question

Misery index

answer

The sum of inflation and unemployment

question

Phillips curve

answer

The short-run trade-off between inflation and unemployment

question

Natural rate of unemployment

answer

The normal rate of unemployment toward which the economy gravitates

question

Natural-rate hypothesis

answer

The theory that unemployment returns to its natural rate, regardless of inflation

question

Disinflation

answer

A reduction in the rate of inflation

question

Supply shock

answer

An event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and, thus, the Phillips curve

question

Sacrifice ratio

answer

The number of percentage points of annual output that is lost in order to reduce inflation one percentage point

question

Rational expectations

answer

The theory that suggests that people optimally use all available information, including about government policies, when forecasting the future

question

The misery index, which some commentators suggest measures the health of the economy, is

answer

the sum of unemployment rate and the inflation rate.

question

The original Phillips curve illustrates

answer

the trade-off between inflation and unemployment.

question

The Phillips curve is an extension of the model of aggregate supply and aggregate demand because, in the short run, an increase in aggregate demand increases prices and

answer

decreases unemployment

question

Along a short-run Phillips curve,

answer

a higher rate of inflation is associated with a lower unemployment rate.

question

If, in the long run, people adjust their price expectations so that all prices and incomes move proportionately to an increase in the price level, then the long-run Phillips curve

answer

is vertical.

question

According to the Phillips curve, in the short run, if policymakers choose an expansionary policy to lower the rate of unemployment,

answer

the economy will experience an increase in inflation.

question

An increase in expected inflation

answer

shifts the short-run Phillips curve upward, and the unemployment-inflation trade-off is less favorable.

question

Which of the following would shift the long-run Phillips curve to the right.

answer

an increase in the minimum wage

question

When actual inflation exceeds expected inflation,

answer

unemployment is less than the natural rate of unemployment.

question

A decrease in the price of foreign oil

answer

shifts the short-run Phillips curve downward, and the unemployment-inflation trade-off is more favorable.

question

The natural-rate hypothesis argues that

answer

in the long run, the unemployment rate returns to the natural rate, regardless of inflation.

question

If people have rational expectations, a monetary policy contraction that is announced and is credible could

answer

reduce inflation with little or no increase in unemployment.

question

If the sacrifice ratio is five, a reduction in inflation from 7 percent to 3 percent would require

answer

a reduction in output of 20 percent

question

If the Fed were to continuously use expansionary monetary policy in an attempt to hold unemployment below the natural rate, the long-run result would be

answer

an increase in the rate of inflation.

question

The original Phillips curve shows that:

answer

high inflation leads to low unemployment.

question

When the Fed increases the money supply faster than expected, there will be in the short run ________ the short run Phillips curve.

answer

a movement up and to the left along

question

When, in the long run, people get used to, and come to expect, a higher inflation rate, there will be ________ the short run Phillips curve.

answer

an upward shift of

question

When the Fed increases the money supply slower than expected, there will be in the short run ________ the short run Phillips curve.

answer

a movement up and to the left along

question

When, in the long run, people get used to, and come to expect, a lower inflation rate, there will be ________ the short run Phillips curve.

answer

a downward shift of

question

Friedman and Phelps argued that in the:

answer

long run, inflation has no effect on unemployment.

question

Friedman and Phelps argued that the Phillips curve was:

answer

vertical in the long run.

question

According to Friedman and Phelps, if actual inflation is greater than expected inflation, the unemployment rate will:

answer

be lower than the natural rate of unemployment.

question

According to Friedman and Phelps, if actual inflation is less than expected inflation, the unemployment rate will:

answer

be greater than the natural rate of unemployment.

question

If there is high inflation and the Fed follows a policy to reduce the inflation rate, we can expect that in the short run, the economy will experience ________ with ________ unemployment.

