Macroeconomics Final
The labor-force participation rate is computed as:
(Labor Force ÷ Adult Population)
The Fed's response to a stock-market fall
- Increase money supply - Lower interest rates
The Fed's response to a stock-market boom
- Keep money supply lower - Keep interest rates higher
Increase in the interest rate affects money
- Raises the cost of holding money - Reduces the quantity of money demanded
The LRAS curve might shift
-Any change in natural rate of output -Changes in labor -Changes in capital -Changes in natural resources -Changes in technological knowledge
The AD curve might shift:
-Changes in consumption -Changes in investment -Changes in government purchases -Changes in net exports
A rise in price level Decreases the quantity of goods and services demanded because:
-Consumers are poorer -Higher interest rates -Currency appreciates
a fall in price level Increases quantity of goods and services demanded because:
-Consumers are wealthier -Interest rates fall -Currency depreciates
Price level & consumption (C): wealth effect
-Decrease in price level: increase real value of money, consumers are wealthier and spend more, increase in demand
Three key facts about economic fluctuations:
-Economic fluctuations are irregular and unpredictable -Most macroeconomic quantities fluctuate together -As output falls, unemployment rises
Higher aggregate-demand:
-Higher output & Higher price level -Lower unemployment & Higher inflation
Lower aggregate-demand:
-Lower output & Lower price level -Higher unemployment & Lower inflation
if The Fed decreases the money supply
-Money-supply curve shifts left -Interest rate increases -Decrease in quantity demanded of goods and services -Aggregate-demand curve shifts left
if The Fed increases the money supply,
-Money-supply curve shifts right -Interest rate falls -Increase in quantity demanded of goods and services -Aggregate-demand curve shifts right
Aggregate-supply curve
-Shows the quantity of goods and services That firms choose to produce and sell and each price level -upward sloping
Aggregate-demand curve
-Shows the quantity of goods and services That households, firms, the government, and customers abroad Want to buy at each price level. -Downward sloping
NAIRU: Non-Accelerating Inflation Rate of Unemployment
-another name for the natural rate of unemployment when inflation is constant -generally around 5-6% unemployment
Price level & net exports (NX): exchange-rate effect
-decrease in US price level: decrease interest rate, US dollar depreciates, stimulates net exports, increase demand
Price level & investment (I): interest-rate effect
-decrease in price level: decrease in interest rate, increase spending on investment goods, increase in quantity demanded
Advantages of unemployment insurance:
-government-controlled insurance program to reduce the hardship of unemployment -protects incomes when qualified workers are unemployed -benefits stop when a worker takes a new job or after twenty-six weeks
Disadvantages of unemployment insurance:
-increases frictional unemployment - unemployed devote less effort to job search
Okun's Law:
-the idea that changes in unemployment create greater-than-proportional changes in output
efficiency wage
-the minimum rate needed to retain good employees -increases unemployment
minimum wage
-the minimum rate that workers must be paid per hour for working a job -increases unemployment
When the price level changes, which of the following can cause a change in aggregate demand?
-the real value of wealth -the interest rate -the value of currency in the market for foreign exchange
Which of the following can explain the upward slope of the short-run aggregate supply curve?
