# Econ Chapter 10 Homework

Choose the statement that is incorrect.
A). the quantity of real GDP supplied is the total quantity of goods and services, valued in constant base-year (2009) dollars, that firms plan to produce during a given period.
B). aggregate supply is the relationship between the quantity of real GDP supplied and the price level
C). over the business cycle, aggregate supply fluctuates around potential GDP
D). at any given time, the quantity of capital and the state of technology are fixed, but the quantity of labor is not fixed
C). over the business cycle, aggregate supply fluctuates around potential GDP
As we move up along the long-run aggregate supply curve, ____.
A). the prices of goods and services remain constant
B). the real wage rate remains constant
C). the money wage rate remains constant
D). the prices of goods and services increase and the money wage rate decreases
B). the real wage rate remains constant
As we move along the short-rib aggregate supply curve, ___.
A). the money wage rate, the prices of other resources, and the potential GDP remain constant
B). potential GDP increases
C). the real wage rate, the prices of other resources, and potential GDP remain constant
D). the money wage rate and the prices of other resources change by the same percentage
A). the money wage rate, the prices of other resources, and potential GDP reman constant
When the price level, the money wage rate, and other factor prices rise by the same percentage, there is a movement along ___. Potential GDP ___.
A). the LAS curve and the SAS curve; decreases
B). the LAS curve; decreases
C). the LAS curve; does not change
D). the LAS curve and the SAS curve; does not change and the quantity of real GDP supplied increases
C). the LAS curve; does not change
when the price level rises but the money wage rage and other factor prices remain the same, there is a movement along ___. the quantity of real GDP supplied ___.
A). the SAS curve; increases
B). the SAS curve; decreases
C). the LAS curve; decreases
D). the LAS curve and the SAS curve; decreases
A). the SAS curve; increases
An increase in potential GDP increases ____.
A). the price level
B). the money wage rate
C). both long-run aggregate supply and short-run aggregate supply
D). long-run aggregate supply but does not increase short-run aggregate supply unless technology advances
C). both long-run aggregate supply and short-run aggregate supply
Choose the correct statement.
A). the higher the price level, the greater is the quantity of real GDP demanded
B). the quantity of real GDP demanded depends on the quantity of real GDP supplied
C). the quantity of real GDP demanded is the sum of the real consumption expenditure, investment, government expenditure, and exports minus imports
D). the aggregate demand curve slopes downward because of the wealth effect and the money wage rate
C). the quantity of real GDP demanded is the sum of the real consumption expenditure, investment, government expenditure, and exports minus imports
An increase in expected future income ___ aggregate demand
increases
An increase in expected future inflation rates ___ aggregate demand
increases
An increase in expected future profits ___ aggregate demand.
increases
Aggregate demand increases if expected future income, inflation, or profits ___. And aggregate demand increases if fiscal policy ___ government expenditure.
A). increase; decreases
B). decrease; increases
C). increase; increases
D). decrease; decreases
C). increase; increases
Aggregate demand increases if fiscal policy ___ taxes or ___ transfer payments.
A). increases; increases
B). decreases; increases
C). decreases; decreases
D). increases; decreases
B). decreases; increases
Aggregate demand increases if monetary policy ___ the quantity of money and ____ interest rates.
A). decreases; increases
B). decreases; decreases
C). increases; decreases
D). increases; increases
C). increases; increases
Aggregate demand increases if the exchange rate ___ or foreign income ____.
A). increases; increases
B). decreases; increases
C). decreases; decreases
D). increases; decreases
B). decreases; decreases
Starting from a position of long-run equilibrium, a world expansion ___, and an increase in expected future profits ___.
A) decreases real GDP and raises the price level; decreases real GDP and raises the price level
B). increases real GDP and lowers the price level; increases real GDP and raises the price level
C). increases real GDP and raises the price level; increases real GDP and raises the price level
D). increases real GDP and raises the price level; increases real GDP and lowers the price level
C). increases real GDP and raises the price level; increases real GDP and raises the price level
Starting from a position of long-run equilibrium, an increase in government expenditures ___ real GDP and ___ the price level.
