Macro Final: HWK 7

When monetary and fiscal policymakers decrease aggregate demand, which of the following costs to the economy is incurred in the short run?

The price level decreases.

The multiplier effect states that there are additional shifts in aggregate demand from expansionary fiscal policy, because it

increases income and thereby increases consumer spending.

The wealth effect along an aggregate-demand curve stems from the idea that a higher price level

decreases the real value of households' money holdings.

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

the equilibrium interest rate increases.

The economy will move to a point on the short-run Phillips curve where unemployment is higher if

the inflation rate decreases.

The short-run Phillips curve shows the combinations of

unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.

An unfavorable supply shock will cause

unemployment to rise and the short-run Phillips curve to shift right.

while a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows:

"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. "

If the MPC = 4/5, then the government purchases multiplier is

5

Which of the following illustrates how the investment accelerator works?

An increase in government expenditures increases aggregate spending so that Hardware Plus finds it profitable to build more new stores.

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall.

Which of the following would reduce the natural rate of unemployment?

Neither an increase in unemployment compensation nor an increase in the rate of money growth

According to the theory of liquidity preference,

an increase in the interest rate reduces the quantity of money demanded. This is shown as a movement along the money-demand curve. An increase in the price level shifts money demand to the right.

A basis for the slope of the short-run Phillips curve is that when unemployment is high there are

downward pressures on prices and wages.

A movement to the left along a given short-run Phillips curve could be caused by

expansionary monetary policy, but not a reduction in the natural rate of unemployment.

A shock increases the costs of production. Given the effects of this shock, if the central bank wants to return the unemployment rate toward its previous level it would

increase the rate at which the money supply increases. However, this will make inflation higher than its previous rate.

suppose the central bank pursues an unexpectedly tight monetary policy. In the short-run the effects of this are shown by

moving to the right along the short-run Phillips curve.

A goal of monetary policy and fiscal policy is to

offset shifts in aggregate demand and thereby stabilize the economy

When the Federal Reserve decreases the federal funds target rate, the lower rate is achieved through

purchases of government bonds, which reduces interest rates and causes people to hold more money.

Changes in the interest rate

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

Liquidity preference theory is most relevant to the

short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.