question

The origin of the idea of a trade-off between inflation and unemployment was a 1958 article by

answer

A.W. Phillips.

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Phillips's research looked at British data on

answer

unemployment and nominal wage growth.

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The negative relationship between unemployment and inflation is known as the

answer

Phillips curve.

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The Phillips curve appeared to fit the data well for the United States in the

answer

1960s.

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Friedman and Phelps suggested that there should not be a stable relationship between inflation and unemployment, but there should be a stable relationship between

answer

unanticipated inflation and cyclical unemployment.

question

Milton Friedman and Edmund Phelps questioned

answer

the stability of the relationship between inflation and unemployment.

question

In the extended classical model, an anticipated decrease in the money supply would cause output to ________ and the price level to ________ in the short run.

answer

remain unchanged; decrease

question

In the extended classical model, an unanticipated increase in the money supply would cause output to ________ and the price level to ________ in the short run.

answer

increase; increase

question

In the extended classical model, an unexpected decrease in aggregate demand would cause unanticipated inflation to be ________ and cyclical unemployment to be ________.

answer

negative; positive

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In the expectations-augmented Phillips curve, ? = ? e - 3(u - ). If ? = 0.03 when ? e = 0.06 and u = 0.06, then =

answer

0.05.

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In the expectations-augmented Phillips curve, ? = ? e - 3(u - ). If ? = 0.06 when ? e = 0.06 and u = 0.04, then =

answer

0.04.

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In the expectations-augmented Phillips curve, ? = ? e - 3(u - ). If ? = 0.09 when ? e = 0.06 and u = 0.02, then =

answer

0.03.

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In the expectations-augmented Phillips curve, ? = ? e - 3(u - 0.06). When ? = 0.06 and ? e = 0.03, the unemployment rate is

answer

0.05.

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In the expectations-augmented Phillips curve, ? = ? e - 3(u - 0.05). When ? = 0.06 and ? e = 0.03, the unemployment rate is

answer

0.04.

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In the expectations-augmented Phillips curve, ? = ? e - 3(u - 0.05). When ? = 0.03 and ? e = 0.06, the unemployment rate is

answer

0.06.

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The Phillips curve is the relation between inflation and unemployment that holds for a given natural rate of unemployment and a

answer

given expected rate of inflation.

question

Suppose most people had anticipated that inflation would be 3% in the coming year because the Fed would increase the money supply by 3%. Instead, the Fed increases the money supply by 5%. In the short run, this would cause actual output to be ________ full-employment output and prices to increase by ________ 3%.

answer

above; more than

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An increase in the expected rate of inflation would

answer

shift the Phillips curve upward.

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If the expected inflation rate is unchanged, a fall in the natural rate of unemployment would

answer

shift the Phillips curve to the left.

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If the expected rate of inflation rose at the same time the natural rate of unemployment rose, the Phillips curve

answer

would shift up.

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A beneficial supply shock would cause

answer

the short-run Phillips curve to shift downward and to the left.

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Classicals argue that an adverse supply shock would

answer

raise both the natural rate of unemployment and the actual rate of unemployment.

question

Historically, Brazil has suffered higher and more variable rates of inflation than Venezuela. You would expect the short-run aggregate supply curve of Brazil to be ________ than that of Venezuela, and the Phillips curve of Brazil to be ________ than that of Venezuela.

answer

steeper; steeper

question

The Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds

answer

as long as the expected inflation rate and the natural rate of unemployment are approximately constant.

question

The Phillips curve shifted during the 1970s primarily because of

answer

the two large oil price shocks.

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Examining data on cyclical unemployment plotted against unanticipated inflation shows

answer

a negative relationship.

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The Friedman-Phelps analysis suggests that there is a long-term relationship between

answer

unanticipated inflation and cyclical unemployment.

question

An analysis of the American economy since 1960 shows that there is a stable relationship between inflation and unemployment

answer

only in the short run.

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Both classicals and Keynesians agree that policymakers

answer

cannot keep the unemployment rate permanently below the natural rate by permanently running a high rate of inflation.

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The Lucas critique is an objection to the assumption that

answer

historical relationships between macroeconomic variables will continue to hold after new policies are in place

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The argument that when policy changes, people's behavior changes so that historical relationships between macroeconomic variables will no longer hold is known as

answer

the Lucas critique.

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The long-run Phillips curve is

answer

vertical.

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The fact that the long-run Phillips curve is vertical implies that

answer

money is neutral in the long run.

