Macro Eco Chapters 10, 11

Many economists view the natural rate of unemployment as the level observed when real GDP is given by the position of the Long-Run Aggregate supply curve. There can be positive unemployment in this situation because..

Information is costly and rigidities always exit causing some types of employment ( frictional and structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes.

Long-Run Aggregate supply curve

Is a vertical line representing the real output of goods and services after dull adjustment has occurred. it can also be view as representing the real gdp of the economy under conditions of full employment- the full employment level of real GPD.

Base-Year dollars

Are the value of a current sum expressed in terms of prices in a base year.

Endowments

Are the carious resources in an economy, including both physical resources and such human resources as ingenuity and management skills.

Aggregate supply

is the total of all planned production for the economy.

The long-run aggregate supply curve is determined by

The full-employment level of real output. It is a vertical line set at the real output level corresponding to a fully employed economy.

The long-run aggregate supply curve shifts outward when

there is economic growth.

The long-run aggregate supply curve

is vertical because changes in the price level have no effect on real output.

Year to year rightward shifts in long-run aggregate supply leads to

Year to year rightward shifts in long-run aggregate supply signify rising real output over time. This positive relationship between real output and time is called a trend path or trend line.

Aggregate demand is

The total of all planned expenditures in the entire economy.

Aggregate demand curve

is a curve showing planned purchases rates for all final goods and services in the economy at various price levels, all other things held constant.

Real-Balance Effect

is the change in expenditures resulting from a change in the real value of money balances when the price level changes, all other things held constant also called the wealth effect.

Interest rate effect

is one of the reasons that the aggregate demand curve slopes downward: Higher price levels increase the interest rate, which in turn causes business and consumer to reduce despite spending due to the higher cost of borrowing.

Open economy effect

is one of the reasons that the aggregate demand curve slopes downward Higher price levels result in foreign residents desiring to buy fewer U.S. -made goods, while u.s. residents now desire more foreign-made goods, thereby reducing net exports. This is equivalent to a reduction in the amount of real goods and services purchased in the united states.

Suppose that there is a sudden fall in the price level. As a consequence, economy wide planned spending on purchases of goods and services will

Which of the following is not a reason for this change in economy-wide planned spending?

Increase The substitution effect

Total expenditures for domestically produced goods and services consist of

Consumer spending, business spending, government spending, and net foreign spending. Total expenditures on real GDP are composed of these four components.

Which one of the following is not a component of total expenditures?

Merchandise inventories. They are not one of the four components of TE. However, they are a part of investment expenditures.

What determines the total value of annual U.S. GDP?

The spending and production decisions of consumers, firms, governments, and foreigners.

The total of all planned real expenditures in the economy is

Aggregate demand.

The aggregate demand curve

Shows planned purchase rates of goods and services at various price levels.

The aggregate demand curve slopes downward because of the

Real-balance, interest rate and open economy effects. When the price level rises, the aggregate quantity demanded drops because of these three effects.

According to the real-balance effect, an increase in the price level

reduces an individuals expenditures due to a decrease in the real value of cash balances.

According to the interest rate effect, an increase in the price level.

Reduces the aggregate quantity of goods and services demanded. Increases nominal interest rates. Reduces borrowing and spending.

From the list below, match the letter of the outcome each of the following events produces upon the AD curve.

Deflation has occurred during the past year- Movement down along the AD Curve. Real GDP levels of all the nations major trading partners have declined-Shifts to left There has been a decline in the foreign exchange value of the nations currency- Shifts to right. The price level has increase this year – Movement up along.

Shifts in the AD curve indicate that either more or less will be purchased at any given _____ level.

Price.

Higher real incomes (GPD) in the nations key trading partners will surely cause foreigners to want to purchase ____ of the nations output

more.

Which of the following will generate an increase in aggregate demand?

Government spending for the onset of a war. will necessitate increases in federal government purchases.

The U.S. Aggregate demand curve would shift to the left if

…

The U.S. Aggregate demand curve would shift to the left if

The federal reserve board cause the real interest rate to increase.

The aggregate demand curve would shift tot he right as a result of

a drop in the foreign exchange value of the dollar.

All of the following would cause the aggregate demand curve to shift except

price level changes.

RGDP=

NGDP x 100/ PI

Suppose that the dull employment level of nominal GDP rises in one year from 16.2 to 17.8 trillion. The long-run equilibrium price level, however, remains unchanged at 108.

By how much, if any, has the aggregate demand curve shifted to the right? 16.2 x 100/108 =15 17.8 x 100 /108 = 16.48 A= 1.48 trillion AD has shifted exactly by 1.48 trillion.

Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP and increase in equilibrium price level.

Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrence of decrease in equilibrium real GDP with no change in the equilibrium price level.

Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP with no change in the equilibrium price level.

Long-run aggregate supply schedule (LRAS) shifts to the right and Aggregate demand schedule ( AD_ shifts to the right by a larger amount. Long-run (LRAS) shifts to the left and (AD) shifts to the left by an equal amount. LRAS shifts to the right and AD shifts to the right by an equal amount.

Suppose that during a given year, the quantity of U.S. real GDP that can be produced in the long run falls from $13 T to $12.t T, measured in base-year dollars.

During the year, no change occurs in the various factors that influence AD. As a result, the U.S. Long-run equilibrium price level during this particular year will increase.

Similar case. If the Long run rises from 11T to 12T

Increase. Decrease.

Consider the accompanying diagram when answering the questions that follow:

Suppose that the current price level is P3. In this case, the price will rise toward P 1 because

Firms would stand ready to offer fewer services than people wish to purchase. Inventories of unsold goods would bein to be depleted. Actual real GDP would be less than total planned real expenditures.

The figure to the right shows an economy in an initial long-run equilibrium at point A

Show how, if at all, the equilibrium real GDP and the long-run equilibrium price level are affected by a decrease in the value of the home currency in terms of the currencies of other nations.

According to your graph, the equilibrium price level ___ while the equilibrium real GDP is _____

Rises, Unchanged.

In Ciudad Barrios, El Salvador people wait in line at credit unions to receive money from relatives working in the U.S.

Based on the above information, developing countries income inflows transmitted by migrant workers are primarily affecting their economies long-run aggregate _____ curves.

The equilibrium prive level in nations that are recipients of large inflows of funds from migrant will likely

demand. Rise because there is an increase in the aggregate demand in these countries.

Long-run equilibrium in the economy will occur

at the price level were total planned real expenditures equals real GDP at full employment.

The Long-run equilibrium of an economy occurs

Where the long-run aggregate supply curve meets the aggregate demand curve.

In the accompanying graph the equilibrium price level is _____ and the equilibrium real GDP is ______.

In the accompanying graph if the price level is 140

120, $ 8 Trillion. Real GDP exceeds total planned expenditures.

