question
Business cycles examine ___ time horizons while growth theory focuses on ___ time horizons.
answer
Business cycles examine short-run time horizons while growth economics focus on long-run time horizons.
question
The aggregate demand-aggregate supply model is used to study
answer
The aggregate demand-aggregate supply model is used to study business cycles.
question
Aggregate demand and aggregate supply refer to
answer
Aggregate demand and aggregate supply refer to demand and supply of GDP, respectively.
question
A decrease in the price level will ___ the nominal interest rate and cause a(n) ___ movement along the aggregate demand curve.
answer
A decrease in the price level will decrease the interest rate and cause a downward movement along the aggregate demand curve.
question
An increase in the real wealth in China will cause which of the following? Select all that apply.
answer
An increase in the real wealth in China will increase both Chinese and U.S. aggregate demand.
question
Net exports will ____ when the value of the dollar falls and shift the aggregate demand curve ___
answer
increase, right
question
A technological advancement will cause which of the following to occur? Select all that apply.
answer
A technological advancement will increase both long-run and short-run aggregate supply.
question
Which of the following does not determine a country's ability to produce goods and services in the long run?
answer
The price level does not determine a country's ability to produce goods and services in the long run.
question
An increase in the price of crude oil from $100 a barrel to $200 a barrel will affect
answer
short-run aggregate supply (SRAS)
question
In 2011, a record-breaking earthquake and tsunami hit Japan and destroyed roads, buildings, and nuclear power plants. How will this natural disaster impact the U.S. economy in the short run?
answer
A natural disaster in Japan will result in a decrease of U.S. real GDP, decrease of U.S. price level, and an increase in U.S. unemployment in the short run.
question
The price level increases. This will cause the short-run aggregate supply to
answer
If the price level increases, the quantity of short-run aggregate supply (SRAS) will increase, but the SRAS curve itself will not shift.
question
Input prices decrease. This will cause the short-run aggregate supply to
answer
A decrease in input prices causes an increase (a rightward shift) of the short-run aggregate supply curve.
question
Firms and workers expect the price level to fall. This will cause the short-run aggregate supply to
answer
The expectation of a lower price level causes the SRAS curve to increase.
question
The price level decreases. This will cause the short-run aggregate supply to
answer
If the price level decreases, the SRAS curve itself will not shift.
question
New policies cause an increase in the cost of meeting government regulations. This will cause the short-run aggregate supply to
answer
A new policy that increases firms' cost of meeting government regulations decreases short-run aggregate supply.
question
The number of workers in the labor force increases. This will cause the short-run aggregate supply to
answer
An increase in the number of workers in the labor force increases the short-run aggregate supply curve.
question
The price level increases. This long-run aggregate supply curve will
answer
If the price level increases, the LRAS curve will not shift at all. In fact, the equilibrium level of real GDP will not even change. Recall that the LRAS curve is vertical. This means that no matter what the price level is, the quantity of LRAS is the same.
question
The stock of capital in the economy increases. The long-run aggregate supply curve will
answer
An increase in the stock of capital is an increase in resources. The three things that shift the LRAS curve are resources, technology, and institutions. Capital is a part of resources. With more capital, a nation's ability to produce increases, shifting the LRAS curve to the right.
question
Natural resources increase. The long-run aggregate supply curve will
answer
The three things that shift long-run aggregate supply are resources, technology, and institutions. With an increase in natural resources, the economy is able to produce more output, shifting long-run aggregate supply to the right.
question
The price level decreases. The long-run aggregate supply curve will
answer
A price level change does not shift long-run aggregate supply. Also, because LRAS is vertical, it does not even change the quantity of long-run aggregate supply, so output remains the same.
question
Firms and workers expect the price level to rise. The long-run aggregate supply curve will
answer
A change in the expectation of the price level is a short-term phenomenon and does not affect a nation's ability to produce in the long run. A change in price expectations would shift the short-run aggregate supply curve but not the long-run aggregate supply curve. The only three things that shift the LRAS curve are resources, technology, and institutions.
question
The number of workers in the labor force increases. The long-run aggregate supply curve will
answer
If the number of workers in the labor force increases, then a nation's ability to produce increases. Labor is a part of resources. This increase in resources shifts the LRAS curve to the right.
question
Referring to the graph above, what happens after an increase in aggregate demand in the short run?