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When the economy goes into a recession, there's an increase in

answer

cyclical unemployment.

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According to Okun's law, if full-employment output is $5000 billion, then each percentage point of unemployment sustained for one year reduces output by

answer

$100 billion.

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Some economists argue that Okun's Law overstates the cost of cyclical unemployment because

answer

it ignores the fact that leisure increases during a recession.

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The natural rate of unemployment in the United States generally ________ from 1960 to 1980 and ________ from 1980 to 1995.

answer

rose; fell

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One reason for the fall in the natural rate of unemployment since 1980 is

answer

changes in the demographic composition of the work force.

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The bulk of the decline in the natural rate of unemployment since 1980 is because of

answer

a decline in the share of young workers in the labor force.

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A difficulty faced by policymakers who wish to use the unemployment rate as a guide to whether the economy is weak or strong is that

answer

the natural rate of unemployment is hard to measure.

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Because the natural rate of unemployment is not known precisely, policymakers who use it as a guide for policy must be

answer

less aggressive with policy changes than they would be if they knew the value of the natural rate.

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One cost of a perfectly anticipated inflation is that it

answer

increases menu costs.

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The costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation are called

answer

shoe leather costs.

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Shoe leather costs are

answer

the costs in time and effort incurred by people and firms who are trying to minimize their holdings of cash because of inflation.

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When actual inflation is greater than expected inflation

answer

there are transfers from lenders to borrowers.

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One cost of an unanticipated inflation is that it

answer

transfers wealth from lenders to borrowers.

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A COLA is

answer

a cost of living adjustment.

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Hyperinflation occurs when

answer

the inflation rate is extremely high.

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The reduction of the inflation rate is called

answer

disinflation.

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The costs of disinflation would be low if

answer

expected inflation falls as inflation falls.

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A rapid and decisive reduction in the rate of growth of the money supply for the purpose of disinflation is called

answer

a cold turkey policy.

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Keynesians prefer a disinflation policy of

answer

gradualism

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The sacrifice ratio is

answer

the amount of output lost when the inflation rate is reduced by one percentage point.

question

The amount of output lost when the inflation rate is reduced by one percentage point is called

answer

the sacrifice ratio.

question

Ball found that the disinflation of the early 1980s in the United States had a sacrifice ratio of about

answer

2.

question

Ball's research showed that the sacrifice ratio

answer

varied considerably across countries.

question

Ball found that an important factor affecting the sacrifice ratio is

answer

the flexibility of the labor market.

question

Countries in which wages adjust slowly to changes in the supply of and demand for labor are likely to have ________ sacrifice ratio.

answer

a high

question

Countries in which wages adjust rapidly to changes in the supply and demand for labor are likely to have ________ sacrifice ratio.

answer

a low

question

Countries in which the government does not regulate the labor market are likely to have ________ sacrifice ratio.

answer

a low

question

Ball's research on disinflation across different countries found that

answer

costs of disinflation were smaller for rapid disinflation than for gradual disinflation.

question

If a rapid disinflation has a lower sacrifice ratio than a slow disinflation, then reducing inflation is best accomplished by

answer

a cold-turkey approach.

question

a cold-turkey approach.

answer

the credibility of the central bank.

question

Inflation expectations in the United States generally

answer

rose from 1971 to 1982, then fell from 1982 to 2000, and have been stable since then.

question

Keynesians are skeptical of the classical theory that recessions are periods of increased mismatch between workers and jobs because

answer

help-wanted advertising falls during recessions.

question

The gift exchange motive suggests that

answer

workers who feel well treated will work harder and more efficiently.

question

A model in which workers won't be concerned about the possibility of being fired if they don't work hard, because their wage is so low, is called

answer

a shirking model.

question

The effort curve is

answer

s-shaped, because a small increase in the real wage will increase work effort more at an intermediate wage than at a low wage or at a high wage.

question

According to the efficiency wage model, firms will pay the real wage that

answer

maximizes effort per dollar of real wage.

question

Assuming no change in the effort curve of employees, the efficiency wage model implies that

answer

the real wage is rigid and equals the efficiency wage.

question

A firm faces the following relationship between the real wage it pays and the effort exerted by its workers. Real Wage Effort (E) 10 20 11 24 12 27 13 29 The marginal product of labor for this firm is given by MPN = E (100 - N)/9. The firm will choose to pay a wage such that the effort level is

answer

27.

