Aggregate Demand And Supply Models Eco/372 Week 3 Team Assignment

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1. News Story: Workers at a car-manufacturing plant in Flint, Michigan are laid off because the economy is weak and GM cars aren't selling well. 

GM isn't sure when the plant will reopen. What type of unemployment describes the workers' situation?

§ Frictional unemployment

§ Structural unemployment

§ Full unemployment

§ Cyclical unemployment


2. Globalization that allows governments to pursue expansionary policies can be dangerous because it can lead to:

§ A reduction in the debt ceiling

§ Goods price inflation

§ Asset price inflation

§ Goods price deflation


3. Macroeconomics is: 

§ The study of aggregate economic relationships.

§ An analysis of economic reality that proceeds from the parts to the whole.

§ The study of pricing policies of firms and the purchasing decisions of households.

§ The study of individual choice and how that choice is influenced by economic forces.


4. Which of the following types of unemployment is considered to be the most controllable through demand-side macroeconomic policy?

§ Frictional unemployment

§ Cyclical unemployment

§ Structural unemployment

§ Natural unemployment


5. If banks hold excess reserves whereas before they did not, the money multiplier:

§ Will become smaller

§ Will become larger

§ Might increase or might decrease

§ Will be unaffected


6. Using the expenditure approach, gross domestic product equals:

§ The sum of consumption, investment, government purchases, and net exports

§ Gross national product minus net exports

§ The sum of consumption, investment, and government purchases

§ Gross national product


7. How do investment in technology and investment in capital differ?

§ They have similar effects on output so they have no important differences from an economic point of view.

§ They have the same effects on output but investments in technology are much more closely tied to the level of saving than investments in capital.

§ They have different effects on output because of the positive externalities associated with investments in capital.

§ They have different effects on output because of the positive externalities associate with investments in technology.


8. The interest rate is the price paid for use of a:

§ Real asset.

§ Financial liability.

§ Financial asset.

§ Real liability.


9. If the reserve requirement is 20 percent, and banks keep no excess reserves, an increase in an initial inflow of $100 into the banking system will cause 

an increase in the money supply of:

§ $50

§ $100

§ $500

§ $20


10. Suppose farmers can use their land to grown either wheat or corn. The law of supply predicts that an increase in the market price of wheat will cause:

§ Farmers to substitute wheat for the production of corn.

§ Farmers to raise the production of corn and wheat.

§ Farmers to lower the production of corn and wheat.

§ Farmers to substitute corn for the production of wheat.


11. According to Keynes, why might deflation create problems for an economy?

§ In expectation of increased spending, too many entrepreneurs would begin businesses and most would fail.

§ The cost of repricing goods would increase costs, and therefore reduce profits, for businesses and they would cut production.

§ People would drop out of unions because unions would become ineffective at keeping wages of members high.

§ Consumers might expect prices to fall further and cut back consumption now.


12. When interest rates rise, people are:

§ More likely to borrow, that is, purchase a financial asset.

§ More likely to borrow, that is, sell a financial asset.

§ Less likely to borrow, that is, sell a financial asset.

§ Less likely to borrow, that is, purchase a financial asset.


13. According to the Classical growth model, an economy that increases its saving will grow:

§ Quickly since the increase in saving will permit greater investment.

§ Quickly since the increase in saving will permit more rapid technological progress.

§ Slowly because interest rates will fall, causing investment to decline.

§ Slowly because consumption and aggregate demand will be reduced.


14. Suppose that consumer spending is expected to decrease in the near future. If output is at potential output, which of the following policies 

is most appropriate according to the AS/AD model?

§ A reduction in government spending

§ An increase in taxes

§ An increase in government spending

§ No change in taxes or government spending


15. Which of the following topics is best characterized as a macroeconomic issue?

§ The effect of a drought on the price of corn

§ The decision by Apple to produce fewer Macintosh computers

§ The effect of an increase in federal spending on the unemployment rate

§ The choice a student makes in selecting college course


16. If income increases more rapidly than expected, then:

§ Estimates of the target rate of employment are likely to increase.

§ The budget is less likely to be in surplus.

§ Tax revenues will be lower than expected.

§ Spending on income-support programs will likely be lower than expected.



17. In which of the following situations is a budget surplus most likely to occur?

§ When fiscal policy is contractionary and the economy is expanding

§ When fiscal policy is expansionary and the economy is contracting

§ When fiscal policy is expansionary

§ When the economy is contracting


18. The largest expenditure component of GDP is:

§ Government spending

§ Net exports

§ Investment

§ Consumption


19. Which of the following is the path through which contractionary monetary policy works?

§ Money down implies interest rate up implies investment up implies income down.

§ Money down implies interest rate down implies investment down implies income down.

§ Money down implies interest rate up implies investment down implies income down.

§ Money down implies interest rate down implies investment up implies income down.


20. As a country develops economically, what changes usually take place in the goods it exports?

§ There is little change because comparative advantage does not change.

