midterm 2
The government plans to spend $100 billion. If the marginal propensity to consume is 0.5, what is the total increase of the real GDP?
$200 billion
suppose the economy has experienced a positive demand shock which is true in the short run
firms are artificially profitable, wages are low
contractionary fiscal policy
g goes down taxes go up transfers go down shift left
spending by local, state, federal entities
govt spending
When the newest economic data lies to the right of the Phillips curve, that likely means the Phillips curve
has shifted upwards.
suppose policy makers think the natural rate of unemployment is 3.5% and therefore pass a stimmy designed to reach that rate profit are temporarily: wages are too: unemployment: moving to long run who has bargaining power: wages: profits: unemployment: expected inflation will: Srpc will:
high low drops workers inc dec inc inc inc
what would cause cost push inflation
if oil prices inc
The original Phillips curve
illustrates the short-run trade-off between inflation and unemployment
biden passes an infrastructure plan, what happens to ad
inc
suppose the housing mkt crashes inflation gdp wages are profits unemployment
inc dec high low high
As unemployment decreases, inflation
increases
Suppose that there has been a sudden influx of refugees in the small town of Dallon, leading to a doubling of the local population. The accompanying graph depicts Dallon's market for food. Adjust the graph to show the immediate impact that this rise in population has on the food market. Then determine what happens to equilibrium price and quantity. Market for foodPriceQuantityDS Equilibrium price
increases
Suppose that there has been a sudden influx of refugees in the small town of Dallon, leading to a doubling of the local population. The accompanying graph depicts Dallon's market for food. Adjust the graph to show the immediate impact that this rise in population has on the food market. Then determine what happens to equilibrium price and quantity. Market for foodPriceQuantityDS Equilibrium quantity
increases
Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected. The accompanying graph depicts a market for electric vehicles. Demonstrate the effect of a reduction in the price of lithium-ion batteries by adjusting the accompanying diagram. equilibrium quantity
increases
what is the problem if theres a pos demand shock and the govt does nothing neg demand shock
inflation goes up recessionary gap
Suppose the economy has experienced a positive demand shock, where AD shifted to the right. You may assume the economy is in an inflationary gap. Place each of the following into the true or false category.
inflation increased, wages are low, profits high, when moving to long run inflation becomes permanently higher
new capital goods: durable equipment, software, inventory
investment
The idea that demand creates its own supply comes from
keynes law
Which school of thought gained popularity after the onset of the Great Depression and argues that prices and wages are "sticky," particularly on the downside? It also argues that the deficiencies in aggregate demand can be combated by increases in government spending.
keynsian
made domestically and sold oversea
net exports
what would shift the entire LR phillips curve to the left
a decrease in frictional unemployment
says law
a given value of supply creates an equal value of demand somewhere in the economy
what gap has the unemployment rate above the natural rate of unemployment
a recessionary gap
if oil prices inc, what happens to profits for most firms gdp inflation cost push or demand pull
dec dec inc cost push
in AS/AD what happens when consumers are pessimistic
decrease in AD
Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected. The accompanying graph depicts a market for electric vehicles. Demonstrate the effect of a reduction in the price of lithium-ion batteries by adjusting the accompanying diagram. equilibrium price
decreases
example of contractionary fiscal policy
decreasing government spending
Which item is not assumed to be constant along the aggregate supply curve?
economy wide price level
The price that results when quantity demanded equals quantity supplied is most correctly called the
equilibrium price.
which policy has more bang for its buck
govt spending
If the price of a good decreases, the demand for that good
increases
Beanlightened coffee is for Andrew a(n)
inferior good
A firm will find it beneficial to undertake an additional investment project
when the expected rate of return is greater than the interest rate.
Which is a valid interpretation of Say's law?
A given value of supply creates an equal value of demand somewhere in the economy.
One reason that the aggregate demand (AD) curve is downward sloping is the "net export effect."
A higher price level makes goods produced domestically more expensive relative to foreign produced goods.Therefore, net exports decrease.
Suppose that because of globally adverse meteorological conditions, there are serious concerns of climbing prices in an extensive group of commodities. As a result, people now expect an acute increase in the level of input prices. Consider the graph of aggregate demand (AD), aggregate supply (AS), and potential GDP.
As a result, the price level in the economy increases and real GDP decreases .
The Phillips curve illustrates which of the short‑run relationships?
