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One potential problem with using fiscal policy to close recessionary output gaps is that:
sustained government deficits can be harmful to long-run economic growth.
 
According to Keynesians, the primary reason money is not neutral is
price stickiness.
 
In the Keynesian model in the long run, an increase in the money supply will raise
the price level but not the level of output.
 
Using the Keynesian model, the effect of an increase in the effective tax rate on capital would be to
cause _____ in the real interest rate and ______ in output in the short run.
a decrease; a decrease
 
Using the Keynesian model, the effect of a decrease in the effective tax rate on capital would be to
cause ________ in the real interest rate and ______ in output in the long run.
an increase; no change
 
Using the Keynesian model, the effect of a government-imposed ceiling on interest rates paid on personal checking accounts that is lower than the current market interest rate would be to cause _____ in the real interest rate and _____ in output in the short run.
a decrease; an increase
 
The portion of planned aggregate expenditure that is independent of output is called ______ expenditure.
autonomous
 
Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy can affect ______ as well
as aggregate demand and that fiscal policy is _______.
potential output; not flexible enough
 
If Keynes' law applies during economic contractions and Say's law applies during economic expansion,
how will the three goals of macroeconomics be affected?
trade-offs and connections may differ in the short run and the long run
 
If the price level of what firms produce is rising across an economy, but the costs of production are constant, then:
higher profits will induce expanded production
 
___________________ happens when the economy is producing at its potential and unemployment is at the natural rate of unemployment.
Full employment GDP
 
In an AD/AS model, the point where the economy has excess capacity is called the:
Keynesian zone of the AS curve
 
In an AD/AS model:
the portion of the Short Run Aggregated Supply curve where GDP is far below potential and the
Short Run Aggregated Supply curve is flat
 
When prices of outputs in an economy become sufficiently high causing production to exceed potential GDP, the resulting:
hyper-intense production will be unsustainable in the long run
 
The ____________ describes a situation where sufficient credit is available, but the economy experiences
a reduction in consumption and investment.
interest rate effect
 
Short-run equilibrium output is the level of output at which actual output:
equals planned aggregate expenditure.
 
Changes in government purchases affect planned spending _____, and changes in taxes and/or transfers
affect planned spending _______.
directly; indirectly
 
Which of the following will have the greatest influence on the slope of the demand curve in a single market model?
substitute goods
 
As the aggregate price level in an economy rises, ____________________.
interest rates increase
 
As the aggregate price level in an economy decreases:
imports decrease
 
Aggregate demand curves slope downwards for each of the following reasons EXCEPT:
The interest rate effect: As prices for outputs rise, it costs more to make the same purchases, driving
up the demand for money, raising interest rates and reducing investment spending.
 
Whether the economy is in a recession is illustrated in the AD/AS model by how close the ______ is to the potential GDP line.
equilibrium
 
The _________________ means that a higher price level leads to lower real wealth.
wealth effect
 
In the Keynesian cross diagram, the 45-degree line represents the short-run equilibrium condition that:
Y = PAE.
 
For an economy starting at potential output, a decrease in planned investment in the short run results in a(n):
recessionary output gap.
 
The income-expenditure multiplier arises because one person's additional spending becomes another person's
additional income that will generate additional:
spending
 
In the basic Keynesian model, a decline in autonomous spending:
reduces short-run equilibrium output.
 
Government policies intended to decrease planned spending and output are called ______ policies.
contractionary
 
Melanie decided to save 20% of her annual earnings for 10 years so she would have a down payment for a house.
After 5 years, what change in the economy would cause an increase in the purchasing power of the funds she has managed to save?
deflation
 
_______________________ are economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the ___________.
neoclassical economists; long run
 
Aggregate supply (AS) denotes the relationship between the ______________ that firms choose to produce and sell and the_____________, holding the price of inputs fixed.
total quantity; price level for output
 
The maximum quantity that an economy can produce, given its existing levels of labor, physical capital, technology,
and institutions, is called:
potential GDP
 
_________________ results when an economy experiences high unemployment and high inflation at the same time.
stagflation
 
Say's Law argues that a given _________ must create an equivalent _________ somewhere else in the economy.
value of supply; value of demand
 
When the economy of a country is operating close to its full capacity:
cyclical unemployment is close to zero
 
Economic production has fallen to less than full potential due to inadequate incentives for firms to produce.
The duration of this economic condition will likely be:
short term
 
Potential GDP in the U.S. will be unaffected by ____________________.
the unemployment rate
 
