Exam 3 Questions Flashcards
(40 cards)
Which of the following statements is FALSE?
An increase in disposable income leads to a decrease in aggregate demand
The long-run aggregate supply curve is vertical because ______________
the natural level of real GDP is independent of the price level
The sticky-price theory implies that
All of the above are correct.
Events during the recession of 2007-2009 made many consumers pessimistic about their future incomes. How did this increased pessimism affect the aggregate demand curve?
The aggregate demand curve shifted to the left.
The velocity of money (V) in the equation MV = PY refers to:
The rate at which money is exchanged from one transaction to another.
USA 2005
M1: $1,367 billion
Real GDP (base year 2009) $14,236 billion
Price level (base year 2009) 0.92
Note: Price level = GDP deflator/100
Refer to the table above. Calculate the velocity of M1 in 2005. Round to the nearest 10th.
9.6
The “interest rate effect” can be described as an increase in the price level that raises the interest rate and reduces
investment and consumption spending
Refer to the figure above. Which of the following would cause a movement from point C to B?
an increase in government purchases
Criticism of stabilization policy argues that
the lag problem ends up being a cause of economic fluctuations
In the long-run equilibrium, how are unemployment rates typically described?
Unemployment is equal to the natural rate of unemployment.
What does the classical dichotomy suggest about the relationship between real and nominal variables?
Real variables are determined by different forces than nominal variables
If the economy is initially at point D and moves to point A, what action should the Federal Reserve take to meet its dual mandate?
Conduct contractionary monetary policy by increasing interest rates to reduce aggregate demand and stabilize prices.
What is the crowding out effect in the context of government borrowing?
Government borrowing competes with private investment for household savings, leading to higher interest rates and reduced private investment.
Which factor leads to an increase in investment in an economy?
Expectations of future profits
What could cause a movement from point B to point F on the aggregate demand curve?
An increase in consumption due to higher consumer confidence
How does Real GDP typically behave during recessions, as shown in the figure?
Real GDP declines during recessions.
A reduction in the inflation rate would make relative prices
less variable, making it more likely that resources will be allocated to their best use
Money neutrality suggests that an increase in the money supply leads to _______ in the price level and inflation and __________ in real GDP.
an increase/ no change
High and unexpected inflation has a greater cost
for savers in high income tax brackets than for savers in low income tax brackets
Refer to the figure below. A decrease in the interest rate, independent of the price level, would cause a movement from
D to A
A decrease in the nominal wage rate would lead to ________ in short-run aggregate supply and ________ in long-run aggregate supply
an increase/no change
An increase in human capital in an economy would lead to
an increase in long-run aggregate supply
When the interest rate decreases
1. The domestic currency depreciates and net exports increase.
2. The return to saving increases and households save a higher fraction of income.
3. Firms are able to finance more capital purchases and investment increases.
4. Aggregate demand increases.
1,3, and 4
Refer to the figures above. Which graph best describes the effect of a decrease in income, all else constant?
B
