Question 1

In the aggregate demand-aggregate supply model, everything else remaining unchanged, a decrease in government spending shifts the ____curve to the_____ .

Accepted Answer

A decrease in government spending will lead to a decrease in the overall demand for goods and services in the economy. This will cause a leftward shift in the aggregate demand curve, as there will be lower demand for goods and services across all price levels. This is represented by a movement along the fixed aggregate supply curve, resulting in a decrease in both output and the price level.

Question 2

If the Fed does not change its monetary policy in an economy that is producing an output lower than the full- employment level of output, the short-run aggregate supply curve will eventually shift____, and the price level will_____.

Accepted Answer

In an economy producing below its full-employment output level, without a change in monetary policy, over time, wages and input costs tend to decrease, leading to an increase in short-run aggregate supply (shift to the right). This increase in supply typically results in a lower price level.

Question 3

According to_____ , people use all available information in making their economic decisions.

Accepted Answer

The theory of rational expectations suggests that individuals make economic decisions based on all available information, including past events and future expectations.

Question 4

The argument that a change in policy systematically alters the structure of econometric models is known as the

Accepted Answer

The argument that a change in policy systematically alters the structure of econometric models is known as the Lucas critique, named after economist Robert Lucas. It highlights the importance of considering how individuals and firms might respond to changes in policy when estimating the effects of policy changes on the economy. The Keynesian cross refers to a specific graphical representation of aggregate demand and supply in the short run, cross-equation restrictions refer to constraints imposed on econometric models when estimating multiple equations simultaneously, and the endogeneity principle relates to the potential feedback loops between economic variables, which can complicate econometric analysis.

Question 5

If an economy is in a recession, with output below its full-employment level, a(n)_____ return the economy to its long-run equilibrium, which would cause the price level to_____

Accepted Answer

If the economy is in a recession, expansionary policies such as increasing government spending or reducing taxes can be implemented to increase output and return the economy to its long-run equilibrium. This would cause an increase in aggregate demand, potentially leading to an increase in the price level.

Question 6

The development of the large structural macroeconomic models was spearheaded by _____economists.

Accepted Answer

The large structural macroeconomic models were primarily developed by Keynesian economists, who believed in active government intervention in the economy to stabilize it and promote full employment. These models were used extensively in policy-making during the post-WWII period.

Question 7

If there is no policy action in an economy that is producing an output below its full-employment level, then

Accepted Answer

In an economy producing below its full-employment level without policy intervention, the price level typically declines slowly due to decreased demand for goods and services, which can eventually help in restoring equilibrium.

Question 8

Suppose business firms collectively become pessimistic about prospects for future profits because of continued worries about terrorism.Explain how this would affect investment, aggregate demand, output, and the price level in the short run and the long run.

Accepted Answer

The answer of Suppose business firms collectively become pessimistic about...

Question 9

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in money supply shifts the____ curve to the _____.

Accepted Answer

An increase in money supply increases the purchasing power of consumers, resulting in higher consumption and investment spending. This leads to an increase in demand for goods and services, shifting the aggregate demand curve to the right.

Question 10

Macroeconomic models from the 1950s and 1960s that consist of hundreds of equations that describe the economy in great detail are called

Accepted Answer

Macroeconomic models from the 1950s and 1960s that consist of hundreds of equations that describe the economy in great detail are referred to as large, structural macroeconomic models.

Question 11

One of the reasons that led to the inconsistency of the large structural macroeconomic models was

Accepted Answer

Large structural macroeconomic models faced inconsistency because individual equations were often estimated in isolation, ignoring the interdependencies between them.

Question 12

The_____ believe that an economy will adjust on its own without any government policy interventions.

Accepted Answer

The belief that the economy will adjust on its own without any government policy interventions is a core principle of classical economics. Classical economists such as Adam Smith argued that markets work best when left alone and that government interference could actually harm the economy.

Question 13

The_____ believe that it takes a long time for prices and wages to change to restore equilibrium in an economy.