An increase in the U.S. Price level can be cause by all of the following except.

Worsening economic conditions in Asia.

If economic growth caused the long-run aggregate supply curve to shift rightward over time, but the aggregate demand curve does not change, we expect

The long-run equilibrium price to decline, and there will be a secular deflation.

Secular deflation

is a persistent decline in prices resulting from economic growth in the presence of stable aggregate demand.

A persistent decline in the price level due to economic growth with stable aggregate demand is

Secular deflation.

In the long run, persistent deflation in a growing economy can occur if

Increases in the LRAS are proportionately larger than the increases in AD.

An increase in the LRAS curve that is larger proportionately than in increase in the AD curve will lead to

A decrease in the price level and an increase in output.

Inflation can be cause by

A decrease in the Long-run aggregate supply curve or increase in the aggregate demand curve.

Consider this statement: "persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the long-run aggregate supply curve. " this statement is describing

Demand-side inflation.

Supply-side inflation can be cause by a continual

Decrease in aggregate supply while aggregate demand remains unchanged.

Which of the following factors could cause the economy to experience supply-side inflation?

Government laws which say that the average work week must be reduced by one hour every year.

Within the arctic circle lies the underutilized and untapped resource endowments. Some economists believe that unfreezing these resources

will increase aggregate supply.

Economists think that if underutilized and untapped resource endowments near and within the arctic circle can be brought into broader use, it will generate

Speedier rightward shifts of the long-run aggregate suppy curve of the united states and other northern nations.

The volume of the untapped endowment of arctic oil is thought to be

sufficiently large enough to provide the entire worlds requirements for about half a year.

Suppose the economy’s initial equilibrium is represented by the intersection of LRAS1 and AD1. Suppose there is a persistent reduction in labor force participation.

Movement from A to C

From the list below, match the letter of the outcome each of the following events produces upon the LRAS curve.

Last year, businesses invested in new capital equipment, so this year the nations capital stock is higher than it was last year.

There has been an 8 percent increase in the quantity of money in circulation that has shifted the AD curve.

A hurricane of unprecedented strength has damaged oil rigs, factories, and ports all along the nations coast.

inflation has occurred during the past year as a result of rightward shifts of the AD curve.

-Shifts to right -Movement up along. -Shifts to left. -Movement up along.

Initially, an economy has a maximum real GDP of 5 trillion.

Draw the long-run aggregate supply curve.

draw the new long-run aggregate supply curve for an increase in labor productivity.

Which of the following is a correct implantation for why the aggregate demand curve sloes downward?

As the price level decreases, the real value of cash balances increases, and total expenditures rise.

The graph shows the aggregate demand curve in a representative economy.

Suppose that there is a decrease in taxes. Draw the new AD curve.

LRAS curve remains fixed while its long-run equilibrium price level decreases, it must be the case that aggregate demand has ________

increased.

An increase in AD occurs when, at any given price level, planned expenditures ____

rise.

An increase in the quantity of money in circulation as well as rise in real incomes of countries that are the nations key trading partners will cause AD to

increase.

AD will also rise if domestic residents have lower disposable incomes, as they do after a rise in _____

taxes

Given a fixed LRAS curve.

Long-run equilibrium price level will increase if

An increase in quantity of money in circulation, A decrease in taxes, A rise in real incomes of countries that are key trading partners of this nation. The below factors effect the LRAS: Increased long-run economic growth. An increase in the labor force participation rate.

Assume that the AD has not changed, but the long-run equilibrium price level has risen.

A decrease in labor productivity A decrease in capital stock The depletion of existing mineral resources used to produce various goods.

For each event below, suppose that the economy beings at the long…

Significant productivity improvements occur, and the quantity of money in circulation decreases.

No new investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government enacts a large tax decrease for the nations house holds

More efficient techniques for producing goods and services. At the same time the government increases its spending on gods and services.

E,D,B

Initially, an economy is in long-run equilibrium with a real GDP of $4 trillion.

Suppose productive increased 50%

The situation shown above is called

secular deflation.

Initially, an economy is in long-run equilibrium with a real GDP of $4 trillion.

Suppose people desire to purchase more goods and services, but there is no change in the productive capacity of the economy.

The situation shown above can be described as

Demand-side inflation.

In the figure at right, a movement from point B to point C could be explained by

increased government spending.

If consumers confidence In the economy rises

Aggregate demand will shift rightward and the price level will rise.

According to the real-balance effect, an increase in the price level will

Decrease total planned real expenditures as a result of decrease in the real value of money balances.

If the dollar appreciates and foreign goods become less expensive, the total planned expenditures on domestic goods and services will

Fall due to the open economy effect.

Demand-side inflation occurs when

Increases in aggregate demand are not matched by increases in aggregate supply.

A reduction the amount of oil will tend to cause which of the following?

A reduction in output and an increase in the price level.

For supply-side inflation to occur in the long run,

The long-run aggregate supply curve has to shift to the left.

What will be the result in a growing economy if increases in aggregate demand outpace rightward shifts of the long-run aggregate supply curve?

Inflation accompanied by increases in real GDP.

Long-Run Aggregate supply curve:

Wages, Prices, and factors of production can change EX. Contracts expire Full-employment REAL GDP.

Real Wage=

Nominal Wage/ Price level

Suppose the price level goes up by 5%. what happens?

overtime nominal wages will go up with no ultimate change in the real wage. No change in labor. No change in output.

What happens when the price level rises.

The AD curve is downward-sloping

The Real-balances effect. -Money in pocket, bank account. ex.-less spending. The interest rate effect. -Might have to barrow money. Raised rates. Investment spending will fall. the open economy effect. -If prices go up then goods produced in other countries become more affordable. People will buy more goods from other countries. Total demand for the us goods and services will go down.

Which of the following would cause a decrease in long-run aggregate supply?

A decrease in the labor force.

Suppose that the nations long run aggregate supply had not changed but its long run equilibrium price level has decreased.

A decrease in QTY of money in circulation An increase in the labor force. A fall in real incomes of countries.

Assume that the economy is in long-run equilibrium with complete information and that input prices adjust rapidly to change s in the prices of goods and services.

If there is a sudden rise in the price level induced by an increase in aggregate demand. Real GDP will

NOT CHANGE

Consider the accompanying diagram when answering the questions that follow.

Suppose that the current price level is P 3. In this case, the price will rise toward P1 because.

Firms would stand ready to offer fewer services than people with to purchase. Actual real GDP would be less that total planned real expenditures. Inventories of unsold goods would bein to be depleted.

Significant productivity improvements occur, and the quantity of money in circulation increases

No new capital investment takes place, and a fraction of the exciting capital stock depreciates and becomes unusable. At the same time. the government imposes a large tax increase on the nations households

More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.