A). increases real GDP and raises the price level
B). increases; real GDP and lowers the price level
C). decreases real GDP and lowers the price level
D). decreases real GDP and raises the price level
A). increases real GDP and raises the price level
Everything else remaining the same, an increase in aggregate demand increases ___.
A). long-run aggregate supply
B). short-run aggregate supply
C). potential GDP
D). the quantity of real GDP supplied
D). the quantity o real GDP supplied
If an economy is at full-employment equilibrium and a decrease in consumption expenditure occurs, the new short-run equilibrium is ___ and ___ gap emerges.
A). an above full-employment equilibrium; an inflationary
B). a below full-employment equilibrium; an inflationary
C). an above full-employment equilibrium; a recessionary
D). a below full-employment equilibrium; a recessionary
D). a below full-employment equilibrium; a recessionary
Changes in consumption spending play a large role in the business cycle because ___ accounts for approximately ____ percent of GDP.
A). consumption expenditure; 90
B). consumption expenditure; 70
C). U.S. consumer purchases of net exports; 70
D). U.S. consumer purchases of net exports; 50
B). consumption expenditure; 70
Inflation expectations “become self-fulfilling” because consumers decide to __, which __.
A). produce more goods and services at today’s lower prices; increases short-run aggregate supply
B). produce fewer goods and services at today’s lower prices; decreases short-run aggregate supply
D). buy more goods and services at today’s lower prices; increases aggregate demand
D). buy more goods and services at today’s lower prices; increases aggregate demand
Stagflation ___.
A). has not ben experienced in the United States since the Great Depression
B). is another name for an inflationary gap
C). is a combination of recession and inflation
D). occurs when aggregate demand decreases by more than short-run aggregate supply increases
C). is a combination of recession and inflation
According to the Shoppers Stimulate Discount Stores Article, the ___ macroeconomic school of thought justifies the policy discussed in this news clip.
A). monetarist
B). Keynesian
C). new classical
D). classical
B). Keynesian
Which of the following statements about the monetarist view of the macroeconomy is incorrect?
A). the money wage rate is sticky
B). taxes should be kept low to avoid disincentive effects that decrease potential GDP
C). all recessions result from inappropriate monetary policy
D). left alone, the economy rarely operates at full employment
D). left alone, the economy rarely operates at full employment
A ___ macroeconomist believes that the economy is self-regulating and always at full employment.
A ___ macroeconomist believes the economy requires active help from fiscal policy and monetary policy to maintain full employment.
A). Keynesian; new Keynesian
B). classical; monetarist
C). classical; Keynesian
D). new classical; monetarist
C). classical; Keynesian
New classical theorists believe that
the uneven pace of technological change is the most significant cause of business cycle fluctuations
the wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption
how can government policies shift the aggregate demand curve to the right?
by increasing government purchases
a higher exchange rate will result in
a decrease in net exports and a decrease in aggregate demand
in she short run, an unexpected decrease in oil prices will
decrease the price level but increase real GDP
If firms reduce investment spending and the economy enters a recession, which of these contributes to the adjustment that causes the economy to return to its long-run equilibrium?
the eventual agreement by workers to accept lower wages
monetarism is a school of economic thought that favors
a monetary growth rule
the classical view assumes
according to Keynesian theory, fiscal policymakers can combat the impact of recessions by
increasing government spending
if the economy moves into a recession, monetarists argue that the Fed should
keep the money supply growing at a constant rate
___ advocates active government intervention via fiscal policy when the economy is in recession
Keynesian theory
the 1974-1975 recession was a result of a
leftward shift of the short-run aggregate supply curve
which of these factors will cause the long-run aggregate supply curve to shirt to the right?
the accumulation of more machinery and equipment
the economy is in long-run equilibrium when the short-run aggregate supply and aggregate demand curve intersect at a point
on the long-run aggregate supply curve
a monetary growth rule that might be supported by a monetarist would be a plan
for the Federal Reserve to increase the quantity of money at a fixed rate and not respond to economic fluctuations
Stagflation is a
combination of inflation and recession
In the long-run, the level of output is
the full-employment level of output
which of these shifts aggregate demand curve to the right
lower interest rates
the aggregate demand and aggregate supply model explains
short-run fluctuations in real GDP and the price level
which of these policies affects the economy through intended changes in the quantity of money and interest rates?
