Exam 4

Question 1

recession

Answer 1

periods of falling real incomes and rising unemployment

Question 2

depressions

Answer 2

severe recessions (rare)

Question 3

short-run economic fluctuations are often called

Answer 3

business cycles

Question 4

is it true that economic fluctuations are regular and predictable?

Answer 4

no economic fluctuations are irregular and unpredictable

Question 5

as output decreases, unemployment rate

Answer 5

increases

Question 6

to study fluctuations most economists use the model of Aggregate Demand and Aggregate Supply which explains

=

Answer 6

the long-run
M x V = P x Y

Question 7

Classical Dichotomy separates

Answer 7

real and nominal variables

Question 8

Neutrality of money shows changes in the ___ dont effect _________ but do effect __________

Answer 8

MS dont effect real variables but only nominal

Question 9

In the short run changes in ______ variables can affect ______ variables

Answer 9

in the short run changes in nominal variables can affect real variables

Question 10

the aggregate demand (AD) curve shows quantity of goods and services demanded =

Answer 10

Y = C + I + G (constant) + NX
G = government funding

Question 11

if:
P is increasing C is:
P is increasing I is:
P is increasing NX is:

Answer 11

DECREASING
DECREASING
DECREASING

Question 12

The wealth effect supposes (P)rice rises and people hold fewer
P INCREASES, C…

Answer 12

goods and services so real wealth is lower
DECREASES

Question 13

the interest rate effect supposes
P increasing = Investment

Answer 13

price rises and to get more money consumers sell bonds and assets.
this drives up interest rates
Investment decreasing
( I depends negatively on interest rates)

Question 14

exchange rate effect =

M increasing

Answer 14

P increasing —>Investment increasing—>Money increasing—>eXports decreasing

M increasing —>NX decreasing

A weaker domestic currency means that the price you pay for foreign goods will generally rise significantly

Question 15

which of C, I, G, NX, P will shift the AD curve?

Answer 15

Changes in C, I, G, and NX will shift the ad curve but not price!

Question 16

examples of changes in C

Answer 16

stock market crash
preferences (consumption/ saving tradeoff)
tax cuts

Question 17

examples of changes in I

Answer 17

firms buy new computers, equipment, factories
expectations
interest rates, monetary policy
investment tax credit or other tax incentives

Question 18

examples of changes in G

Answer 18

federal spending, defense
state and local spending, roads and schools

Question 19

examples of changes in NX

Answer 19

recessions in countries that buy our exports
appreciation/ depreciation resulting from international speculation in foreign exchange market

Question 20

Shifts in C, I, G, NX that shit AD to the RIGHT

Answer 20

C increasing
I increasing
G increasing
NX increasing

Question 21

Shifts in C, I, G, NX that shit AD to the LEFT

Answer 21

C decreasing
I decreasing
G decreasing
NX decreasing

Question 22

if a ten year old investment tax credit expires what shifts?

Answer 22

Investment falls so
AD curve shifts left

Question 23

if the US exchange rate falls what shifts?

Answer 23

NX rises so
AD curve shifts right

Question 24

if a fall in prices increases the real value of consumers’ wealth what shifts?

Answer 24

move down along AD curve (wealth effect)

Question 25

if state governments replace sales taxes with new taxes on interest, dividends, and capital gains what shifts?

Answer 25

C rises so AD shifts right

Question 26

Long-Run Aggregate-Supply Curve (LRAS) =

Answer 26

Y + A F(K,L,H,N)

Question 27

the natural rate of output(YN) is the amount of output the economy produces when YN is also called

Answer 27

unemployment is at its natural rate potential output or full-employment output

Question 28

3 theories of SRA's (Short-Run Aggregate Supply)

Answer 28

some type of market imperfection result: output deviates from its natural rate (Y is different then Yn) when the actual price level (P) deviates from the price level people expected(Pe)

Question 29

3 theories of SRA's: The Sticky-Wage Theory

Answer 29

imperfection: nominal wages are sticky in the SR, they adjust sluggishly due to labor contracts, social norms firms and workers set the nominal wage in advance based on Pe, the price level they expect

Question 30

If P > Pe revenue and production ….

Answer 30

revenue is higher, but labor is not production is more profitable so firms increase output and employment

Question 31

The Sticky-Price Theory: Firms set sticky prices in advance based on

Answer 31

Pe

Question 32

3 theories of SRA's: The Misperceptions Theory

Answer 32

Imperfection: Firms may confuse changes in P with changes in the relative price of the products they sell. For example if the price level falls unexpectedly, suppliers will mistakenly believe that as the prices of their products fall, it is a drop of the relative price of their products. Suppliers then believe that the reward of supplying their product has fallen, thus they decrease the quantity that they supply

Question 33

In all 3 theories, Y deviates from YN when P deviates from PE Y =

Answer 33

Y = YN + a (P – Pe) Y = output YN = Natural rate of output (long-run) a = a > 0, measures how much Y responds to unexpected changes in P

Question 34

3 theories of SRA's: The imperfections in these theories are temporary. Over time, In the LR, PE = AS curve is

Answer 34

sticky wages and prices become flexible misperceptions are corrected In the LR, PE = P AS curve is vertical

Question 35

Wealth effect:

Answer 35

As the price level falls, the real value of money increases, making consumers feel wealthier, which increases consumption.

Question 36

Interest-rate effect:

Answer 36

A lower price level reduces interest rates, encouraging more investment spending.

Question 37

Exchange-rate effect:

Answer 37

A lower domestic price level can lead to a lower interest rate, causing the domestic currency to depreciate, which boosts net exports.

Question 38

The aggregate demand curve shifts right if either a. speculators gain confidence in U.S. assets or foreign countries enter into recession. b. speculators gain confidence in U.S. assets or recessions in foreign countries end. c. speculators lose confidence in U.S. assets or foreign countries enter into recession. d. speculators lose confidence in U.S. assets or recessions in foreign countries end.

Answer 38

b. speculators gain confidence in U.S. assets or recessions in foreign countries end. If speculators gain confidence in U.S. assets, demand for U.S. assets increases, strengthening the dollar and boosting investment, shifting aggregate demand (AD) right. If recessions in foreign countries end, their incomes rise, leading to higher demand for U.S. exports, also shifting AD right.

Question 39

The long-run aggregate supply curve shifts right if a. immigration from abroad increases. b. the capital stock increases. c. technology advances. d. All of the above are correct.

Answer 39

d. All of the above are correct. The long-run aggregate supply (LRAS) curve represents an economy’s productive capacity. It shifts to the right when there's an increase in resources or productivity: More immigration → larger labor force More capital stock → more tools and equipment for production Technological advances → more efficient production

Question 40

LRAS shifts right when:

Answer 40

👨‍🔧 Labor increases (e.g., immigration, population growth) 🏗️ Capital increases (e.g., investment in machinery, infrastructure) 🧠 Technology improves (innovation, productivity gains) 📚 Human capital grows (education, training)

Question 41

SRAS shifts when:

Answer 41

📈 Input prices change (e.g., oil prices, wages) 🔧 Temporary supply shocks (e.g., natural disasters) 🏛️ Government regulations change ☝️ Expectations about inflation shift

Question 42

he sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected, a. production is more profitable and employment rises. b. production is more profitable and employment falls. c. production is less profitable and employment rises. d. production is less profitable and employment falls.

Answer 42

d. production is less profitable and employment falls.

Question 43

If the prices fall what happens to foreign purchases AND the supply of money?

Answer 43

Foreign purchases increases and the supply of dollars in the market for foreign - currency exchange increases