ECON 1010 Chapter 28: ECON1010 Notes - Chapter 28

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24 Sep 2015

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In long run, inflation occurs if quantity of money grows faster than potential gdp. In short run, two types of inflation: demand-pull inflation inflation starts because aggregate demand increases; rest of interest rate cut, increase in money quantity, government expenditure, tax cut, export increase, expected future profits. Process: ad increases = rightward shift = price level/real gdp = inflationary gap: money wage = sas leftward = price level /real gdp back to potential gdp. Process: sas decrease = leftward shift = real gdp /price level . To cover unemployment boc increases money quantity = real gdp /price level . Inflation spiral sas keeps increasing and process repeats: stagflation - combination of rising price level and decreasing real gdp; in 1970s. If inflation expected, money wage adjusts to keep up with inflation, with change in price level not real.

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In the money market, money supply is determined by the central bank, such as the Fed in the U.S. Because of this, money supply curve is usually vertical in the short run, while the money demand curve is downward sloping. The quantity demanded of money has an inverse relationship with the interest rate, but a direct relationship with both the price level and real GDP. Therefore, when the general price level increases, what will most likely happen?

		A. The money demand curve will shift to the right.
		B. The money demand curve will shift to the left.
		C. Both the interest rate and investment will rise.
		D. Only A and C.
		E. Only B and C.

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is in the Keynesian range of the aggregate supply curve, then

		A. real GDP will fall and the price level will rise.
		B. real GDP will rise and the price level will fall.
		C. only the real GDP will fall.
		D. only the price level will fall.
		E. both real GDP and the price level will fall.

Which of the following will shift the aggregate demand curve to the left?

		A. The federal government increases spending for highways and bridges.
		B. Consumers expect an economic downturn.
		C. The federal government increases income taxes.
		D. Only A and C.
		E. Only B and C.

Which of the following will shift the aggregate supply curve to the left?

		A. All workers agree to a reduction in wages.
		B. The federal government increases the gasoline taxes.
		C. An improvement in technology raises labor productivity.
		D. Only A and C.
		E. Only B and C

There are also two kinds of deflation, the demand-pull deflation and cost-push deflation. Then which of the following is most likely to be true?

		A. An increase in AD will cause the demand-pull deflation.
		B. An increase in AS (or SRAS) will cause a cost-push deflation.
		C. Economists worry about the demand-pull deflation more than the cost-push deflation.
		D. Only A and C.
		E. Only B and C.

The short-run aggregate supply curve (SRAS) can be written as follows: Y = Yf + b (p - pe), where Y = real GDP, Yf = full-employment real GDP, p = price level, pe = expected price level, and b is a positive coefficient. The SRAS can be re-written as p = pe - (1/b)(Yf) + (1/b)(Y). Then which of the following is true?

		A. An increase in pe will cause a rightward shift of the SRAS curve.
		B. An increase in pe will cause a leftward shift of the SRAS curve.
		C. An increase in Yf will cause a leftward shift of the SRAS curve.
		D. Only A and C.
		E. Only B and C.

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1) If actual (equilibrium ) real GDP is less than the full-employment, or natural, level of real GDP, then wages and other input prices are expected to:

a. fall and SRAS to shift to the left until long-run equilibrium is achieved.

b. fall and SRAS to shift to the right until long-run equilibrium is achieved.

c. rise and SRAS to shift to the left until long-run equilibrium is achieved.

d. rise and SRAS to shift to the right until long-run equilibrium is achieved.

2) In a self-regulating economy, inflationary gaps are automatically eliminated in the long run by:

a. decreases in wage rates that cause short-run aggregate supply to shift rightward.

b. decreases in wage rates that cause short-run aggregate supply to shift leftward.

c. increases in wage rates that cause short-run aggregate supply to shift rightward.

d. increases in wage rates that cause short-run aggregate supply to shift leftward.

3) Assume the economy is initially in equilibrium at the full-employment level of real GDP. If businesses and consumers become pessimistic regarding future economic conditions, ceteris paribus, the aggregate demand curve will shift to the ________, causing the level of output to ______.

a. left; fall

b. right; fall

c. left; rise

d. right; rise

4) Economists that advocate a macroeconomic policy of laissez-faire:

a. believe the economy is self-regulating only if the government intervenes to move the economy to equilibrium at natural real GDP.

b. believe the economy is self-regulating and will automatically move to equilibrium at natural real GDP in the long run.

c. also advocate central planning and government control of resources.

d. also advocate active government intervention in the economy.

5) Which of the following summarizes the process for closing a recessionary gap if the economy is self-regulating?

a. Labor shortages put upward pressure on wages, which leads to higher costs of production and a decrease in short-run aggregate supply.

b. Labor shortages put downward pressure on wages, which leads to increases in employment and spending and an increase in aggregate demand.

c. Unemployed resources put upward pressure on the price level, which leads to higher wages, increases in spending, and increases in aggregate demand.

d. Unemployed resources put downward pressure on the price level, which leads to lower costs of production and an increase in short-run aggregate supply.

