Optional extra quiz

The multiplier for changes in government spending is calculated as

1/(1 - MPC).

In a closed economy, national saving equals

All of the above are correct.

Cyclical unemployment refers to

B. short-run fluctuations around the natural rate of unemployment.

An increase in the expected price level shifts the short-run aggregate supply curve to the right.

FALSE

All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?

Output will rise but by less than it did when the previous unit was added.

If aggregate demand shifts right, then eventually price level expectations rise. The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

TRUE

Human capital is the term economists use to refer to the knowledge and skills that workers acquire through education, training, and experience.

True

The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left.

True

When the Fed increases the money supply, the interest rate decreases. This decrease in the interest rate increases consumption and investment demand, so the aggregate-demand curve shifts to the right.

a. TRUE

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. What happens to the price level and real GDP in the short run?

both the price level and real GDP fall

If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level

is lower and output is the same as the original long-run equilibrium.

The primary economic function of the financial system is to

match one person's saving with another person's investment.

If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise?

nominal GDP but not real GDP.

The inflation rate is defined as the

percentage change in the price level from the previous period

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,

production is more profitable and employment rises.

The one variable that stands out as the most significant explanation of large variations in living standards around the world is

productivity

A larger budget deficit

raises the interest rate and reduces investment.

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level

rises, shifting aggregate supply left.

Suppose that businesses and consumers become much more optimistic about the future of the economy. To stabilize output, the Federal Reserve could

sell bonds to raise interest rates.

Refer to Figure 34-8. An increase in government purchases will

shift aggregate demand from AD1 to AD2.

Investment is a

small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

Fiscal policy is determined by

the president and Congress and involves changing government spending and taxation.

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

the slope of the aggregate-demand curve.