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Flashcards in Practice exam 2 Deck (47):
1

Aggregate demand is:

total expenditure in the economy

2

An increase in exports from the US to other countries would shift:

aggregate demand to the right

3

A government “stimulus package” would shift:

aggregate demand to the right

4

A government “stimulus package” would:

increase prices and raise Real GDP

5

A ban on international tourism from Ebola would shift:

aggregate demand to the left

6

Natural Real GDP is represented by:

the long run aggregate supply curve

7

A personal income tax cut in the US should shift:

aggregate demand to the right

8

A personal income tax cut in the US should:

increase prices and raise Real GDP

9

A decrease in investment spending in the US would shift:

aggregate demand to the left

10

A decrease in investment spending in the US would:

decrease prices and lower Real GDP

11

In the Classical view of the world, what factor makes savings equal to investment?

interest rates

12

(True/False) Workers in the Classical world are willing to accept wage cuts because
they consider only the nominal value of their wages, which will be unchanged.

False
-They care about the real value

13

(True/False) Classical economists believe that the economy is stable and selfcorrecting.

True

14

The graph above represents a(n):

recessionary gap
(look at 14 on test)

15

On Figure 1, draw a line to represent how the Classical economists believed the gap would be
eliminated

The line a will move to the right

16

The change you drew in #15 would happen, according to Classical economists:

because wages fall, without any government action

17

In Figure 1, the curve labeled ____________________ is the AD.

C

18

In Classical theory, if a recession starts in the economy, what will happen?

wages and prices will fall to correct it

19

(True/False) Classical economics believes that we need to look at the economy in
the long run, not the short run

True

20

Bread costs $1 per loaf, my hourly wage is $6. If my wage goes to $8 and bread to $2, the
real wage has _____ and the nominal wage has ______.

fallen, risen

21

(True/False) Classical economics depends on markets working correctly in a world of
competitive markets.

True

22

Keynesian economics is:

a. demand oriented

23

Suppose my income this week is $6,000 and I spent $4,500, and last week my income was
$4,000 and I spent $3,000. What is my MPC?

Income up by 2000
Spending went up by 1500
.75 MPC. 1 / 1 - MPC = 4

24

If my MPC is what you calculated in #23, a $10 billion increase in government spending
would cause how big a change in GDP?

40

25

According to Keynesians, if investment falls by $10 billion, the economy will:

fall by more than $10 billion

26

(True/False) Minsky’s theory comes from Keynes’ theory.

True

27

Classical economists believed that interest rates are determined by:

savings and investment

28

Keynesian economists believed that interest rates are determined by:

supply and demand for money

29

Draw a new line on Figure 2 to represent how a Keynesian would argue that this gap should
be closed.

C moves to the right in the Keynesian world
since the government makes it move

30

The change you drew in #29 would happen, according to Keynesian economists:

only through government spending and taxing changes

31

_________ (True/False) According to the Keynesians, the economy may be in disequilibrium.

True

32

According to a Keynesian, __________ is the most volatile factor of the following:

investment

33

The key to supply side economics is _________________

Incentive

34

_________________ was the first president to believe in
supply side economics.

Ronald Reagan

35

The legacy of supply side economics is that we now all care about ______ as a major
macroeconomic variable, when we didn’t before.

productivity

36

A “Supply shock” is:

an unexpected change in aggregate supply that is disruptive to the economy

37

(True/False) New Classicals argue that new technologies destroy old jobs before
they create many new jobs.

True

38

(True/False) New Classicals believe the economy adjusts to changes almost
instantaneously.

True

39

Most modern economists are:

New Keynesians

40

List all the names associated with the LRAS, and explain why the LRAS is considered to be
all of those things.

1. LRAS ( long run aggregate supply) 2. Full employment GDP (if we are on that line we are at
full employment. 3. Natural GDP (in the long run the economy will go there

41

Draw the aggregate demand and supply graph as a Classical would in the long run, and
explain what it means.

• Classical believe nominal and real is separate
◦Like a cross

42

If you are new keynesians you believe in the
word _____. Wages and prices adjust slowly

sticky

43

John Leonard was killed by _________.

income tax

44

In the long run we are all ________.

dead

45

According to Keyne most important thing to investment is _______

Expectations

46

Keynes phrase on investment is ________ ______.

Animal Spirits

47

Bipmetalism example william jennings bryan cross of gold
he first see the scarecrow and factory workers

Wizard of Oz