Macroeconomics - Chapters 20-22
Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, then we would expect that in the short-run,
Real GDP will fall and the price level might rise, fall, or stay the same
Over the long run the Volcker disinflation
Shifted the short-run, but not the long run Phillips curve left
in 1936, Keynes published a book, the General Theory, which attempted to explain
Short-run economic fluctuations
In the long run, which of the following depends primarily on the growth rate of the money supply?
The inflation rate but not the natural rate of unemployment
Which of the following shifts the long-run Phillips curve left?
a decrease in the minimum wage rate, but not an increase in the inflation rate
The initial impact of an increase in an investment tax credit is to shift
aggregate demand right
The aggregate demand curve shows the
quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level
If there is a temporary adverse supply shock, then the short-run Phillips curve shifts to the
right. It remains to the right if the central ban pursues expansionary monetary policy
An economy has a current inflation rate of 12%. If the central bank wants to reduce inflation to 4% and the sacrifice ratio is 2, how much annual output must be sacrificed in the transition?
16%
If the Fed reduces inflation 1 percentage point and this makes output fall 5 percentage points and unemployment rises 2 percentage points for one year, the sacrifice ratio is
5
During the last half of 1980, the U.S. unemployment rate was about 7.5 percent. Historical experience suggests that this is?
Above the natural rate, so real GDP growth was likely low
Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left. If there is no policy response, then eventually
Because unemployment is high wages will be bid down and short-run aggregate supply will shift right.
In the short run what happens to the price level and real GDP?
Both the price level and real GDP rise
Samuelson and Solow argued that when unemployment is high there is
Downward pressures on wages and prices
In which case can we be sure real GDP rises in the short run?
The money supply increases and taxes fall
According to the Phillips curve, unemployment and inflation are negatively related in
The short-run but not in the long run
Which of the following shifts aggregate demand to the right?
an increase in the money supply
Samuelson and Solow reasoned that when aggregate demand was high, unemployment was
low, so there was upward pressure on wages and prices
If the interest rate is above the FED's target, the FED should
buy bonds to increase the money supply
Other things the same, if the long-run aggregate supply curve shifts right, prices
decrease and output increases
In the short run, an increase in the money supply causes interest rates to
decrease, and aggregate demand to shift right
An economic contraction caused by a shift in aggregate demand causes prices to
fall in the short run, and fall even more in the long run
Macroeconomics forecast are
imprecise; this makes policy lags more relevant
Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
unemployment falls, but it would have fallen less if people had been expecting 25% inflation.
Most economists believe that fiscal policy
Primarily affects aggregate demand
Which of the following rises when the U.S. price level falls?
real wealth
Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?
As people revise their price-level expectation downward, firms and workers strike bargains for lower nominal wages
If the natural rate of unemployment falls
Both the short-run and long-run Phillips curves shift left
Changes in the price level affect which components of aggregate demand?
Consumption, investment, and net exports
Proponents of rational expectations argued that the sacrifice ratio
Could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.
If countries that imported goods and services from the United States went into recession, we would expect that U.S. net exports
Fall, making aggregate demand shift left
Other things the same, during recessions tax tend to
Fall. The fall in taxes stimulates aggregate demand
Other things the same, an unexpected fall in the price level results in some firms having
Higher than desired prices which depresses their sales
Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?
Increase taxes
Which of the following is correct concerning the long-run Phillips curve?
Its position depends on the natural rate of unemployment
Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is
Keynesian in mature, and that his view is more valid for the short run for the long run
An increase in the expected price level shifts short-run aggregate supply to the
Left, and an increase in the actual price level does not shift short-run aggregate supply
The short run effects of the housing/financial crisis are shown by
Moving to the right along the short-run Phillips curve
An increase in the price level and a reduction in output would result from
Natural disasters such as hurricanes, floods and droughts
Which of the following implies that an increase in the money supply growth rate permanently changes the unemployment rate?
Neither the long-run Phillips curve nor the long-run aggregate supply curve
Which of the following both shifts aggregate demand right?
Net exports fall for some reason other than a price change and the price level rises
If the minimum wage increased, then at any given rate of inflation
Output would be lower and unemployment would be higher
When we say economic fluctuations are "irregular and unpredictable" we mean that?
Recessions do not occur at regular intervals
Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
Rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.
Which of the following tends to make the size of a shift aggregate demand resulting from a tax cut smaller than it otherwise would be?
The crowding-out effect
The Employment Act of 1946 stats that
The government should promote full employment and production
The economy will move to a point on the short-run Phillips curve where unemployment is higher if
The inflation rate decreases
According to liquidity preference theory, equilibrium in the money market is achieved by adjustments in
The interest rate
Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp decline in the stock market, a tax cut, an increase in the money supply and a decline in the value of the dollar. In the short run
The price level and real GDP will rise, fall, or neither the price level nor real GDP will change.