Accepted Answer

Keynesians argue that prices and wages are sticky, meaning they do not adjust quickly to changes in supply and demand, leading to periods of disequilibrium in the economy. This contrasts with classical economists, who believe in the rapid adjustment of prices and wages to achieve market equilibrium.

Question 14

Suppose an economy is producing an output above its full-employment level.To return the economy to long-run equilibrium, a(n) _____monetary policy can be used, which would cause the price level to ____.

Accepted Answer

Contractionary monetary policy can be used to decrease the money supply and increase interest rates, leading to reduced spending and investment. This slowdown in economic activity can help lower the price level and bring the economy back to its full-employment level, thus restoring long-run equilibrium.

Question 15

Which of the following is a difference in the views of Keynesian and classical economists?

Accepted Answer

Keynesians generally believe that policymakers can intervene effectively in the economy, while classical economists often argue that policymakers lack full knowledge and that markets are better left to adjust on their own.

Question 16

A key failure of large structural macroeconomic models, according to the theory of rational expectations, is that the models assumed that expected inflation is independent of

Accepted Answer

Large structural macroeconomic models failed because they assumed expected inflation was independent of monetary policy, whereas the theory of rational expectations suggests that agents' expectations will incorporate all available information, including the impacts of monetary policy on inflation.

Question 17

If an economy is in a recession, with output below its full-employment level, a(n) ______ to return the economy to its long-run equilibrium, which would cause the price level to_____

Accepted Answer

An expansionary policy, such as increasing government spending or reducing taxes, would increase aggregate demand and output, which would cause the price level to increase. This policy would work towards returning the economy to its long-run equilibrium level of output.

Question 18

Suppose ATM costs increased because of additional security required to prevent electronic fraud.Explain how this would affect money demand, aggregate demand, output, and the price level in the short run and the long run.

Accepted Answer

The answer of Suppose ATM costs increased because of additional...

Question 19

In some sophisticated macroeconomic models, if monetary policy is used to combat recession, the real interest rate _____, whereas the real interest rate ______if fiscal policy is used.

Accepted Answer

In these models, if monetary policy is used to combat recession, the central bank lowers interest rates to stimulate borrowing and spending, leading to a decrease in the real interest rate. However, if fiscal policy is used, the government increases spending, which can lead to an increase in demand for loanable funds and an increase in the real interest rate.

Question 20

Answer the questions below.
a.Suppose the economy is initially in long-run equilibrium in the AD-AS model.Draw a diagram showing long-run equilibrium, including the AD, LRAS, and SRAS curves.

b.Now suppose stock prices decline sharply.Draw a new diagram showing the AD, LRAS, and SRAS curves.How have the level of output and the price level changed? What happens to consumption spending and investment spending?

c.Redraw your diagram from part b, then draw new lines to show what would happen if the Fed changed monetary policy to return the economy to full-employment equilibrium.Does the money supply increase or decrease? Which curve (AD, LRAS, or SRAS) shifts as a result of the Fed's policy change? What happens to the price level and level of output compared with what they were in part b? What happens to consumption spending and investment spending compared with what they were in part b?

Accepted Answer

The answer of Answer the questions below.
a.Suppose the economy is...

Quiz 12: The Aggregate-Demandaggregate-Supply Model

In the aggregate demand-aggregate supply model, everything else remaining unchanged, a decrease in government spending shifts the curve to the_ .

If the Fed does not change its monetary policy in an economy that is producing an output lower than the full- employment level of output, the short-run aggregate supply curve will eventually shift, and the price level will_.

According to_____ , people use all available information in making their economic decisions.

The argument that a change in policy systematically alters the structure of econometric models is known as the

If an economy is in a recession, with output below its full-employment level, a(n) _ return the economy to its long-run equilibrium, which would cause the price level to_

The development of the large structural macroeconomic models was spearheaded by _____economists.

If there is no policy action in an economy that is producing an output below its full-employment level, then

Suppose business firms collectively become pessimistic about prospects for future profits because of continued worries about terrorism.Explain how this would affect investment, aggregate demand, output, and the price level in the short run and the long run.

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in money supply shifts the curve to the _.