question

A firm faces the following relationship between the real wage it pays and the effort exerted by its workers. Real Wage Effort (E) 10 20 11 24 12 27 13 29 The marginal product of labor for this firm is given by MPN = E (100 - N)/9. How many workers will the firm employ?

answer

96

question

In the efficiency wage model with the efficiency wage above the market-clearing wage, the level of employment depends on

answer

labor demand alone.

question

In the efficiency wage model with the efficiency wage above the market-clearing wage, when employment is at its full-employment level

answer

there is an excess supply of labor.

question

In the efficiency wage model, an increase in productivity will cause

answer

In the efficiency wage model, an increase in productivity will cause

question

In the efficiency wage model, if the real wage is higher than the market-clearing wage so that there is an excess supply of labor,

answer

employers will not hire workers who are willing to work for a lower wage.

question

According to the efficiency wage model, during a recession, firms will not reduce real wages because

answer

this would reduce worker effort and productivity.

question

The efficiency wage model can be modified to allow real wages to vary over the business cycle by assuming that

answer

workers' effort may depend on the unemployment rate and the real wage.

question

In the Keynesian model, the real wage is mildly procyclical because

answer

workers' effort may depend on the unemployment rate and the real wage.

question

In the efficiency wage model, an increase in productivity would

answer

increase output but have no effect on the real wage.

question

In the Keynesian model with efficiency wages,

answer

the full-employment level is determined at the intersection of the labor demand curve and the efficiency wage line.

question

A firm is a price taker if it

answer

always sells its output at the industry-determined price.

question

A model in which individual producers act as price setters, because there are only a few sellers and the product they sell is not standardized, is called

answer

imperfect competition.

question

In the Keynesian model, firms are best characterized as

answer

monopolistically competitive.

question

When the demand for an imperfect competitor's product is greater than it planned, the firm will

answer

meet the demand at its set price.

question

If the menu cost theory is true, then firms that change prices less frequently than other firms are likely to be in

answer

less competitive industries.

question

The theory that firms will be slow to change their products' prices in response to changes in demand because there are costs to changing prices is called

answer

menu cost theory.

question

According to the menu cost theory, firms will be slow in changing their prices because

answer

the cost of changing the price might exceed the additional revenue the price change would generate.

question

The cost to a firm of producing one more unit of output

answer

is the firm's marginal cost.

question

In setting the price of its product, a monopolistic competitor sets the price equal to its marginal cost plus an amount called the

answer

markup.

question

Because of price stickiness in the Keynesian model, a decline in investment demand will not cause the

answer

LM curve to shift down and to the right in the short run.

question

In the Keynesian model in the short run, the amount of employment is determined by the effective labor demand curve and the level of

answer

output.

question

In the Keynesian model, short-run equilibrium occurs

answer

where the IS and LM curves intersect.

question

In the Keynesian model, when the economy is not in long-run equilibrium, then the short-run equilibrium point is not on which curve?

answer

FE

question

In the Keynesian model in the short run, a decrease in the money supply will cause

answer

a decrease in output and an increase in the real interest rate.

question

The distinguishing feature that determines whether an analysis is classical or Keynesian is

answer

the speed of price adjustment.

question

In the Keynesian model, money is

answer

neutral in the long run, but not in the short run.

question

In the Keynesian model in the long run, a decrease in the money supply will cause

answer

no change in either the real interest rate or output.

question

In the Keynesian model, which curve is vertical?

answer

LRAS

question

In the Keynesian model in the long run, a decrease in the money supply will cause ________ in the real interest rate and ________ in the price level.

answer

no change; a decrease

question

According to Keynesians, the primary reason money is not neutral is

answer

price stickiness.

question

In the Keynesian model in the long run, an increase in the money supply will raise

answer

the price level but not the level of output.

question

Using the Keynesian model, the effect of an increase in the effective tax rate on capital would be to cause ________ in the real interest rate and ________ in output in the short run.

answer

a decrease; a decrease

question

Using the Keynesian model, the effect of a decrease in the effective tax rate on capital would be to cause ________ in the real interest rate and ________ in output in the long run.

answer

an increase; no change

question

Using the Keynesian model, the effect of a government-imposed ceiling on interest rates paid on personal checking accounts that is lower than the current market interest rate would be to cause ________ in the real interest rate and ________ in output in the short run.

answer

a decrease; an increase

question

In the Keynesian model, an increase in government purchases affects output by

answer

increasing aggregate demand as national saving declines.

question

In the Keynesian model in the short run, a decrease in government purchases causes output to ________ and the real interest rate to ________.

answer

fall; fall

question

In the Keynesian model in the long run, an increase in taxes causes the price level to ________ and the real interest rate to ________.

answer

fall; fall

question

Suppose the government decided to tighten monetary policy and decrease government expenditures. In the short run in the Keynesian model, the effect of these policies would be to ________ the real interest rate and ________ the level of output.

answer

have an ambiguous effect on; decrease

question

Suppose the government decided to ease monetary policy and then increase taxes. In the short run in the Keynesian model, the effect of these policies would be to ________ the real interest rate and ________ the level of output.

answer

lower; have an ambiguous effect on

question

The 1980s were characterized by ________ monetary policy and ________ fiscal policy.

answer

tight; easy

question

Easy monetary policy and tight fiscal policy lead to

answer

low real interest rates.

question

According to Keynesians, the primary source of business cycle fluctuations is

answer

aggregate demand shocks.

question

The Keynesian theory is consistent with the business cycle fact that inflation is

answer

procyclical and lagging.

question

The idea that, in order to avoid the costs of hiring and training, firms in a recession retain some workers they would otherwise lay off, is called

answer

labor hoarding.

question

The use of macroeconomic policies to smooth or moderate the business cycle is known as

answer

aggregate demand management.

question

In the Keynesian model, the difference between using monetary and fiscal policy to eliminate a recession is that

answer

an expansionary monetary policy will leave the economy with a lower real interest rate than an expansionary fiscal policy.

question

In the Keynesian model, the difference between no intervention by the government during a recession and intervention using expansionary monetary or fiscal policy is that no intervention will return the economy to its equilibrium level of output

answer

slower than intervention will and at a lower price level.

question

A problem with the use of aggregate demand management to stabilize the business cycle is that

answer

the precise amount that output will change in response to monetary or fiscal policy isn't known.

question

In the 1990s, nominal interest rates in Japan were approximately

answer

0%.

question

A situation in which expansionary monetary policy has no effect on the economy is known as

answer

a liquidity trap.

question

Bernanke suggested methods for monetary policy to deal with the lower bound, including all of the following EXCEPT

answer

tightening monetary policy more aggressively.

question

Worries about the zero bound from 2002 to 2005 led the Fed to

answer

keep the Federal funds rate below the inflation rate.

question

In the long run in the Keynesian model, a beneficial supply shock would leave the economy with a higher level of output, but also a ________ real interest rate and a ________ price level.

answer

lower; lower

question

In the short run in the Keynesian model, a sharp increase in oil prices would leave the economy with a ________ level of output and a ________ real interest rate.

answer

lower; higher

question

Recent research by Keynesians and classicals has led to

answer

a reconciliation of the types of models they use.

question

The theory that real shocks to the economy are the primary cause of business cycles is

answer

real business cycle theory.

question

Which of the following is not a primary cause of business cycle fluctuations, according to real business cycle theory?

answer

A change in the money supply

question

The distinction between real and nominal shocks is that

answer

real shocks directly affect only the IS curve or the FE line, but not the LM curve.

question

Real business cycle theorists think that most business cycle fluctuations are caused by shocks to

answer

the production function.

question

Which of the following is an example of a productivity shock?

answer

The introduction of new management techniques

question

A temporary adverse productivity shock would

answer

decrease the level of employment.

question

In the classical IS-LM/AD-AS model, a beneficial productivity shock would ________ output, ________ the real interest rate, and ________ the price level.

answer

increase; decrease; decrease

question

An adverse supply shock would directly ________ labor productivity by changing the amount of output that can be produced with any given amount of capital and labor. It would also indirectly ________ average labor productivity through changes in the level of employment.

answer

decrease; increase

question

When RBC economists work out a detailed numerical example of a more general theory, they are performing

answer

calibration

question

When RBC economists compare the volatility in their models to the data, what are they looking at?

answer

The amount of random variation in economic variables

question

When RBC economists compare the correlations in their models to the data, what are they looking at?

answer

The degree to which different economic variables move together

question

The most common measure of productivity shocks is known as

answer

the Solow residual.

question

The Solow residual is

answer

the most common measure of productivity shocks.

question

Given data on capital (K), labor (N), and output (Y), and estimates of capital's share of output (a), the Solow residual is measured as

answer

Y / (Ka N1-a).

question

The formula Y / (Ka N1-a) provides a calculation of

answer

the Solow residual.