§ Exports go from being diversified to being specialized in whatever the country finds to its comparative advantage.

§ Services and manufactured goods decline in importance and are replaced by raw materials and agricultural products.

§ Raw materials and agricultural products decline in importance and are replaced by services and manufactured goods.


21. What would make foreigners want to buy more from the United States?

§ Higher tariffs

§ Higher interest rates in the United States

§ Inflation in the United States

§ A fall in the value of the dollar in the foreign exchange market


22. The depreciation of currency will:

Balance a trade surplus.

§ Have no impact on a country's comparative advantage.

§ Worsen a country's comparative advantage.

§ Improve a country's comparative advantage.


23. The government of Crossland wants to influence its exchange rate. It will do so by buying and selling:

§ Currencies in its official reserves

§ Commodities

§ Goods and services from the current account

§ Transfers


24. If a country wants to prevent its exchange rates from falling, it could: 

§ Place restrictions on imports

§ Pursue easier monetary policy

§ Remove any subsidies on exports

§ Remove restrictions on imports


25. Central banks are responsible for:

§ Both monetary policy and fiscal policy

§ Monetary policy but not fiscal policy

§ Neither monetary policy nor fiscal policy

§ Fiscal policy but not monetary policy


26. Quotas and tariffs can:

§ Never have the same effect on imports and import prices.

§ Have the same effect on the price of domestically produced goods if they are set appropriately.

§ Yield the same amount of tax revenue if they are set appropriately.

§ Both increase international trade by the same amount if set appropriately.


27. Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8 percent. A Keynesian economist would most likely 

blame this increase in unemployment on:

§ An increase in the minimum wage.

§ An increase in the bargaining power of labor unions.

§ A decline in the level of aggregate demand.

§ A decline in aggregate supply.


28. U.S. imports involve an:

§ Inflow of foreign currency from foreigners to the U.S. economy

§ Inflow of dollars from foreigners to the United States economy

§ Outflow of foreign currency from the United States to foreigners

§ Outflow of dollars from the United States to foreigners


29. The law of demand states that quantity demanded of a good is inversely related to the price of that good. Therefore, as the price of a good goes:

§ Up, the quantity demanded goes down.

§ Down, the quantity demanded stays the same.

§ Up, the quantity demanded also goes up. 

§ Down, the quantity demanded goes down.


30. According to Keynes, market economies:

§ Never experience significant declines in aggregate demand.

§ Are constantly experiencing significant declines in aggregate demand.

§ May recover slowly after they experience a significant decline in aggregate demand.

§ Quickly recover after they experience a significant decline in aggregate demand.

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SHORT-RUN ECONOMIC FLUCTUATIONSJames SoccorsiJames McCauleyTimeko AvansKedriane BucklandJef FasickECO/37207/25/2016Lori Geddes
IntroductionIn this Power Point presentation we will be showing how the following topics cover Short-Run Economic Fluctuations.Identify the three key facts about short-run economic ±uctuations and how the economy in the short run di²ers from the economy in the long run.Explain economic ±uctuations and how shifts in either aggregate demand or aggregate supply can cause booms and recessions using the model of aggregate demand and aggregate supply.Explain how monetary policy a²ects interest rates and aggregate demand.Analyze how ³scal policy a²ects interest rates and aggregate demand.Evaluate why policymakers face a short-run trade-o² between in±ation and unemployment.Evaluate why the in±ation-unemployment trade-o² disappears in the long run.
The three key facts about short-run economic Fuctuations. Irregular and UnpredictableMost Macroeconomic Quantities Fluctuate together Real GDP measures short term changes in the economy. As unemployment rises, output falls
How the economy in the short run difers From the economy in the long run.Short run – where one factor of production (e.g. capital Fxed) e.g. less than six months.Long run – where all factors of production of a Frm are variable (e.g. can build bigger factory) e.g. greater than six months / year
Economic FluctuationsEconomic fuctuations are irregular and unpredictableMost macroeconomic quantities fuctuate togetherAs output Falls, unemployment rises(Mankiw, 2015, pp. 420-422)
Model of Aggregate Demand and Aggregate Supply(Mankiw, 2015, p. 426)
How Shifts Cause Booms and RecessionsAggregate Supply, changes in:LaborCapitalNatural ResourcesTechnological KnowledgeAggregate Demand, changes in:ConsumptionInvestmentGovernment PurchasesNet Exports
Impact of Monetary PolicyThe manipulation of money is enacted by the monetary authorityMonetary authority in the U.S.A. is the Federal Reserve Bank To maintain a balance between the interest rates and in±ation, the monetary policy are changes from time to time. Supply of money a²ects the employment, cost of loan as well as the spending of consumers and ultimately the aggregate demand. A higher supply of money results into lower interest rates and higher aggregate demand. A lower supply of money increases the interest rates and reduces the aggregate demand.
Monetary Policy - Impact on Interest RatesTwo types of monetary policy - Expansionary monetary policy and Contractionary monetary policy.


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