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The demand for money
A) d and e are correct
B) all of the following are correct
C) decreases as the average selling price of a unit of outputincreases
D) increases as GDP increases
E) is increased by credit card usage
2. The higher the interest rate, the more of their wealth peoplewill hold as money.
A) True
B) False
3. The money demand curve slopes
A) downward because the cost of holding money decreases as theinterest rate decreases
B) downward because the cost of holding money increases as theinterest rate decreases
C) upward because people demand more money as GDP increases
D) upward because people demand more money as GDP decreases
E) downward because people demand more money as the price levelincreases
4. Which of the following, other things constant, will shift themoney demand curve to the left?
A) an increase in the interest rate
B) a decrease in the interest rate
C) a decrease in real GDP
D) an increase in real GDP
E) an increase in the price level
5. An increase in the money supply will
A) increase the demand for money at each interest rate
B) decrease the demand for money at each interest rate
C) lead people to try to exchange money for interest-bearingassets
D) lead people to try to exchange interest-bearing assets formoney
E) increase the interest rate
6. When an increase in the money supply reduces the interest rate,investment and nominal GDP increase.
A) True
B) False
7. In the short run, a decrease in the money supply will cause adecrease in Gross Domestic Product and a decrease in the pricelevel.
A) True
B) False
8. The demand curve for investment is graphed with __________ onthe vertical axis and __________ on the horizontal axis.
A) the interest rate; investment
B) investment; the interest rate
C) the price level; investment
D) investment; the price level
E) real GDP; investment
9. As the interest rate increases,
A) the demand for investment curve shifts to the right
B) the demand for investment curve shifts to the left
C) there is a movement downward along the demand for investmentcurve
D) there is a movement upward along the demand for investmentcurve
E) GDP increases
10. If the economy experiences a contractionary gap and the Fedstimulates the economy, then:
A) The money supply is increasing because the Fed prints moremoney
B) The money supply is decreasing because the Fed hoardsmoney
C) The money supply is increasing because the Fed makes open-marketpurchases
D) The money supply is decreasing because the Fed makes open-marketsales
E) There is no change in the money supply because the Fed cannotinfluence the money supply
11. If the Fed decreases the money supply, GDP
A) increases because the resulting increase in the interest rateleads to a decrease in investment
B) increases because the resulting decrease in the interest rateleads to an increase in investment
C) decreases because the resulting increase in the interest rateleads to a decrease in investment
D) decreases because the resulting increase in the interest rateleads to an increase in investment
E) decreases because the resulting decrease in the interest rateleads to an increase in investment
12. An increase in the money supply can increase the price level,real GDP, or both, but it is impossible to tell exactly what willhappen without knowing the slope of the aggregate supplycurve.
A) True
B) False
13. If the economy experiences an expansionary gap and the Fedsells US government securities in the open-market, then:
A) Money supply increases, investment increases, aggregate demandincreases
B) Money supply increases, the interest rate increases, and theaggregate demand increases
C) Money supply decreases, the interest rate decreases, and theaggregate demand falls
D) Money supply decreases, the investment decreases, and theaggregate demand decreases
E) Interest rate falls, investment falls, aggregate demandincreases
14. If the money supply equals $1,000 and nominal GDP equals$3,000, then V
A) equals 1/3
B) equals 3
C) equals 3 million
D) cannot be determined since we do not know anything aboutprices
E) cannot be determined since we do not know anything about realGDP
15. If the money supply is increasing at a constant 8 percent,velocity is constant, real GDP is increasing at 5 percent, and theinflation rate is 3 percent, which of the following is true?
A) The growth rate of GDP is too low to be maintained.
B) The inflation rate is too low to be maintained.
C) Velocity is too low to be maintained.
D) The money supply growth rate is too low to be maintained.
E) This situation can continue indefinitely.
16. If real output and velocity are stable and predictable, thenthe equation of exchange can be used to derive a simplerelationship between
A) the money supply and the price level
B) the money supply and the interest rate
C) the money supply and the foreign exchange rate
D) velocity and real GDP
E) velocity and nominal GDP
17. For the quantity theory of money to yield usefulpredictions,
A) fiscal policy must be ineffective in altering aggregatedemand
B) fiscal policy must be effective in altering aggregatedemand
C) the economy must be operating at the potential level of realGross Domestic Product
D) velocity must be stable or predictable
E) velocity must be unstable
18. A rising rate of inflation
A) makes people more willing to hold money as an asset
B) reduces the usefulness of money as a store of value and thusincreases the velocity of money
C) increases the usefulness of money as a medium of exchange andthus reduces the velocity of money
D) is usually preceded by a reduction in the money supply
E) does not, apparently, have any effect on the velocity ofmoney
19. There is considerable disagreement about whether the Fedshould
A) engage in open market operations
B) have the power to set reserve requirements
C) reduce the money supply when the economy is growing
D) allow banks to invest in the stock market
E) attempt to control interest rates or should instead attempt tocontrol the money supply
20. For interest rates to remain stable during economic expansions,the growth rate of the money supply should
A) exceed the growth in the demand for money
B) just match the growth in the demand for money
C) be less than the growth in the demand for money
D) be zero
E) just match the growth in nominal GDP

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ECON 1010 Chapter 28: ECON1010 Notes - Chapter 28

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