macro test 3
When a factor, other than the price level, that affects the aggregate quantity supplied changes, we would expect the short-run aggregate supply curve to
The correct answer is A: shift inward or outward.Explanation: When graphing the short-run aggregate supply curve, we plot the aggregate price level on the y-axis and output on the x-axis. So when a factor not represented on the graph changes, the curve will shift either inward or outward.
The Phillips curve illustrates
The correct answer is A: the short-run tradeoff between inflation and unemployment.Explanation: Economist A. W. Phillips observed the short-run inverse relationship between inflation and unemployment and created the downward-sloping Phillips curve.
Keynes's circular flow model illustrates the flow real variables while holding nominal variables constant.
The correct answer is A: true Explanation: The circular flow model explains the flow of goods and services (real variables) and holds prices (nominal variables) constant.
A downward movement along the Phillips curve will cause an inward shift in the aggregate demand curve.
The correct answer is A: trueExplanation: A downward movement along the Phillips curve indicates lower inflation with higher unemployment. If unemployment is high, production and income decrease. Consumers alter their spending patterns and reduce demand because of lower income. The aggregate demand curve will shift inward.
When the U.S. price level rises, we expect foreigners to
The correct answer is B: buy less U.S. goods and services. Explanation: Net exports are an important component of aggregate expenditures. When domestic price levels rise, foreign spending and demand for domestic products will fall. As a result, real GDP, or income, will also decrease.
The belief that the economy adjusts immediately to its long-run equilibrium is consistent with the
The correct answer is B: classical view.Explanation: Classical economists believe that prices and wages will adjust immediately, and the economy reaches its long-run equilibrium without short-run adjustments.
The vertical Phillips curve implies that expansionary monetary policy can raise the rate of inflation.
The correct answer is B: falseExplanation: A vertical Phillips curve indicates just the opposite. According to classical economics, money is neutral in the long run and cannot affect real variables. The Phillips curve is vertical because output (a real variable) is not affected by changes in the money supply (a nominal variable).
Adaptive expectations will speed up the adjustment process that takes place when an economy operates above or below full employment.
The correct answer is B: falseExplanation: Adaptive expectations actually slow down the process. Thinking adaptively about the economy means looking backward and examining past economic behavior. Conclusions will be made relatively slowly, and the adjustment process will be slow.
John Maynard Keynes, during the Great Depression in the 1930s, wrote that economies experiencing high unemployment should follow policies that
The correct answer is B: increase aggregate demand.Explanation: Keynes believed that the problems with the economy were due to a lack of spending, or lack of demand. Therefore, he focused on the demand side of the economy and advocated programs that would increase aggregate demand. The most popular method to increase spending was to increase government spending and / or lower taxes.
Suppose the government increases its spending. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________.
The correct answer is B: outward; decrease; increaseExplanation: Increasing government spending will increase aggregate demand and shift the AD curve outward. This outward shift causes prices and output to rise. If the economy is producing a higher level of output, more people are working, and the unemployment rate decreases. In the meantime, the short-run trade-off that is illustrated by the Phillips curve dictates that prices must rise when the unemployment rate falls.
In the graph shown, an increase in government spending will cause the equilibrium to move from
The correct answer is B: point A to point B.Explanation: When the government increases spending, the aggregate demand curve shifts outward causing a movement, in this example, from point A to point B. A change in a factor other than the price level will cause a change in aggregate demand, or a shift in the aggregate demand curve.
Point A on the graph represents the
The correct answer is B: point where consumption equals income.Explanation: The intersection of the consumption function and the 45-degree line represents the point where consumers spend all of their income, and nothing is left over to contribute to their savings.
Suppose a supply shock causes an inward shift of the short-run aggregate supply curve. In the short run,
The correct answer is B: prices rise, and output falls.Explanation: An inward shift of the short-run aggregate supply curve will cause a short-run price increase and output decrease.
When graphing Keynes's consumption function, we place __________ on the horizontal axis and __________ on the vertical axis.
The correct answer is B: real GDP; consumptionExplanation: Real GDP, or income, is placed on the horizontal axis, and consumption, or consumer spending, is placed on the vertical axis. Remember that the vertical intercept is autonomous spending, and the slope is the marginal propensity to consume.
If an economy is experiencing a(n) __________, Keynes would propose to __________ consumer demand by implementing ___________ fiscal policy.
