Unit 4 Econ
Aggregate demand decreases if the exchange rate ______ or foreign income ______.
increases; decreases.
A ______ macroeconomist believes that business cycle fluctuations are the efficient responses of a well-functioning market economy that is bombarded by shocks that arise from the uneven pace of technological change. A ______ macroeconomist believes that the short-run aggregate supply curve is horizontal at a fixed price level.
new classical; new Keynesian
In ______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve. In ______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve.
new classical; new Keynesian
Long-run macroeconomic equilibrium ______.
occurs when real GDP equals potential GDP, and the LAS, SAS, and AD curves intersect
The marginal propensity to import is equal to _______.
the change in imports divided by the change in real GDP, other things remaining the same
The table gives an economy's aggregate demand, short-run aggregate supply, and long-run aggregate supply schedules. Draw the LAS curve, the SAS curve and the AD curve. Label the curves. Draw a point at the short-run macroeconomic equilibrium. Draw a horizontal arrow at the equilibrium price that shows the output gap The graph shows ________ gap.
- a recessionary moved right from the equilibrium
-The multiplier is the amount by which a change in ______ expenditure is magnified or multiplied to determine ________. -To calculate the multiplier, we divide ______ by ______.
- autonomous; the change in equilibrium expenditure and real GDP -the change in equilibrium; the change in autonomous expenditure
-The graph shows an economy's aggregate demand curve. Investment increases by $0.5 trillion, and the multiplier is 4. Draw a new demand curve that shows the effect of this increase in investment. Label it AD1. Draw a point to indicate the quantity of real GDP demanded following the increase in investment when the price level is 115. Label it B. -An increase in investment shifts the AE curve _______ and the AD curve _______.
- move line to the right, the new equilibrium is 14,115 -upward; rightward
-The graph shows an economy's long-run aggregate supply curve and aggregate demand curve. Draw two curves that show the economy experiencing economic growth with inflation. Label the curves. Draw a point at the new long-run price level. -High inflation accompanies economic growth when ______.
- move the AD up and move LAS to the right, place point on equilibrium -the quantity of money increases rapidly
The table gives the aggregate demand schedule, the short-run aggregate supply schedule, and the long-run aggregate supply schedule for an economy. -The quantity of real GDP at the short-run macroeconomic equilibrium is ______ billion -The economy has ________.
-$550 - an inflationary gap of $50 billion
The marginal propensity to consume is 0.8, the marginal tax rate is 0.20, and the marginal propensity to import is 0.14. The autonomous tax multiplier is ________.
-1.6 -b/(1-(b(1-t)-m))
An economy has a consumption function of C = 10 + 0.8Y, investment of 6, government expenditure of 10, exports of 10, and an import function of M = 0.1Y. If government expenditure increases to 15, what is the increase in equilibrium expenditure?
-16.65 -1/(1-slope of the AE curve)
If real GDP is zero, investment is $1.5 trillion, government expenditure is $1.0 trillion, exports are $0.5 trillion, and consumption is zero. Draw a line that shows autonomous expenditure. Label it A. Consumption expenditure minus imports, which varies with real GDP, is called _______.
-Add 1.5 +1.0+0.5=3.0 horizontal line at 3.0 -induced expenditure
Draw an aggregate demand curve. Label it AD. Draw a short-run aggregate supply curve. Label it SAS. Draw a point at the short-run macroeconomic equilibrium. Label it 1. Draw a point on the SAS curve at which firms are unable to meet the demand for their output. Label it 2. When firms are unable to meet the demand for their output, _____. Prices _____.
-Draw the demand and supply point. For label one, place point at equilibrium. For label 2, place a point on SAS line (11.5, 105). -the quantity of real GDP demanded is greater than the quantity of real GDP supplied; rise
-The graph shows an economy's aggregate demand curve, short-run aggregate supply curve, long-run aggregate supply curve, and equilibrium. Draw the AD curve when it is correctly expected that the inflation rate will be 1515 percent a year. Label it. Draw the SAS curve when a change to the money wage rate occurs that correctly expects the increase in aggregate demand. Label it. Draw a point at the new equilibrium. -When inflation is correctly anticipated, _______.
-Move the point equilibrium up to (13.0, 115), draw the demand and supply lines -the economy remains at full employment
-Draw an aggregate demand curve. Label it AD. Draw an arrow on the AD curve that shows the international substitution effect when the price level falls. Label it 1. Draw an arrow on the AD curve that shows the international substitution effect when the price level rises. Label it 2. -Other things remaining the same, when the U.S. price level rises, U.S.-made goods and services become _______ expensive relative to foreign-made goods and services. People spend ______ on U.S.-made items and ________ on foreign-made items. ____________ decreases.
-The arrow goes up for two; the arrow goes down for 1 -more, less, more, the quantity of U.S real GDP demanded.
In an economy without taxes and imports, an increase in investment of $50 billion increases equilibrium expenditure by $125 billion. What are the values of the multiplier and the slope of the AE curve?
