and SRAS 1, and the money supply increases unexpectedly, what would be the long-run equilibrium?

E 3

Which of the following helps to explain the downward-sloping nature of the aggregate demand curve?

Falling prices put downward pressure on real interest rates, causing business investment to increase.

Which of the following would cause the short-run aggregate supply curve to be upward sloping?

Labor contracts make wages sticky.

In the above figure, if we start at AD 1 and SRAS 1, and the money supply increases unexpectedly, what causes the economy to get to the long-run equilibrium?

People's expectations will revise after a short-run gain in output, wages will rise, and SRAS will shift leftward.

In the above figure, suppose the economy is currently in equilibrium at point C. Applying misperception theory (also called rational expectations theory), what happens in Long Run if the Fed announces that it is decreasing the money supply?

The price level will decrease.

Suppose the economy is in equilibrium when there is a change in environmental policy that bans all chemical fertilizers on farmland. We would expect to observe

a decrease in real output and an increase in the price level.

A reduction in world oil supplies is likely to cause

a reduction in aggregate supply, a rise in the equilibrium price level, and a fall in real Gross Domestic Product (GDP).

Refer to the above figure. Suppose the economy is in equilibrium at point A. If the Fed tries to stimulate the economy by expansionary monetary system, and this is not expected by the people in the economy, we would expect to see

aggregate demand increases, real GDP increases, and the price level increases in the short run. In the long run, people realize the real situation, causing the short-run aggregate supply curve to shift up and the real GDP returns to $4 trillion and the price level increases to 150.

An increase in government spending initially and primarily shifts

aggregate demand to the right.

In the above figure, starting at E 1, if there is a supply shock that is temporary (short run), the

aggregate supply would shift to SRAS 1 and then return to SRAS 0.

A tax increase has

both a crowding out and multiplier effect

Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. What happens to the price level and real GDP in the short run?

both the price level and real GDP fall.

In the above figure, suppose the economy is initially at a short-run equilibrium at point D and there is an unanticipated increase in the money supply. Which point represents the new short-run equilibrium?

c

Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long run equilibrium be?

c

If aggregate supply remains unchanged, a decrease in aggregate demand may

cause a recession.

An unexpected decrease in aggregate demand

causes the price level to fall and the unemployment rate to rise.

To fight a recession, Congress and the president should

decrease taxes to increase aggregate demand.

In the long run, a decrease in the money supply will

decrease the price level.

If taxes

decrease, then consumption increases, and aggregate demand shifts rightward

To keep the budget balanced during the recession when tax revenue is low and government purchase is high, the federal government must _________ government spending, or ________ taxes, and which will ________ aggregate demand.

decrease; increase; reduce

The Fed initiates a contractionary monetary policy that is correctly anticipated by economic agents in the economy. The result is

decreased prices, but no change in real GDP.

If the Fed conducts open-market sales, the money supply

decreases and aggregate demand shifts left.

During recessions, taxes tend to

fall and thereby increase aggregate demand.

According to liquidity preference theory, the money-supply curve would shift rightward

if the Federal Reserve chose to increase the money supply.

If the current unemployment rate is 5%, under which of the following circumstances would you expect the Fed to use expansionary monetary policy

if the natural unemployment rate is below 5%.

According to the interest-rate effect, an increase in the price level will

increase money demand and interest rates. Investment declines.

In the long run, the effect of an increase in the money supply is to

increase the price level only.

Imagine the U.S. economy is in long-run equilibrium. Then suppose the aggregate demand increases. We would expect that in the long-run the price level would

increase.

An increase in government spending

increases the interest rate and so investment spending decreases.

If crowding out occurs, an increase in government spending

increases the real interest rate and consumption and investment spending decline.

If businesses and consumers become pessimistic, the Federal Reserve can attempt to reduce the impact on the price level and real GDP by

increasing the money supply, which lowers interest rates.

Which of the following would be most likely to induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in

investment spending.

Increases in government spending will lower the long term growth rate of GDP, if it lowers ________ spending and if the government purchases ________ and not ________ goods.

investment; consumption; investment

If government purchases increased by $50 billion, then Aggregate Demand would be ________ $50 billion.

may be greater than or less than

Monetary policy in Japan since the early 1990s has had limited effectiveness even though the Bank of Japan lowered

nominal interest rates to almost zero, because deflation (a negative rate of inflation) kept real interest rates up.

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy.

A key implication of the policy irrelevance (policy ineffectiveness) proposition is that

only unanticipated policy actions can influence real Gross Domestic Product (GDP).

An increase in the U.S. interest rate

raises the opportunity cost of holding dollars.

Which of the following would cause stagflation?

rising oil prices

According to the theory of liquidity preference,

the demand for money is represented by a downward-sloping line on a supply-and-demand graph.

In the above figure, if A is the initial equilibrium point and there is an unanticipated rise in aggregate demand from AD 1 to AD 2, then

the new short-run equilibrium will be at point B.

The real rate of interest is

the nominal rate of interest minus the anticipated rate of inflation.

In the above figure, start with the economy in equilibrium at point A. Then an unanticipated reduction in aggregate demand occurs. In the short run, this would cause

the price level to fall from P 1 to P 2, real Gross Domestic Product (GDP) to fall from y 1 to y 2, and the rate of unemployment to increase.

A\In the short run, an unexpected increase in aggregate demand typically causes

the price level to increase and the unemployment rate to fall.

Figure 34-2. On the left-hand graph, MS represents the supply of money and MD represents the demand for money; on the right-hand graph, AD represents aggregate demand. The usual quantities are measured along the axes of both graphs. Refer to Figure 34-2. What is measured along the horizontal axis of the left-hand graph?

the quantity of money

An decrease in taxes shifts aggregate demand

to the right. The larger the multiplier is, the farther it shifts