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EC140 Chapter 23: Chapter 23

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tanrat153
14 Oct 2016
School
WLU
Department
Economics
Course
EC140
Professor
David Johnson

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EC140 Full Course Notes
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Document Summary

Ae curve shifts in response to a change in price level (change in all of the economies prices: change in price level affects desired consumption and net imports, which causes the shift. In summary, a rise in the price level leads to a reduction in the real value of the pri(cid:448)ate se(cid:272)tor"s (cid:449)ealth. A redu(cid:272)tio(cid:374) i(cid:374) (cid:449)ealth leads to a de(cid:272)rease i(cid:374) auto(cid:374)o(cid:373)ous desired consumption and thus to a downward shift in the ae function. Changes in net exports: when domestic price level rises and exchange rate is constant, canadian goods become more expensive relative to foreign goods. The net export function shifts down, causing a downward shift of the ae curve. Ae function shifts due to price level change. As a result of pri(cid:272)e le(cid:448)el (cid:272)ha(cid:374)ge, ca(cid:374)ada"s net exports change, as well as the purchasing power of nominal assets (money) changes. This is what shifts the ae function either up or down, changing equilibrium gdp.

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Related Questions

14) Globalization refers to

A) the process of establishing a common world currency.

B) the willingness of individuals within a given country to share knowledge.

C) the process of countries becoming more open to foreign trade and investment.

D) the reduction in growth rates of real GDP per capita as a result of trade with foreign

countries.

15) According to a study by economists Raymond Fisman and Edward Miguel, as the level of corruption in a country increases,

A) so does the number of parking violations by the country's United Nations delegates.

B) so does the size of the country's population.

C) the levels of foreign direct investment and foreign portfolio investment decrease.

D) the levels of real GDP per capita and real income per capita increase.

16) Which of the following best describes the "wealth effect"?

A) When the price level falls, the real value of household wealth falls.

B) When the price level falls, the nominal value of household wealth falls.

C) When the price level falls, the nominal value of household wealth rises.

D) When the price level falls, the real value of household wealth rises.

17) The "interest rate effect" can be described as an increase in the price level that raises the interest 17) rate and chokes off

A) government spending.

B) government spending and unplanned investment.

C) investment and consumption spending.

D) net exports.

18) Which of the following is one explanation as to why the aggregate demand curve slopes downward?

A) Decreases in the price level raise the interest rate and increase consumer spending.

B) Decreases in the price level raise the interest rate and increase investment spending.

C) Decreases in the U.S. price level relative to the price level in other country's lower net exports.

D) Decreases in the price level to raise real wealth and increase consumer spending.

19) Higher personal income taxes

A) increase in aggregate demand.

B) increase disposable income.

C) decrease aggregate demand.

D) both B and C

20) If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?

A) This will move the economy up along a stationary aggregate demand curve.

B) This will move the economy down along a stationary aggregate demand curve.

C) This will shift the aggregate demand curve to the left.

D) This will shift the aggregate demand curve to the right.

21) How do lower taxes affect aggregate demand?

A) They increase disposable income, consumption, and aggregate demand.

B) They reduce disposable income, consumption, and aggregate demand.

C) they increase corporate investment and aggregate demand.

D) They increase aggregate supply and thus increase aggregate demand as well.

Question 1

The higher the capital utilization rate, the greater the depreciation rate.

True
False

Question 2

Higher capital utilization rates may raise the user costs of capital because higher utilization rates imply

operating at inconvenient times.
paying overtime to employees operating the machines.
operating when complementary services like transporters are unavailable or more expensive.
All of the above.

Question 3

If the rental price of capital increase, the capital utilization rate

increases.
decreases.
remains the same.

depends on whether the substitution rate is greater than the income effect

Question 4

The vacancy rate in the labor market is

the number of job openings divided by the number of unemployed people in the labor force.
the number of job openings divided by the number of workers in the labor force.
the ratio of open jobs to filled jobs.
the ratio of open jobs to the total number of jobs that employers want occupied.

