Exam 4 Flashcards
(1) which curve shifts–AD or SRAS?, and (2) in what direction that curve shifts–right or left?
Interest rates in the economy increase
Answer: AD curve shifts to the left
(1) which curve shifts–AD or SRAS?, and (2) in what direction that curve shifts–right or left?
Labor becomes more productive
Answer: SRAS curve shifts to the right
(1) which curve shifts–AD or SRAS?, and (2) in what direction that curve shifts–right or left?
Households expect higher income in the future
Answer: AD curve shifts to the right
(1) which curve shifts–AD or SRAS?, and (2) in what direction that curve shifts–right or left?
Foreign real national income increases
Answer: AD curve shifts to the right
What will happen to the short run equilibrium (1) price level, (2) quantity of Real GDP, and (3) unemployment rate in each of the following cases? (Increase, Decrease, or Stay the same).
Interest rates in the economy increase
AD shifts left - P falls (decrease), Real GDP falls (decrease), unemployment rate rises (increase)
What will happen to the short run equilibrium (1) price level, (2) quantity of Real GDP, and (3) unemployment rate in each of the following cases? (Increase, Decrease, or Stay the same).
Labor becomes less productive
SRAS shifts left - Price rises (increase), Real GDP falls (decrease), and unemployment rate rises (increase)
State Say’s law
Say’s law states supply creates its own demand
Explain why classical economists believed that there could never be a general surplus of goods and services in the economy
Classical economists believed that there could never be a general surplus of goods and services in the economy because production creates demand sufficient to purchase all goods and services produced (i.e., because they believed in Say’s law)
Describe the relationship between Real GDP and Natural Real GDP and between the unemployment rate and the natural unemployment rate in the three states of an economy
In a recessionary gap, Real GDP < Natural Real GDP.
In an inflationary gap, Real GDP > Natural Real GDP.
In long-run equilibrium, Real GDP = Natural Real GDP.
In a recessionary gap, unemployment rate > natural unemployment rate.
In an inflationary gap, unemployment rate < natural unemployment rate.
In long-run equilibrium, unemployment rate = natural unemployment rate
Describe how a self-regulating economy moves out of a recessionary gap
The surplus of labor that occurs during a recessionary gap drives down the wage rate, shifting the SRAS curve rightward until the recessionary gap disappears
What is the implication of believing an economy is self-regulating?
The implication of believing an economy is self-regulating is an advocacy of laissez faire (noninterference) macroeconomic policy
Explain why Keynes believed that Say’s law might not hold in a money economy
Keynes believed that Say’s law might not hold in a money economy because an increase in savings might not be matched by an equal increase in investment, since both saving and investment depend on a number of factors that may be far more influential than the interest rate
state why Keynes was so concerned about consumption
Keynes was concerned with consumption because it is by far the largest part of total spending
Define (autonomous consumption)
Autonomous consumption is the part of consumption that is independent of disposable income.
Define (marginal propensity to consume)
The MPC measures the change in consumption as disposable income changes.
Define (the consumption function)
The consumption function, C, equals C0 + (MPC)(Yd)
why Keynes believed that the government may have a management role to play in the economy
Keynes believed that it is possible for the economy to be in equilibrium and in a recessionary gap, too, and that government intervention may be necessary since the private sector may not be able to increase C or I by enough to get to an equilibrium at full employment
Describe the role of business inventories in moving the economy from disequilibrium to equilibrium in the TE-TP framework
There is some optimum inventory level for businesses. If TE < TP, inventory levels rise unexpectedly, sending firms the signal to cut production until TP equals TE. If TE > TP, the the opposite occurs
- If investment changes because of a change in a factor other than the price level, then the
A. economy moves from one point on an AD curve to another point on the same curve.
B. AD curve shifts.
C. economy moves from one point on a short-run aggregate supply (SRAS) curve to another point on the same curve.
D. SRAS curve shifts.
E. none of the above
B. AD curve shifts.
- The wage rate rises. As a result, in the short run Real GDP will __________ and the price level will __________.
A. rise; rise
B. fall; fall
C. remain constant; fall
D. fall; rise
E. rise; fall
D. fall; rise
- If the natural unemployment rate is 5 percent and the current unemployment rate is 6 percent, then the economy is
A. producing a level of Real GDP that is greater than the level of natural Real GDP.
B. in an inflationary gap.
C. producing a level of Real GDP that is less than the level of natural Real GDP.
D. A and B
E. B and C
C. producing a level of Real GDP that is less than the level of natural Real GDP.
- The unemployment rate is equal to the natural unemployment rate at
A. some point within the interior of the physical PPF but beyond the institutional PPF.
B. some point within the interior of the physical PPF, but we cannot locate it with more accuracy.
C. some point within the interior of the institutional PPF, but we cannot locate it with more accuracy.
D. every point on the institutional PPF.
E. every point on the physical PPF.
D. every point on the institutional PPF.
- When total production is greater than total expenditures, __________ is produced than households want to buy, which leads to __________ in inventory, which signals firms that they have __________, which causes firms to cut back production.
A. less; decreases; underproduced
B. less; increases; overproduced
C. more; decreases; underproduced
D. more; increases; overproduced
D. more; increases; overproduced
- Two economists, Smith and Jones, are discussing the currently high unemployment rate. Smith says that something ought to be done quickly because the economy may not be able to restore itself to full employment. Jones says that it is better to take a “hands-off” approach. Which of the following is most likely to be true?
A. Smith and Jones are most likely both Keynesian economists with a few minor differences of opinion.
B. Smith and Jones are most likely both classical economists with a few minor differences of opinion.
C. Jones is likely to be a Keynesian economist and Smith is likely to be a classical economist.
D. Smith is likely to be a Keynesian economist and Jones is likely to be a classical economist.
E. None of the above
D. Smith is likely to be a Keynesian economist and Jones is likely to be a classical economist.
- If income rises from $1,000 to $1,400 and consumption rises from $800 to $1,168, the marginal propensity to consume is __________ percent.
A. 8
B. 85
C. 15
D. 92
D. 92
