Question 1

If falling prices cause an expectation of even lower prices in the future,this argues for a relatively ________ AD curve,thus ________ the Pigou effect.
A)steep,weakening
B)steep,intensifying
C)flat,weakening
D)flat,intensifying

Accepted Answer

If falling prices cause an expectation of even lower prices in the future, consumers will delay their purchases, which will shift the aggregate demand (AD) curve to the left, making it relatively steep. This will weaken the Pigou effect, which suggests that lower prices can stimulate economic activity by increasing real money balances and consumption. A steep AD curve would imply that a given decrease in prices would lead to a bigger decrease in output and employment, thus reducing the effectiveness of monetary policy in stabilizing the economy.

Question 2

Suppose that from an initial AD/SAS/LAS intersection,the money supply grows by six percent.At the same time,the nominal wage rises by ten percent.As a result,output will be ________ the natural GDP,with a price level ________.
A)below,10 percent lower
B)below,10 percent higher
C)below,between 6 and 10 percent higher
D)above,that is unchanged
E)above,between 6 and 10 percent higher

Accepted Answer

When the money supply grows by six percent, it typically leads to an increase in aggregate demand, which would push the price level up and increase output. However, if nominal wages rise by ten percent, this increases production costs, which can shift the aggregate supply curve to the left, increasing the price level further but reducing output. Therefore, output will be below the natural GDP because of the higher production costs, and the price level will be higher, but not as high as a ten percent increase in nominal wages might suggest, because the increase in the money supply also plays a role in determining the price level. The exact price level increase would depend on the relative shifts of the demand and supply curves but is expected to be between 6 and 10 percent higher.

Question 3

At any AD/SAS intersection to the left of LAS,excess ________ in the labor market is putting ________ pressure on the nominal wage.
A)supply,upward
B)supply,downward
C)demand,upward
D)demand,downward

Accepted Answer

At any AD/SAS intersection to the left of LAS (long-run aggregate supply), there is excess supply of labor in the market (since the economy is producing below its potential), and this puts downward pressure on the nominal wage. Therefore, the correct answer is B, where excess supply is represented by "supply" and the downward pressure on nominal wage is represented by "downward".

Question 4

If autonomous spending does NOT respond to changes in the interest rate,the resulting ________ IS curve implies that an economy ________ self-correct.
A)horizontal,will instantly
B)horizontal,can fail to
C)vertical,will instantly
D)vertical,can fail to

Accepted Answer

A vertical IS curve indicates that changes in the interest rate do not affect output, suggesting that the economy may not self-correct through interest rate adjustments.

Question 5

With a falling price level,we move ________ along the demand for labor curve and thus trace ________ along the short-run aggregate supply curve.
A)upward,upward
B)upward,downward
C)downward,upward
D)downward,downward

Accepted Answer

The answer of With a falling price level,we move ________...

Question 6

With unchanging labor supply and demand curves,employment greater than equilibrium employment requires a real wage ________ the equilibrium real wage,at a point that is off of the labor ________ curve.
A)below,supply
B)below,demand
C)above,supply
D)above,demand

Accepted Answer

For employment to be greater than equilibrium employment with unchanging labor supply and demand curves, the real wage must be below the equilibrium real wage to incentivize employers to hire more workers. This situation occurs at a point off of the labor supply curve because the labor supply curve represents the relationship between the wage rate and the quantity of labor that workers are willing to supply at those wage rates. When the wage is below equilibrium, it indicates that the quantity of labor supplied is less than the quantity of labor demanded at that wage, hence the point is off the supply curve.

Question 7

Keynes said that even should monetary impotence not occur,full self-correction could be short-circuited by
A)the price level failing to fall sufficiently due to downwardly-rigid wages.
B)the price level failing to fall sufficiently due to continuously falling wages.
C)the price level falling too much due to downwardly-rigid wages.
D)the price level falling too much due to continuously falling wages.

Accepted Answer

Keynes argued that downwardly-rigid wages could prevent prices from falling enough to stimulate demand and restore full employment. This means that even if monetary policy is effective, it may not be enough to achieve full self-correction in the economy. Option B, C, and D are incorrect as continuously falling wages or excessive wage cuts could exacerbate the problem of low demand and lead to further economic contraction.

Question 8

In the case of "unresponsive expenditures," the operation of the Pigou effect
A)shifts the LM curve downward,raising output.
B)shifts the LM curve downward,but fails to affect output.
C)shifts the IS curve rightward,but since that curve is vertical this has no effect on output.
D)shifts the IS curve rightward,raising output.