Which of the following effects provide incentives for consumers to spend less when the price level rises?
The wealth effect and the interest-rate effect
During recessions
Workers are laid off, factories are idle, firms may find they are unable to sell all they produce
A central bank sets out to reduce unemployment by changing the money supply growth rate. The long-run Phillips curve shows that in comparison to their original rates, this policy will eventually lead to
an increase in the inflation rate and no change in the unemployment rate
Which of the following shifts the long-run aggregate supply curve to the left?
an increase in the price of imported natural resources, but not opening international trade
Other things the same, if the workers and firms expected prices to rise 2% but instead the rise by 3%, then
employment and production rise
Country A's long-run Phillips curve is farther to the right than country B's. Country A and country B are identical in all other ways. In particular, they have the same money supply growth rates. In the long run as compared to country B country A will have
higher unemployment and the same rate of inflation
In the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,
households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods
When they are confronted an adverse shock to aggregate supply, policymakers face a difficult choice in that
if they contract aggregate demand, the unemployment rate will increase further. if they expand aggregate demand, the inflation rate will increase further. they face a less favorable trade-off between inflation and unemployment than they did before the shock.
Open market purchases
increase investment and real GDP
According to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5% and actual inflation was 6%, then the firm would believe that the relative price of what it produce had
increased, so it would increase production.
Aggregate demand shifts right when the government
increases the money supply
According to Friedman and Phelps, the unemployment rate is above the natural rate when actual inflation
is less than expected inflation
If inflation expectations rise, the short-run Phillips curve shifts
left, so that any rate unemployment rate inflation is lower in the short run than before
Other things the same, a decrease in the price level motivates people to hold
less money, so they lend more, and interest rate falls
Other things the same, in the long run a country that reduces the minimum wage from very high levels will have
lower unemployment and the same level of inflation
People might deposit more money into interest-bearing accounts
making the interest rate fall, if there is a surplus in the money market
According to liquidity preference theory, a decrease in the price level shifts the
money demand curve leftward, so the interest decreases
Other things the same, an increase in the price level induces people to hold
more money, so they lend less, and the interest rate rises
The effect of an increase in the price level on the aggregate-demand curve is represented by
movement to the left along a given aggregate-demand curve
People had been expecting the price level to be 170 but it turns out to be 165. Diamond power tools increases the number of workers it employs, What could explain this?
neither sticky wage theory not sticky price theory
Soon after he became chairman of the FED in 1976, Paul Volcker embarked on a course
of disinflation
According to the 2009 article, The Economists, the multiplier effect and crowding-out effect would exactly offset each other when the economy is
operating at full capacity
If a central bank increases the money supply in response to an adverse supply shock, then which of the following quantities moves closer to its pre-shock value as a result?
output but not the price level
As the price level rises
people will want to hold more money, interest rates rise
The model of aggregate demand and aggregate supply explains the relationship between
real GDP and the Price level
In the long run, a decrease in the money supply growth rate
reduces expected inflation so the short-run Phillips curve shifts left and unemployment returns to its natural rate
If the central bank increases the money supply, in the short run, output
rises so unemployment falls
In the mid-1970s the price of oil rose dramatically. This
shifted the aggregate supply left
In the long run, the change in price expectations caused by optimism shifts
short-run aggregate supply left
In the long run, the change in the price expectations created by the stock boom shifts
short-run aggregate supply to the left
Since the end of WWII, the U.S. has almost always had rising prices and an upward trend in real GDP. This can be explained by
technological progress and money supply growth
When the price level falls
the interest rate falls, so the quantity of goods and services demand rises
For the U.S. economy, which of the following is the most important reason for the downward slope of the aggregate-demand curve?
the interest-rate effect
The position of the long-run Phillips curve and the long-run aggregate supply curve both depends on
the natural rate of unemployment, but not monetary growth
Suppose that the economy is at long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then in the short run.
the price level will fall, and real GDP might rise, fall, or stay the same
If there are sticky wages, and the price level is greater than what was expected then,
the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve.
Aggregate demand includes
the quantity of goods and services households, firms, the government, and customers abroad want to buy
In the late 1970s, proponents of rational expectations argued that
the sacrifice ratio was smaller than previously thought
In recent years, the FED has chosen to target interest rates rather than the money supply because
they money supply is hard to measure with sufficient precision
The government of Murkland considers two policies. Policy A would shift AD right by 300 units while policy B would shift AD right by 200 units. According to the short-run Phillips curve, policy A will lead
to a lower unemployment rate and a higher inflation rate than policy B
An adverse supply shock will cause output
to fall and prices to rise
In Southland the Department of Finance is responsible for monetary policy. Southland has had an inflation rate of 25% for many years. Suppose that the Southland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then
unemployment rises, but it would have risen more if people had been expecting 25% inflation.