B,C,E

Initially, an economy is in long-run equilibrium with a real GDP of…

suppose that increases in marginal tax rates on wages reduce the supply of labor.

Whenever the general level of prices rises because of continual increase in aggregate demand, we say that the economy is experiencing

Demand-side inflation.

Suppose the economy’s initial equilibrium is represented by the intersection…

Movement from A to C

What pattern would you observe in an economy in which aggregate demand in increasing but in which long-run aggregate supply remained the same?

Inflation accompanied by no change in real GDP.

Ch11. Since investment is inversely related to the rate of interest, the former will obviously

decrease.

Ch11. Because investment is the process by which physical capital is put into place for furture production, a lower-than-otherwise level of investment implies a lower-than otherwise level of future equilibrium real GDP.

Lower-than-otherwise.

Ch11. Regarding the economy’s current equilibrium real GDP, it must be noted that in the classical model this variable is determined exclusively by

supply.

Ch11. Since the economy’s current real GDP is unaffected by the decision of the country’s residents to seek to decrease their saving, it must be true, all else constant, that the current level of employment is

also unaffected.

Ch11. Consider a country whose economic structure matches the assumptions of the classical model.

After reading a recent best-seller documenting a growing population of low-income elderly people who were ill- prepared for retirement, most residents of this country decide to increase their saving at any given interest rate.

The current equilibrium interest rate will

Current equilibrium real GDP

Current equilibrium employment

Current equilibrium investment

Future equilibrium real GDP

Decrease No effect No effect Increase Increase

Ch11. is a dictum of economist J.B. say that supply creates its own demand. Producing goods and services generates the means and willingness to purchase other goods and services.

Say’s Law

Ch11. Refers to reacting to changes in money prices rather than relative prices. If a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion.

Money illusion.

Ch11. The model of a long run equilibrium

is the same as the classical model

Ch11. One of the main conclusions of says law was that

If people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

Ch11. States that if something of value is created it will in turn generate an equal amount of income that will be spent ( demand) on other goods and services.

Say’s Law

Ch11. Which of the following best exemplifies say’s law

The production of a $4000 plasma TV set creates demand for other goods and services valued at $4000.

Ch11. Say’s law fits best in the _________ since this philosophy placed great importance on ________________ to determine the _________

Classical theory, aggregate supply, level of output.

Ch11. Consider the assumption of the classical model.

Draw the long-run aggregate supply curve such that real GDP is $10 trillion.

Draw the aggregate demand curve. Properly label your line.

Suppose that aggregate demand were to increase due to a weaker dollar. which of the following would be the result?

Inflation only.

The Classical model has a __________. Therefor any change in the aggregate demand (AD) curve will only result in a change in the price level.

Vertical aggregate supply curve.

Ch11. Indicate the amount of unemployment as the surplus in the labor market.

Suppose that an economy begins in equilibrium at E1 as depicted in the graph to the right.

Draw a new aggregate demand curve reflecting an increase in the amount of money in circulation.

During the paid adjustment period, the economy will immediately tend toward a price level that remains constant and a level of real GDP that increases before quickly returning to full employment.

Now that the macro economy is in a disequilibrium what happens in the labor market?

As the wage increase, the

Ch11.

unemployment decreases, which increases wages. Quantity demanded of labor decreases, while the law of supply increase the number of workers seeking jobs.

Ch11. The extent of which real GDP responds to changes in the price level along the short-run aggregate supply curve is largely determined by

the speed with which input pries adjust and people become more fully informed. the ability of firms to use existing workers and capital more intensively. the ability of firms to hire additional inputs, particularly workers.

Ch11. Is the horizontal portion of the aggregate supply curve in which there is excessive unemployment and unused capacity in the economy.

Keynesian short-run aggregate supply curve.

Ch11. Which of the followings is a possible explanation for sticky prices?

Labor contracts cause wages to be fixed over the contract period.

Ch11. The Keynesian model of the macroeconomy argues that prices are sticky due to labor contracts and unions.

The existence of sticky prices cause the ____ to be horizontal.

Suppose that the aggregate demand changes due to
an decrease in the amount of money in circulation.

Draw the new AD curve.

Short-run aggregate supply.

Ch11. The Keynesian model argues that prices are sticky. One reason supporting this argument is that

Nominal wages are inflexible downwards.

Ch11. Labor contracts

Prevent nominal wages from falling.

Ch11. Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to

Reduce their workforce.

Ch11. Thus, according to the Keynesian model full employment is

possible but not guaranteed.

Ch11. An important difference between the classical model and the Keynesian model is that the

Keynesians believe that the aggregate supply curve is ________.

The classical model assumes prices ____ so that the aggregate supply curve is _______ and the economy is always _______

The Keynesian model indicates that the economy will find an equilibrium however the economy will not always _________.

Horizontal in the short run. Are flexible, vertical, at full employment Reach full employment.

Ch11. What did Keynes mean when he said that prices are sticky?

Prices, especially the price of labor, are inflexible downward. Prices are inflexible sine the firms costs are inflexible too. If input costs are difficult to decrease, it implies that the prices firms charge for their products are unlikely to decrease too.

Ch11. If the prices were sticky, according to Keynes, this would then imply that the

Short-run aggregate supply is horizontal.

Ch11. An important difference between the classical model and the Keynesian model is that..

Prices adjust to bring equilibrium in the classic model and output adjusts to bring about an equilibrium in the Keynesian model.

Ch11. The Keynesian model was supported empirically by data from the decade of the

1930’s. depicted as the era of the great depression. This is when Keynes developed his model in hopes of proving macroeconomic tools for governments to correct the economy.

Ch11. The modern Keynesian short-run aggregate supply curve is best described by which of the following statements?

It is very flat at low levels of real GDP, increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.

Ch11. Short-run Aggregate supply curve

is the relationship between total planned economy wide production and the price level in the short run, all other things held constant. If prices adjust incompletely in the short run, the curve is positively sloped.

Ch11. Suppose that the macroeconomy is depicted by the table below.

Ch11. The macroeconmy is depicted by the graph to the right.

Suppose the AD has changed due to reduced taxes.
The new short-run equilibrium price level had and the real GDP has _____

Thus, in the short run it is ____ to produce beyond the full employment level of real GDP

The cost of producing beyond the full employment level of real GDP is ______

Increased, Increased. Possible. A higher price level. The price level and real GDP move in the same direction as aggregate demand.

Ch11. In the modern Keynesian model the short-run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on the capital input?

Existing machinery can be used longer hours.

Ch11. In the modern Keynesian model the short run aggregate curve slopes upward. This model explains the reason behind the upward sloping SRAS curve by

One can explain the shape of the upward sloping short run aggregate supply curve by only focusing on the capital input by..