answer

recession, high

question

Theory or liquidity preference

answer

Keynes's theory that the interest rate is determined by the supply and demand for money in the short run

question

Liquidity

answer

The ease with which an asset is converted into a medium of exchange

question

Federal funds rate

answer

The interest rate banks charge one another for short-term loans

question

Fiscal policy

answer

The setting of the level of government spending and taxation by government policymakers

question

Multiplier effect

answer

The amplification of the shift in aggregate demand from expansionary fiscal policy, which raises incomes and further increase consumption expenditures

question

Investment accelerator

answer

The amplification of the shift in aggregate demand from expansionary fiscal policy, which raises investment expenditures

question

Marginal propensity to consume, or MPC

answer

The fraction of extra income that a household spends on consumption

question

Crowding-out effect

answer

The dampening of the shift in aggregate demand from expansionary fiscal policy, which raises the interest rate and reduces investment spending

question

Stabilization policy

answer

The use of fiscal and monetary policies to reduce fluctuations in the economy

question

Automatic stabilizers

answer

Changes in fiscal policy that do not required deliberate action on the part of policy makers

question

Keynes's liquidity preference theory of the interest rate suggests that the interest rate is determined by

answer

the supply and demand for money.

question

When money demand is expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the interest rate

answer

decreases the quantity demanded of money.

question

When the supply and demand for money are expressed in a graph with the interest rate on the vertical axis and the quantity of money on the horizontal axis, an increase in the price level

answer

shifts money demand to the right and increases the interest rate.

question

For the United States, the most important source of the downward slope of the aggregate-demand curve is

answer

the interest-rate effect.

question

In the market for real output, the initial effect of an increase in the money supply is to

answer

shift aggregate demand to the right.

question

The initial effect of an increase in the money supply is to

answer

decrease the interest rate.

question

The long-run effect of an increase in the money supply is to

answer

increase the price level.

question

Suppose a wave of investor and consumer pessimism causes a reduction in spending. If the Federal Reserve chooses to engage in activist stabilization policy, it should

answer

increase the money supply and decrease interest rates.

question

The initial impact of an increase in government spending is to shift

answer

aggregate demand to the right.

question

If the marginal propensity to consume (MPC) is 0.75, the value of the multiplier is

answer

4.

question

An increase in the marginal propensity to consume (MPC)

answer

raises the value of the multiplier.

question

Suppose a wave of investor and consumer optimism has increased spending so that the current level of output exceeds the long-run natural rate. If policymakers choose to engage in activist stabilation policy, they should

answer

decrease government spending, which shifts aggregate demand to the left.

question

When an increase in government purchases raises incomes, shifts money demand to the right, raises the interest rate, and lowers investment, we have seen a demonstration of

answer

the crowding-out effect.

question

Which of the following statements regarding taxes is correct?

answer

A permanent change in taxes has a greater effect on aggregate demand than a temporary change in taxes.

question

Suppose the government increases its purchases by $16 billion. If the multiplier effect exceeds the crowding-out effect, then

answer

the aggregate-demand curse shifts to the right by more than $16 billion

question

When an increase in government purchases increases the income of some people, and those people spend some of that increase in income on additional consumer goods, we have seen a demonstration of

answer

the multiplier effect.

question

When an increase in government purchases causes firms to purchase additional plant and equipment, we have seen a demonstration of

answer

the investment accelerator.

question

Which of the following is an automatic stabilizer?

answer

unemployment benefits

question

Which of the following statements about stabilization policy is true?

answer

Many economists prefer automatic stabilizers because they affect the economy with a shorter lag when activist stabilization policy.

question

Which of the following best describes how an increase in the money supply shifts aggregate demand?

answer

The money supply shifts right, the interest rate falls, investment increases, and aggregate demand shifts right.

question

In long run interest rate is determined by

answer

supply and demand for loanable funds

question

In the short run intereste rate is determined by

answer

supply and demand for money

question

In short run, price level is sticky and...

answer

cannot adjust

question

In the short run fiscal policies affect

answer

aggregate demand

question

In the long run fiscal policies influence

answer

growth

question

For every dollar the government spends, aggregate demand shifts to the right by...

answer

1 / (1-MPC)

question

If the MPC is 0.75 than the multiplier (aka shift) is...

