Macro Exam 3
The intersection of the IS curve and the Fed Rule gives the equilibrium values of output and interest rate for given values of _______, _______, and _______.
- Government Spending (G) - the price level (P) - and the factors in Z
As the interest rate rises (falls), ___ Falls, thus total planned spending ________ as well.
- I - rises (falls)
A decreases in ___ lowers Equilibrium output (Y) by a multiple of the initial decrease in ___
-AE -I
When dealing with a cost shock, the increase in P leads the Fed to raise r, which lowers __ and thus __
-I -Y
Examples of events that can shift the AS curve
-New discoveries of oil -Problems in the production of energy -Increase in wage rates (causes an increase in prices, examples of cost shock)
2 main inputs into the Fed's interest rate decision
-Output (Y) -Inflation (P)
Long-Run Aggregate Supply Curve
-When the AD curve shifts from AD0 to AD1, the equilibrium price level initially rises from P0 to P1 and output rises from Y0 to Y1. -Wages respond in the longer run, shifting the AS curve from AS0 to AS1. -If wages fully adjust, output will be back to Y0. -Y0 is sometimes called potential GDP.
In the short run, a supply shock as a result of an unexpected decrease in oil prices will _______ the price level but ________ real GDP
-decrease -increase
Fluctuations in total spending in the economy may affect both ___________ and _________ in the short run
-employment -production
Along the IS curve, output _____ as the interest rate ________ because...
-falls -increases -planned investment depends negatively on the interest rate
When interest rates_______________ , aggregate expenditure ____________ , ceteris paribus.
-increase -falls
When an expansionary fiscal policy works well, there is an ___________ in output with little increase in the ___________.
-increase -price level
With a higher price level, the Fed ____________ the interest rate (r), and in this case, there is almost complete crowding out of __________
-increases -planned investment
In a binding situation, the _________________ does not change, thus the AD curve is __________
-interest rate -vertical
An increase in the money supply lowers _____________ and increases _____________________, which causes the aggregate demand curve to shift rightward.
-interest rates -investment and consumer spending
When a is small relative to b; when the Fed sees a price increase, it responds with a ______ increase in the ___________
-large -interest rate
An increase in future price expectations may shift the AS curve to the ____ and thus act like a ________
-left -cost shock
When dealing with a cost shock, the shift of the AS curve to the left leads to ________ output at a ______ price level
-lower -higher
In the goods market (IS Curve), there is a _______ relationship between output and the interest rate because...
-negative -planned investment depends negatively on the interest rate
In the Fed Rule, the Fed raises the interest rate as ________ increases
-output
An increase in the money supply can be depicted by a _______ in the ___ curve
-shift -AD
If wages adjust fully to match higher prices, then the long-run AS curve is __________, and so fiscal policy will have ____ effect on output
-vertical -no
When the economy is on the flat part of the AS curve, there is _____________________ crowding out of planned investment
-very little -output expands to meet the increased demand
When an expansionary fiscal policy does not work well, the output multiplier is close to _______. Output is initially close to capacity, and attempts to increase it further mostly lead to a ___________________
-zero -higher price level
Cost Shock (Supply Shock)
A change in costs that shifts the short-run AS curve
Aggregate Supply (AS) curve aka "price/output response" curve
A curve that traces out the price decisions and output decisions of all firms in the economy under different levels of aggregate demand
Aggregate supply (AS) curve
A graph that shoes the relationship between the aggregate quantity of output supplied by all firms in an economy and the overall price level
When the interest rate (r) is fixed, an increase in government spending (G) increases...
AE, and thus Y in equilibrium
The intersection of the AS and AD curves determines..
Aggregate output and the aggregate price level
AE =
C + I + G
Fed Rule
Equation that shows how the Fed's interest rate decision depends on the state of the economy
Aggregate Demand curve (AD)
Falls when P increases because the higher P leads the Fed to raise r, which decreases I and thus Y
an increase in P shifts the Fed Rule _____
Left
an increase in Z shifts the Fed Rule _____
Left
As the economy approaches capacity, the short-run AS curve becomes....
Nearly vertical
A decrease in net taxes and an increase in government spending increase ____________
Output (Y) -both result in a shift of the AD curve to the right
The AD curve reflects the negative relationship between...
P and Y
IS Curve
Relationship between aggregate output and the interest rate in the goods market
Binding situation
State of the economy in which the Fed rule calls for a negative interest rate
Real Wealth Effect
The change in consumption brought about by a change in real wealth that results from a change in the price level
The vertical part of the short-run AS curve represents...
