Chapter 10 Econ201

Classical economists believed that the Depression in the 1930s lasted so long because:
A)	wage-levels were rigid.

Feedback: Classicals believed that wage-level rigidities were a cause of the Depression.

According to Keynes, if a large portion of people in the economy decided to save more and consume less, aggregate income would:
A)	decline and remain there.
Feedback: Keynes believed that if increased savings did not get translated into an equal amount of investment, a downward spiral would begin resulting in lower equilibrium income.

The money wealth effect, the interest rate effect, and the international effect cause the AD curve to:
C)	slope downward.
Feedback: These effects explain why a lower price level raises the aggregate quantity demanded.

For some time now, the U.S. has been pressuring Japan to institute policies to shore up its ailing economy. Policies that lead to increased Japanese growth would increase U.S. exports and:
D)	shift the U.S. aggregate demand curve rightward.
Feedback: Foreign income is a shift factor of the AD curve. A rise in foreign income increases U.S. exports and shifts the AD curve rightward.


If the Federal Reserve Bank increases the money supply, the AD curve would:
B)	shift to the right.
Feedback: An increase in the money supply lowers interest rates and increases investment spending, causing the AD curve to shift to the right.

Assuming markups are constant, prices in quantity-adjusting markets:
C)	change whenever production costs change.
Feedback: In quantity-adjusting markets, firms generally alter output when demand changes, not prices. Prices will change, however, if production costs change and markups are constant.

The short-run aggregate supply curve is most likely to shift up (left) if:
B)	wages increase.
Feedback: The short-run aggregate supply curve assumes constant input prices. When input prices increase, the SAS curve shifts up.

The long-run aggregate supply curve is:
A)	vertical because it shows that in the long run a higher price level will not bring about higher output.
Feedback: The long-run aggregate supply curve gives the long-run output level an economy can produce and is unaffected by the price level.

A doubling of prices:
D)	does not affect potential output.
Feedback: A doubling of all prices, including input prices, does not affect potential output, which is determined by the productive capacity of the economy.


Suppose an economy is in both long- and short-run equilibrium and foreign income declines. What best describes what will happen to the economy?
D)	Total output and the price level will decline in the short run. In the long run, input prices will fall, causing the price level to fall more, and the economy to return to its original potential output.
Feedback: A decrease in foreign incomes will reduce exports. This decreases aggregate demand reducing output and the price level and this new equilibrium exists below potential output. As a result of some unemployment, input prices fall and the short-run aggregate supply curve shifts down until output returns to its potential at a lower price level.


Expansionary fiscal policies are most appropriate when the economy is experiencing:
A)	a recessionary gap.
Feedback: When the economy is in a recessionary gap, aggregate demand is less than potential output. Expansionary policies are appropriate in this case because they increase aggregate demand and stimulate output and employment.


In the Keynesian model, short-run equilibrium income:
C)	is not necessarily the same as potential income.
Feedback: In the Keynesian model, in the short run, there can be a difference between equilibrium income and potential income. Keynes believed that sometimes the economy needed help (from the government) in reaching potential income.

In macroeconomics, the money wealth effect occurs when an increase in the price level leads to:
C)	a decrease in the real value of the money people hold and a decrease in consumption.
Feedback: The money wealth effect is one reason aggregate demand curve is downward-sloping. A rising price level decreases the value of money wealth. Since people are poorer, they spend less.

Holding all other things constant, an increase in the price level:
D)	decreases net exports.
Feedback: As the price level increases, foreign goods will become a more attractive substitute, so exports will fall and imports will rise, causing net exports to decrease.

A larger multiplier effect will make the aggregate demand curve:
B)	flatter.
Feedback:
The multiplier effect causes the wealth, interest rate, and international effects to be larger. So, for any change in the price level, the effect on real output is larger. This makes the AD curve flatter.

Which of the following would cause the United State's aggregate demand curve to shift to the right?
C)	an increase in the money supply.
Feedback:
An increase in the money supply will reduce interest rates and stimulate the economy. An increase in the price level leads to movement along the curve, not a shift. The other possible answers describe scenarios that would decrease aggregate demand.


The long-run aggregate supply curve is:
C)	vertical.
Feedback:
The LAS curve is a vertical line which crosses the horizontal axis at the level of the country's potential output. Potential output is determined by technology and the availability of resources. Since it is unaffected by the price level, the LAS is vertical.


Given the graph above, this economy is experiencing:
B)	an inflationary gap.
Feedback:
Since the short-run equilibrium is to the right of the LAS curve, the equilibrium output is greater than the potential level of output. The amount by which equilibrium output exceeds potential output is called the inflationary gap.

If the economy is experiencing a recession, the market's self-correcting mechanism would involve:
A)	falling wages and prices and an increase in the short-run aggregate supply.
Feedback: Falling wages will cause an increase (downward shift) in the short run aggregate supply curve, which will help return the economy to potential output.


Macroeconomic policy is:
A)	difficult because economists don't know the exact level of potential output.
Feedback: Macroeconomic policy is difficult because economists don't know the exact level of potential output and because implementing fiscal policy is a slow, political, and imprecise process.