The correct answer is B: recession; stimulate; expansionaryExplanation: The Keynesian model dictates the implementation of expansionary fiscal policy (increasing government spending or decreasing taxes) to stimulate consumer demand and lead an economy out of a recession.
In the classical view, the outward shift of the demand curve for labor as illustrated in the graph below causes
The correct answer is B: the equilibrium wage rate to adjust to w*'.Explanation: According to the classical view, the outward shift of the demand curve for labor will result in an immediate upward adjustment of the equilibrium wage rate from w* to w*'. The supply of labor is unaffected, and the economy remains at the same level of full employment.
Assume taxes = $0. According to the chart, Dean's consumption is equal to
The correct answer is C: $50.Explanation: Use the formula C = a + bY. Substitute the numerical value in for the variables. C = 10 + .8 (50) = $50.
What is the effect of technological progress on prices and output?
The correct answer is C: Both the long-run and the short-run aggregate supply curves shift outward.Explanation: An increase in technology means the economy can produce more than it could before. The short-run aggregate supply curve will continue to shift to the right until it intersects the aggregate demand curve at the new full-employment level of output as seen in the graph below.
The graph below shows an increase in aggregate demand. Classical economists would agree that the new equilibrium price level is at point ____.
The correct answer is C: CExplanation: When the aggregate demand curve shifts outward, the equilibrium price level automatically increases to P1 in this case, and the economy remains at full employment (Yf0 ).
Which of the following would not shift the aggregate demand curve?
The correct answer is C: Changes in the price levelExplanation: When a factor other than the price level changes, the aggregate demand curve shifts inward or outward. The aggregate demand curve measures the quantity of goods and services demanded as a function of the aggregate price level. A change in the price level will only cause a movement along the aggregate demand curve.
The microeconomic demand curve
The correct answer is D: All of the above are correct.Explanation: The microeconomic demand curve shows how both the substitution and income effects cause a decrease in the quantity demanded as a result of increasing prices. The microeconomic demand curve also measures the effect of nominal variables on other nominal variables and assumes that the aggregate price level is constant.
When the labor demand curve shifts outward, which of the following graphs accurately depicts the adjustment process according to the classical view of economics?
The correct answer is D: Explanation: According to the classical view of economics, when the labor demand curve shifts outward, the wage rate automatically adjusts to a higher level. In this case, the wage rate increases from w* to w*'.
Which of the following will shift the classical aggregate supply curve outward?
The correct answer is D: Improvements in technologyExplanation: The full-employment level of output depends on the economy's technological capabilities and resource endowments. Any improvement in technology, land, labor, or capital will shift the aggregate supply curve outward and increase the full-employment level of output.
Which of the following statements regarding the aggregate demand (AD) curve is correct?
The correct answer is D: The AD curve represents the inverse relationship between the expenditures of households, businesses, government, and foreigners and the aggregate price level. Explanation: The aggregate demand curve illustrates the inverse relationship between aggregate expenditures and the aggregate price level. As the aggregate price level rises, households, businesses, government, and foreigners will demand less quantity. The opposite is true when the price level decreases.
Suppose an economy experiences a surge in immigration. Which of the following is the most likely result?
The correct answer is D: The long-run aggregate supply curve and the short-run aggregate supply curve will shift to the right.Explanation: If an economy's technology or resource pool improves, the long-run aggregate supply curve will shift to the right to indicate a higher level of full employment. Remember that when the long-run aggregate supply curve shifts, the short-run aggregate supply curve will shift with it. A surge in immigration allows an economy to employ more workers, thereby increasing the labor pool, and the long-run aggregate supply curve and the short-run aggregate supply curve will shift to the right.
In the short run, the unemployment rate depends on
The correct answer is D: all of the above.Explanation: In the short run, the unemployment rate depends on monetary policy, aggregate demand, and the rate of inflation. Monetary policy affects the aggregate price level, and will alter the trade-off between inflation and unemployment. Fiscal policy can shift the level of aggregate demand, which in turn affects output and price levels. Finally, the rate of inflation and the unemployment rate move in opposite directions in the short run, which is illustrated by the Phillips curve.
Classical economists argue that inflationary and recessionary gaps
The correct answer is D: are eliminated by automatic adjustments of internal mechanisms in the economy.Explanation: Classical economists believe that shifts in either the demand or supply curve result in immediate and automatic adjustments of the aggregate price level.
