Chapter 9 and 11

Question 1

In the long run, the economy will approach _____ employment.

Answer 1

• full

Question 2

In the short-run, economic coordination is _____.

Answer 2

• pronounced

Question 3

_____ leads to depressions and recessions according to Keynes, so the government ought to _____.

Answer 3

• insufficient demand

* buy stuff

Question 4

Auction prices are those that _____, while sticky / custom prices _____.

Answer 4

• adjust quickly / on a daily basis

* adjust slowly; like industrial commodities where changes in demand don’t immediately lead to price changes.

Question 5

For most firms, _____ is the largest cost; since this tends to be a _____, so the prices of firm products usually reflect that

Answer 5

• wages

* sticky price

Question 6

Sticky prices lead to a _____ economy where supply/demand fails to quickly _____.

Answer 6

• hampered

* bring prices and production into equilibrium

Question 7

Short-run macroeconomics is _____.

Answer 7

• period of time when prices don’t change or change very slowly

Question 8

Aggregate demand curve shows _____. It slopes _____.

Answer 8

• relationship between real GDP and prices

* downward

Question 9

The wealth effect _____; interest effect _____; and the international trade effect _____. These are all to _____ the AD curve.

Answer 9

• means that increases in spending result from falling price levels or increases in the real value of money
• says low interest rates lead to more consumption, more demand for goods / services
• says an open economy will lead to lower price levels and increased demand for goods
• move along.

Question 10

Factors that shift the AD curve to the right or left without changes in prices include _____.

Answer 10

• changes in supply of money, taxes, gov’t spending, and all other changes in demand.

Question 11

Increases in the supply of money will _____, leading to the AD curve shifting to the _____.

Answer 11

• increase aggregate demand

* right

Question 12

Decrease in taxes lead to _____, thereby shifting the AD curve _____.

Answer 12

• increased demand

* to the right

Question 13

At any price level, increases in gov’t spending shift AD _____

Answer 13

• to the right

Question 14

Any kind of _____ will generally shift the AD curve to the right.

Answer 14

• increase in demand without an increase in price

Question 15

The multiplier effect means that when the gov’t spends, the AD curve _____.
Multiplier = _____.

Answer 15

• Shifts to the right by a factor more than the original amount spent.
• 1 / (1 - MPC)

Question 16

A multiplier is _____.

Answer 16

• ratio between the total shift in aggregate demand to the initial shift.

Question 17

The consumption function is _____. The marginal propensity to consume is _____ and marginal propensity to save is _____. MPC + MPS = _____.

Answer 17

• C = C_a + by where C is total spending, C_a is the autonomous spending, b is the marginal propensity to consume, and y is the output of the economy.
• MPC = additional consumption / additional income
• MPS = additional savings / additional income
• 1

Question 18

Recessions are the result of sharp _____.

Answer 18

• increases in demand or decreases in supply

Question 19

Equilibrium output is _____ and the savings function is _____.

Answer 19

• y* = (C_a + I) / (1 - b)

* S = y - C; y = C + I; S = I

Question 20

Fiscal multiplier function is _____.

Answer 20

• C + I + G

Question 21

Both increases in gov’t spending and taxes will _____, although _____ will have a smaller multiplier effect.

Answer 21

• increase total planned expenditures for goods / services.

* taxes

Question 22

The broken window fallacy says _____.

Answer 22

• Keynes’ model means that breaking a window will help GDP and therefore society. The fallacy asks whether this is actually good for society.

Question 23

Automatic stabilizers are _____.

Answer 23

• welfare, taxes, unemployment insurance, “automatic” things that control GDP fluctuations

Question 24

Progress tax rates are automatic stabilizers in that _____.

Answer 24

• they stabilize income as it goes up and down

Question 25

An increase in tax rate will _____ MPC.

Answer 25

• decrease

Question 26

The permanent income mindset means _____. Lack of inventory cycle means _____. Both of these are factors of _____.

Answer 26

• stable income leads to spending habits based on the average.
• firms overproduce what is demanded need so their products sit on the shelves, leading to lags in the economy.
• economic stability

Question 27

To account for exports and imports in the expenditures vs. output graph, _____.

Answer 27

• Exports are (X) added to C_a+I+X+G that all contribute to the expenditure-intercept of the line, while the slope of this line is b-m where b is MPC and m is the marginal propensity to import.

Question 28

A reduction of income will change the expenditure-output chart by _____. This is because _____.

Answer 28

• flattening the line, or reducing its slope.

* a reduction in income means a reduction in the MPC, and MPC is slope.

Question 29

The locomotive effect means _____.

Answer 29

• When rich countries import crap from 3rd world countries, it tends to a situation where rich countries, in their development, “drag” developing countries with them.