During a recession the economy experiences
falling employment and income
Which of the following is correct?
Real GDP is the variable most commonly used to measure short-run economic fluctuations. It is almost impossible to predict these fluctuations with much accuracy.
According to classical macroeconomic theory, changes in the money supply effect
nominal variables, but not real variables
The saying "money is a veil" means that
while nominal variables are the first thing we may observe about an economy, what's important are the real variables and the forces that determine them.
Which of the following is included in the aggregate demand for goods and services?
All of the above are correct.
When the price level falls, the quantity of
consumption goods demanded and the quantity of net exports demanded both rise.
The wealth effect, interest rate effect, and exchange rate effect are all explanations for
The slope of the aggregate demand curve
If the price level falls, the real value of the dollar
rises, so people will want to buy more.
The aggregate quantity of goods and services demanded changes as the price level rises because
real wealth falls, interest rates rise, and the dollar appreciates.
When the price level increases, the real value of people's money holdings
falls, so they buy less.
In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households
increases, and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.
Other things the same, an increase in the price level induces people to hold
more money, so they lend less, and the interest rate rises.
When the price level falls
the interest rate falls, so the quantity of goods and services demanded rises.
In the context of the aggregate demand curve, the interest rate effect refers to the idea that when the price level increases
Households increase their holdings of money; in turn, interest rates increase, which reduces spending on investment goods.
When the dollar depreciates, US
net exports rise, which increases the aggregate quantity of goods and services demanded.
When the dollar appreciates, US
net exports fall, which decreases the aggregate quantity of goods and services demanded.
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire
increased consumption, which shifts the aggregate demand curve to the right.
Suppose a stock market crash makes feel people poorer. This decrease in wealth would induce people to
decrease consumption, which shifts aggregate demand left.
An increase in household saving causes consumption to
fall, and aggregate demand to decrease.
When taxes decrease, consumption
increases as shown by the shift of the aggregate demand curve to the right
When taxes increase, consumption
decreases, as shown by a shift of the aggregate demand curve to the left.
Other things the same, when the government spends more, the initial effect is
aggregate demand shifts right
When the money supply increases
interest rates fall, and so aggregate demand shifts right.
Which of the following shifts aggregate demand to the right?
The fed buys bonds in an open market.
Which of the following would both shift aggregate demand right?
taxes decrease, and government expenditure increases.
If speculators lost confidence in foreign economies and so wanted to buy more US bonds
the dollar would appreciate which would cause aggregate demand to shift left.
If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer US bonds
the dollar would depreciate which would cause aggregate demand to shift right.
The long run aggregate supply curve shifts right if
All of the above
Which of the following shifts long run aggregate supply right?
an increase in either technology or the human capital stock.
Wages tend to be sticky
because of contracts, social norms, and notions of fairness.
The sticky-wage theory of the short run aggregate supply curve says that when the price level is lower than expected
relative to prices wages are higher and employment falls.
People had been expecting the price level to be 120 but it turns out to be 122. In response, Robinson Tire Company increases the number of workers it employs. What could explain this?
both sticky price theory and sticky wage theory
The misperceptions theory of the short run aggregate supply curve says that if the price level is higher than expected, then some firms believe that the relative price of what they produce has
increased, so they increase production
If the price level is higher than expected, firms might raise their production in the short run if
All of the above are correct
Monetary policy and fiscal policy influence
output in the short run only
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 goal of monetary policy and fiscal policy is to
offset shifts in aggregate demand and thereby stabilize the economy
Liquidity preference refers directly to Keyne's theory concerning
the effects of changes in money demand and supply on interest rates.
Liquidity preference theory is most relevant to the
short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
Liquidity refers to
the ease with which an asset is converted into a medium of exchange
People are likely to want to hold more money if the interest rate
decreases, making the opportunity cost of holding money fall.
When households find themselves holding too much money, they respond by
purchasing interest earning financial assets and interest rates fall.
If the Fed increases money supply
the interest rate decreases, which tends to raise stock prices
According to the interest rate effect, an increase in the price level will
increase money demand and interest rates. Investment declines.
if the federal reserve decided to raise interest rates, it could
sell bonds to lower the money supply
if the stock market booms, then
aggregate demand increases, which the fed could offset by decreasing the money supply.
if the stock market crashes, then
aggregate demand decreases, which the fed could offset by purchasing bonds
suppose that the federal reserve is concerned about the effects of falling stock prices on the economy. What could it do?
buy bonds to lower the interest rate
which of the following is an example of an increase in government purchases?
the government builds new roads.
the multiplier effect states that there are additional shifts in aggregate demand from fiscal policy, because it
increases income and thereby increases consumer spending
The government builds a new water treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates
the multiplier effect
the government buys new weapons systems. the manufacturers of weapons pay their employees. the employees spend this money on goods and services. the firms from which the employees buy the goods and services pay their employees. this sequence of events illustrates
the multiplier effect
which of the following correctly explains the crowding out effect?
an increase in government expenditures increases the interest rates and so reduces investment spending.
which of the following is an example of crowding out?
an increase in government spending increases the interest rates, causing investments to fall.
Assume the MPC is 0.72. the multiplier is
3.57
A reduction in personal income taxes increases aggregate demand through
an increase in personal consumption.
if households view a tax cut as temporary, then the tax cut
has less of an affect on aggregate demand than if households view it as permanent.
which of the following are effects of an increase in government spending financed by a tax increase
the tax increase reduces consumption; the change in the interest rate reduces residential construction.
Monetary policy
can be implemented quickly, but most of its impact on aggregate demand occurs months after the policy is implemented.
if businesses and consumers become pessimistic, the federal reserve can attempt to reduce the impact on the price level and real GDP by
increasing the money supply, which lowers interest rates.
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.
Suppose there is an increase in government spending. To stabilize output, the federal reserve would
decrease the money supply
suppose households attempt to increase their money holdings. to stabilize output by countering this increase in money demand, the federal reserve would
increase the money supply
the price of imported oil rises. if the government wanted to stabilize output, which of the following could it do?
increase government expenditures or increase money supply
Critics of stabilization policy argue that
All of the above are correct
Critics of stabilization policy argue that
Policy affects aggregate demand with a lag, and the effects on aggregate demand are long lived.
Critics of stabilization policy argue that
the lag problem ends up being a cause of economic fluctuations
monetary policy affects the economy with a long lag, in part because
changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.
the lag problem associated with fiscal policy is due mostly to
the political system of checks and balances that slows down the process of implementing fiscal policy.
Automatic stabilizers
are changes in taxes or government spending that increase aggregate demand without requiring policy makers to act when the economy goes into recession.
An example of an automatic stabilizer is
unemployment benefits
during periods of expansion, automatic stabilizers cause government expenditures
to fall and taxes to rise
other things the same, during recessions taxes tend to
fall. the fall in taxes stimulates aggregate demand.
in the long run, changes in money supply affect
prices
One determinant of the natural unemployment rate is the
minimum wage rate
In the long run,
inflation depends primarily upon the money supply growth rate
one determinant of the long run average unemployment rate is the
minimum wage, while the inflation rate depends primarily upon the money supply growth rate.
a basis for the slope of the short run Philips curve is that when unemployment is high there are
downward pressures on prices and wages.
the short run relationship between inflation and unemployment is often called
the Philips curve
Economist A.W Philips found a negative correlation between
wage inflation and unemployment
the short run Phillips curve shows the combinations of
unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short run aggregate supply curve.
when aggregate demand shifts right along the short run supply curve, unemployment
falls, so there are upward pressures on wages and prices.