As unemployment decreases, inflation increases
The Phillips curve illustrates the relationship between
Inflation and unemployment
recessionary gap
what occurs when the equilibrium quantity of output is below potential output unemployment high
Which of the following does not shift the SRAS curve?
Changes in disposable income
If the government follows contractionary policy, then government spending_____, taxes ______, and transfers______
Decreases, increases, decreases
expansionary fiscal policy (more fun for congress to pass)
G goes up taxes go down transfers go up shift right
Which statement is true about the transition from the short run to the long run?
If unemployment is high, nominal wages will eventually fall.
Which of the following is true about cost-push inflation?
It can be associated with stagflation, which is both high unemployment and high inflation
Consider a country experiencing hyperinflation. Which of the following is NOT true?
The Aggregate Price Level is decreasing
Which of the following would NOT be an example of fiscal policy?
The Federal reserve increases interest rates
Consider the market for Amazon stocks. If everyone expects the price of Amazon stocks to drop in the near future, which of the following will happen?
The supply of Amazon stocks today will increase and the demand for Amazon stocks today will decrease
True or false. Government spending is more efficient than tax cuts.
True
Suppose the U.S. economy is initially in long-run equilibrium and producing at the full employment level of output. Then a major backlash against American foreign policy results in a worldwide protest against American made goods and service, effectively eliminating the demand for all American exports.
a. In the short run, the AD curve shifts to the left b. At the new short-run equilibrium, real GDP is less than full employment GDP and the unemployment rate is greater than the natural rate of unemployment. c. Assuming there are no other changes to the economy, in the long run, the self-correcting mechanism will shift the SRAS curve to the right until the economy reaches a new long‑run equilibrium.
suppose an economy has experienced a neg demand shock, what happens in the short run
aggregate price level dec
the law of demand says that
as the price of a good increases, buyers are willing and able to purchase less.
In economic terms, Starbucks coffee is for Andrew a(n)
normal good
After several years of current data lying along the same Phillips curve, economists plot the newest statistics and find that their points lie well above the old curve.
Increases in the prices of essential raw materials led people to expect higher inflation in the future.
What would cause an excess in supply of a good?
Quantity demanded is less than quantity supplied
Regarding the timeframe, when is it advisable to use Keynesian and neoclassical economics?
Use Keynesian in the short‑run and neoclassical in the long‑run
In the long run, how does the economy adjust back to full employment?
Wages fall, and aggregate supply increases.
If the economy is in an inflationary gap, then
Ye > Yo
Andrew, a college student, loves drinking coffee late at night to study for exams. Having no income, he is used to buying cheap, bad-tasting coffee, such as Beanlightened, that he needs to grind and brew himself. The coffee tastes putrid but, with enough cream and sugar, Andrew is able to tolerate it. Occasionally, he does go out to Starbucks when he has spare money. After graduation, Andrew gets a job working at a database firm as a programmer. His income is now a healthy $75,000 a year, and he decides he has had enough bad-tasting coffee. He ends up buying coffee daily from Starbucks, even though it costs significantly more than Beanlightened.
a change in income.
spending by households
consumption
in the phillips curve because of sticky wages , when there is a positive demand shock, firms are temporarily
profitable
when consumers become optimistic
profits become high, wages are low
if a givt wanted to prevent a recession what could they do
raise govt spending dec taxes
in long run equilibrium
real gdp is equal to potential output
in AS/AD when consumers become confident that there is an increase in spending what happens to the AD curve what happens to inflation and GDP high or low unemployment and what type demand pull or cost push
shift right goes up high, cyclical demand pull, too much spending
An increase in the nominal wages will shift
the SRAS curve to the left.
Demand is best described as
the quantity of a good or a service that people are willing and able to purchase at different possible prices.
what best describes the relationship between inflation and real gdp in the long run
there is no relationship
suppose that an economy has experienced a positive demand shock which is true in the short run
unemployment drops, inflation inc
if expected inflation increases the SRPC shifts
up
According to the neoclassical view, the long-run Phillips Curve is
vertical
whats shifts sras to the left
wage inc
why does ad slope down
wealth affect foreign purchase interest rate affect
inflationary gap
what occurs when the equilibrium quantity of output is above potential output overall price level has risen
Why does the aggregate demand curve slope downward?
when domestic price level rises our goods become more expensive to foreigners
A surplus exists
when quantity supplied exceeds quantity demanded.