According to the graph, point Y2 represents the point at which
The correct answer is D: income exceeds consumption.Explanation: The point Y2 represents the point where income exceeds consumption. Notice that the green dotted line is all the points where consumption equals income. If the 45-degree line is above the linear consumption function, income exceeds consumption, and the consumer contributes to savings.
Keynes's sticky wage theory holds that
The correct answer is D: wages will not immediately adjust to higher levels, and firms are able to profit from increased production.Explanation: If wages remain lower than the new market equilibrium, firms' labor costs remain the same, or sticky, while the costs of their products rise. Able to profit from these sticky wages, firms increase their production in the short run.
According to the graph below, a change in the spending plans of consumers, businesses, government, or foreigners is illustrated by the movement from point ______ to point ______.
The correct answer is A: A; BExplanation: A change in the spending plans of consumers, businesses, government, or foreigners will shift the aggregate demand curve. In this case, aggregate demand has increased. If the players in the economy decided to decrease their spending, aggregate demand would decrease, illustrated by a movement from point B to point A.
When the wage rate falls below equilibrium, excess demand for labor is alleviated through which of the following processes according to the classical theory?
The correct answer is A: Explanation: When the wage rate falls below equilbrium, wages are immediately pushed back up to the equilibrium wage of w*. Firms move up the labor demand curve by demanding a smaller quantity of labor.
In the short run, what is the effect of an outward shift in the aggregate demand curve?
The correct answer is A: Prices and output rise.Explanation: Both output and prices rise, because demand is higher at every price level.
In the long run, what happens to the levels of prices and output as a result of an outward shift in the short-run aggregate supply curve?
The correct answer is A: Prices rise, and output returns to the full-employment level.Explanation: In the long run, the economy cannot produce above or below the full-employment level, because prices adjust until output rises or falls to the appropriate level. If the short-run aggregate supply increases, the economy will be able to temporarily operate beyond the speed limit. Over time, however, pressure on prices and wages will cause firms to cut back production until output returns to the full-employment level.
Expected inflation is
The correct answer is A: how much people expect the aggregate price level to change.Explanation: Expected inflation is the inflation rate that people predict for the future based on current economic conditions.
Over time, the long-run aggregate supply curve can shift outward as a result of
The correct answer is A: increases in productivity.Explanation: Increases in productivity increase the full-employment level of output, moving the long-run aggregate supply curve to the right, because they allow the economy to produce a higher level of output at every price level.
Keynes's model of a demand-driven economy ignores the effects of
The correct answer is A: inflation and supply shocks.Explanation: Keynes is quoted as having said, "In the long run, we are all dead." His short-run model of the economy employs expansionary fiscal policy to pull an economy out of a recession. In doing so, prices and output increase and can lead to inflation in the long run or an increase in the price of resource inputs.
Adaptive expectation formation means that
The correct answer is A: people base their expectations of the future on what has occurred in the past.Explanation: Adaptive expectations are based on what has occurred in the past. If inflation was 10% last year and people hold adaptive expectations, they will assume that inflation will be 10% this year. If expectations are adaptive, it may take the economy a long time to reach long-run equilibrium.
According to Keynes, consumption is a function of
The correct answer is A: real GDP.Explanation: On the graph of the consumption function, consumption is placed on the vertical axis, and real GDP—or income—is placed on the horizontal axis. When income changes, consumption also changes. Remember that Keynes's macroeconomic equilibrium dictates that spending must equal income.
Unemployment _______________ when real GDP declines.
The correct answer is A: risesExplanation: When the economy operates below full employment, resources are not efficiently allocated. Prices begin to fall at the same time that unemployment begins to rise, and a recessionary environment is created.
Improvements in technology or resource endowments will shift the classical supply curve outward.
The correct answer is A: trueExplanation: According to the classical view, automatic adjustments of prices keep the economy at full employment. Therefore, the classical supply curve is vertical and represents the level of output that is possible if all resources are efficiently employed. Improvements in technology or resource endowments create opportunities for the economy to produce a higher level of full-employment output, and the classical supply curve will shift outward.
When an economy is operating above full employment, we expect prices to adjust upwards.
The correct answer is A: trueExplanation: An economy cannot consistently operate above full employment. The short-run aggregate supply curve begins to shift inward, while the aggregate quantity demanded decreases. The adjustment of these two forces raises the aggregate price level. Prices continue to rise until the economy reaches equilibrium.