-wages are slow to adjust to changing economic conditions -firms do not want to increase and decrease prices rapidly - unexpected price changes create uncertainty for households and firms
Three effects - explain why AD curve slopes downward:
-wealth effect -interest rate effect -exchange rate effect
natural rate of unemployment:
-when the level of unemployment approximates its long-run trend -determined by levels of frictional, structural, and institutionally induced unemployment -the rate of unemployment where inflation should be constant
The multiplier effect
Additional shifts in aggregate demand Result when expansionary fiscal policy increases income And thereby increases consumer spending
The short-run AS curve might shift:
Changes in labor, capital, natural resources, or technological knowledge
Misperceptions theory
Changes in the overall price level Can temporarily mislead suppliers About changes in individual markets and Changes in relative prices
Fed alters the money supply by
Changing the quantity of reserves in the banking system
If price level < expected
Firms have incentive to produce less output
Marginal propensity to consume, MPC
Fraction of extra income that consumers spend
Fiscal policy
Government policymakers Set the level of government spending and taxation
encouraged worker effect
If output increases and hiring begins: -people who were discouraged "re-enter" labor force when looking for a job becomes easier -someone not in the labor force is then counted in the labor force as unemployed -unemployment rate rises even though there are more jobs in the economy
Keynes's theory
Interest rate adjusts To bring money supply and money demand into balance
Model of aggregate demand (AD) & aggregate supply (AS)
Most economists use it to explain short-run fluctuations in economic activity
Sticky-wage theory
Nominal wages are slow to adjust to changing economic conditions
Sacrifice ratio
Number of percentage points of annual output Lost in the process of reducing inflation by 1 percentage point
The crowding-out effect
Offset in aggregate demand Results when expansionary fiscal policy raises the interest rate Thereby reduces investment spending
Recession
Period of declining real incomes and rising unemployment
Sticky-price theory
Prices of some goods & services are Slow to adjust to changing economic conditions
If interest rate < equilibrium
Quantity of money people want to hold is More than quantity supplied
If interest rate > equilibrium
Quantity of money people want to hold less than quantity supplied
Deflation
Reduction in the price level
Disinflation
Reduction in the rate of inflation
in the short run, increase in prices
Tends to raise the quantity of goods and services supplied
in the short run, decrease in prices
Tends to reduce quantity of goods and services supplied
exchange-rate effect
a lower price level causes the real exchange rate to depreciate which stimulates spending on net exports
Wealth effect
a lower price level increases real wealth which stimulates spending on consumption
interest-rate effect
a lower price level reduces the interest rate, which stimulates spending on investment
If improved confidence in policy makers makes people more optimistic about the future:
aggregate demand should shift right
At first, an increase in government spending primarily shifts:
aggregate demand to the right
A decrease in the availability of an important major resource such as oil shifts:
aggregate supply left
labor force
all workers employed and unemployed
unemployed
all workers who do not have jobs but want one
underground employed
all workers who work in the underground economy are not counted in the labor force or employed
part-time worker
all workers who work less than a full-time job are counted as employed
Which of the following results in higher inflation and higher unemployment in the short run?
an adverse supply shock such as an increase in the price of oil
Which of the following shifts aggregate demand to the right?
an increase in profits due to technology
workers
anyone able to work (16 years +, not disabled, institutionalized, or military)
employed
anyone who worked
Automatic stabilizers:
are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession
The natural unemployment rate includes
both frictional and structural unemployment
People hold money primarily because it:
can directly be used to buy goods and services
Monetary neutrality
changes in the monetary supply affect nominal variables but do not affect real variables
Which of the following suggests that an increase in government spending can decrease investment spending and cause aggregate-demand to shift to the left?
crowding-out effect
union membership issue
declining membership with reduction in manufacturing
An increase in the minimum wage:
decreases the quantity of labor demanded but increases the quantity of labor supplied
In the long run, the level of output:
depends on supply-side factors and available technology
in the long run, inflation...
depends primarily upon the money supply growth rate
structural unemployment
due to available workers not matching available jobs
cyclical unemployment
due to business cycles; when unemployment differs from its natural rate
frictional unemployment
due to workers changing jobs
underground economy
economic activity, legal or illegal, not counted by government
what is an explanation for the existence of structural unemployment?
efficiency wages, minimum-wage laws, unions
discrimination
electing an employee based on some predetermined criteria, whether legal or illegal
During a recession the economy experiences:
falling employment and income
If price level > expected
firms have incentive to produce more output
Right-to-work laws:
give workers in a unionized firm the right to choose whether to join the union
productivity
goods produced per labor hour
Fiscal policy is affected by changes in which of the following?
government spending
Most economists believe that money neutrality holds:
in the long run but not the short run
According to the Phillips curve, policymakers would reduce unemployment but raise inflation if they:
increased the money supply
Other things the same, a decrease in the U.S. interest rate:
induces firms to invest more
Federal funds rate
interest rate banks charge one another for short term loans
With respect to its impact on aggregate demand for the U.S. economy, which of the following is the most important?
interest-rate effect
Which expenditure component of real GDP fluctuates the most over the course of the business cycle?
investment
The position of the long-run aggregate supply curve:
is determined by resource and technology limits
the theory of efficiency wages explains why
it may be in the best interest of firms to offer wages that are above the equilibrium level
Which of the following is not an explanation for the existence of structural unemployment?
job search
Efficiency wages, minimum-wage laws, and unions all:
keep wages above the equilibrium level, causing a surplus of labor
if capital stock increases, AS curve shifts?
left
if expected price level increases AS curve shifts?