-The multiplier is 2.5 and the slope of the AE curve of 0.6. -125/50 -Multiplier= 1/(1-slope) rearrange to find slope 2.5=1/(1-slope)
-Equilibrium expenditure is the level of aggregate expenditure that occurs when ______. -Choose the correct statement.
-aggregate planned expenditure equals real GDP -The level of aggregate expenditure that occurs where the AE curve intersects the 45 line is equilibrium expenditure.
The graph gives a long-run aggregate supply curve and a short-run aggregate supply curve. Technology advances and the full-employment price level remains constant. An increase in potential GDP increases ________.
-move the LAS 1 and SAS 1 to the right, SAS 1 is below the SAS 0. -both long-run aggregate supply and short run aggregate supply.
-The graph shows the aggregate demand curve, short-run aggregate supply curve, and long-run aggregate supply curve. Draw a curve that shows the effect of a rise in the price of oil. Label it. Draw a point at the new equilibrium in the economy. -A rise in the price of oil creates ________.
-move the SAS line up -a one-time cost-push rise in the price level
An economy has a consumption function of C = 10 + 0.8Y, investment of 6, government expenditure of 10, exports of 10, and an import function of M = 0.1Y. What is equilibrium real GDP?
120
An economy has a consumption function of C = 10 + 0.8Y, investment of 6, government expenditure of 10, exports of 10, and an import function of M = 0.1Y. What is the multiplier for this economy?
3.33
An economy has a consumption function of C = 10 + 0.8Y, investment of 6, government expenditure of 10, exports of 10, and an import function of M = 0.1Y. What is the equation of the aggregate expenditure curve?
AE = 36 + 0.7Y
Choose the statement that is INCORRECT 43
Along the LAS curve the money wage rate is constant and the real wage rate rises as the price level rises.43
Choose the statement that is incorrect.
Along the SAS curve, the real wage rate and the price level change by the same percentage.
Choose the statement about the long-run Philips curve that is INCORRECT.
An unexpected increase in aggregate demand shifts the long-run Philips curve rightward.
Choose the statement about the business cycle that is INCORRECT.
In a business cycle, real GDP shows steady growth and steady inflation.
Which of the following statements about the Keynesian view of the macroeconomy is incorrect?
Technological change is the most significant influence on both aggregate demand and aggregate supply.
The figure shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the economy of Tomorrowland. The economy is currently at point A. A demand-pull rise in the price level will initially move the economy to point _______ and to point _______.
E when aggregate demand increases; D when the money wage rate rises
Choose the statement about real business cycle theory that is INCORRECT.
Economists have not been able to isolate the RBC theory impulse
Deflation in Japan arose because _______.
Japan's money stock did not grow fast enough to accommodate the growth of potential GDP and a trend rise in velocity.
Marginal Propensities to Consume and Save
MPC= Change in consumption expenditure / Change in disposable income MPS= change in saving / change in disposable income MPC + MPS = 1
You observe that unplanned inventories are decreasing. You predict that there will be _______.
an expansion
A business cycle can be described by the following sequence: ______ equilibrium, _______ equilibrium, ________ equilibrium
below full-employment; full-employment; above full-employment
Aggregate demand decreases if expected future income, inflation, or profits _______. And aggregate demand decreases if fiscal policy _______ government expenditure.
decreases, decrease
Aggregate demand decreases if monetary policy ______ the quantity of money and ______ interest rates.
decreases; increases
A rise in the money wage rate ______.
does not change the LAS curve because along the LAS curve a rise in the money wage rate is accompanied by an equal percentage change in the price level
Aggregate demand decrease if fiscal policy _______ taxes or ______ transfer payments.
increases; decreases
When costs increase and the Fed wants to return the economy to full employment, the Fed responds by _______ the quantity of money. If the Fed continually responds to successive increases in costs, a _______ inflation evolves.
increasing; cost-push
If aggregate planned expenditure is less than the real GDP, then _________.
inventories INCREASE, and as real GDP DECREASES a movement down along the AE curve occurs
A decrease in the marginal propensity to import _______, everything else remaining the same.
makes the multiplier larger
The quantity of real GDP supplied depends on all the following except ______.
quantity of real GDP demanded.
In real business cycle theory, _________ are the main source of economic fluctuations
random fluctuations in productivity
In RBC theory, the lower the real interest rate, other things remaining the same, the ______ today.
smaller is the supply of labor
According to mainstream business cycle theory, _______.
the money wage rate is sticky and consequently if aggregate demand grows faster than potential GDP, an inflationary gap emerges
The graph shows a short-run Phillips curve. Draw an arrow on the curve that shows the effect of an unexpected increase in aggregate demand. When aggregate demand unexpectedly increase, ________
the natural unemployment does not change.
If the expected inflation rate increases and the natural rate of unemployment remains constant, then _______.
the short-run Phillips curve shifts upward and the long-run Phillips curve does not shift
A rational expectation _______.
will often turn out to be wrong, but no other forecast that could have been made with the information available could do better
The marginal propensity to consume is 0.8, the marginal tax rate is 0.20, and the marginal propensity to import is 0.14. The government increases government expenditure and autonomous taxes each by $50 billion. What is the resulting change in equilibrium expenditure?
$20 billion