Assume taxes = $0. According to the chart, Bruce is able to contribute $4 to his savings.
The correct answer is A: trueExplanation: Bruce has an income of $70 and a consumption level of only $66. The remaining $4 that he does not spend is contributed to his savings.
Classical economists argued that the Great Depression would eventually end when output returned to the full employment level with no help from the government.
The correct answer is A: trueExplanation: Classical economists believed that the economy was self-regulating and that it would return to the full employment level in the long run. Although Keynes and others agreed with this proposition, they questioned the classical economists' notion of the length of the short run.
According to Say's Law, supply creates demand.
The correct answer is A: trueExplanation: French economist J.B. Say stated that the income payments received by producers would equal the value of the goods they produced. Therefore, demand always equals the amount of goods produced.
Which of the following events will most likely cause an outward shift in the aggregate demand curve?
The correct answer is C: The government increases spending.Explanation: Government can stimulate aggregate demand by increasing its spending. Increased spending will cause the aggregate demand curve to shift outward.
Government policy can shift the aggregate demand curve either inward or outward.
The correct answer is A: trueExplanation: The government is a part of the aggregate expenditures equation:Y = C + I + G + NX. If the government decides to increase its spending, the aggregate demand curve will shift outward. If the government decides to increase taxes, disposable income would decrease, and the aggregate demand curve will shift inward.
There are no profit opportunities in the long run.
The correct answer is A: trueExplanation: The long run is a period of time long enough for all prices to adjust. Because of this reason, firms are unable to profit from fixed, or "sticky" prices.
The minimum wage law can prevent immediate wage increases and allows firms to profit from lower labor costs and high revenue.
The correct answer is A: trueExplanation: The minimum wage law mandates the lowest wage employees can pay for labor. As the price level rises across the economy, it will take time for lawmakers to adjust the nominal wage to keep up with rising prices. In the meantime, firms will increase production and profits.
In the short run, there is a positive relationship between the aggregate price level and the quantity of goods and services supplied.
The correct answer is A: trueExplanation: The short-run aggregate supply curve slopes upward to graphically illustrate the profit opportunities that exist in the short run. As the price level rises, sticky wages, sticky prices, and confusion cause the level of output to increase. When two variables move in the same direction, they are said to have a positive relationship.
Businesses cut back spending when the price level rises, because the resulting increased demand for money drives the interest rate upward.
The correct answer is A: trueExplanation: When prices rise, more money is needed to purchase the same basket of goods and services. The increasing demand for money drives the cost of borrowing money---the interest rate---upward. Businesses find investments to be less profitable when interest rates rise, so they cut back spending. Because households and foreigners also cut back spending, an increase in the price level causes a downward movement along the aggregate demand curve.
Rising production costs will shift the short-run aggregate supply curve inward.
The correct answer is A: trueExplanation: When the costs of production rise, firms decide to produce less at every price. The short-run aggregate supply curve shifts inward.
An increase in the price level will increase the demand for money.
The correct answer is A: trueExplanation: When the price level increases, people will demand more money to buy the same basket of goods and services.
What is the most likely short-run result of an inward shift of the aggregate demand curve?
The correct answer is B: A lower equilibrium price and outputExplanation: This graph shows how an inward shift of the aggregate demand curve causes a lower short-run equilibrium price and output.
Which of the following is not a reason why wages might be sticky?
The correct answer is B: Employees work more when wages rise.Explanation: The concept of sticky wages implies that wages are slow to adjust when prices begin to rise, and production costs are kept relatively low. If employees were to work more when wages rose, labor costs would increase immediately rather than remain constant in the short run. Empirical evidence, however, shows that employees tend to work less when wages rise.
Which of the following statements regarding output in the long run is correct?
The correct answer is B: Output is determined by the quantity and productivity of resources.Explanation: The long-run aggregate supply curve is a vertical line intersecting output at full employment. At this point, all resources are fully employed, and the economy is operating at its most efficient level. Changes in an economy's resource pool (land, labor, or capital) or its technology can affect output in the long run.
What happens when the economy is operating beyond the full-employment level of output?
The correct answer is B: Prices and wages begin to rise, causing firms to cut back on production until the full-employment level of output is reached.Explanation: In the short run, the economy can operate beyond full employment. Eventually, however, prices and wages begin to rise, because there are not enough workers to produce the higher level of output. The increases force employers to cut back on production, until the full-employment level of output is reached.