answer
Price level, output, and employment increase
question
A lower price level in the United States affects the purchases of imported goods. Select all of the following affects of a lower price level in the United States on aggregate demand.
answer
A lower price level in the United States causes the quantity of aggregate demand to increase and import purchases to decrease.
question
The price level increases. This will cause the aggregate demand curve to
answer
Neither. A change in the price level (P) leads to a movement along the AD curve. When the price level rises, the quantity of aggregate demand declines along the curve. This is due to the wealth effect, interest effect, and the international trade effect.
question
Investment decreases. This will cause the aggregate demand curve to
answer
Decrease. Investment (I) is one component of aggregate demand, so a decrease in investment decreases aggregate demand. Note this is not the interest rate effect, which must start with a change in price level.
question
Imports decrease and exports increase. This will cause the aggregate demand curve to
answer
Increase. Net exports (NX) is one component of aggregate demand, so an increase in exports and a decrease in imports imply that net exports rise, and therefore aggregate demand increases. Note this is not the international trade effect, which must start with a change in price level.
question
The price level decreases. This will cause the aggregate demand curve to
answer
Neither. A change in the price level (P) leads to a movement along the AD curve. When the price level falls, the quantity of aggregate demand increases along the curve. This is due to the wealth effect, the interest rate effect, and the international trade effect.
question
Consumption increases. This will cause the aggregate demand curve to
answer
Increase. Consumption (C) is one component of aggregate demand, so an increase in consumption means an increase in aggregate demand. Note this is not the wealth effect, which must start with a change in price level.
question
Government purchases increase. This will cause the aggregate demand curve to
answer
Increase. Government purchases (G) is one component of aggregate demand, so an increase in government purchases means an increase in aggregate demand.
question
Suppose that the economy is in long-run equilibrium. A sudden shift to which curve will eventually result in a new long-run equilibrium where the price level is exactly the same as it was initially?
answer
If the short-run aggregate supply curve shifts, it will eventually revert to its original level in the long run.
question
Devaluing the currency will cause the price level to ___ in the short run
answer
The reduction in the value of the Zhoullar means an increase in AD. Remember that the value of the dollar (or Zhoullar, in this case) is a shift factor for AD. In this case, a devaluing of the Zhoullar leads to an increase in AD. The new intersection with SRAS will be at a price level above the long-run equilibrium price level.
question
Devaluing the currency will cause the real GDP to ___ in the short run
answer
A devaluation of the Zhoullar leads to an increase in AD. The new intersection with SRAS will be at a level of real GDP (the horizontal axis) above the long-run equilibrium level of real GDP. See the figure in the solution to part 1, above.
question
Devaluing the currency will cause the unemployment rate to ___ in the short run
answer
With an increase in AD, the new intersection with SRAS will be at a level of real GDP (the horizontal axis) above the long-run equilibrium level of real GDP. With output above its natural rate, unemployment must be below its natural rate. See the figure in the solution to part 1, above.
question
Devaluing the currency will cause the price level to ___ in the long run
answer
With an increase to AD in the short run, SRAS will decrease in the long run as input prices, such as wages, increase to compensate for the higher price level. The new intersection of AD and SRAS will be exactly at the LRAS curve. This will be higher up than the original long-run equilibrium, indicating a higher price level.
question
Devaluing the currency will cause the real GDP to ___ in the long run
answer
With an increase to AD in the short run, SRAS will decrease in the long run such that the new intersection of AD and SRAS will be exactly at the LRAS curve. This means real GDP (measured on the horizontal axis) is exactly the same as before the increase to AD. Remember that long-run output only changes when LRAS shifts. See the figure in the solution to part 4, above.
question
Devaluing the currency will cause the unemployment rate to ___ in the long run
answer
With an increase to AD in the short run, the SRAS curve will decrease in the long run such that the new intersection of AD and SRAS will be exactly at the LRAS curve. This means real GDP (measured on the horizontal axis) is exactly the same as before the increase to AD, which further means that unemployment is also the same. See the figure in the solution to part 4, above.
question
A scorching summer that kills the corn crop will affect
answer
This event is important because it affects the supply of food. The result is higher production costs; thus, SRAS will decrease.
question
The theory of sticky input prices implies that an increase in the price level in the short run leads to __________ in a firm's profit level.