answer

1 / (1 - 0.75) = 1 / 0.25 = 4

question

The crowding out affect worksin the opposite direction of the

answer

multiplier

question

In crease in government purchases, means increase in income, demand for money goes to the right...which raises interest rates

answer

which lowers investments

question

The other half of fiscal policy is

answer

taxation

question

If taxes are reduced, take home pay is increased and therefore

answer

consumption increases

question

What are the two reasons that fiscal policies effects aggregate supply?

answer

1) reduce taxes, more incentive to work, aggregate supply shift to the right 2) gov't purchases (roads/bridges) increase amount of goods supplied at each price level...aggregate supply shift to the right

question

change in output demanded

answer

= change in spending on output

question

Change in output demanded ( ^ Y) =

answer

[ 1 / (1 - MPC ) ] x [ change in G ]

question

activist stabilization policy is a way to use discretionary monetary/fiscal policies to

answer

1) minimize flucuation of output and 2) maintain output and long-run natural rate

question

Activist stabilization policies can be used to move long-run natrual rate

answer

from levels that are above or below the natural rate of output

question

A period of mildly falling incomes and rising unemployment

answer

Recession

question

A period of unusually severe falling incomes and rising

answer

Depression

question

Short-run economic fluctuations

answer

The business cycle

question

The model most economists use to explain short-run fluctuations in the economy around its long-run trend

answer

Model of aggregate demand and supply

question

A curve that shows the quantity of goods and services that households, firms, the government, and customers abroad are willing to buy at each price level

answer

Aggregate-demand curve

question

A curve that shows the quantity of goods and services that firms are willing to produce at each price level

answer

Aggregate-supply curve

question

The production of goods and services that an economy achieves in the long run when unemployment is at its natural or normal rate

answer

Natural rate of output

question

Costs associated with changing prices

answer

Menu costs

question

A period of falling output and rising prices

answer

Stagflation

question

A policy of increasing aggregate demand in response to a decrease in short-run aggregate supply

answer

Accommodative policy

question

Why can a variety of spending, income, and output measures can be used to measure economic fluctuations?

answer

because most macroeconomic quantities tend to fluctuate together.

question

According to the interest-rate effect aggregate demand slopes downward (negatively) because

answer

lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases.

question

What would not cause a shift in the long-run aggregate-supply curve?

answer

An increase in price expectations

question

NOT a reason why the aggregate-demand curse slopes downward?

answer

The classical dichotomy/monetary neutrality effects

question

The model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to

answer

shift aggregate demand to the right.

question

What is true regarding the long-run aggregate-supply curve? The long-run aggregate-supply curve

answer

is vertical because an equal change in all prices and wages leaves output unaffected.

question

According to the wealth effect, aggregate demand slopes downward (negatively) because

answer

lower prices increase the value of money holdings and consumer spending increases.

question

The natural rate of output is the amount of real GDP produced

answer

when the economy is at the natural rate of unemployment.

question

Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on productions. This is a demonstration of the sticky-wage theory of the

answer

sticky-wage theory of the short-run aggregate-supply curve.

question

Suppose the price level falls but suppliers only notice that the price of the particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the

answer

misperceptions theory of the short-run aggregate-supply curve.

question

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending due to the end of the Cold War. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

answer

Prices fall; output falls.

question

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending due to the end of the Cold War. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

answer

Prices fall; output is unchanged from its initial value.

question

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

answer

Prices rise; output falls.

question

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

answer

Output and the price level are unchanged from their initial values.

question

Stagflation occurs when the economy experiences

answer

rising prices and falling output.

question

What events shifts the short-run aggregate-supply curve to the right?

answer

a drop in oil prices

question

Whenever the economy is in recession, we can expect:

answer

investment to decrease

question

What occurs when the price level rises?

answer

People need to hold more money, so interest rates rise, making firms borrow and invest less.

question

What would cause the aggregate demand curve to shift to the right?

answer

A new law that requires the government to cover the full cost of medicines for the elderly.

question

The long run aggregate supply curve is ________, because in the long-run, nominal variables, such as the price level, ________ affect real variables, such as the production of goods and services in the economy.