Which of the following events will most likely cause an inward shift of the short-run aggregate supply curve?
The correct answer is B: The economy experiences a supply shock.Explanation: A supply shock raises the prices of inputs, and the costs of production rise. Firms produce less at every price level, and the short-run aggregate supply curve shifts inward.
Which of the following will occur if the natural rate of unemployment falls?
The correct answer is B: The long-run aggregate supply curve shifts to the right.Explanation: When the natural rate of unemployment falls, the economy is able to efficiently operate at a higher level of full employment. The long-run aggregate supply curve will shift to the right.
An increasing price level will cause
The correct answer is B: a reduction in the overall quantity of goods and services demanded.Explanation: An increasing price level will cause a movement along the downward-sloping aggregate demand curve. This movement will be a reduction in the overall quantity of goods and services demanded.
Policymakers can expand aggregate demand and lower unemployment, but the cost is
The correct answer is B: a temporary increase in inflation.Explanation: In the short run, there is a trade-off between inflation and unemployment. When aggregate demand increases, productivity temporarily increases and reduces unemployment. This trade-off is illustrated by the Phillips curve.
The aggregate demand (AD) curve graphically illustrates the inverse relationship between
The correct answer is B: aggregate expenditures and the price level.Explanation: The AD curve illustrates the combined spending plans of all players in the economy (households, businesses, and foreigners) as a function of the aggregate price level.
When the price level is above the equilibrium price,
The correct answer is C: businesses recognize increasing profits.Explanation: When prices rise relative to costs of production, firms increase production to take advantage of the profit opportunities in the short run. For this reason, the short-run aggregate supply curve slopes upward.
The aggregate demand curve slopes downward because
The correct answer is B: an increase in the aggregate price level reduces the quantity of goods and services demanded.Explanation: The aggregate demand curve illustrates the inverse relationship between the aggregate price level and the quantity of goods and services demanded. When the price level rises, the quantity demanded decreases; when the price level drops, the quantity demanded increases.
According to the graph, if real GDP is below $500, inventories will be
The correct answer is B: below the planned level, and firms will increase their production.Explanation: When real GDP falls below equilibrium, suppliers face excess demand---consumption exceeds output. To achieve macroeconomic equilibrium, firms will increase production to eliminate the excess demand.
Increasing prices will cause the short-run aggregate supply curve and the long-run aggregate supply curve to shift to the left.
The correct answer is B: falseExplanation: Changes in prices will cause a movement along the short-run aggregate supply curve, while the long-run aggregate supply curve is unaffected. Remember that there is no relationship between output and prices in the long run, and the long-run aggregate supply curve is vertical.
In the long run, the aggregate supply curve slopes upward, but in the short run the aggregate supply curve is vertical.
The correct answer is B: falseExplanation: In the short run, the aggregate supply curve slopes upward. According to Keynes, producers are able to profit from confusion about price changes, sticky wages, and sticky prices. As prices increase, production decreases; as prices decrease, production increases. In the long run, the aggregate supply is vertical. In the long run, there is no relationship between the price level and output.
When prices and wages did not adjust to equilibrium during the Great Depression as classical economists predicted, John Maynard Keynes proposed increasing the supply of loanable funds to remedy the Depression
The correct answer is B: falseExplanation: Keynes proposed stimulating demand and spending to force adjustments to equilibrium.
In the long run, inflation and unemployment are closely related.
The correct answer is B: falseExplanation: Only in the short run are inflation and unemployment closely related. Remember that the Phillips curve (the short-run tradeoff between inflation and unemployment) is vertical in the long run. Output is independent of nominal variables.
The Phillips curve's downward slope depends on rational expectations.
The correct answer is B: falseExplanation: The Phillips curve depends on adaptive expectations. If expectations in an economy were rational, the adjustments would be immediate and would not generate a trade-off. Because expectations are adaptive, there is a trade-off between inflation and unemployment.
The short-run aggregate supply (SRAS) curve is based on the premise that because all prices will change at the same rate, businesses can alter their production to take advantage of profit opportunities.
The correct answer is B: falseExplanation: The SRAS curve is based on the premise that all prices will not adjust at the same rate. Remember that the curve slopes upward to reflect the positive relationship between the price level and output in the short run. When businesses see prices begin to increase, they increase production and total revenue while some prices of input goods and wages remain constant in the short run.