answer
When inflation begins to push up all prices in the economy, output prices are flexible and, therefore, can increase quickly. In contrast, input prices are often set by contracts and do not change, making them sticky. Thus, businesses see their revenues increase while their costs remain the same. As a result, profits increase when businesses expand their output.
question
What is the effect of an increase in aggregate demand in the short-run on the AD curve?
answer
In the short run, an increase in aggregate demand causes the AD curve to shift to the right, and no other adjustments take place.
question
What is the effect of an increase in aggregate demand in the short-run on the AS curve?
answer
An increase in the aggregate demand curve in the short run causes the short-run aggregate supply curve to eventually decrease. Long-run equilibrium is restored at the natural rate of output (Y*) and a higher price level.
question
What is the effect of a spike in oil prices on the AS curve?
answer
The increase in the price of oil is a negative supply shock, which shifts the short-run aggregate supply curve to the left.
question
If an economy is operating at a real GDP level which is below its potential real GDP (full output), one will find ____.
answer
relatively high unemployment levels.
question
In the summer of 2008, global oil prices spiked to extremely high levels before coming down again at the end of that year. This temporary event had global effects, because oil is an important resource in the production of many goods and services. Assuming all else equal, what would have happened in the economy in the short run?
The price level ____, output ____, and unemployment rate ____.
The price level ____, output ____, and unemployment rate ____.
answer
increased; decreased; increased
question
Assuming all else equal, the price level increases. This will cause the Aggregate Demand curve to ___.
answer
stay the same
question
Starting from its potential output (long run output), an economy's government decides to increase spending. In the long run, the economy will find _____.
answer
that it is producing at its potential output but at a higher aggregate price level.
question
In 2011, a record breaking earthquake and tsunami hit Japan and destroyed roads, buildings, and nuclear power plants. How will this natural disaster impact the Japanese economy in the short run? (assuming all else equal)
answer
real GDP will decrease; price level will increase; unemployment will increase
question
When the aggregate price level falls, the purchasing power of assets rise which leads to ____. (assuming all else equal)
answer
an increase in the quantity of aggregate output demanded
question
Which of the following determines a country's ability to produce goods and services in the long run?
answer
technology
question
Aggregate Demand curve will shift left ____. (assuming all else equal)
answer
if there is a decrease in household wealth
question
Oil spike, long run
answer
price level is the same
output is the same
output is the same
question
If an economy is in short run equilibrium such that the actual level of output is greater than the potential level of output, then this means that ____. (assuming all else equal)
answer
after some time, nominal wages will rise.
question
*14*
answer
****
question
Which of the following led to the Great Depression?
answer
A fall in aggregate demand led to the Great Depression.
question
Which of the following are false regarding the Great Depression and the Great Recession?
A. Both of the economic downturns resulted from a breakdown of the loanable funds market.
B. Real GDP returned to its pre-recession level faster during the Great Depression than during the Great Recession.
C. Unemployment rates were higher during the Great Depression than during the Great Recession.
A. Both of the economic downturns resulted from a breakdown of the loanable funds market.
B. Real GDP returned to its pre-recession level faster during the Great Depression than during the Great Recession.
C. Unemployment rates were higher during the Great Depression than during the Great Recession.
answer
Real GDP returned to its pre-recession level faster during the Great Recession than during the Great Depression, and only the Great Recession resulted from a breakdown of the loanable funds market.
A & B
A & B
question
Classical economists emphasize the ___________ while Keynesian economists focus on the ____________.
answer
Classical economists focus on the long run while Keynesian economists focus on the short run.
question
According to classical economists, savings are ____________, while Keynesian economists believe savings are ____________.
answer
According to classical economists, savings are crucial to growth, while Keynesian economists believe savings are a drain on demand.
question
Which of the following would a Keynesian economist have recommended in year 1 of the Great Depression and Great Recession? (real GDP falling)
answer
A Keynesian economist would have recommended an infrastructure program designed to stimulate the economy.
Initiate an infrastructure program; for example, expanding the electrical grid or the highway system.