The economy's maximum (capacity) output
Zero interest rate bound
The interest rate cannot go below zero
Potential Output (Potential GDP)
The level of aggregate output that can be sustained in the long run without inflation (Y0)
The aggregate demand curve shows the relationship between...
The price level and the quantity of real GDP demanded
Stagflation
The simultaneous increase in unemployment and inflation
Aggregate Supply
The total supply of all goods and services in an economy
The short-run AS curve has an upward slope because...
Wages are a large fraction of total costs, and wage changes lag behind prices.
Inflation targeting
When a monetary authority chooses its interest rate values with the aim of keeping the inflation rate within some specified band over some specified horizon
Some economists believe the wages can be "stuck" and not adjust downward during recessions. These economists advocate:
active fiscal stimulus to move the economy back to full employment
The AD curve in a binding situation
always vertical
Example of demand-pull inflation
an improvement in Keynes's animal spirits, such as a rise in consumer confidence
The AD curve is shifted to the right by..
an increase in aggregate demand (income) (higher government spending)
If prices have been rising and if people's expectations are adaptive (i.e., forming expectations on the basis of past pricing behavior), firms may...
continue raising prices even if demand is slowing or contracting
In a binding situation, changes in P and Z ________ shift the r=0 line
do not
When the price level increases very little, the Fed __________ raise the interest rate much, and so there is little change in planned investent
does not
Z in the Fed Rule equation
economic factors other than Y (Output) and P (inflation) that lie outside our model and are likely to vary from period to period in ways that are hard to predict
Government policies that increase aggregate demand are called __________.
expansionary policies
At low levels of aggregate output, the short-run AS curve is.....
fairly flat
When the Fed cares more about the price level than output, the AD curve is relatively _____, as the Fed is willing to accept large changes in Y to keep P stable
flat
Which of these actions is the government likely to take if the economy is operating above the potential GDP?
increase taxes
Cost-push (supply-side) inflation
inflation caused by an increase in costs
Demand-Pull inflation
inflation that is initiated by an increase in aggregate demand
Any point on the IS curve is an equilibrium in the goods market for the given ______________
interest rate (r)
The IS curve represents the relationship between...
interest rates and aggregate output in the goods market
If the shift in the AD curve is caused by a decrease in net taxes ____________________________________________, that causes the crowding out of investment
it is consumption, not government spending
A rapid increase in the price of oil can shift the short-run aggregate supply to the...
left
An increase in Z, such as an increase in consumer confidence, shifts the AD curve to the ______, due to a tightening of monetary policy
left
The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point on the...
long-run aggregate supply curve
The federal reserve will _________________ when the economy is operating below the potential GDP
lower interest rates
Planned investment depends ___________ on the interest rate
negatively
Looking at recent Fed policy it appears the Fed has..
not engaged in inflation targeting
John Maynard Keynes referred to animal spirits which are...
optimistic views of investors that propel economic growth
A high interest rate (r) discourages... so...
planned investment (I), so planned aggregate expenditure (AE) at every level of income falls.
In the short run, the aggregate supply curve (the price/output response curve) has a ___________ slope
positive
A shift in AD must be caused by something other than a change in the _______________
price level
When the economy is producing on the nearly flat portion of the AS curve, firms are...
producing well below capacity, and they will respond to an increase in demand by increasing output much more than they increase prices.
Any price increase that results from a demand-side shock is also considered demand-______ inflation
pull
Lower interest rates shift the AD curve to the ______
right
an increase in G shifts the IS curve _____
right
The aggregate demand and aggregate supply model explains...
short-run fluctuations in real GDP and the price level
The tax multiplier is _____________ in absolute value than is the government spending multiplier
smaller
In reference to the Fed rule, if a is small relative to b, the Fed has a ______ preference for stable prices relative to output
strong
The AD curve slopes down because...
the Fed raises the interest rate (r) when P increases and because I depends negatively on r -also a real wealth effect on consumption
Potential GDP
the level of aggregate output that can be sustained in the long run without spurring inflation
In the long-run, the level of output that can be sustained without inflation is...
the potential GDP
Monetary policy in the form of changes in Z has _________ issues as does fiscal policy in the form of changes in G and T.
the same
The vertical portion of the short-run AS curve exists because....
there are physical limits to the amount that an economy can produce in any given period
Since 1991 there have been ______ economic recessions.
two; 2001, 2008
Expansionary fiscal policy works well when the economy is operating....
well below the full employment level of output