The components of demand are:
consumption, investment, government spending, exports and imports
 
The 4 macroeconomic goals are: economic growth, low unemployment, low inflation, and ________________.
a sustainable balance of trade
 
Which of the following must be present in order for the aggregate supply curve to form an upward slope?
fixed cost of inputs combined with rising prices for outputs
 
In an AS-AD diagram, __________________________ could explain a rise in cyclical unemployment?
a shift to the left in either AS or AD
 
The term "full employment GDP" is synonymous with which of the following?
potential GDP
 
In macroeconomics, _____________________ denotes the relationship between the total quantity of goods
and services and the price level for output.
aggregate demand (AD)
 
The graph above reflects a significant increase in world oil prices.
What will the impact on aggregate supply most likely lead to? an increase in input prices
 
Why is productivity growth considered to be the most important factor in the AD/ASAD/AS model?
it shifts the AS curve in the long-term
 
In the basic Keynesian model, an increase in government purchases:
increases short-run equilibrium output.
 
Automatic stabilizers are provisions in the law which create automatic ______ in government spending
or ______ in taxes when real output declines.
increases; decreases
 
In the Keynesian cross diagram, the vertical intercept of the expenditure line equals ______ and the slope of the e
xpenditure line equals _____.
autonomous expenditures; the mpc
 
In the Keynesian model, a $1 billion increase in autonomous consumption leads to ______ in short-run equilibrium output.
a greater than $1 billion increase
 
The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, the ensuing financial crisis:
increased the level of uncertainty about the future.
 
For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n):
expansionary output gap.
 
Expansionary policies are government stabilization policies intended to increase:
planned spending
 
Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating
output gaps, are called ______ policies.
stabilization
 
The four components of planned aggregate expenditure are:
consumption, planned investment, government purchases, and net exports
 
Induced expenditure is the portion of planned aggregate expenditure that:
depends on output.
 
Autonomous expenditure is the portion of planned aggregate expenditure that:
is independent of output.
 
Planned aggregate expenditure (PAE) equals:
C + Ip + G + NX.
 
The two parts of planned aggregate expenditure are ______ expenditures and ______ expenditures.
autonomous; induced
 
In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:
Increase production
 
Planned aggregate expenditure is total:
planned spending on final goods and services.
 
In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:
increase production.
 
Aggregate supply curves are ___________ for low levels of output, and _________ for high levels of output.
relatively flat; relatively steep
 
The __________________ in an AD/AS diagram is most relevant to Keynes's Law.
flat portion of the AS curve
 
The ____________________ in an AD/AS diagram is most relevant to Say's Law.
steep portion of the AS curve
 
In an AD/AS model:
real GDP is shown on the horizontal axis
 
When an economy's output increases and the price level decreases, the _________ curve hasshifted to the ____________.
AS; right
 
The following table shows the aggregate supply and demand data for a country.
Price Level       Aggregate Demand     Aggregate Supply
100                  10,000                                     4,000
200                  9,000                           5,000
300                  8,000                           5,000
400                  7,000                           7,000
500                  6,000                           8,500
600                  5,000                           9,000
700                  4,000                           9,500
What is the equilibrium output?
7,000
 
In an AD/ASAD/AS diagram, __________________________ could explain a rise in cyclical unemployment?
a shift to the left in either AS or AD
 
Which of the following must be present in order for the aggregate supply curve to form an upward slope?
fixed cost of inputs combined with rising prices for outputs
 
Keynesians are skeptical of the classical theory that recessions are periods of increased mismatch between workers and jobs because
help-wanted advertising falls during recessions.
 
The gift exchange motive suggests that
workers who feel well treated will work harder and more efficiently.
 
A model in which workers won't be concerned about the possibility of being fired if they don't work hard, because their
wage is so low, is called
a shirking model.
 
According to the efficiency wage model, firms will pay the real wage that
maximizes effort per dollar of real wage.
 
Assuming no change in the effort curve of employees, the efficiency wage model implies that
the real wage is rigid and equals the efficiency wage.
 
The marginal product of labor for this firm is given by MPN = E (100 - N)/9. The firm will choose to pay a wage such that the effort level is
27.
 
The marginal product of labor for this firm is given by MPN = E (100 - N)/9. How many workers will the firm employ?
96
 
In the efficiency wage model with the efficiency wage above the market-clearing wage, the level of employment depends on
labor demand alone.
 