One can explain the shape of the upward sloping short run aggregate supply curve by only focusing on profit by holding the nominal wage constant and therefore increasing the profit margin as the product price rises.

-Increasing worker effort, -Increasing the amount of time present workers work ( either hours or days) -Switching workers from "uncounted production" to counted production. Uncounted production pertains to work carried out that does not directly produce output for the market. ———————————- -Using capital more intensively ( more hours per day). -By having the machines operate at a faster rate. -by delaying maintenance.

Ch11. How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on profits?

Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.

Ch11. The modern Keynesian model assumes that

prices respond to changes in aggregate demand but not fully.

Ch11. since modern Keynesian model allows for price response, the aggregate supply curve

is upward sloping.

Ch11. The macroeconmy is depicted by the graph to the right.

The eq. price level and out put is 80,12 trillion.

The full employment level of GDP is $12 trillion since the LRAS is defined at this point.

Ch11. In the modern Keynesian model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only address labor input?

Which of the following is the best example of uncounted production?

The workers are switched from uncounted production to counted production, thus enabling the firm to expand output as the price level expands. An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine parts.

Ch11. The long-run aggregate supply curve will not shift if there is a change in

The price level.

Ch11. All of the following will shift the short-run aggregate supply and the long-run aggregate supply except for

A temporary change in input prices.

Ch11. Complete the following diagram.

Draw a long-run aggregate supply curve for any value of GDP greater than 2 trillion.

Draw a short-run aggregate supply curve label.

Which of the following factors will shift the short-run aggregate supply curve but not the long run AS.

If petroleum prices increase temporarily the _______ curve would shift to the _____

An economy wide increase in wages. Short-run aggregate supply curve, Left

Ch11. Suppose that the rental rate of machinery increased temporarily. The result of this would be best described by

what if it decrease?

A decrease in the short run aggregate supply curve. An increase.

Ch11. The economy is depicted in the graph to the right.

Suppose, there is an increase in the supply of labor. which of the following best describes the result of this event?

Both the short-run and long-run aggregate supply curves shift outward.

Ch11. Which of the following will increase both the short-run and long-run aggregate supply curves?

Younger workers in the labor force receive better and more training than their predecessors.

Ch11. Which of the following is true concerning shifts of the long-run aggregate supply curve?

An increase in the long-run aggregate supply curve is depicted as rightward shifts and an increase in real GDP.

Ch11. Suppose that there is a temporary, but significant, increase in oil prices in the economy depicted in the figure to the right.

Draw the impact of the elevated oil prices.

If the central bank wishes to prevent the equilibrium real GDP from changing in response to the oil price increase, it should

Increase the quantity of money in circulation in order to shift aggregate demand rightward.

Ch11. Between early 2005 and late 2007, total planned expenditures by U.S households substantially increase in response to an increase in the quantity of money in circulation. From a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were.

The resulting spending gap between early 2005 and 2007 in response to the increases.

An increase in the price level along with an increase in equilibrium real GDP. An inflationary gap.

Ch11. Suppose that an economy beings at the short-run equilibrium shown as point A in the figure to the right.

Few workers in this nations economy are union members. unions had large wage givebacks. economic conditions improved abroad, real GDP raised.

Hurricane caused short term halts in production and created bottlenecks in production. At the same time, the nations banks significantly pushed up the rate of growth of the nations money supply.

A strengthening of the value of this nation’s currency in terms of other countries currencies affects both SRAS curve and the AD curve.

A weakening of the value of this nations currency occurs.

Unions successfully negotiated wage boosts, economic conditions worsen abroad and deposable income in other nations.

A run of good weather led to great crop harvests.

D,B,C,B, E,C

Ch11. Suppose that the economy is depicted in the graph to the right.

The equilibrium price level and real GDP in this economy are 80;10 trillion

Draw a AD line that leads to recessionary gap.

Ch11. Show a change in AD that leads to an inflationary gap

Ch11. An economy is currently in a long run equilibrium where SRAS = LRAS = AD. Suppose that there is an increase in the money supply, which of the following is the best explanation of the outcome.

Aggregate demand increases

Ch11. Given that the economy is currently in a long run equilibrium where SRAS = LRAS = AD there is an increase in the money supply the economy would then experience.

An inflationary gap.

Ch11. Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If there is decreased security about jobs and future income, which of the following is the best description of the outcome in the economy?

Aggregate demand decrease.

Ch11. Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that there is decreased security about jobs and future income, the new short run position of the economy finds itself in is termed.

a recessionary gap.

Ch11. Suppose that the economy is depicted in the graph to the right.

Show demand-pull inflation by correctly shifting AD.

Ch11. Show an economy experiencing cost-push inflation.

Ch11. Inflation in an economy implies that

The average price level has increased over a state period of time.

Ch11. Cost-push inflation arises due to

a decrease in the short run aggregate supply curve.

Ch11. Which of the following would create cost-push inflation.

an increase in wages paid to workers.

Ch11. Demand pull inflation arises due to

A depreciation of the US $ this causes the AD curve to increase and create a demand pull inflation.

Ch11.Which of the following would create demand-pull inflation?

an increase in household income.

Ch11. Persistent inflation arises due to

the AD curve increasing by a larger portion that the long run supply curve.

Ch11. Which of the following statements best characterizes demand-pull and cost-push inflation?

both are short run types of inflation.

Ch11. Suppose that the value of the US dollar yesterday was $1 = 4 yen. Today the exchange rate changed such that the $1 = 3 yen. Given that the US dollar has depreciated, the aggregate demand in the united states should

shift to the right. The Short run supply curve shifts to the left.

Suppose that the US dollar was $1 = 4 euros. Today the exchange rate is $1 = 3 euros

The US dollar depreciated.

A depreciation of the U.S dollar should be result in

a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short run aggregate supply.

$1 = 4 pesos now its worth 6 pesos.
Given that the US $ has appreciated, the aggregate demand in the united states should

AD shifts to the left Short-run supply shifts to the right.

$1 = 4 euros now its worth 5

An appreciation of the US $ result in

US $ appreciated. A lower price level but the impact on the level of real GDP depends on the magnitude of the shifts in the AD and short run supply curves

The current state of the US domestic economy is depicted in the graph.

Draw a new aggregate demand curve.

Draw a new SRAS curve.

Suppose that the curves shifted in the opposite direction. The price level decrease and real GDP remains at the original level.

Suppose the short-run supply curve shifts by more than the aggregate demand curve. In this case, the result would be that

The price level decreases and real GDP increases.

Suppose that foreign currencies depreciate relative to the dollar.

Suppose that the curves shifted in the same proportions. The price level decreases and real GDP remains at the origin.

During the summer of 2011, the stock market took a beating as the average value of shares traded in the U.S. stock market dropped by more than 15 percent. In response, total planned expenditures began to decline at any given price level because.