answer

vertical, do not

question

The long run aggregate supply will shift to the right whenever:

answer

factors of production (such as labor and capital) increase.

question

What would cause the short run aggregate supply curve to shift to the left, but have no effect over the long run aggregate supply?

answer

Prices of inputs (such as wages or oil prices) increase.

question

If an economy is in a state of long run equilibrium, all of the following will occur, what would NOT happen

answer

the economy will be producing its natural rate of output.

question

Suppose the economy is in long run equilibrium. If aggregate demand increases, we can expect that in the short run output will ________, and in the long run output will ________.

answer

increase, return to the natural rate of output

question

Suppose the economy is in long run equilibrium. If the stock market crashes in the short run, we can expect the price level to ________, and output to ________

answer

decrease, decrease

question

Suppose the economy is in long-run equilibrium. If the price of oil increases substantially, in the short run, we can expect the price level to ________, and output to ________

answer

increase, decrease

question

What is included in the aggregate demand for goods and services?

answer

consumption demand, investment demand, net exports

question

When the price level falls the quantity of

answer

consumption goods demanded and the quantity of net exports demanded both rise.

question

As the price level falls,

answer

the exchange rate falls, so net exports rise.

question

From 2001 to 2005 there was a dramatic rise in the price of houses. If this made people feel wealthier, then it would shift

answer

aggregate demand right.

question

The long-run aggregate supply curve shows that by itself a permanent change in aggregate demand would lead to a long-run change

answer

in the price level, but not output.

question

Over the last fifty years both real GDP and prices have trended upward in most countries. Continuing real GDP growth and inflation can be explained by

answer

continued technological progress and continuing increases in the money supply.

question

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

answer

production is more profitable and employment rises.

question

An increase in the expected price level shifts the

answer

the short-run but not the long-run aggregate supply curve left.

question

Economic expansions in Germany and Japan would cause

answer

the U.S. price level and real GDP to rise.

question

In recent years, the Federal Reserve has conducted policy by setting a target for the

answer

federal funds rate.

question

People choose to hold a smaller quantity of money if

answer

the interest rate rises, which causes the opportunity cost of holding money to rise.

question

In the graph of the money market, the money supply curve is

answer

vertical. It shifts rightward if the Fed buys bonds.

question

According to liquidity preference theory, if the price level decreases, then

answer

the interest rate falls because money demand shifts left.

question

If the Federal Reserve decided to lower interest rates, it could

answer

buy bonds to raise the money supply.

question

If the stock market crashes, then

answer

aggregate demand decreases, which the Fed could offset by increasing the money supply.

question

If the MPC = 3/5, then the government purchases multiplier is

answer

5/2

question

Explain the crowding-out effect?

answer

An increase in government expenditures increases the interest rate and so reduces investment spending.

question

If households view a tax cut as temporary, then the tax cut

answer

has less of an affect on aggregate demand than if households view it as permanent.

question

The short-run Phillips curve shows the combinations of

answer

unemployment and inflation that arise in the short run as aggregate demand shifts the economy along the short-run aggregate supply curve.

question

In the late 1960s, economist Edmund Phelps published a paper that

answer

argued that there was no long-run tradeoff between inflation and unemployment.

question

An increase in expected inflation shifts

answer

the short-run Phillips curve right.

question

Friedman and Phelps concluded that

answer

in the long run the Phillips curve is vertical, which is consistent with classical theory.

question

A policy intended to reduce unemployment by taking advantage of a tradeoff between inflation and unemployment leads to

answer

higher inflation and no change in unemployment in the long run.

question

An adverse supply shock will shift short-run aggregate supply

answer

left, making prices rise.

question

If there is an adverse supply shock, then

answer

unemployment rises and the short-run Phillips curve shifts right.

question

The sacrifice ratio is the

answer

number of percentage points annual output falls for each percentage point reduction in inflation.

question

If people believe that the central bank is going to reduce inflation

answer

the short-run Phillips curve shifts left and the sacrifice ratio will fall.

G.FinalMacro.2011

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards