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Assignment 10

According to the new Keynesian theory
-unexpected changes in aggregate demand change real GDP.
-expected changes in aggregate demand change real GDP
-current and past expectations of the price level determine the money wage rate
Say’s Law: Supply creates its own demand; implies there cannot be insufficient aggregate demand or demand caused recessions
What caused the stagflation of the 1970’s
-1973 oil shock
-collapse of the Bretton-woods fixed exchange rate system
-sharp increase in agriculture prices
The real business cycle (RBC) theory assets that the impart on real GDP of technological change is
usually positive but occasionally negative
The rational expectations/new classical theory argues that the primary factor leading to business cycles are
Unexpected changes in aggregate demand
One reason why many supply-side economist focus on lowering the top marginal tax rate is their belief that:
it would have the greatest positive influence on the decision markers in the economy with the highest marginal product (i.e. most productive in the economy)
Which of the following is a criticism of real business cycle theory
real business cycle theory believes that productivity changes are caused by technology changes when in fact they are caused by changes in aggregate demand
Real business cycle theory says that the factor leading to the business cycle is changes in
Rational expectations are
based on all relevant information
Which theory distinguishes between expected and unexpected fluctuations in aggregate demand and asserts that only unexpected changes can affect real GDP
new classical cycle theory
The forces that generate economic growth are those that shift the
long-run aggregate supply curve rightward
The Employment Act of 1946 states that is the responsibility of the federal government to
promote full employment
As real GDP increases and the economy improves (ceteris paribus) government outlays and expenditures tend to:
According to the real business cycle theory, technological change
happens at an uneven pace
According to aggregate demand and supply analysis, the rising oil prices coupled with global financial crisis in 2007-2008 caused the unemployment rate to _______ and the level of real aggregate output to ______.
increase, decrease
Fiscal policy
involves changing taxes and government spending
For monetarists the main cause of economic fluctuations is changes in
inappropriate monetary policy
“Current economic parameters are determined by past rational expectation” is a property of the _____ school of thought.
New Keynesian
According to the Ricardo-Barro eddect,
households increase their personal saving when governments run budget deficits.
Supply side economists focus policy change by lowering the:
highest (i.e. marginal tax rates)
As real GDP increases and the economy improves (ceteris paribus) government tax revenues tend to:
Factors that shift the long-run aggregate supply and potential GDP rightward include an increase in:
-quality and quantity of other inputs
-quantity of capital (physical capital and human capital)
-quantity of labor
One assumption of the new classical model is that
people make rational expectations about aggregate demand
Suppose that following an expected decline in the price level, workers immediately renegotiate their money wage rates to match the fall in prices. This behavior is most consistent with
the new classical cycle theory
In a demand-pull inflation, the AD (steps A to B) curve shifts _____ and the SRAS curve shifts _____ (steps B to C).
rightward; leftward
An decrease in the input prices (such as the money wage) ceteris paribus:
increase the short-run aggregate supply
The cyclical deficit is the portion of the deficit
created by fluctuations in real GDP
“If policy is anticipated, there is not short-run” is a property of the _____ school of thought.
rational expectations/new classical
Taken to its logical conclusion, the real business cycle theory (and new classical theory) proposes that:
actual GDP always equals potential GDP, making all unemployment voluntary
The real business cycle theory asserts that changes in ____ lead to changes in ___.
technology; productivity
The system that measures the lifetime tax burden and benefits of each generation is called
generational accounting
If decision markers become so pessimistic that all new money injected into the economy by the FED becomes hoarded and not loaned out or spent, we are in a:
liquidity trap
Sticky prices and wages are a property of the ____ school of thought
Which theory fundamentally denies demand-side economic shocks?
real business cycle theory
Keynes used the term “animal spirits” to represent
volatile investment spending arising from fluctuations in business confidence
The supply side school of thought proposed
-cutting the (top) marginal tax rates
-cutting government regulation
-cutting the size of the government
The monetarist school of thought
believes that velocity is predictable making monetary policy effective
If the economy is on the negative slope of the Laffer curve and you raise taxes:
tax revenues will fall
Income taxes in the United States are automatic stabilizers becasue
tax revenues increase when income increases, thus offsetting some of the increase in aggregate demand
Demand-pull inflation persists because of
continuing increases in the quantity of money
The short-run aggregate supply curve is upward sloping because in the short run the
price level changes but the money wage rate (or other input prices) does not
The Keynesian explanation of the business cycle rests on several concepts, including
rigid money wages rates (i.e. sticky prices and wages)
The real business cycle theory proposes that:
aggregate demand shocks do not effect the business cycle
By itself, an increase in aggregate demand increases GDP by the least amount (or zero) in the _____.
real business cycle theory
Adaptive expectations are a property of the ____ school of thought.
Which of the following could start a demand-pull inflation?
an increase in government expenditures
Economists who believe tax policy has a big effect on employment and potential GDP are called
Keynes Law: Demand creates its own supply; implies there cannot be insufficient aggregate supply and implies demand-caused recessions.
If a tax cut increase people’s labor supply, then
tax cuts increase potential GDP
Which of the following is true?
-keynesian economics is focused on aggregate demand
-aggregate demand is “passive” in the real business cycle theory
-classical economics is focused on aggregate supply

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