Accepted Answer

The answer of In the case of "unresponsive expenditures," the...

Question 9

Keynes held out the possibility of "monetary impotence" causing the aggregate demand curve to be ________ below the natural real GDP,which results in an economy with ________ self-correction.
A)vertical,instant
B)vertical,no
C)horizontal,instant
D)horizontal,no

Accepted Answer

The answer of Keynes held out the possibility of "monetary...

Question 10

John Maynard Keynes revolutionized macroeconomics with the 1936 publication of his book
A)Macro-Economics.
B)The Wealth of Nations.
C)The General Theory of Employment,Interest,and Money.
D)Aggregate Economic Analysis.

Accepted Answer

Keynes revolutionized macroeconomics with the publication of 'The General Theory of Employment, Interest, and Money' in 1936. This book challenged classical economic theory and emphasized the role of government intervention in stabilizing the economy.

Question 11

Suppose that from an initial labor market equilibrium the price level suddenly falls.The resulting movement ________ the labor demand curve results in an excess ________ labor,which then puts ________ pressure on the nominal wage to restore labor market equilibrium.
A)up,demand for,upward
B)down,supply of,upward
C)up,supply of,downward
D)down,demand for,upward
E)up,demand for,downward

Accepted Answer

A fall in the price level reduces the demand for labor, leading to an excess supply of labor, which puts downward pressure on nominal wages to restore equilibrium.

Question 12

At any AD/SAS intersection to the right of LAS,excess ________ in the labor market is putting ________ pressure on the nominal wage.
A)supply,upward
B)supply,downward
C)demand,upward
D)demand,downward

Accepted Answer

The answer of At any AD/SAS intersection to the right...

Question 13

From an initial AD/SAS/LAS intersection,a fiscal stimulus with no initial change in the nominal wage causes output to ________ while the price level ________.
A)rise,remains constant
B)rise,rises
C)remains constant,rises
D)remains constant,falls
E)fall,rises

Accepted Answer

A fiscal stimulus increases aggregate demand, leading to higher output and a higher price level in the short run, assuming nominal wages are initially fixed.

Question 14

Suppose that from an initial AD/SAS/LAS intersection,the money supply grows by ten percent.At the same time,the nominal wage rises by six percent.As a result,output will be ________ the natural GDP,with a price level ________.
A)below,10 percent lower
B)below,10 percent higher
C)below,between 6 and 10 percent lower
D)above,that is unchanged
E)above,between 6 and 10 percent higher

Accepted Answer

When the money supply grows, it typically leads to an increase in aggregate demand (AD), which would push the economy towards higher output and higher prices. The increase in nominal wages by 6% suggests that the cost of production for firms increases, which could shift the aggregate supply (AS) curve to the left, indicating a higher cost of production but not as drastically as the increase in AD. Therefore, output would be above the natural GDP because of the increased demand, and the price level would be higher, but the exact increase in price level would be tempered by the increase in nominal wages, placing it between 6 and 10 percent higher.

Question 15

The "Pigou effect" is the stimulus to aggregate demand when a lower price level causes
A)a lower interest rate to increase fixed investment.
B)a lower interest rate to increase inventory investment.
C)a lower interest rate to increase the demand for consumer durables.
D)holdings of money to increase in purchasing power,thus raising consumption demand.

Accepted Answer

The Pigou effect states that when the price level decreases, the purchasing power of money increases, leading to an increase in consumption demand. This is because individuals now have more money to spend on goods and services, leading to an increase in aggregate demand. Option D is the only choice that reflects this concept. Option A is incorrect because a lower interest rate would increase investment demand, not consumption demand. Option B is incorrect because a lower interest rate would increase borrowing and investment in inventory, not consumption demand. Option C is incorrect because a lower interest rate would increase borrowing and investment in consumer durables, not consumption demand.

Question 16

The combination of the Keynes,Pigou,expectations,and redistribution effects results in an economy that self-corrects given a sufficiently low price level,when the four effects give rise to an AD curve that is
A)vertical.
B)downward-sloping and that stays to the left of LAS.
C)downward-sloping and that intersects LAS.
D)downward-sloping and that stays to the right of LAS.

Accepted Answer

The combination of the four effects results in an AD curve that is downward-sloping and intersects LAS. This is because the Keynes and Pigou effects lead to a negatively sloped AD curve, while the expectations effect and redistribution effect can shift the AD curve. However, when the price level is sufficiently low, the Keynes and Pigou effects dominate and the AD curve intersects LAS. At this point, the economy is in equilibrium and there are no further incentives for firms or consumers to change their behavior, resulting in self-correction.