The stock market shock created a negative aggregate demand shock.

Leftward movement along the short-run aggregate supply curve was caused when

Aggregate demand shifted to the left.

In this most recent case of finical shocks during the summer of 2011, aggregate demand declined generating a leftward movement along the short-run aggregate supply curve, thus creating…

a recessionary gap.

The classical model assumes that wages and prices

Are always completely flexible

In the classical model, a decrease in aggregate demand will result in

A decrease in the price level and no change in output.

Which of the following might also yield the outcome shown by the diagram?

I considering the forces which may increase an economy’s real GDP in the long run, which of the following will not play a role?

A and B Lower wages for labor.

In modern Keynesian analysis, an increase in aggregate demand will result in

an increase in both price level and output.

Suppose that there is an increase in real interest rates.

Determine the most likely short-run effect on this nations economy if there is a significant downturn in economic activity.

Deflation and a lower real GDP

Determine the most likely short-run effect on this nations economy if there is a significant raw material price inflation in other nations around the world.

Suppose that the dollar becomes weaker in foreign exchange markets. Consider the two effects of a weaker dollar.

Due to the weakening of the dollar the price level _____ and real GDP ____.

will increase, may increase or decrease depending on the size of the shifts.

Consider a country whose economic structure matches the assumptions of the classical model.

Suppose that businesses in this nation suddenly anticipate lower future profitability from investments they undertake today.

The current EQ interest rate will – D Current EQ real GDP will – N Current EQ employment will – N Current EQ saving- D Future EQ real GDP will – D

Suppose that there is an improvement in technology.

Suppose that AD has changed due to higher taxes

New short run EQ has decreased and real GDP has decreased. thus it is in the short run possible to produce below the full employment level. The cost is higher unemployment.

Suppose that this economy is known to be operating below full employment.

In this model, a change in AD will

Change real GDP but not the price level.

According to the figure at right, an increase in aggregate demand between real GDP levels Y and Y 1

would most likely result in some inflation.

In the classical model, a decrease in AD will result in

a decrease in the price level and no change in output.

Demand-pull inflation arises due to

an increase in household income

which of the following would create demand-pull inflation?

an increase in household income.

suppose that the value of the US dollar depreciated.

AD will
the Short run supply will

Shift to the right Shift to the left.

In the figure at right, the inflationary gap can correctly e identified as

The difference between 12.2 trillion and 12 trillion.

The gap that exists when equilibrium real gross domestic product is greater than full employment

RGDP>Full employment.

Inflationary gap.

Suppose that there is an increase in oil prices.

A leftward shift of the SRAS and a cost push inflation.

Ch.13

Fiscal Policy

The discretionary changing of government expenditures or taxes in order to achieve national economic goals, such as: • High employment (low unemployment) • Price stability • Economic growth

Ch.13

An increase in government spending will

Stimulate economic activity.

Ch.13

Changes in government spending

– Military spending – Education spending – Budgets for government agencies

Ch.13

A rise in taxes

causes a reduction in aggregate demand because it can reduce consumption spending, investment expenditures, and net exports

Ch.13

Crowding-out effect

– The tendency of expansionary fiscal policy to cause a decrease in pl anned investment or planned consumption in the private sector – This decrease normally results from the rise of interest rates

Ch.13

Ricardian Equivalence Theorem

The proposition that an increase in the government budget deficit has no effect on aggregate demand – Reason: people anticipate that a larger deficit today will mean higher taxes in the future and adjust their spending accordingly

Ch.13

Direct Expenditure Offsets

Actions on the part of the private sector in spending income that offset government fiscal policy actions – Any increase in government spending in an area that competes with the private sector will have some direct expenditure offset

Ch.13

Recognition Time Lag

The time required to gather information about the current state of the economy

Ch.13

Action Time Lag

The time required between recognizing an economic problem and putting policy into effect – Particularly long for fiscal policy which requires congressional approva

Ch.13

Effect Time Lag

The time it takes for a fiscal policy to affect the economy

Ch.13

Fiscal policy time lags are

Long – a policy designed to correct a recession may not produce results until the economy is experiencing inflation – Variable in length – they can be from 1-3 years, and the timing of the desired effect cannot be predicted • Because fiscal policy time lags tend to be variable , policymakers have a difficult time fine-tuning the econom

Ch.13

Automatic
or
Built-In Stabilizers

– Changes in government spending and taxation that occur automatically without deliberate action of Congress • The tax system • Unemployment compensation • Welfare spending

Ch.13

Suppose that congress and the president decide that economic performance is weakening and that the government should" do something" about the situation. They make no tax changes but do enact new laws increasing government spending on variety of programs.

Prior to the congressional and presidential actions, careful studies by government economists indicated that the direct effect of a rise in government expenditures on equilibrium real GPD Is equal to 6. In the 12 months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. This could have happened because of all the following except.

A supply-side effect.

Ch.13
Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy actions, nor have there been any other events of significance. Nevertheless, by the end of the second year, real GDP has returned to its original level, and the price level has increase sharply. This possibly happened because.

The LRAS was vertical; the increase in government spending raised aggregate demand and resulted in only a rise in the price level in the long run.

Ch.13
Fiscal Policy

The discretionary changing of government expenditures or taxes to achieve national economic goals, such as high employment with price stability.

Ch.13
Tax increase

Tax cut

Lowers prices. lowers demand Increases prices. increases demand.

Ch.13

Gov’t Spending multiplier = 1/MPS

Government spending = Real GDP/Gov’t spending Multiplier.

1/0.20 = 5 1/5 = 0.20 trillion

Ch.13

When an economist is using the term "discretionary" as in discretionary spending, they are referring to the

Amount of government spending decided upon by congress or the government’s ruling body.

Ch.13

Fiscal policy refers to

Discretionary changes in government spending and taxes.

Ch.13

Suppose that the economy is shown to the right.

This economy is currently experiencing

A recessionary gap Since the short-run EQ is to the left of the LRAS curve.

Ch.13

Using the line drawing tool, draw and label the fiscal policy correction that will bring the economy to full employment.

Ch.13

Suppose that the econmy is shown to the right.

This economy is currently experiencing

an inflationary gap. the fiscal policy correction is labeled D1

Ch.13

You are a member of congress. The economy is currently experiencing an inflationary gap. Which of the following are fiscal policies that congress can enact in an attempt to correct the economy?

What will happen in a recessionary gap?

A decrease in government spending and an increase in taxes. An increase in government spending and a decrease in taxes.

Ch.13

The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business. This is an example of

Direct expenditures to a fiscal policy action.

Ch.13

The government reduces its taxes without decreasing its expenditures; to cover the resulting budget deficit, it issues more bonds, thereby pushing up the market interest rate and discouraging private planned investment spending. This is an example of

Indirect crowing out from a fiscal policy action.

