question

The FE line shows the level of output at which the ________ market is in equilibrium.

answer

Labor

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The FE line

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is vertical.

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The FE line is vertical because the level of output at full employment doesn't depend on the

answer

real interest rate.

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Which of the following would shift the FE line to the right?

answer

An increase in labor supply

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Which of the following would shift the FE line to the left?

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A decrease in the capital stock

question

An increase in the money supply would cause the FE line to

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remain unchanged.

question

An increase in investment spending would cause the FE line to

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remain unchanged.

question

An adverse supply shock would cause the FE line to

answer

shift to the left.

question

Describe what happens to the FE line if government purchases increase.

answer

In the classical model of the labor market, the rise in government purchases reduces people's perceived wealth, so they increase their labor supply. The increase in labor supply results in a new labor market equilibrium with increased employment and a lower real wage. The higher level of employment shifts the FE line to the right.

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The IS curve shows the combinations of output and the real interest rate for which

answer

the goods market is in equilibrium.

question

The IS curve

answer

slopes downward.

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Any change that reduces desired saving relative to desired investment (for a given level of output) causes the real interest rate to ________ and shifts the IS curve ________.

answer

increase; up and to the right

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A decline in expected future output would cause the IS curve to

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shift down and to the left.

question

A decrease in the effective tax rate on capital would cause the IS curve to

answer

shift up and to the right.

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An increase in labor supply would cause the IS curve to

answer

remain unchanged.

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An increase in the money supply would cause the IS curve to

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remain unchanged.

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A temporary decline in productivity would cause the IS curve to

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remain unchanged.

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A decrease in wealth would cause the IS curve to

answer

shift down and to the left.

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An increase in the expected future marginal product of capital would cause the IS curve to

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shift up and to the right.

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The IS curve would unambiguously shift up and to the right if there were

answer

an increase in both government purchases and the expected future marginal product of capital.

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Draw a saving-investment diagram to show how each of the following changes shifts the IS curve. (a) Future income rises. (b) The future marginal productivity of capital increases. (c) Government purchases decrease temporarily. (d) The effective corporate tax rate increases.

answer

(a) IS shifts up and to the right. (b) IS shifts up and to the right. (c) IS shifts down and to the left. (d) IS shifts down and to the left.

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A rise in the price of a bond causes the yield of the bond to

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fall

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A decline in the price of a bond causes the yield of the bond to

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rise

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The LM curve

answer

slopes upward.

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Looking only at the asset market, an increase in output would cause

answer

an increase in the real interest rate along the LM curve.

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A change that increases the real money supply relative to real money demand causes

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the LM curve to shift down and to the right.

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A change that increases real money demand relative to the real money supply causes

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the LM curve to shift up and to the left.

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Banks decide to raise the interest rate they pay on checking accounts from 1% to 2%. This action would

answer

increase money demand, shifting the LM curve up and to the left.

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You have just read that the Federal Reserve has increased the money supply to avoid a recession. For a given price level, you would expect the LM curve to

answer

shift down and to the right as the real money supply rises.

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The Fed has announced that it plans to lower the rate of monetary growth from 10% per year to 2% per year. You would expect this announcement to directly

answer

increase money demand, shifting the LM curve up and to the left.

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The probable effect of introducing an increased number of automatic teller machines is to

answer

decrease money demand, shifting the LM curve down and to the right.

question

An increase in wealth that doesn't affect labor supply would cause the IS curve to ________ and the FE line to ________.

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shift up and to the right; be unchanged

question

An increase in the effective tax rate on capital would cause the IS curve to ________ and the LM curve to ________.

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shift down and to the left; be unchanged

question

When all markets in the economy are simultaneously in equilibrium, we say

answer

there is general equilibrium.

question

To reach general equilibrium, the price level adjusts to shift the ________ until it intersects with the ________.

answer

LM curve; FE line and IS curve

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What adjusts to restore general equilibrium after a shock to the economy?

answer

The LM curve

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The IS-LM model predicts that a temporary beneficial supply shock

answer

increases output, national saving, and investment, but not the real interest rate.

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A temporary supply shock, such as a bumper crop, would

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shift the FE line to the right and leave the IS curve unchanged.

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A temporary supply shock, such as an increase in oil prices, would

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have no effect on the IS curve.

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You have just read that Australia has suffered a drought, destroying its wheat crop for this year. The effect of this adverse supply shock on Australia would probably be

answer

an increase in prices and an increase in real interest rates.