monetary policy
which of these factors will shift the short-run aggregate supply to the left?
a decrease in the size of the labor force
which of these factors will cause the aggregate demand curve to shift?
a change in the expectations of households and firms
the long-run aggregate supply curve
shifts to the right as technological change occurs
an unexpected change in the price of oil would cause a shift of the ___ curve
short-run aggregate supply
the aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded
keynes maintained that the economy could remain long-term at levels of output below the full-employment level of output due to
sticky wages
when aggregate demand increases, unemployment will usually ___ and inflation will ____.
fall, rise
if the price level and the money wage are rise by the same percentage, the quantity of real GDP supplied ___ and there is a movement up along the ___ aggregate supply curve
does not change; long-run
if the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ___ and there is a movement up along the ___ aggregate supply curve
increases; short-run
a rise in the money wage rate with no change in potential GDP creates ___
a leftward shift of the SAS curve and no change in the LAS curve
the increase in labor productivity ___ LRAS and SAS
increases
correct statements
the overall effect of the increase in labor productivity and the rise in the wage rates is an increase in potential GDP
rising wage rates decrease short-run aggregate supply (SAS) and have no effect on long-run aggregate supply
the increase in labor productivity increases long-run aggregate supply (LRAS)
the fall in the average weekly wage rate ___ short-run aggregate supply (SAS) and ___ long-run aggregate supply (LRAS)
increases; does not change
the fall in the minimum wage ___ short-run aggregate supply (SAS) and ___ long-run aggregate supply (LRAS)
increases; increases
chinese premier wen jiabao has warned Japan that its companies operating in China should raise the pay for their workers. a rise in wages in China ___ aggregate supply (AS)
decreases China’s short-run (SAS)
the “average overall increase across the board” wage increase ___
decreases short-run aggregate supply (SAS)
long-run aggregate supply (LRAS) is the relationship between the quantity of real GDP supplied and the price level when the ___ changes in step with the price level to maintain full employment
money wage rate
short-run aggregate supply (SAS) is the relationship between the quantity of ___ supplied and the ___ when the money wage rate, the prices of other resources, and potential GDP remain constant
real GDP; price level
the aggregate demand (AD) curve shows the relationship between the quantity of real GDP demanded and ____, when everything else remains the same
the price level
a movement along the aggregate demand curve (AD) occurs if ___
the price level changes and all other factors remain unchanged
as the price level rises, interest rates ___ and real wealth ___
rise; decreases
people substitute goods in the ___ for goods in the ___
future; present
so, as the price level rises, there is
a decrease in the quantity of real GDP demanded because people cut back spending
when the government cuts income taxes,
disposable income increases
the greater the disposable income, the greater is the quantity of consumption goods and services that households plan to buy and the greater is aggregate demand
when the United States experiences strong economic growth, US income increases and US consumers buy more goods and services, including goods and services produced in Canada
the fed increases the quantity of money and all other things remain the same. in the short run, aggregate demand
increases
the increase in the personal consumption expenditures ___ aggregate demand (AD)
the increase in exports ___ aggregate demand (AD)
increases; decreases
the increase in investment ___ aggregate demand (AD)
the decrease in government spending ___ aggregate demand (AD)
increases; decreases
mexico trades with the US. when the us economy goes into a recession, ___
mexico’s exports to the US decrease, mexico’s aggregate demand decrease, and mexico’s AD curve shifts leftward
when mexico decreases the quantity of money, mexico’s AD
decreases and its AD curve shifts leftward
when the price level in mexico falls
the quantity of real GDP demanded increases
AD is the relationship between the quantity of ___ demanded and the ___ when all other influences on expenditure plans remain the same
real GDP; price level
example of fiscal policy
the US government as proposed a hike in the corporate tax rate
fiscal policy includes
changing taxes, transfer payments, and government expenditure on goods and services
the fact that the US government has proposed a hike in the corporate tax rate implies a change in taxes. so it illustrates fiscal policy
example of monetary policy
the fed has raised the federal funds rate by .3 percent
monetary policy includes
changing the quantity of money and the interest rate