Question 5

Unemployment can exist in a market clearing model if it takes some search time for workers to find jobs.

True
False

Question 6

A decrease in workers’ effective real incomes while they are unemployed will

lower the job finding rate and raise the expected duration of unemployment.
lower the job finding rate and the expected duration of unemployment.
raise the job finding rate and lower the expected duration of unemployment.
raise the job finding rate and the expected duration of unemployment.

Question 7

In the Barro model, the natural rate of unemployment is

positively related to the job separations rate.
zero.
fixed.
positively related to the job finding rate.

Question 8

If the interest rate increases, the real demand for money also increases

True
False

Question 9

Commodity money is money that has value because

of the intrinsic value of the commodity.
it is legal tender.
the government says so.
All of the above.

Question 10

High-powered money is

money held by business for investment.
total currency in circulation plus depository institution deposits at the Fed.
total currency in circulation.
government bonds held by the public and depository institutions.

Question 11

U.S. M1 money includes

currency held by the public.
checkable deposits.
traveler’s checks.
All of the above.

Question 12

U.S. M2 money includes

currency, time deposits, and government bonds.
savings deposits, small time deposits, and private bonds.
checkable deposits, savings deposits, and small time deposits.
retail money market mutual funds, small time deposits, and government bonds.

Question

Money is different from other assets like capital and bonds in that

money does not pay interest.
money has intrinsic value.
money is a better long term store of value.
All of the above.

Question

If a person’s income doubles, we expect their cash holdings to

double
more than double.
less than double.
decrease.

Question 15

Real money demand does not change when

nominal GDP changes.
the interest rate changes.
the price level changes.
All of the above.

Question 16

All else constant, the price level rises when the supply of money increases.

True
False

Question 17

If the nominal interest rate were to increase, then

money demand decreases and the price level increases.
money demand increases and the price level decreases.
the money supply and the price level would increase.
the money supply and the price level would decrease.

Question 18

Real money demand is a function of real GDP and the nominal interest rate.

True
False

Question 19

The real return on money is zero.

True
False

Question 20

If the expected inflation rate is 5% and the unexpected inflation rate is 4%, the actual inflation is

1%
9%
-1%
1.25%

Question 21

When the rate of growth of money is constant

the inflation rate equals the growth rate of money.
the nominal interest rate rises.
real money balances are declining.
All of the above.

Question 22

A decrease in the money growth rate in the market clearing model causes

a decrease in the nominal interest rate.
an increase in money demand.
a decrease in the price level.
All of the above.

Question 23

A decrease in the money growth rate in the market clearing model causes

an increase in the nominal interest rate.
an increase in money demand.
an increase in the price level.
All of the above.

Question 24

Under price level targeting the money supply becomes

neutral
endogenous
exogenous
predetermined

Q 25 During a recession, the interest rate falls tending to cause money demand to rise, but is at least partly offset by real GDP falling tending to cause money demand to fall.

True
False

Part 1

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale.

a.The short-run aggregate supply (SAS) curve slopes upward because households spend more as their incomes increase.

b.The long-run aggregate supply curve can never shift.

c.Either a decrease in the nominal money supply by the Federal Reserve, all else held constant or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.

d.The Keynesian portion of the short-run aggregate supply (SAS) curve would be relevant during a recessionary situation.

e.Stagflation occurs when the aggregate demand (AD) curve shifts out on the upward sloping portion of the short-run aggregate supply (SAS) curve.

Part 2

Evaluate whether each of the following statements is true or false. Explain your answer and provide a supporting rationale, using graphs to support your answer. You can create graphs by hand and take pictures and upload them with your answers, or you may use Word or Excel, and upload the file created by these software packages.

a.If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.

b.The federal government's control of the money supply, which influences interest rates, is the primary tool that policymakers use to impact the macroeconomy.

c.A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.

d.The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.

e.Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.