Question 17

Falling prices tend to redistribute income from ________,which plausibly ________ the Pigou effect.
A)debtors to creditors,reinforces
B)debtors to creditors,weakens
C)creditors to debtors,reinforces
D)creditors to debtors,weakens

Accepted Answer

Falling prices tend to redistribute income from debtors to creditors, which plausibly weakens the Pigou effect.

Question 18

If the labor supply curve shifts to the left,the equilibrium real wage ________ and the equilibrium level of employment ________.
A)rises,rises
B)rises,falls
C)falls,rises
D)falls,falls

Accepted Answer

If the labor supply curve shifts to the left, it means there are fewer workers available for employment. This will result in an increase in the equilibrium real wage, as there are now fewer workers to fill available jobs. However, the decrease in available workers will also decrease the equilibrium level of employment, as businesses will be unable to hire as many workers at the higher wage rate.

Question 19

Keynes discussed the possibility of a horizontal LM curve,which causes a ________,thus the possibility of ________.
A)vertical AD curve,monetary impotence
B)vertical AD curve,an escape from monetary impotence
C)horizontal AD curve,monetary impotence
D)horizontal AD curve,an escape from monetary impotence

Accepted Answer

A horizontal LM curve implies that the money supply is perfectly elastic, leading to monetary impotence because changes in the money supply do not affect interest rates or output, thus resulting in a vertical AD curve.

Question 20

Regarding the theoretical operation of the Pigou,expectations,and redistribution effects,does the U.S.experience between 1929 and 1933 provide any evidence?
A)Since the price level did not fall,no evidence is provided.
B)Only the Pigou effect appears to have operated.
C)The Pigou effect appears to have overwhelmed the other effects.
D)All three effects appear to have helped cushion the fall in output.
E)The expectations and redistribution effects appear to have overwhelmed the Pigou effect.

Accepted Answer

The U.S. experience between 1929 and 1933 suggests that the expectations and redistribution effects overwhelmed the Pigou effect. The price level fell sharply during this period, which would have normally triggered the Pigou effect, but it was apparently overshadowed by the negative expectations of investors and the massive redistributions of income that occurred.

Quiz 8: Aggregate Demand, aggregate Supply, and the Great Depression

If falling prices cause an expectation of even lower prices in the future,this argues for a relatively AD curve,thus the Pigou effect.

Suppose that from an initial AD/SAS/LAS intersection,the money supply grows by six percent.At the same time,the nominal wage rises by ten percent.As a result,output will be the natural GDP,with a price level .

At any AD/SAS intersection to the left of LAS,excess in the labor market is putting pressure on the nominal wage.

If autonomous spending does NOT respond to changes in the interest rate,the resulting IS curve implies that an economy self-correct.

With a falling price level,we move along the demand for labor curve and thus trace along the short-run aggregate supply curve.

With unchanging labor supply and demand curves,employment greater than equilibrium employment requires a real wage the equilibrium real wage,at a point that is off of the labor curve.

Keynes said that even should monetary impotence not occur,full self-correction could be short-circuited by

In the case of "unresponsive expenditures," the operation of the Pigou effect

Keynes held out the possibility of "monetary impotence" causing the aggregate demand curve to be below the natural real GDP,which results in an economy with self-correction.

John Maynard Keynes revolutionized macroeconomics with the 1936 publication of his book

Suppose that from an initial labor market equilibrium the price level suddenly falls.The resulting movement the labor demand curve results in an excess labor,which then puts pressure on the nominal wage to restore labor market equilibrium.

At any AD/SAS intersection to the right of LAS,excess in the labor market is putting pressure on the nominal wage.

From an initial AD/SAS/LAS intersection,a fiscal stimulus with no initial change in the nominal wage causes output to while the price level .

Suppose that from an initial AD/SAS/LAS intersection,the money supply grows by ten percent.At the same time,the nominal wage rises by six percent.As a result,output will be the natural GDP,with a price level .

The "Pigou effect" is the stimulus to aggregate demand when a lower price level causes

The combination of the Keynes,Pigou,expectations,and redistribution effects results in an economy that self-corrects given a sufficiently low price level,when the four effects give rise to an AD curve that is

Falling prices tend to redistribute income from ,which plausibly the Pigou effect.

If the labor supply curve shifts to the left,the equilibrium real wage and the equilibrium level of employment .

Keynes discussed the possibility of a horizontal LM curve,which causes a ,thus the possibility of .

Regarding the theoretical operation of the Pigou,expectations,and redistribution effects,does the U.S.experience between 1929 and 1933 provide any evidence?