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HW 3

The use of government purchases, transfer payments, and taxes to influence the level of economic activity is called:
Fiscal policy.
To eliminate a recessionary gap, policy-makers may pursue:
An expansionary policy that increases aggregate demand.
All of the following are held constant along a short-run aggregate supply curve except:
Output prices.
When the Great Depression reached tis trough in 1933, real GDP has fallen by _____ since the depression began in 1929.
30%.
All of the following statements is true about the short-run aggregate supply curve except:
It is drawn holding price level constant.
A change in the aggregate quantity of goods and services supplied at every price level is called a:
Change in short-run aggregate supply.
To eliminate an inflationary gap, policy-makers may pursue:
A contractionary policy that decreases aggregate demand.
Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?
The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption which will increase demand further and income further, etc.
According to the wealth effect, if the average price level rises, the value of consumers’:
Real wealth and consumption spending fall.
How will a recession in the economies of our foreign trading partners affect U.S. aggregate demand?
U.S. aggregate demand will decrease.
The short run in macroeconomic analysis is a period:
In which wages and some other prices do not respond to changes in economic conditions.
In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:
The aggregate demand and the short-run aggregate supply curve.
In the short run, all prices are flexible.
False.
Aggregate demand is the total value of real GDP that:
All sectors of the economy are willing to purchase at various average price levels, all other things unchanged.
What are the four sources of aggregate demand?
Consumption, private investment, government purchases, and net exports.
A change in the price level, all other things unchanged, causes:
A movement along the aggregate demand curve.
Which of the following will not cause a change in aggregate demand?
An increase in an economy’s price level.
Suppose the economy is initially at point A. Now suppose that there is an increase in government purchases. In the short-run,
The price level rises to Pb and real GDP increases to Yb.
What could have caused the aggregate demand curve to shift to the right from AD1 to AD2?
An increase in exports.
Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. What happens in the short-run?
Real GDP decreases to Y3 and the price level falls to P3.
Using the aggregate demand-aggregate supply model, predict what happens in the short run when there is a general decrease in raw materials cost.
The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.
Suppose the U.S. is in a recession while foreign countries that trade with the U.S. are not. How will this affect the U.S.?
U.S. imports will FALL, U.S. exports will RISE and U.S. aggregate demand will RISE.
All other things unchanged, an increase in government spending will:
Shift the aggregate demand curve to the right.
What do economists mean by the term “sticky wage”?
It refers to a wage that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus in the labor market.
Public policy to eliminate a recessionary gap could involve an increase in taxes.
False.
Federal Reserve policies meant to influence the level of economic activity is called:
Monetary policy.
The government expenditure multiplier is given by:
The change in real GDP divided by the change in government expenditure.
Suppose the price of an important natural resource such as oil falls. What will be the effect on the short-run aggregate supply curve?
The aggregate supply curve will shift to the right.
Public policy to eliminate inflationary or recessionary gaps is called stabilization policy.
True.
Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.
The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
Suppose the economy is initially in long-run equilibrium. Which of the following events leads to a decrease in the price level and real GDP in the short run?
A sharp fall in stock market prices.
A change in the aggregate quantities of goods and services demanded at each price level is called a:
Change in aggregate demand.
An economic analysis of the short run is useful to explain:
How deviations of real GDP from potential output can and do occur.
The rise and fall of real GDP over the course of the business cycle suggests that:
The economy may not always be in long-run equilibrium.
Suppose the economy is initially in short-run equilibrium at B. A shift from AD1 to AD2 could have been caused by all of the following except:
An increase in the price level from Pa to Pb.
The short-run aggregate supply shows the amount of real GDP that will be:
Made available at various price levels.
The recent ‘great’ recession, like the great depression was, in the simplest terms, caused by:
A decline in aggregate demand.
Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and a decrease in real GDP in the short run?
A sharp fall in stock market prices.
Using the aggregate demand-aggregate supply model, predict what happens in the short run if an increase in health insurance premiums paid by firms raises the cost of employing each worker.
The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.
The aggregate demand curve shifts due to changes in consumption expenditures, investment expenditures, government purchases, or net exports.
True.
All other things unchanged, an increase in personal income tax rates will:
Shift the aggregate demand curve to the left.
All other things unchanged, a higher exchange rate:
Reduces net exports and aggregate demand.
Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates.
The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. What happens in the short run?
Real GDP increases to Y2 and the price level rises to P2.
Suppose that government spending on defense rises by $50 billion. What happens to the aggregate demand curve?
It shifts right by more than $50 billion at each price level.
Using the aggregate demand-aggregate supply model, predict what happens in the short run when the consumer confidence index falls as consumers become pessimistic about their economic prospects.
The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
Aggregate demand is defined as:
The relationship between the total quantity of goods and services demanded and the price level, all other determinants of spending unchanged.
All other things unchanged, an increase in exports relative to imports will:
Shift the aggregate demand curve to the right.
In a graph that shows the aggregate supply and aggregate demand curves, what are the variables on the axes of the graph?
The price level measured by the implicit price deflator is on the vertical axis and real GDP is on the horizontal axis.
An increase in the prices of natural resources will lead to a decrease in short-run aggregate supply.
True.

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