question

Measures of the Solow residual show it to be

answer

strongly procyclical.

question

One important reason why the Solow residual may be strongly procyclical even if the actual technology used in production doesn't change is that

answer

resource utilization is procyclical.

question

If the utilization rates of capital (uK) and labor (uN) are procyclical, then the Solow residual, as conventionally measured, is

answer

A u(a/K) u [(1-a)/N]

question

Labor hoarding occurs when

answer

because of hiring and firing costs, firms retain workers in a recession that they would otherwise lay off.

question

Braun and Evans found that

answer

the measured Solow residual varied sharply over the seasons.

question

Critics of the RBC approach argue that it's hard to find productivity shocks large enough to cause business cycles. What is the RBC counterargument to this criticism?

answer

Business cycles could be caused by the cumulation of small productivity shocks.

question

Models that are similar to RBC models but allow for shocks other than productivity shocks are known as

answer

DSGE models.

question

DSGE models are

answer

similar to RBC models but allow for shocks other than productivity shocks.

question

A temporary increase in government purchases in the classical model would

answer

shift the labor supply curve to the right.

question

In the classical model, a temporary increase in government purchases causes

answer

an increase in output and the real interest rate.

question

In the classical model, a temporary decrease in government spending would cause a decrease in

answer

output, employment, the real interest rate, and the price level.

question

Classical economists would cite all of the following as reasons why the government cannot smooth out the business cycle EXCEPT that

answer

only productivity shocks can cause real fluctuations in the business cycle.

question

According to classical economists, the government should increase government purchases when

answer

the benefits of the spending exceed the costs.

question

According to classical economists, the increase in unemployment in recessions is caused by

answer

a mismatch of workers and jobs.

question

According to classical economists, unemployment rises in recessions due to an increase in ________ unemployment, not ________ unemployment.

answer

frictional and structural; cyclical

question

Davis and Haltiwanger showed that ________ churning of jobs occurs and that this churning reflects closing of old plants and opening of new ones ________.

answer

much; within the same industry

question

In recession years, ________ jobs are lost than created, and vacancies and job openings ________.

answer

more; decline

question

The term household production refers to

answer

output produced at home.

question

A household-production model more closely matches the U.S. data than a standard RBC model because it has a

answer

higher standard deviation of market output.

question

Assuming that money is neutral, an increase in the nominal money supply would cause

answer

a rise in nominal wages.

question

Assuming money neutrality in the classical model, a 10% increase in the nominal money supply would cause

answer

no change in the real money supply.

question

The idea that expected future increases in output cause increases in the current money supply and that expected future decreases in output cause decreases in the current money supply, rather than the other way around, is known as

answer

reverse causation.

question

Reverse causation is the idea that

answer

expected future increases in output cause increases in the current money supply.

question

The basic classical model can account for the procyclical behavior of money if there

answer

is reverse causation from future output to money.

question

Friedman and Schwarz argue that money is not neutral because

answer

they found several historical incidents in which changes in the money supply were not responses to macroeconomic conditions, and output moved in the same direction as money.

question

You and a friend are arguing over the issue of the nonneutrality of money. You believe that money is not neutral, and to prove your point you would cite all of the following EXCEPT

answer

the fact that every recession was preceded by a drop in the money supply.

question

The misperceptions theory was originally proposed by ________ and rigorously formulated by ________.

answer

Milton Friedman; Robert Lucas

question

If producers have imperfect information about the general price level and sometimes misinterpret changes in the general price level as changes in relative prices, then

answer

the short-run aggregate supply curve slopes upward.

question

The short-run aggregate supply curve can slope upward because

answer

producers have misperceptions about the aggregate price level.

question

According to the misperceptions theory, when the aggregate price level is higher than expected,

answer

the aggregate quantity of output supplied rises above the full-employment level.

question

According to the misperceptions theory, when the price level falls below the expected price level

answer

the economy moves along its SRAS curve.

question

If you expect a general price increase of 5% this year and the price of the hamburgers you sell increases by 10%, you would conclude that the relative price of your good has

answer

increased, and you would increase your output.

question

You are likely to think that the relative price of your good has risen and you should increase your output if you expected

answer

the inflation rate to be 10% and the price of your good rose 13%.

question

Short-run aggregate supply is greater than long-run aggregate supply in the misperceptions theory if

answer

the actual price level is greater than the expected price level.

question

Which of the following equations is most likely to represent short-run aggregate supply according to the misperceptions theory?