In the efficiency wage model with the efficiency wage above the market-clearing wage, when employment is at its full-employment level
there is an excess supply of labor.
 
In the efficiency wage model, if the real wage is higher than the market-clearing wage so that there is an excess supply of labor,
employers will not hire workers who are willing to work for a lower wage.
 
According to the efficiency wage model, during a recession, firms will not reduce real wages because
this would reduce worker effort and productivity.
 
The efficiency wage model can be modified to allow real wages to vary over the business cycle by assuming that
workers' effort may depend on the unemployment rate and the real wage.
 
In the Keynesian model, the real wage is mildly procyclical because
workers' effort may depend on the unemployment rate and the real wage.
 
In the efficiency wage model, an increase in productivity would
increase output but have no effect on the real wage.
 
In the Keynesian model with efficiency wages, the full-employment level is determined at the intersection of the labor
demand curve and the efficiency wage line.
 
A model in which individual producers act as price setters, because there are only a few sellers and the product they
sell is not standardized, is called
imperfect competition.
 
When the demand for an imperfect competitor's product is greater than it planned, the firm will
meet the demand at its set price.
 
The theory that firms will be slow to change their products' prices in response to changes in demand because
there are costs to changing prices is called
menu cost theory.
 
According to the menu cost theory, firms will be slow in changing their prices because
the cost of changing the price might exceed the additional revenue the price change would generate.
 
In setting the price of its product, a monopolistic competitor sets the price equal to its marginal cost plus an amount called the
markup.
 
In the Keynesian model in the short run, the amount of employment is determined by the effective labor demand curve and the level of
output.
 
In the Keynesian model, short-run equilibrium occurs where
the IS and LM curves intersect.
 
In the Keynesian model in the short run, a decrease in the money supply will cause
a decrease in output and an increase in the real interest rate.
 
The distinguishing feature that determines whether an analysis is classical or Keynesian is
the speed of price adjustment.
 
In the Keynesian model, money is
neutral in the long run, but not in the short run.
 
In the Keynesian model in the long run, a decrease in the money supply will cause
no change in either the real interest rate or output.
 
In the Keynesian model, which curve is vertical?
LRAS
 
In the Keynesian model in the long run, a decrease in the money supply will cause _____ in the real interest rate
and _____ in the price level.
no change; a decrease
 
In the Keynesian model, an increase in government purchases affects output by
increasing aggregate demand as national saving declines.
 
In the Keynesian model in the short run, a decrease in government purchases causes output
to _____ and the real interest rate to _____.
fall; fall
 
In the Keynesian model in the long run, an increase in taxes causes the price level to _____ and the real interest rate to _____.
fall; fall
 
Suppose the government decided to tighten monetary policy and decrease government expenditures. In the short run in the
Keynesian model, the effect of these policies would be to _____ the real interest rate and _____ the level of output.
have an ambiguous effect on; decrease
 
Suppose the government decided to ease monetary policy, then increase taxes. In the short run in the Keynesian model,
the effect of these policies would be to _____ the real interest rate and _____ the level of output.
lower; have an ambiguous effect on
 
The 1980s were characterized by _____ monetary policy and _____ fiscal policy.
tight; easy
 
Easy monetary policy and tight fiscal policy lead to
low real interest rates.
 
According to Keynesians, the primary source of business cycle fluctuations is
aggregate demand shocks.
 
The Keynesian theory is consistent with the business cycle fact that inflation is
procyclical and lagging.
 
The idea that firms retain some workers in a recession, whom they would otherwise lay off, to avoid the costs of hiring and
training, is called
labor hoarding.
 
The use of macroeconomic policies to smooth or moderate the business cycle is known as
aggregate demand management.
 
In the Keynesian model, the difference between using monetary and fiscal policy to eliminate a recession is that an expansionary monetary policy will leave the economy with a lower real
interest rate than an expansionary fiscal policy.
 
In the Keynesian model, the difference between no intervention by the government during a recession and intervention
using expansionary monetary or fiscal policy is that no intervention will return the economy to its equilibrium level of output
slower than intervention will and at a lower price level.
 
A problem with the use of aggregate demand management to stabilize the business cycle is that the precise amount
that output will change in response to monetary or
fiscal policy isn't known.
 
In the 1990s, nominal interest rates in Japan were approximately
0%.
 
A situation in which expansionary monetary policy has no effect on the economy is known as
a liquidity trap.
 
Critics of Japan's macroeconomic policies in the 1990s argue that Japan erred in not
using expansionary fiscal policy more effectively.
 