Government expenditures fund construction of high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building. This is an example of

direct expenditure offsets to a fiscal policy action.

A recession occurs, and government-funded unemployment compensation is paid to laid off workers. This is an example of

An automatic fiscal stabilizer

Congress votes to fun a new jobs program designed to put unemployed workers to work. This is an example of

a discretionary fiscal policy.

The federal reserve decides to reduce the quantity of money in circulation in an effort to slow inflation. This is an example of

Monetary policy

Under powers authorized by an act of congress. the president decides to authorize an emergency release of funds for spending programs intended head off economic crises. This is an example of

a discretionary fiscal policy.

Currently, a governments budget is balanced. The marginal propensity to consume is 0.75. The government has determined that each additional $10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by .20 percent. it has also determined that every 0.10(on tenth) percentage change in the market interest rate generates a change in planned investment expenditures equal to $1 billion. finally, the government knows that to close a recessionary gap and take into account the resulting change in the price level, it must generate a net rightward shift in the aggregate demand curve equal to $250 billion

My way to solve =

.20% multiplied by 1 billion expenditure $= .20(mx)
MPC = Marginal propensity to consume = 0.75 (MPC)

1 – 0.20- =.80 (1-mx)
1- .75 = .25 (1-MPC)

.80
______ = 3.2 which is the net multiplier
0.25

250/3.2 = 78.125 or 78.13

another example:

.20 x 4 billion EX $ = .80

MPC= 0.80

1 – .80 = .20
1- .80 = .20

.20/.20 = 1

150/1= 150

Net change in spending of m = 0.20 X = 1 billion. (1-MX) = (1-0.20) = $0.80 We know that the AD curve will shift tot he right by the net change in spending multiplied by the multiple, which = 1/1- mpc (0.25) = 4 therefore , the net increase in AD due to the 1 billion increase in government expenditures is = 1-mx/1-mpx = 3.2 which is the net multiplier. To close the recessionary gap, government spending will have to increase by an amount equal to 250/3.2 = $

If the Ricardian equivalence theorem is not relevant, then an income-tax-rate cut

Will result in a multiple times higher increase in equilibrium real GDP in the short run; however, a tax-rate reduction will reduce the automatic-stabilizer properties of the tax system, so equilibrium real GDP would be less stable.

In may and June of 2008, the federal government issued one time-tax rebates-checks returning a small portion of taxes previously paid – to millions of u.s residents, and u.s real disposable income temporarily jumped by nearly $500 billion.

however, household real consumption spending did not increase in response to the short-lived increase in real disposable income because.

Which of the following economic theories can be used to account for this apparent non-relationship between real consumption and real disposable income in the late spring of 2008?

The one-time tax rebate failed to increase the recipients permanent income which determines an individuals current consumption. The permanent income hypothesis.

Expansionary fiscal policy that creates a budget deficit can lead to crowding out. This crowding out effect is exhibited by

Increased government expenditures and decreased investment.

Increased government spending crowds out investment due to

higher interest rates.

Currently the government has a balance budget. It decided to follow an expansionary fiscal policy of reducing taxes by $100 billion. Which of the following statements bests describes the Ricardian equivalence Theorem under these conditions?

The ricardian equivalence theorem implies that expansionary fiscal policy that creates a budget deficit will result in

Households save more than anticipated. No changes in aggregate demand.

The US government decides to follow expansionary fiscal policy. Congress is meeting in late session on the last day before it breaks for vacation. One of the representatives makes a statement. "it does not matter what we spend the money on, let’s just pass the bill and go home".

Evaluate the accuracy of the representatives belief by choosing either the correct affirmation or rebuttal below.

In the extreme case of direct expenditure offsets the

It does matter what the government decides to purchase with the additional spending. Increase in government expenditures are matched by a decrease in consumption.

The laffer curve indicates

An inverse relationship between tax rates and tax revenues. a positive relationship between tax rates and tax revenues.

According to the supply side economists a(n) decrease in marginal tax rates will

same for increase.

Either increase or decrease the amount of leisure time chosen by workers.

When there is an economic downturn, congress and the president use fiscal policy to stabilize real GDP. But the conduct of the fiscal policy involves several time lags such as the recognition time lag that causes a delay in identification of the economic problem, the action time lag that is cause by the delay in congressional approval of the policy and the effect time lag that arises because policy actions take time to exert their full effect on the economy. These time lags could actually cause discretionary fiscal policy to

Destabilize real GDP because by the time a policy has begun to have its effects, the economy might already be recovering and the policy action might push real GDP up faster than intended, thereby making real GDP less stable.

There are several time lags involved when fiscal policy is applied. The first hurdle faced by a government is

Recognizing that the economy is facing a problem that could be solved by applying fiscal policy.

Which of the following statements is correct?

Governments have a difficult time fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable.

Given the existence of time lags, there is potential danger in using fiscal policy. Which of the following outcomes could occur because of the existence of such time lags?

-governments may undershoot the necessary change to gov spending or taxes to reach full GDP because they are uncertain what other factors may impact the economy. -governments ma overshoot the full employment real GDP as the economy has improved by the time the policy takes effect. -subsequent changes in the economy have caused the government to change its fiscal policy making it less consistent and the government less trustworthy.

The government just passed a new tax bill that will be applied to the economy next year. Most people will not immediately feel the impact of this new tax bill and not adjust their W-2 tax forms. The impact of the new tax bill wont become apparent to them until the following April when their tax bills are due . This problem is referred to as the.

Effect time lag, and it makes it difficult to use discretionary fiscal policy to close a recessionary gap.

The congressional meetings, discussions, arguments, debates over fiscal policy and the subsequent signing of vetoing by the president of a bill are part of the

Action time lag.

Which of the following statements is true when considering time lags?

Time lags in fiscal policy can be extremely long and may take several years before an impact is felt.

How do automatic stabilizers work?

When a decline in national income occurs there will be a reduction in income tax collections and an increase in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted. increases government aid through welfare and unemployment compensations.

Suppose that the economy is presently operating at full employment. If there is a decrease in national income, which of the following will occur automatically?

A decrease in tax revenues.

Automatic stabilizers

Cause changes in the economy without the action of congress and the president.

The purpose of automatic stabilizers is to

Lessen the impact of unemployment in a recession and slowdown inflation during an expansion.

Which of the following is not an automatic stabilizer

Defense spending.

A progressive tax system s one in which the tax rates

Increase as income increases.

Fiscal policy is likely to be more effective

When the government borrowing does not increase interest rates substantially. when there are less offsetting reductions in private sector spending during abnormal times as opposed to more normal times.

During normal times, fiscal policy probably achieves most of its impact through

The workings of automatic stabilizers

Fiscal policy is likely to be least effective

during normal economic times.