Macroeconomic models from the 1950s and 1960s that consist of hundreds of equations that describe the economy in great detail are called

One of the reasons that led to the inconsistency of the large structural macroeconomic models was

The_____ believe that an economy will adjust on its own without any government policy interventions.

The_____ believe that it takes a long time for prices and wages to change to restore equilibrium in an economy.

Suppose an economy is producing an output above its full-employment level.To return the economy to long-run equilibrium, a(n) _monetary policy can be used, which would cause the price level to .

Which of the following is a difference in the views of Keynesian and classical economists?

A key failure of large structural macroeconomic models, according to the theory of rational expectations, is that the models assumed that expected inflation is independent of

If an economy is in a recession, with output below its full-employment level, a(n) __ to return the economy to its long-run equilibrium, which would cause the price level to_

Suppose ATM costs increased because of additional security required to prevent electronic fraud.Explain how this would affect money demand, aggregate demand, output, and the price level in the short run and the long run.

In some sophisticated macroeconomic models, if monetary policy is used to combat recession, the real interest rate _, whereas the real interest rate __if fiscal policy is used.

Quiz 12: The Aggregate-Demandaggregate-Supply Model

In the aggregate demand-aggregate supply model, everything else remaining unchanged, a decrease in government spending shifts the ____curve to the_____ .

If the Fed does not change its monetary policy in an economy that is producing an output lower than the full- employment level of output, the short-run aggregate supply curve will eventually shift____, and the price level will_____.

According to_____ , people use all available information in making their economic decisions.

The argument that a change in policy systematically alters the structure of econometric models is known as the

If an economy is in a recession, with output below its full-employment level, a(n) _____ return the economy to its long-run equilibrium, which would cause the price level to_____

The development of the large structural macroeconomic models was spearheaded by _____economists.

If there is no policy action in an economy that is producing an output below its full-employment level, then

Suppose business firms collectively become pessimistic about prospects for future profits because of continued worries about terrorism.Explain how this would affect investment, aggregate demand, output, and the price level in the short run and the long run.

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in money supply shifts the____ curve to the _____.

Macroeconomic models from the 1950s and 1960s that consist of hundreds of equations that describe the economy in great detail are called

One of the reasons that led to the inconsistency of the large structural macroeconomic models was

The_____ believe that an economy will adjust on its own without any government policy interventions.

The_____ believe that it takes a long time for prices and wages to change to restore equilibrium in an economy.

Suppose an economy is producing an output above its full-employment level.To return the economy to long-run equilibrium, a(n) _____monetary policy can be used, which would cause the price level to ____.

Which of the following is a difference in the views of Keynesian and classical economists?

A key failure of large structural macroeconomic models, according to the theory of rational expectations, is that the models assumed that expected inflation is independent of

If an economy is in a recession, with output below its full-employment level, a(n) ______ to return the economy to its long-run equilibrium, which would cause the price level to_____

Suppose ATM costs increased because of additional security required to prevent electronic fraud.Explain how this would affect money demand, aggregate demand, output, and the price level in the short run and the long run.

In some sophisticated macroeconomic models, if monetary policy is used to combat recession, the real interest rate _____, whereas the real interest rate ______if fiscal policy is used.

In the aggregate demand-aggregate supply model, everything else remaining unchanged, a decrease in government spending shifts the curve to the_ .

If the Fed does not change its monetary policy in an economy that is producing an output lower than the full- employment level of output, the short-run aggregate supply curve will eventually shift, and the price level will_.

If an economy is in a recession, with output below its full-employment level, a(n) _ return the economy to its long-run equilibrium, which would cause the price level to_

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in money supply shifts the curve to the _.

Suppose an economy is producing an output above its full-employment level.To return the economy to long-run equilibrium, a(n) _monetary policy can be used, which would cause the price level to .

If an economy is in a recession, with output below its full-employment level, a(n) __ to return the economy to its long-run equilibrium, which would cause the price level to_

In some sophisticated macroeconomic models, if monetary policy is used to combat recession, the real interest rate _, whereas the real interest rate __if fiscal policy is used.