Monetary expansion can still be effective in getting out of liquidity trap if it's combined with
expansionary fiscal policy.
 
In the long run in the Keynesian model, a beneficial supply shock would leave the economy with a higher level of output,
but also a _____ real interest rate and a _____ price level.
lower; lower
 
In the short run in the Keynesian model, a sharp increase in oil prices would leave the economy with a _____
level of output and a _____ real interest rate.
lower; higher
 
If input prices rise and AS shifts to the left by 2,000 units at each price level, what output level will equal the new equilibrium price?
7,000
 
The assumption that firms meet the demand for their products at preset prices is the key assumption upon which ______ is built.
the basic Keynesian model
 
The largest component of planned aggregate expenditure is:
Consumption
 
Autonomous expenditure is the portion of planned aggregate expenditure that:
is independent of output.
 
Planned aggregate expenditure (PAE) equals:
C + Ip + G + NX.
 
The two parts of planned aggregate expenditure are ______ expenditures and ______ expenditures.
autonomous; induced
 
In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:
Increase production
 
In the Keynesian cross diagram, the vertical intercept of the expenditure line equals ______ and the slope of the
expenditure line equals _____.
autonomous expenditures; the mpc
 
In the Keynesian model, a $1 billion increase in autonomous consumption leads to ______ in short-run equilibrium output.
a greater than $1 billion increase
 
The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, the ensuing financial crisis:
increased the level of uncertainty about the future.
 
For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n):
expansionary output gap.
 
Expansionary policies are government stabilization policies intended to increase:
planned spending
 
Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps,
are called ______ policies.
stabilization
 
In the basic Keynesian model, an increase in government purchases:
increases short-run equilibrium output.
 
Automatic stabilizers are provisions in the law which create automatic ______ in government spending
or ______ in taxes when real output declines.
increases; decreases
 
The four components of planned aggregate expenditure are:
consumption, planned investment, government purchases, and net exports
 
Induced expenditure is the portion of planned aggregate expenditure that:
depends on output.
 
Planned aggregate expenditure is total:
planned spending on final goods and services.
 
In the short run with predetermined prices, when output is less than planned aggregate expenditure, firms will:
increase production.
 
In the Keynesian cross diagram, the 45-degree line represents the short-run equilibrium condition that:
Y = PAE.
 
For an economy starting at potential output, a decrease in planned investment in the short run results in a(n):
recessionary output gap.
 
The income-expenditure multiplier arises because one person's additional spending becomes another person's
additional income that will generate additional:
spending
 
In the basic Keynesian model, a decline in autonomous spending:
reduces short-run equilibrium output.
 
Government policies intended to decrease planned spending and output are called ______ policies.
contractionary
 
One potential problem with using fiscal policy to close recessionary output gaps is that:
sustained government deficits can be harmful to long-run economic growth.
 
The portion of planned aggregate expenditure that is independent of output is called ______ expenditure.
autonomous
 
Short-run equilibrium output is the level of output at which actual output:
equals planned aggregate expenditure.
 
Changes in government purchases affect planned spending _____, and changes in taxes and/or transfers affect
planned spending _______.
directly; indirectly
 
Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy can affect ______ as well as aggregate
demand and that fiscal policy is _______.
potential output; not flexible enough
 
In an AD/AS diagram, an increase in structural unemployment will:
have no effect on AS or AD
 
What is the term used to describe the maximum quantity that an economy can produce, in context of its existing inputs,
market and legal institutions?
potential GDP
 
In macroeconomics, what name is given to the costs of changing prices that businesses must consider?
menu costs
 
The equilibrium quantity of labor increases and the equilibrium wage decreases when:
labor supply shifts to the right, if wages are flexible
 
The Keynesian economic framework is based on an assumption that:
prices and wages are sticky and do not adjust rapidly
 
According to the Keynesian framework, ___________________ in ____________________ may cause inflation,
but not a recession.
an increase; domestic investment
 
The equilibrium quantity of labor and the equilibrium wage increase when:
labor demand shifts to the right, if wages are flexible
 
The equilibrium quantity of labor decreases and the equilibrium wage increases when:
labor supply shifts to the left, if wages are flexible
 
Consumption, investment, government spending, exports and imports are:
all components of aggregate demand
 
If markets throughout the global economy all have flexible and continually adjusting prices, then:
each economy will always head for its natural rate of unemployment
 
According to the _____________________ argument, a market- oriented economy has no obvious way to implement
a plan of systematic wage reductions.
coordination
 