One of the advantages of fiscal policy is that it

Generates a psyche of safety for consumers and investors because they know the government has the ability to use it.

The equilibrium real GDP is $13.00 trillion and full-employment EQ (FE) is 16.00 trillion. The marginal propensity is 0.30. Answer the questions using the data in the following graph.

a. Marginal propensity to consume: 1 – Marginal Propensity to save (MPS) since MPC + MPS = 1 MPC = 1- 0.30 = 0.70 Real GDP x MPS x 1000 = 3 x 0.30 x 1000 = 900 billion (calculated investment and spending increased) In order to convert the change in taxes from trillions of dollars to Billions of dollars, we need to multiply the expression by 1000. thus Real GDP x MPS ____________ x 1000 MPC = 3.00 x 0.30 ____________ x 1000 0.70 =$ 2396.71

Assume that MPC = 0.60, consider the following

a. If government expenditures rise by 1 billion, calculate by how much the aggregate expenditure curve will shift upward.

a. When government expenditures increases by 1 billion, the Aggregate expenditure or AE curve will shift up by an equal amount. AE1 = C + I + G1 AE2 = C+I+G2. The increase in AE2 -AE 1 = G2 – G1. The *****curve will shift upward by 1 billion.****** b. When taxes are raised by 1 billion, the aggregate expenditure or AE curve will shift downward by an amount that is equal to the initial increase in taxes time the MPC. AE = C + I + G = A + MPC ( Y – T) + I + G in other words ********MPC x Change in taxes = 0.60 x 1 = 0.6 ********

Assume that MPX = 0.75, when answering the following questions.

Calculate by how much the aggregate expenditure curve will shift.

calculate the increase in EQ level of real GDP.

a. Suppose the government raises both taxes and government expenditures by 3 billion, calculate by how much the aggregate expenditure curve will shift. (1-0.75) x 3 =$ 0.75 billion b. By the same about… Increases in real GDP = Increase in government spending or increase in taxes = $ 3 billion. ****************

Suppose the government increases both taxes and government spending by the same amount, creating a balanced budget multiplier. If MPC increases, then

The value of the balanced-budget multiplier will not change.

When considering a change in government spending in the traditional Keynesian model, which of the following expenditures is considered an offset to government spending?

None of these above are considered offsets. Taxes would be the off set!!!

When government spending increase, the change in total expenditures.

when government spending decreases

Increased by more than the change in government spending. It decreases by more than the change in government spending.

The economy is depicted by the expenditures function as shown.

Suppose that the government decided to increase government spending by $4 trillion

Suppose that the government decided to decrease government spending by $2 trillion

Show the new equilibrium level of real GDP

The value of the autonomous spending multiplier is planned expenditures 16-4 _______________ = ________ = 0.50 real GDP 24-0 1 1 _______ = ____ = 2. (1 – 0.50 ) 0.50 Y = multiplier x G therefor the EQ GDP is $4 trillion

The economy is depicted by the expenditures function as shown.

Suppose that the government decided to decrease government spending by $2 trillion.

Draw the new expenditure line after the decrease.

Label the new EQ level of real GDP

what is the autonomies spending multiplier

4

Suppose that the economy Is depicted by the following relationship:

C= $100 + .90(Y – T)

G= $600

T = $600

I = $200

X= $250

Suppose that the government decides to increase government spending by $100 what is the new EQ of GDP income?

Expenditures = C + I + G + X Solve for Y Y = C + I + G + X Y= 100 + .90(Y – 600) + 200 + 600 + 250 Y=1150 + 0.90(Y)- – (0.90)(600) Y=1150 +0.90(Y) – 540 Y=610 + 0.90(Y) Y= 0.90(Y) = 610 0.10(Y) =610 Y=6100 multiplier is 1/MPS (1- .90 = .10) 1 __ = 10 .10 10 x 610 = 6100 Add $100 to G therefore the new income level is 7,100

Example two of the above problem

C= 100 + .75 ( Y – T) C 100 G 700 T 700 I 100 X 150 ************MY STEPS******************* 100 + 700 + 100 + 150 = 1050 T = 700 x .75 = 525 1050-525 = 525 1 – .75 = .25 1 / .25 =4 525 * 4 = 2100 Real GDP = 2100 Add spending to $100 (G) Real GDP = 2500 Caution! when adding T!

In the Keynesian model the amount of consumption is dependent on

Disposable income.

So any change in the level of taxes leads to

a smaller change in consumption and expenditures compared to the change in taxes.

The economy is depicted by the planned real expenditures function as shown.

Suppose that the government decided to increase current taxes

The economy is depicted by the planned real expenditures function as shown.

Suppose that the government decided to decrease current taxes

The balanced budget multiplier is equal to

1.

Which of the following must be true if the balanced budget multiplier to equal one?

The increases in income stemming from a change in government spending must be greater than the change in income stemming from the change in taxes.

The economy is depicted by the planned real expenditures function as shown.

Suppose that the government decided to increase government spending and taxes by 4 trillion. Mark the new EQ level GDP.

The economy is depicted by the planned real expenditures function as shown.

Suppose that the government decided to decrease government spending and taxes by 4 trillion. Mark the new EQ level GDP.

The assumption that the price level is fixed allows an increase in government spending to

show up exclusively as a rise in real GDP.

An increase in government spending shows up exclusively as a change in real GDP when

The price level is assumed to be constant.

The assumption that the price level is fixed in the Keynesian model allows

The multiplier to be fully applied.

If the price level did not remain constant when the government spending increases then

The change in total expenditures would be less than they would be if the price level remained constant.

Crowding out occurs when

Increases in government spending cause interest rates to rise, reducing investment and consumption.

Suppose that congress enacts a lump-sim tax cut of $750 billion. The marginal propensity to consume is equal to 0.75

If Ricardian equivalence holds true, equilibrium Real GDP will

If Ricardian equivalence holds true, savings will

Remain unchanged. increase by the amount of the tax cut.

Consider the following diagram in which the current short-run equilibrium is at point A.

At point A, the economy has __________

If the marginal propensity to save equals 0.10, calculate the change in government spending that could eliminate the gap. $___ trillion.

A recessionary gap 0.10

Consider the following diagram, in which the current short-run equilibrium is at point A.

At point A, the economy has __________

If the marginal propensity to consume equals 0.8, to eliminate the gap, the government should decrease spending by ___________

an inflationary gap. ******formula** 1-0.8 = 0.20 1/0.2 = 5 inflation gap = 1.6 1.6 ___ = 0.32 trillion 5 0.32 Trillion!

suppose that the economy is shown to the right.

This economy is currently experiencing _______

Draw and label the fiscal policy correction that would bring the economy to full employment GDP.