Initiate an infrastructure program; for example, expanding the electrical grid or the highway system.
question
During the 2007-2009 Great Recession, the Obama administration proposed several stimulus packages with a goal of helping the economy recover from the economic crisis. Which school of thought would most likely support the administration's policy prescriptions?
answer
The Keynesian school of thought will most likely support the administration's policy prescriptions.
question
Which of the following statements is consistent with what happened during the Great Recession?
answer
Aggregate demand and long-run aggregate supply decreased during the Great Recession, causing unemployment to rise to 10%.
question
Which of the following could have caused a change in real GDP and unemployment like the one experienced in the first two years of the Great Recession?
answer
The decline in real GDP could have been caused by a decrease in consumer confidence and a decrease in financial market stability.
question
"The recent decline in consumer confidence will likely spell disaster for the economy."
answer
Keynesian
question
"Business managers making investment decisions play a crucial role in the short-run economy."
answer
Keynesian
question
"Consumer spending is down, but that is good news because it means that savings is up."
answer
Classical
question
"In the long run we are all dead."
answer
Keynesian
question
"There is no reason to believe that most prices will take more than several months to adjust in either direction."
answer
Classical
question
According to Keynesian economists, prices tend to be
____. As a result, Keynesian economists focus on
____ changes and aggregate ____ .
____. As a result, Keynesian economists focus on
____ changes and aggregate ____ .
answer
sticky, short-run, demand
question
Which of the following statements is consistent with what happened during the Great Depression?
answer
At the height of the Great Depression, the unemployment rate was over 25%, caused by a large decrease in aggregate demand.
question
One similarity between the Great Recession and the Great Depression is that, in both episodes:
answer
there were significant problems in financial markets.
question
Which of the following best summarizes the main causes of the Great Recession?
answer
The collapse of housing prices led to decreased wealth and significant problems in financial markets, as well as a decrease in expected income and a stock market collapse.
question
The Great Recession lasted longer and was deeper than the average recession, in part, because:
answer
there was a major financial crisis following the collapse of housing prices.
question
During the Great Recession, a major financial crisis followed the collapse of housing prices, which led to:
answer
the decline in the health of many large financial firms and banks.
question
During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part because:
answer
the stock market declined in value by one-third.
question
During the Great Depression, the U.S. aggregate demand curve shifted to the left, in part, because:
answer
the U.S. government increased taxes.
question
During the Great Depression, thousands of U.S. banks failed. As a result:
answer
aggregate demand decreased.
question
Based on the belief that prices are very flexible, classical economists conclude that:
answer
government intervention in the economy is unnecessary.
question
Classical economists believe that savings is crucial for economic growth because:
answer
savings leads to investment spending, which increases output.
question
Keynesian economists believe that prolonged recessions are possible because:
answer
prices are sticky and do not adjust quickly during economic downturns
question
Based on the belief that prices are sticky and inflexible, Keynesian economists conclude that:
answer
the economy is not self-correcting and can become stuck below full employment.
question
Which of the following led to the Great Recession?
answer
a fall in aggregate demand
question
Which of the following is false regarding the Great Depression and the Great Recession?
Great Depression is resulted from a breakdown of financial market, and Great Recession is resulted from a housing market collapse.
Real GDP returned to its pre-recession level faster during Great Depression than during the Great Recession.
During the Great Depression, money supply decreased.
Unemployment rates were higher during the Great Depression than during the Great Recession.
Great Depression is resulted from a breakdown of financial market, and Great Recession is resulted from a housing market collapse.
Real GDP returned to its pre-recession level faster during Great Depression than during the Great Recession.
During the Great Depression, money supply decreased.
Unemployment rates were higher during the Great Depression than during the Great Recession.
answer
Real GDP returned to its pre-recession level faster during Great Depression than during the Great Recession.
question
Which of the following shifts explains well the causes of the Great Recession 2009 ?
answer
aggregate demand
question
During the Great Recession, real gross domestic product (GDP) decreased yet the aggregate price level remained largely unchanged, as depicted in the graph. Unemployment increased to above-normal levels. Which of following best explains why this happened?
answer
A decline in housing prices and stock prices, plus a financial crisis, caused a recession.
question
The Great Recession was different from other recessions since World War II in that:
answer
the decline in real GDP was much larger and lasted longer.
question
During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part, because:
answer
U.S. housing prices fell.
question
One difference between the Great Recession and the Great Depression is that:
answer
the U.S. government reduced taxes during the Great Recession but raised them during the Great Depression.
question
Classical economists believe that government intervention in the economy is unnecessary because:
answer
prices are flexible and, therefore, the economy will adjust back to full employment on its own.
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