The equilibrium quantity of labor and the equilibrium wage level decrease when:
labor demand shifts to the left, if wages are flexible
 
The Keynesian view of economics assumes that:
wages are sticky
 
From a neoclassical view, which of the following is a true statement?
the economy cannot sustain production above its potential GDP in the long run
 
________________ economists place an emphasis on __________ run economic performance.
neoclassical; long
 
Which of the following is a building block of neoclassical economics?
wages and prices will adjust in a flexible manner
 
In the neoclassical version of the AD/AS model, which of the following should you use to represent the AS curve?
a vertical line drawn at the level of potential GDP
 
If an economy experiences a decrease in aggregate demand due to a decline in consumer confidence and output falls
below potential GDP, which of the following is likely to occur?
a rise in unemployment
 
If a neoclassical model shows increasing wages in the economy over the long run, what else will likely occur?
inflationary increase in price level
 
Which of the following government policies would be supported by neoclassical macroeconomic assumptions?
focus on long-term growth and on controlling inflation
 
A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy,
regardless of the level of:
aggregate demand
 
Which of the following represents a Keynesian point of view of macroeconomics?
creating increases in aggregate demand to reduce unemployment's
 
Which of the following would be classified in the M1 category of the money supply?
demand deposits
 
When inventory levels rise,
firms choose not to expand production levels
 
Current consumption spending is most determined by
household income
 
The y-intercept of the consumption function is
autonomous consumption spending - spending that would occur when income is zero
 
The x-axis of the consumption function is
disposable income
 
The position of the aggregate consumption function is determined by
expected future income and level of household wealth
 
A decline in investment spending eventually leads to
a decline in consumption spending
 
A firm that finances its investment by using its own retained earnings incurs an opportunity cost ____
equal to the market interest rate
 
Investment spending expands when the current level of productive capacity falls short of what firms
expect to use
 
A firm that builds up inventories is engaging in ____ because ____
investment, it allows for future consumption
 
A firm is MOST likely to experience unplanned inventory accumulation when
there is an unexpected decrease in aggregate demand
 
Why was there a surge in housing starts between 2000 and 2006?
Low interest rates led to a large increase in new home construction
 
Unplanned inventory accumulation will occur when
sales fall short of expectations
 
The slope of the aggregate consumption function is equal to:
the MPC
 
When the economy is in income-expenditure equilibrium:
there is no unplanned inventory accumulation. (supply = demand)
 
Output expands when
planned aggregate spending is greater than GDP.
 
When GDP is higher than the equilibrium level of income-expenditure:
unplanned inventories accumulate
 
When planned aggregate spending does NOT equal GDP, there is a self-adjustment process that operates through:
inventories
 
If the agg. consumption function shifts up, the level of income-expenditure GDP will:
increase by more than the increase of the consumption function. The magnitude of the income change will
be determined by the size of the multiplier.
 
Individuals save and then cause a slowdown in economic activity, spiraling down and down and down
The paradox of thrift
 
The size of the change in real GDP arising from an initial change in aggregate spending is equal to the:
value of the multiplier times initial change in aggregate spending
 
With respect to measuring the money supply, which of the following terms describes a checking account?
demand deposits
 
Which of the following is a valid criticism of the use of money as a store of value in modern economies?
annual inflationary loss of buying power
 
_____________ is a completely inadequate mechanism ___________ in a modern advanced economy.
barter; for trying to coordinate trades
 
________________ serves society in three functions: medium of exchange, unit of account, and store of value.
money
 
Lance paid $175,000 for his house in 2003 and sold it for $325,000 in 2006. What function did the house serve during
the time Lance owned it?
store of value
 
In macroeconomics, ________________ describes a situation in which two people each want to exchange some good or service
that the other can provide.
double coincidence of wants
 
In modern economics, credit cards are a ______________ because of their wide acceptance as a method of payment for
both goods and services.
medium of exchange
 
If mollusk shells were accepted as a method of payment in modern-day markets, what economic role would they play in the financial system?
medium of exchange
 
In macroeconomics, a ___________________ describes the common way in which market values are measured in an economy.
unit of account
 
Due to inflationary pressures, the national income of households has been spread across a higher overall price base for goods
and services. How will this affect be shown in an AD/ASAD/AS model?
a downward sloping AD curve
 
The _____________ holds that a rise in price level will make domestic goods relatively more expensive, ____________ exports
and _______________ imports.
foreign price effect; discouraging; encouraging