EC 211 SECOND TEST: QUIZZES Flashcards
Which of the following events will increase short-run aggregate supply
an advance in technology
a decrease in money wage rate…
increases short-run aggregate supply
a change in capital stock…
shifts SAS and Shifts LAS
Which of the following shifts aggregate demand rightward?
an increases in investment expenditure
When real GDP exceeds potential GDP, then the economy is in…
An inflationary gap situation
If the economy is in long-run equilibrium and aggregate demand increases, then in the short-run…
the price level rises and real GDP increases
Which school of thought believes that real GDP always equals potential GDP?
only classical
When disposable income increases from $6 trillion to $6.5 trillion, consumption expenditure increases from $5.5 trillion to $5.9 trillion. The MPC equal…
0.8
If the MPC increases from 0.75 to 0.9 and there are no imports,…
the multiplier becomes larger
If there are no taxes or imports and MPC= 0.5, the multiplier equals…
2.0
If the multiplier is 10 and there are no taxes or imports, then the MPC is
0.9
If the price level increases, the AE curve shifts…
Downward and we move along the AD curve
if the price level is held constant and the slope of the AE curve is 0.75, a decrease in the investment of $100 leads to a decrease in real GDP of…
$400
Which of the following shifts the AE curve AND shifts the AD curve?
(i)A decrease in investment
(ii)A change in the price level
(iii)An increase in exports
(i) and (iii)
Which of the following could start demand-pull inflation?
An increase in government expenditure
Cost-push inflation might start to occur if the…
Money wage rate increases
The SAS curve shifts leftward if…
The money wage rate increases
Stagflation is the combination of a____and____…
Rise in price level; a decrease in real GDP
The short-run Phillips curve shows
An inverse relationship between the unemployment rate and inflation rate
If the natural unemployment rate increases, then the short-run Phillips curve shifts____and long-run Phillips curve____…
Rightward; rightward
According to real business cycle theory, workers’ decision to work now versus later depends on…
the real interest rate
If the government runs a surplus total amount of debt is…
decreasing
The difference between automatic fiscal policy and discretionary fiscal policy is that…
Congress must pass laws implementing discretionary fiscal policy
In the short-run, an increase in government expenditure will…
Shift the aggregate demand curve rightward and increase real GDP
Assuming there are no supply-side effects, an increase in government expenditure ____the AD curve and ____the SAS curve…
Shift rightward; does not shift
Using the AD-AS model, in the short run, an increase in government expenditure…
Increase both real GDP and the price level
Automatic stabilization occurs…
Because taxes and transfer payments fluctuate with real GDP
The structural deficit is the deficit that occurs when…
Real GDP equals potential GDP
Why is SAS upward-sloping
money wages and prices are assumed to be constant/ higher prices will lead to higher output and higher profit
Why is LAS vertical
money wage and price level change proportionally, employment is always at full-employment/ regardless of how price level changes GDP does not change
Any factors that shift SAS…
will also shift LAS
The wealth effect
as price increases, real wealth decreases, to restore wealth people save more and consume less (as price decreases AD increases)`
The Substitution effect
as price increases, domestic goods become more expensive, people will substitute domestic goods with foreign goods DOWNWARD SLOPE IN AD
Classical View
-wages and prices adjust so fast that real GDP is always equal to potential GDP
-the economy always remains at long-run equilibrium
(Classical economists argue that tax creates negative effects on incentives and efficiency)
Keynesian View
-economy is NOT self-regulating
-fiscal and monetary policies are needed to restore full-employment
(pessimism lowers AD and leads to recession)
Monetarist View
-all recessions are the result of inappropriate monetary policies
-they prescribe low taxes and a constant rate of growth of the money supply
How is the multiplier related to MPC, MPI, and tax?
Both imports and taxes will reduce the size of the multiplier.
An increase in MPC will increase the multiplier and a decrease in MPC will decrease the multiplier.
Why is AD downward sloping?
price level and real GDP are inversely related.
Impact of deficit or surplus on debt.
Debt is the sum of all previous deficits minus the sum of all previous surpluses. Hence deficit adds to debt and surplus reduces debt.
Automatic stabilizers…
Do no require any action by Congress/ Tax revenue depends on income and hence, real GDP
Structural Deficit
is the deficit or surplus that would occur if the economy is at full employment or real GDP equals potential GDP.
Cyclical Deficit
is an actual deficit or actual surplus minus structural deficit or structural surplus, respectively.
short-run Phillips curves.
SRPC shows an inverse relationship between the inflation rate and unemployment
long-run Phillips curves.
LRPC shows the relationship between unemployment and the inflation rate when the actual inflation rate equals the expected inflation rate.