The classical view of economics states that because all prices adjust immediately, firms can increase production and profit in the short run.
The correct answer is B: falseExplanation: The classical view of economics states the because of the immediate adjustment of all prices, firms cannot profit in the short run. Recall that profit = revenue − costs. When both revenue and costs increase at the same rate, profit is unchanged.
An economy that operates faster than its natural level of full employment will experience high unemployment and unused resources.
The correct answer is B: falseExplanation: When an economy drives faster than the speed limit, there is a low rate of unemployment and increasing competition for scarce resources. Because of this competition, inflation increases, giving us the short-run trade-off between unemployment and inflation known as the Phillips curve.
Assume taxes = $0. According to the chart, Steve is able to contribute $4 to his savings.
The correct answer is B: falseExplanation: With a consumption level in excess of his income level, Steve is unable to contribute any amount to his savings.
Which of the following could cause aggregate demand to decrease?
The correct answer is C: Consumers decide to increase their savings.Explanation: An increase in savings represents a decrease in consumption, one of the components of aggregate demand. When savings increases, aggregate demand decreases.
Which of the following is not a result of an outward shift of the aggregate demand curve?
The correct answer is C: Higher unemploymentExplanation: The Phillips curve explains why unemployment decreases when the price level, or inflation, rises in the short run. Rising demand and prices increase output and employment. Therefore, unemployment decreases in the short run.
Which of the following is most likely to occur in an economy that is operating below its level of full employment?
The correct answer is C: Inflation will be low.Explanation: When an economy operates below its speed limit, it does not use all of its resources. Unemployment will be high, because people are out of work. Unused resources will lower production costs and inflation, illustrating the short-run trade-off between unemployment and inflation.
What happens in the short run to prices and output if the price of oil rises temporarily?
The correct answer is C: Prices rise, and output falls below the short-run equilibrium level.Explanation: A supply shock causes the short-run aggregate supply curve to shift to the left, causing a temporary period of unemployment. In the long run, the economy will return to the full-employment level of output as prices and expectations adjust.
Which of the following will occur when the economy operates above full employment?
The correct answer is C: Prices will adjust upward.Explanation: As manufacturers hire more workers and buy more raw materials, shortages are created, causing workers and owners of raw materials to charge more, and therefore prices will rise.
The short-run aggregate supply curve slopes upward because of
The correct answer is C: confusion, sticky wages, and sticky prices.Explanation: These three occurrences cause the short-run aggregate supply curve to slope upward. In the short run, as prices rise, firms increase their production; as prices fall, firms decrease their production.
Changes in the price level affect
The correct answer is C: consumption, investment, and foreign spending.Explanation: When the price level increases, consumption, investment, and foreign spending decrease. The opposite occurs when the price level decreases. Changes in the price level are represented by movements along the aggregate demand curve.
When prices increase in the short run,
The correct answer is C: firms will increase production.Explanation: Prices of input goods, including wages (the price of labor), may stick to lower levels. Firms take advantage of higher product prices by increasing production and therefore increasing profits.
The supply shocks of the 1970s
The correct answer is C: led to both high inflation and unemployment.Explanation: The supply shocks of the 1970s led the economy into a period of stagflation characterized by rising prices and decreasing output. This decreasing output led to high unemployment. During the 1970s as the economy experienced both high inflation and unemployment, the Phillips curve shifted upward as people adjusted to the high inflation.
In the graph shown, an increase in the money supply will cause the equilibrium to move from
The correct answer is C: point A to point B.Explanation: Increasing the money supply lowers interest rates. Businesses find investments to be more profitable with lower interest rates and decide to increase their investments. An increase in investment spending shifts the aggregate demand curve outward and moves the equilibrium from point A to point B.
Government spending depends on
The correct answer is C: policymakers.Explanation: The level of government spending is determined by policymakers. Through policy changes, the government can shift the aggregate demand curve.
The classical view of economics describes how
The correct answer is C: prices and wages adjust immediately to clear markets.Explanation: Classical economists believe that market-clearing adjustments of prices and wages are immediate.
From the microeconomic perspective, the income effect occurs when
The correct answer is C: rising prices decrease consumer wealth and demand.Explanation: The income effect deals with purchasing power. As the price of a good or service increases, people are willing and able to buy less of it. Thus, the quantity demanded of that good or service decreases.
When prices rise,
The correct answer is C: the demand for money increases.Explanation: When prices rise, people will demand more money to do the same amount of shopping to compensate for their loss of purchasing power.
