Question 1

Based on your understanding of the AS- AD model and the IS- LM model, graphically illustrate and explain what effect a tax increase will have on the economy. In your graphs, clearly illustrate the short- run and medium- run equilibria.

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Question 2

Assume that the economy is initially operating at the natural level of output. An increase in firm confidence will cause:

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Question 3

Which of the following events would cause a shift in the aggregate supply curve in the short run?

Accepted Answer

An increase in the markup would cause an increase in the overall cost of production, causing a leftward shift in the short-run aggregate supply curve. The other options do not directly affect the aggregate supply curve in the short run. An increase in the money supply could potentially lead to inflation in the long run, but it would not have an immediate effect on the aggregate supply curve. A decrease in government spending, increase in taxes, and decrease in consumer confidence could all affect aggregate demand, but they would not directly shift the aggregate supply curve in the short run.

Question 4

When output exceeds the natural level of output, explain what adjustments will occur in the labour market and discuss what effect they will have on output and the price level.

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Question 5

Which of the following events will cause the largest rightward shift (as measured horizontally) of the AD curve?

Accepted Answer

A 15% increase in the nominal money supply will cause the largest rightward shift of the AD curve because it directly increases consumer and investment spending, resulting in a higher demand for goods and services. A decrease in the aggregate price level (A), nominal wage (B), and government spending (E) will also shift the AD curve rightward, but to a lesser extent than an increase in the nominal money supply. A tax increase (C) will shift the AD curve leftward, so it is not a valid option.

Question 6

Suppose the economy is operating at a point where output is greater than the natural level of output. Given this information, is the actual price level equal to the expected price level at the current level of output?

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Question 7

Based on your understanding of the AS- AD model and the IS- LM model, graphically illustrate and explain what effect an increase in the minimum wage will have on the economy. In your graph, clearly illustrate the short- run and medium- run equilibria. Also include in your answer an explanation of the effects of this change in minimum wage on the labour market and the equilibrium real wage.

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Question 8

Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a decrease in government spending. This fiscal contraction will, in the short run, cause a decrease in:

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Question 9

At the current level of output, suppose the actual price level is less than the price level that individuals expect. We know that:

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Question 10

The aggregate supply curve will shift downward when which of the following occurs?

Accepted Answer

All of the above factors can lead to a decrease in production costs for firms, leading to an increase in aggregate supply. A decrease in firm's markup over labor costs (A) will cause the overall cost of production to decrease, leading to an increase in aggregate supply. Similarly, a decrease in the expected price level (B) will decrease firms' costs of production, as they do not need to spend as much on inputs to produce output, leading to a shift in the aggregate supply curve to the right. A decrease in the level of employment protection (C) can lead to a decrease in the cost of labor, and therefore increase the aggregate supply in the economy. Finally, a decrease in unemployment benefits (D) can lead to a decrease in the cost of labor, incentivizing workers to work more, leading to an increase in the aggregate supply curve.

Question 11

Assume that the economy is initially operating at the natural level of output. An increase in taxes will cause which of the following?

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Question 12

The neutrality of money is consistent with which of the following statements?

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Question 13

Results obtained from the Taylor model suggest that the effects of changes in the nominal money supply are neutral after:

Accepted Answer

According to the Taylor model, the effects of changes in the nominal money supply are neutral after four years. This is due to the fact that changes in the money supply only affect output and inflation levels with a lag, and this lag is estimated to be around 2-3 years for output and 3-4 years for inflation. Therefore, the full effects of changes in the money supply are not felt until about four years after the initial change.

Question 14

As product markets become less competitive and the markup rises, we would expect which of the following to occur?

Accepted Answer

When product markets become less competitive, firms have more power to set prices and increase the markup. This results in a decrease in the real wage as firms pay workers less than they would in a more competitive market. The interest rate and aggregate price level are not directly affected by changes in competition in product markets. There may be some effect on output in the short run, but the question specifically asks about the medium run.

Question 15

Which of the following would increase the short- run output effects of a monetary expansion?

Accepted Answer

A decrease in the marginal propensity to save (Option A) would lead to an increase in consumption spending and therefore aggregate demand, thus increasing short-run output effects. The slope of the IS curve being very flat (Option B) would indicate that small changes in interest rates would lead to large changes in output, thus increasing short-run output effects. An increase in the marginal propensity to consume (Option C) would lead to an increase in consumption spending and therefore aggregate demand, thus increasing short-run output effects. An increase in the interest rate sensitivity of investment (Option D) would lead to a larger response in investment spending to changes in interest rates, thus increasing short-run output effects. Therefore, all of the above options (E) would increase the short-run output effects of a monetary expansion.

Question 16

Which of the following events will cause an increase in the aggregate price level?

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Question 17

From the mid- 1990s to the end of 2008, the real oil price:

Accepted Answer

The real oil price steadily increased from the mid-1990s to the end of 2008.

Question 18

Explain what is meant by the neutrality of money.

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Question 19

An increase in the price of oil will tend to cause which of the following in the short run?

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Question 20

An increase in the aggregate price level will cause:

Accepted Answer

An increase in the aggregate price level leads to an increase in the demand for money, which, in turn, increases the interest rate. This is represented by an upward shift in the LM curve in the IS-LM model.

Quiz 7: Putting All Markets Together: the Asad Model