left
if natural rate of unemployment increases, AS curve shifts?
left
if there is a wave of pessimism, AD curve shifts?
left, short-run output and price levels fall
All else equal, if the interest rate rises, people should be expected to hold:
less money
If households view a tax cut as temporary, then the tax cut has:
less of an affect on aggregate demand than if households view it as permanent
offshoring jobs issue
manufacturing jobs moving offshore have not been made up by energy, construction, and service sectors- may be temporary loss
The logic of the multiplier effect suggests that increases in government spending:
may increase spending on other components of GDP
Which of the following is not a cause of frictional unemployment?
minimum-wage laws
The interest rate falls if:
money demand shifts left or money supply shifts right
For U.S. economy the interest rate effect is?
most important
During recessions, automatic stabilizers tend to make the government's budget:
move toward deficit
In the short run, unemployment and inflation are:
negatively related
Cyclical unemployment is caused by
neither frictional nor structural unemployment
Josh is a full-time college student who is not working or looking for a job. The Bureau of Labor Statistics counts Josh as
neither in the labor force nor unemployed
According to classical macroeconomic theory, changes in the money supply affect
nominal variables, but not real variables
If the minimum wage increased, then at any given rate of inflation:
output would be lower and unemployment would be higher
who is not included in the Bureau of Labor Statistics' "employed" category?
people who are looking for work
encouraged worker
persons who don't have a job but continue looking for work are counted as unemployed
discouraged worker
persons who don't have a job who stop looking for work are not counted in the labor force; and therefore, are not employed
Stagflation exists when:
prices rise and output falls
in the short run changes in money supply can temporarily
push real GDP away from its long-run trend
In the long run, an increase in the money supply:
raises prices and leaves unemployment unchanged
Which of the following is most commonly used to monitor short-run changes in economic activity?
real GDP
The model of aggregate demand and aggregate supply explains the relationship between:
real GDP and the price level
Changes in money supply do not effect
real GDP, unemployment, or other real variables
Unemployment insurance:
reduces search effort which raises unemployment
Increase in consumer spending shifts the AD curve to the?
right
Increase in government purchases shifts the AD curve to the?
right
Increase in investment shifts the AD curve to the?
right
Increase in net exports shifts the AD curve to the?
right
if quantity of labor increases, AS curve shifts?
right
if there is New technology, for given labor, capital and natural resources, AS curve shifts?
right
if there is a new discovery of a natural resource, AS curve shifts?
right
If policymakers increase aggregate demand, then in the short run the price level:
rises and unemployment falls
Most economists use the aggregate demand and aggregate supply model primarily to analyze:
short-run fluctuations in the economy
If the central bank decreases the money supply, then in the short run prices:
should fall and unemployment should rise
If policymakers raise government expenditures, then in the short run prices:
should rise and unemployment should fall
If the central bank increases the money supply, in the short run, output:
should rise causing unemployment to fall
Phillips curve
shows the short-run trade-off Between inflation and unemployment
For the U.S. economy, money holdings are a:
small part of household wealth, and so the wealth effect is small
minimum wage, efficiency wages, and unions increase:
structural employment
Minimum wages create unemployment in markets when they create a:
surplus of labor
Size of the spending multiplier depends on
the MPC; A larger MPC = larger multiplier
The short-run relationship between inflation and unemployment is often called:
the Phillips curve
The Phillips curve is criticized on the grounds that:
the Phillips curve does not apply in the long run
full employment
the level of employment when the economy reaches the natural rate of unemployment; generally around 94-95% employment
Which of the following is not a determinant of the long-run level of real GDP?
the price level
If in the long run, people eventually adjust their expectations so that actual and expected inflation are the same, then policymakers can exploit a tradeoff between inflation and unemployment in:
the short run but not in the long run
in the short run output responds...
to changes in the aggregate demand for goods and services
An adverse supply shock will cause output
to fall and prices to rise
Which of the following typically rises during a recession?
unemployment
unemployment rate equation
unemployment rate = # of unemployed ÷ (# of employed + # of unemployed)
In the long run, unemployment and inflation are:
unrelated
hysteresis
when the expected natural rate of unemployment changes due to past unemployment levels
Changes in monetary policy Aimed at contracting aggregate demand
• Decreasing the money supply • Raising the interest rate
Changes in monetary policy Aimed at expanding aggregate demand
• Increasing the money supply • Lowering the interest rate