According to Keynes, sticky wages cause the short-run aggregate supply curve to be
The correct answer is C: upward sloping.Explanation: Sticky wages, as well as sticky prices, create profit opportunities for firms. As the price level rises and wages and other prices are sticky, or remain unchanged, firms will increase their production. When the price level decreases, firms will cut back production. This relationship between the price level and quantity produced gives us an upward-sloping short-run aggregate supply curve.
An increase in an economy's resource pool will
The correct answer is C: will shift both the long-run and short-run aggregate supply curves outward.Explanation: Increasing the resource pool increases the supply of goods and services at every price. Remember that when the long-run supply curve shifts, the short-run supply curve shifts also. A shift in the long-run aggregate supply curve indicates a higher level of full employment.
Suppose that, as a producer, your production costs have increased at the same rate as your revenue. You can conclude that
The correct answer is C: your profit will remain unchanged.Explanation: The short-run aggregate demand curve is based on the premise that all prices will not adjust at the same rate or time, leaving room for profit opportunities when prices increase. If production costs change at the same rate as revenue, there is no room for profit.
Assume taxes = $0. According to the chart, Bruce's consumption is equal to
The correct answer is D: $66.Explanation: Use the formula C = a + bY. Substitute the numerical values in for the variables. C = 10 + .8 (70) = $66.
Which of the following events most likely caused the aggregate demand curve to shift inward?
The correct answer is D: A tax increase reduced consumers' disposable income.Explanation: When the government increases taxes, disposable income decreases. Consumers have less to spend on goods and services, and the aggregate demand curve shifts inward.
Which of the following is a component of GDP?
The correct answer is D: All of the above are components of GDP. Explanation: Consumption, investment, government spending, and the spending of foreigners (in an open economy) are components of gross domestic product.
Which of the following equations accurately represents the macroeconomic equilibrium in an open economy?
The correct answer is D: Y = C + I + G + NX Explanation: Macroeconomic equilibrium exists when (Y) real GDP, or income, equals the sum of the spending plans of the players in the economy (C + I + G + NX).
The aggregate demand curve measures
The correct answer is D: all of the above.Explanation: All of the above are true. The aggregate demand curve measures real GDP (a real variable) as a function of the price level (a nominal variable). Aggregate expenditures (the spending plans of consumers, businesses, and foreigners) change inversely to the changes in the price level, giving the aggregate demand curve a downward slope.
The short-run aggregate supply (SRAS) curve slopes upward, because
The correct answer is D: confusion, sticky wages, and sticky prices provide businesses with profit opportunities in the short run.Explanation: When the prices of goods and services increase, the prices of inputs, such as labor, will remain relatively lower in the short run. Firms then increase production in the short run. Profits are earned when revenues rise at a faster rate than costs. The direct relationship between prices and output give the SRAS curve its upward slope.
Suppose the government decides to cut taxes. The aggregate demand curve will shift __________, unemployment will __________, and prices will __________.
The correct answer is D: outward; decrease; increaseExplanation: Cutting taxes increases consumers disposable income. As their demand increases, the aggregate demand curve will shift outward, causing the short-run equilibrium to occur at higher output and price levels. The Phillips curve illustrates the short-run trade-off between inflation and unemployment. So when prices increase, unemployment will decrease.
A tax cut would cause the equilibrium to move from
The correct answer is D: point A to point B.Explanation: Tax cuts provide households with more disposable income, and they may decide to increase their spending, shifting the aggregate demand curve outward. A tax cut would cause the equilibrium to move from point A to point B.
The vertical long-run aggregate supply curve indicates that
The correct answer is D: prices do not affect overall output.Explanation: Because all prices have completed their adjustments in the long run, there is no relationship between the price level and output. The long-run aggregate supply curve is a vertical line that intersects output at the economy's level of full employment.
A kink in the short-run aggregate supply curve reflects the fact that
The correct answer is D: wages rise when the economy operates beyond full employment but tend not to fall when the economy's resources are underemployed.Explanation: Above the level of full-employment output, the short-run aggregate supply curve is upward sloping, reflecting the fact that wages and prices rise when the economy operates beyond the speed limit. When the economy operates below the speed limit, however, prices and wages may not adjust downward. As a result, the short-run aggregate supply curve is flatter below the full-employment output level and steeper beyond it.