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A temporary adverse supply shock directly causes

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a shift to the left of the FE line.

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After a temporary beneficial supply shock hits the economy, general equilibrium is restored by

answer

a shift down and to the right of the LM curve.

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An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?

answer

The IS curve

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Which market adjusts the quickest in response to shocks to the economy?

answer

The asset market

question

A temporary decrease in government purchases causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.

answer

fall; fall

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An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.

answer

fall; rise

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Suppose the intersection of the IS and LM curves is to the left of the FE line. A decrease in the price level would most likely eliminate a disequilibrium among the asset, labor, and goods markets by

answer

shifting the LM curve down and to the right.

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Suppose the intersection of the IS and LM curves is to the left of the FE line. What would most likely eliminate a disequilibrium among the asset, labor, and goods markets?

answer

A fall in the price level, shifting the LM curve down and to the right

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Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labor, and goods markets?

answer

A rise in the price level, shifting the LM curve up and to the left

question

A temporary decrease in government purchases causes the real interest rate to ________ and the price level to ________ in general equilibrium.

answer

fall; fall

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An increase in taxes (when Ricardian equivalence doesn't hold) causes the real interest rate to ________ and the price level to ________ in general equilibrium.

answer

fall; fall

question

For each of the following changes, what happens to the real interest rate and output in the very short run, before the price level has adjusted to restore general equilibrium? (a) Wealth rises. (b) Money supply rises. (c) The future marginal productivity of capital increases. (d) Expected inflation declines. (e) Future income declines.

answer

a) The IS curve shifts up and to the right, so r rises and Y rises. (b) The LM curve shifts down and to the right, so r falls and Y rises. (c) The IS curve shifts up and to the right, so r rises and Y rises. (d) The LM curve shifts up and to the left, so r rises and Y falls. (e) The IS curve shifts down and to the left, so r falls and Y falls.

question

A decrease in money supply causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.

answer

rise; fall

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An increase in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.

answer

remain unchanged; rise

question

A decrease in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.

answer

remain unchanged; fall

question

Classical economists think general equilibrium is attained relatively quickly because

answer

the price level adjusts quickly.

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Keynesian economists think general equilibrium is not attained quickly because

answer

the price level adjusts slowly.

question

Keynesian economists believe that in the short run,

answer

money neutrality does not exist and prices do not adjust rapidly.

question

Classical economists believe that in the short run,

answer

money neutrality exists and prices adjust rapidly.

question

Under monetary neutrality, an increase in the money supply causes output to ________ and the price level to ________.

answer

not change; rise

question

Under an assumption of monetary neutrality, a change in the nominal money supply has

answer

a proportionate effect on the price level.

question

Describe the differences between classical and Keynesian economists in terms of their views about monetary neutrality.

answer

Keynesians believe that monetary neutrality holds in the long run but not in the short run. Classical economists are more accepting of the view that money is neutral even in the relatively short run.

question

The aggregate demand curve shows

answer

the relation between the aggregate quantity of goods demanded and the price level.

question

The aggregate demand curve shows the combinations of output and the price level that put the economy on

answer

the IS curve and the LM curve.

question

The aggregate demand curve

answer

slopes downward.

question

Which of the following changes shifts the AD curve down and to the left?

answer

A decrease in consumer confidence

question

Which of the following changes shifts the AD curve up and to the right?

answer

A rise in the nominal money supply

question

The aggregate supply curve shows the relation between

answer

the price level and the aggregate amount of output that firms supply.

question

The short-run aggregate supply curve (in the absence of misperceptions)

answer

is horizontal.

question

The long-run aggregate supply curve

answer

is vertical.

question

Which of the following changes shifts the SRAS curve up?

answer

An increase in firms' costs

question

Which of the following changes shifts the long-run aggregate supply curve to the right?

answer

A demographic change that increases the labor supply

question

Which of the following changes shifts the SRAS curve down?

answer

A decrease in firms' costs

question

When the money supply rises by 10%, in the short run, output ________ and the price level ________.

answer

rises; is unchanged

question

When the money supply declines by 10%, in the long run, output ________ and the price level ________.

answer

is unchanged; falls

question

Classical economists think general equilibrium is attained relatively quickly because

answer

the price level adjusts quickly

question

After a temporary beneficial supply shock hits the economy, general equilibrium is restored by

answer

a shift down and to the right of the LM curve

Macroeconomics Ch 9 – Flashcards

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