Exam 4

Question 1

(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 1

Answer: AD curve shifts to the left

Question 2

(1) which curve shifts–AD or SRAS?, and (2) in what direction that curve shifts–right or left?

Labor becomes more productive

Answer 2

Answer: SRAS curve shifts to the right

Question 3

(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 3

Answer: AD curve shifts to the right

Question 4

(1) which curve shifts–AD or SRAS?, and (2) in what direction that curve shifts–right or left?

Foreign real national income increases

Answer 4

Answer: AD curve shifts to the right

Question 5

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

Answer 5

AD shifts left - P falls (decrease), Real GDP falls (decrease), unemployment rate rises (increase)

Question 6

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

Answer 6

SRAS shifts left - Price rises (increase), Real GDP falls (decrease), and unemployment rate rises (increase)

Question 7

State Say’s law

Answer 7

Say’s law states supply creates its own demand

Question 8

Explain why classical economists believed that there could never be a general surplus of goods and services in the economy

Answer 8

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)

Question 9

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

Answer 9

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

Question 10

Describe how a self-regulating economy moves out of a recessionary gap

Answer 10

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

Question 11

What is the implication of believing an economy is self-regulating?

Answer 11

The implication of believing an economy is self-regulating is an advocacy of laissez faire (noninterference) macroeconomic policy

Question 12

Explain why Keynes believed that Say’s law might not hold in a money economy

Answer 12

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

Question 13

state why Keynes was so concerned about consumption

Answer 13

Keynes was concerned with consumption because it is by far the largest part of total spending

Question 14

Define (autonomous consumption)

Answer 14

Autonomous consumption is the part of consumption that is independent of disposable income.

Question 15

Define (marginal propensity to consume)

Answer 15

The MPC measures the change in consumption as disposable income changes.

Question 16

Define (the consumption function)

Answer 16

The consumption function, C, equals C0 + (MPC)(Yd)

Question 17

why Keynes believed that the government may have a management role to play in the economy

Answer 17

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

Question 18

Describe the role of business inventories in moving the economy from disequilibrium to equilibrium in the TE-TP framework

Answer 18

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

Question 19

1. 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

Answer 19

B. AD curve shifts.

Question 20

2. 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

Answer 20

D. fall; rise

Question 21

3. 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

Answer 21

C. producing a level of Real GDP that is less than the level of natural Real GDP.

Question 22

4. 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.

Answer 22

D. every point on the institutional PPF.

Question 23

5. 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

Answer 23

D. more; increases; overproduced

Question 24

6. 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

Answer 24

D. Smith is likely to be a Keynesian economist and Jones is likely to be a classical economist.

Question 25

7. 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

Answer 25

D. 92