answer

Y = 6000 + 50(P - P^c)

question

According to the misperceptions theory, when P < Pc, output is ________ its full-employment level and the short-run aggregate supply curve must shift ________ to restore full employment.

answer

below; downward

question

According to the misperceptions theory, the amount by which producers increase their output when the general price level rises depends on

answer

how much they think their relative prices have increased.

question

If producers believe that the increase in their relative prices is small relative to the increase in the general price level, then the slope of the short-run aggregate supply curve will be

answer

large

question

If producers believe that the increase in their relative prices is large relative to the increase in the general price level, then the slope of the short-run aggregate supply curve will be

answer

small

question

According to the misperceptions theory, an unanticipated decrease in the money supply shifts the AD curve ________, causing output to ________ in the short run.

answer

down and to the left; fall

question

According to the misperceptions theory, after an unanticipated increase in the money supply has occurred, the SRAS curve must shift ________ to restore general equilibrium; as it does so, the price level ________.

answer

upward; rises

question

According to the misperceptions theory, an anticipated decline in the money supply leads to a shift of the AD curve ________ and a shift of the SRAS curve ________.

answer

down and to the left; downward

question

According to the misperceptions theory, an anticipated 10% decrease in the money supply leads to a short-run reduction in the price level of

answer

10%.

question

Which of the following statements is true about the misperceptions theory?

answer

Unanticipated changes in the nominal money supply have real effects, but anticipated changes are neutral.

question

If the money supply grows 7% during the year, and people expected the money supply to grow by 5%, what happens to the short-run aggregate supply curve, according to the misperceptions theory?

answer

it shifts down

question

According to the misperceptions theory, if the Fed wanted to use monetary policy to influence the real economy it would have to

answer

surprise the public with unexpected changes in monetary policy.

question

The reason why some economists believe that attempts by the Fed to surprise the public in a systematic way cannot be successful is that

answer

the public would eventually figure out what the Fed's policies were, negating the Fed's surprise.

question

The primary reason why the Fed cannot systematically surprise the public with its monetary policy is

answer

the presence of rational expectations among the public.

question

The theory of rational expectations suggests that

answer

people make intelligent use of available information.

question

According to the misperceptions theory, short-lived shocks may have long-term effects on the economy because of

answer

propagation mechanisms.

question

The primary reason that short-lived shocks can have long-run effects is

answer

the presence of propagation mechanisms.

question

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

answer

Labor

question

The FE line

answer

is vertical.

question

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

answer

real interest rate.

question

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

answer

An increase in labor supply

question

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

answer

A decrease in the capital stock

question

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

answer

remain unchanged.

question

An increase in investment spending would cause the FE line to

answer

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.

question

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.

question

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

question

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

answer

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.

question

An increase in labor supply would cause the IS curve to

answer

remain unchanged.

question

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

answer

remain unchanged.

question

A temporary decline in productivity would cause the IS curve to

answer

remain unchanged.

question

A decrease in wealth would cause the IS curve to

answer

shift down and to the left.

question

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

answer

shift up and to the right.

question

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

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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.

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(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

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slopes upward.

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

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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

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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

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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

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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

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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 ________.

answer

shift up and to the right; be unchanged

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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

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

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there is general equilibrium.

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

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LM curve; FE line and IS curve

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

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The LM curve

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

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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

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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

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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?

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The IS curve

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

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The asset market

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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.

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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.

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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

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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

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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.

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fall; fall

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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

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

answer

remain unchanged; fall

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Classical economists think general equilibrium is attained relatively quickly because

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the price level adjusts quickly.

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Keynesian economists think general equilibrium is not attained quickly because

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the price level adjusts slowly.

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Keynesian economists believe that in the short run,

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

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Classical economists believe that in the short run,

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money neutrality exists and prices adjust rapidly.

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

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not change; rise

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

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a proportionate effect on the price level.

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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.

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The aggregate demand curve shows

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

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

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the IS curve and the LM curve.

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The aggregate demand curve

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slopes downward.

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

answer

A decrease in consumer confidence

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

answer

A rise in the nominal money supply

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The aggregate supply curve shows the relation between

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

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

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is horizontal.

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The long-run aggregate supply curve

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is vertical.

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Which of the following changes shifts the SRAS curve up?

answer

An increase in firms' costs

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

answer

A demographic change that increases the labor supply

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Which of the following changes shifts the SRAS curve down?

answer

A decrease in firms' costs

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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

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