the fact that the fed has raised the federal funds rate by .3 percent, impplies a change in the interest rate. so it illustrates monetary policy
economic growth results when there are increases in
the full-employment quantity of labor
inflation results when
the increase in aggregate demand exceeds the increase in potential gdp
starting from a full-employment equilibrium, an increase in AD ___ real GDP, and creates a __ gap
increases; inflationary
in the long run, the money wage rate ___, short-run aggregate supply (SAS) ___, and the economy returns to a full-employent equilibrium
rises; decreases
starting from a full-employment equilibrium, a decrease in short-run aggregate supply ___ the price level and ___ real GDP. Creating ___
increases; decreases; stagflation
aggregate demand will increase if
the effect of the tax rebates and the change in the foreign exchange rate outweigh the effect on the housing, credit, and financial crises
a recessionary gap eventually emerges even if AD remains constant because over time
potential GDP increases
a deep recession hits the world economy
the world oil price rises sharply
decreases SAS
US businesses expect future profits to fall
using the three questions above:
starting from a position of long-run equilibrium, a deep recession ___, and a decrease in expected future profits ___
decreases real GDP and lowers the price level, decreases real GDP and lowers the price level
starting from a position of long-run equilibrium, a sharp increase in the world oil price
decreases real GDP and raises the price level
an increase in consumer spending
increases and the price level rises
an increase in exports
short-run macroeconomic equilibrium occurs when the quantity of ___ demanded equals the quantity of ___ supplied at the point of intersection of the ____ curve and the ____ curve
real GDP; real GDP; AD; SAS
long-run macroeconomic equilibrium occurs when real GDP ___ potential GDP – equivalently, when the economy is on its ___ curve
equals; LAS
an above full-employment equilibrium is an equilibrium when real GDP
exceeds potential GDP
the gap between ___ is the output gap
real GDP and potential GDP
when ___, the output gap is called an inflationary gap
real GDP exceeds potential GDP
when ___ there is a full-employment equilibrium
real GDP equals potential GDP
a below full-employment equilibrium is an equilibrium in which potential GDP ___ real GDP
exceeds
when potential GDP ___ real GDP, the output gap is called a recessionary gap
exceeds
stagflation
the combination of recession (decreasing real GDP) and inflation (rising price level)
example of stagflation
the european economy is experiencing a decrease in real GDP for three quarters and a rise in the price level
the defining feature of the classical view of macroeconomics is that the economy is
self-regulating and always at full-employment
classical macroeconomists recommend
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
the defining feature of Keynesian view of macro is that the economy is
rarely at full-employment
keynesian macroeconomists recommend
policies that actively offset changes in AD that bring recession
the defining feature of the monetarist view of macroeconomics is that the economy is
self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
monetarist macroeconomists recommend
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
a classical macroeconomist and a monetarist recommend that taxes be kept low to avoid disincentive effects for all of the events and a Keynesian recommends active fiscal policy and monetary policy to offset all events
Events:
growth in the world economy slows
the world price of oil rises
US labor productivity declines
Obama most likely follows the ___ school of thought and John McCain most likely follows the ___ school of thought
Keynesian or new Keynesian; classical or new classical
Paul Krugman most likely follows the ___ school of thought and Ben Bernanke most likely follows the ___ school of thought
Keynesian or new Keynesian; Keynesian or new Keynesian
a classical macroeconomist believes that the economy is self-regulating and always
at full employment
a new classical view is that business cycle fluctuations are the ___ responses of a well-functioning market economy that is bombarded by shocks that arise from the uneven pace of ___
efficient; technological change
a Keynesian macroeconomist believes that left alone, the economy would ___ operate at full employment and that to achieve and maintain full employment, active help from fiscal policy and monetary policy is required
rarely
a modern version of the Keynesian view, known as new Keynesian view, holds not only that the money wage rate is ____ but also that prices of goods and services are ____
sticky; sticky
a monetarist is a macroeconomist who believes that the economy is self-regulating and that it will normally operate ___, provided that monetary policy is not erratic and that the pace of ___ is kept steady
at full employment; money growth

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