An inflationary gap

You are a member of congress. The economy is currently experiencing a recessionary gap. which of the following are fiscal policies that Congress can enact in an attempt to correct the economy?

An increase in government spending and decrease in taxes.

Suppose that the economy is in short-run equilibrium but there is a recessionary gap.

Which of the following is an example of discretionary fiscal policy that could be used to return the economy to full-employment real GDP?

An increase in government spending.

In an effort to help rejuvenate the nation’s railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use.

This is an example of _______________.

The government increases it expenditures without raising taxes; to cover the resulting budget deficit, it issues more bonds, thereby pushing up the market interest rate and discouraging private planned investment spending.

This is an example of _________________.

The government finances the construction of a classical music museum that otherwise never would have received private funding. This is an example of ______________.

Direct expenditure offset to. Indirect crowing out from. Neither a direct expenditure nor an indirect crowing out offset to.

The graph below shows the Laffer curve.

ID a tax rate/tax revenue combination such that tax rates can be reduced without reducing tax revenues. Label your new point T1.

In early 2008, it appeared that the U.S economy was either in a recession or growing very slowly. President Bush announced a program of tax rebates. This program can be described as ___________ and was intended to ___________

Discretionary fiscal policy; Increase consumer spending.

Suppose the economy is experiencing a recessionary gap at the current level of GDP.

Which of the following fiscal policy actions would be most appropriate given the recessionary gap.

Decreasing taxes

The proposition that an increase in the federal budget deficit caused entirely by a current tax cut has no effect on aggregate demand is called the

Ricardian equivalence theorem.

The time that elapses between the implementation of a policy and its intended result is referred to as.

the effect time lag

During normal times, discretionary fiscal policy

is probably not very effective in influencing real GDP.

Which of the following defines an effect time lag?

The time that elapses between the implementation of a policy and the results of a policy.

The current situation would be described as a ______________. If the government wished to use discretionary fiscal policy to remedy this problem, it would need to ______ government spending.

Show how the increase in government spending could be used to return the economy to full employment.

A recessionary gap. Increase.

Refer to the figure at right. Suppose the economy is operating at paint A. There is a recessionary gap of ______, which can be closed by ________.

$2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending.

In the long run. Contracts _____

In the short run contracts are ____

Expire. Fixed

LRAS measures

Full employment Real GDP. producing at our limit. Determined by our endowment of resources. Changes in the price level have no affect on AS. Vertical line.

Real wage = Nominal Wage/ Price Level.

nominal wage = 100/price level 10 = 10. what if it goes up by 5%? over time nominal wage will go up by 5 % . No change in the real wage. employers will not change the number of workers. no impact on labor. no change in output in the long run.

ECONOMIMC GROWTH IS SHOWN BY _____.

RIGHTWATD SHIFT OF THE LRAS CURVE.

The AD curve is downward-sloping.

-The real-balances effect – P goes up. Decline in consumer spending. -The interest rate effect- As prices go up then we barrow more money to purchase. banks raise interest rates. reduces investment spending. -the open economy effect. if prices go up goods produced in other countries become cheaper. total demand for us goods and services will go down.

Shift in the Aggregate demand curve.

*The supply of money. *Confidence *Real interest rates *Taxes-The value of the dollar.

secular means "long term"

…

the aggregate demand curve

shows planned purchase rates of goods and services at various price levels

Which of the following would cause a decrease in aggregate demand

an increase in real interest rates

which of the following si a correct explanation for why the aggregate demand curves slopes downward

as the price level increases, the real value of cash balances decreases, and total expenditures fall.

The primary difference between the aggregate demand curve and an individual demand curve is that

the aggregate demand curve represents total planned expenditures on all goods and services while individual demand curve represents a single good or service

Which of the following would cause an increase in long-run segregate supply

an increase in the labor force

Which of the following is a correct explanation for why the aggregate demand curve slopes downward/

as the price level decreases, the real value of cash balances increases, and total expenditures rise.

In the classical model, an increase in aggregate demand will result in

an increase in the price level and no change in output

demand-pull inflation arises due to

an increase in the money supply

which of the following would create demand-pull inflation

an increase in household income

inflation in an economy implies that

the average price level has increased over a stated period of time

cost-push inflation arises due to

a decrease in the short-run aggregate supply curve

which of the following would create cost-push inflation

an increase in wages paid to workers

since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to

reduce their workforce

the classical model assumes that wages and prices

are always completely flexible

modern Keynesian analysis assumes that the short-run aggregate supply curve is

upward sloping

demand-pull inflation arises due to

a decrease in the real rate of interest

assume that the multiplier in a country is equal to 10 and that autonomous real consumption spending is $5 trillion. If current real GDP is $20 trillion, the current value of real consumption spending is ____ trillion

23

the marginal propensity to consume in an economy is .75. Thus, if the price level is fixed, a $400 increase in investment would be expected to increase real GDP by

now suppose that the economy is known to be at a level of GDP that is above full employment and that the price level is not fixed. If the short-run aggregate supply curve (SRAS) is positively sloped, which of the following is the most likely effect of the increase in investment?

$1600 Aggregate demand will increase, and real GDP will increase by less than $1600 1-.75=.25 400/.25=1600

in economic terminology, personal disposable income, or income after taxes, can be either

consumed or saved

suppose that disposable income increases in an economy. which of the following relationships must always be true

the change in disposable income is equal to the change in saving plus the change in consumption

the marginal propensity to consume is .75…THE MULTIPLIER IS

Suppose that net exports change by 400
The change in real GDP will be

4 1600

if the interest rate increases, which of the following will occur

the quantity of planned investment will decrease

suppose that planned savings is greater than planned investment at the current level of real GDP.
Which of the following will occur?

there will be an unplanned increase in business inventories, and in the next period, real GDP will decrease

All of the following will cause the planned investment function to shift rightward except

and an increase in the interest rate causes

a decrease in the interest rate a decrease in the amount of real planned investment

saving is the portion of

which of the following statements best reflects the relationship between saving and savings?

disposable income that is not consumed Saving is a flow variable; savings is a stock variable

In the Keynesian model equilibrium national income

IF real gap rises above total planned expenditures the economy will see

equals planned consumption, investment, government, and net export expenditures production and employment decreases

planned real investment is determined by the

The amount of planned real investment in the economy has _____ relationship with the rate of interest

rate of interest an inverse

if real GDP falls below total planned expenditures the economy will see

production and employment increases

the marginal propensity to consume in an economy is 0.75. Thus if the price level is fixed, a $300 increase in net exports would be expected to increase real GDP by ____.

Now suppose that the economy is known to be at a level of GDP that is above full employment and that the price level is not fixed. If the short-run aggregate supply curve the following is the most likely effect of the increase in net exports.

$1200 Aggregate demand will increase, and real GDP will increase by less than $1200