ECON 1012 Lecture Notes - Lecture 22: Natural Disaster, New Keynesian Economics, Rational Expectations

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17 Dec 2017

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Explain how aggregate demand shocks and aggregate supply shocks create the business cycle. Explain how demand-pull and cost-push forces bring cycles in inflation and output. Explain the causes and consequences of deflation. Explain the short-run and long-run tradeoff between inflation and unemployment. We fear deflation because it brings stagnant incomes and high unemployment. And we worry about inflation because it raises our cost of living. We want low inflation, low unemployment, and rapid income growth. As this chapter explains, we face a tradeoff in the short run but not in the long run. Two approaches are explained to further understand the business cycle: mainstream business cycle theory, real business cycle theory. The mainstream business cycle theory is that potential gdp grows at a steady rate while aggregate demand grows at a fluctuating rate. Because the money wage rate is sticky, if aggregate demand grows faster than potential gdp, real gdp moves above potential.

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1. Fiscal policy attempts to affect the level of overall spendingin the economy by changes in:
A) the interest rate.
B) the money supply.
C) banking regulations.
D) taxes and spending.

2. Economists have identified several consecutive months of fallingemployment and forecasts for the next few months are for more ofthe same. At what point in the business cycle is the economyapparently located?
A) recession
B) expansion
C) business cycle peak
D) business cycle trough

3. The onset of the Great Depression:
A) was not a shock to anyone since most economists predicted theâroaring 20sâ were bound to end in disaster.
B) created a disagreement between the Hoover administration andconventional economists because Hoover wanted the government tointervene much more quickly than most others.
C) came as a considerable shock to the conventional wisdom ofeconomics at that time and opened the door for critiques ofmainstream thought by economists like JM Keynes.
D) was in 1918 at the end of World War I.

4. When economists measure economic growth, they often use:
A) the inflation rate.
B) the unemployment rate.
C) nominal GDP.
D) real GDP.

5. In a typical business cycle, the business cycle peak isimmediately followed by the:
A) recession.
B) business cycle trough.
C) expansion.
D) depression.

6. Suppose an economy experiences rising total output accompaniedby increasing employment, this is generally known as:
A) stagflation.
B) recession.
C) inflation.
D) expansion.

7. Controlling interest rates is an example of:
A) fiscal policy.
B) tax policy.
C) monetary policy.
D) exchange rate policy.

8. The alternation between recessions and expansions is known asthe:
A) unemployment rate.
B) long-run economic growth.
C) business cycle.
D) macroeconomy.

9. A recession in America is typically associated with:
A) a falling unemployment rate.
B) a decrease in the number of people living in poverty.
C) a decrease in the percentage of Americans with healthinsurance.
D) an increase in corporate profits.

10. The purpose of macroeconomic policy is to:
A) bring unemployment closer to the natural rate.
B) reduce the severity of recessions.
C) rein in excessively strong expansions.
D) bring unemployment closer to the natural rate and to reduce theseverity of recessions.

11. The trade balance is the difference between the value ofthe:
A) trade deficit and the budget deficit.
B) goods and services that one country sells to other countries andthe value of the goods and services it buys in return.
C) exchange rates of two countries that are engaged ininternational trade.
D) national debt and the foreign debt.

12. Increasing the total amount of available productive resourcesis the focus of __________.
A) macroeconomics
B) fiscal policy
C) monetary policy
D) microeconomics

13. The point on a business cycle when real GDP stops rising andbegins falling is a(n):
A) peak.
B) trough.
C) expansion.
D) recession.

14. During a recession, one will often observe:
A) aggregate output rising.
B) unemployment rates will be increasing while aggregate output isfalling.
C) employment rates will be rising.
D) zero unemployment rates.

15. Monetary policy involves:
A) changes in government spending.
B) changes in government tax receipts.
C) changes in the quantity of money.
D) changes in tax rates.

16. The trough of the business cycle:
A) comes right after the expansion phase.
B) comes before the recession phase.
C) is a temporary maximum level of real GDP.
D) is a temporary minimum level of real GDP.

17. Which one of the following statements about the U.S. economy isnot accurate?
A) Since the Second World War, aggregate output grew at a ratelower than the average annual growth rate of population.
B) Since the Second World War, aggregate output grew at a ratehigher than the average annual growth rate of population.
C) Since the Second World War, macroeconomic policy has helped makethe economy more stable.
D) Long-run growth per capita is the key to higher wages and arising standard of living.

18. An economic recovery is all of the following except:
A) economic growth of a sustained nature.
B) a short-run increase in aggregate production in aneconomy.
C) a time of increasing employment.
D) the end of the business cycle.

19. Which of the following would NOT be classified as amacroeconomic question?
A) How many people are employed in the economy as a whole?
B) What determines the overall level of prices in the economy as awhole?
C) What determines the overall trade in goods, services, andfinancial assets between the United States and the rest of theworld?
D) What determines the cost to a university or college of offeringa new course?

20. Which of the following statements regarding price level orinflation is correct?
A) Supply and demand can not explain why a particular good orservice becomes more expensive relative to other goods andservices.
B) Inflation affects only the more advanced countries whereas lessadvanced countries face deflation.
C) Prices of most goods and services remained stable during thegreat depression.
D) In general, when the economy is in recession and jobs are hardto find, inflation tends to fall.

21. If wages grew at a 5% rate last year and average prices grew ata 3% rate, then the average worker is:
A) better off.
B) worse off.
C) no better or worse off.
D) unaffected.

22. In an open economy:
A) the exchange rate is determined by the government.
B) specialization in activities with a comparative advantage is notpossible.
C) trade is only beneficial to the relatively larger economy.
D) there is trade in goods, services, or assets with othercountries.

23. Changes in government spending and taxes in an effort to changeoverall spending in an economy is:
A) fiscal policy.
B) monetary policy.
C) investment.
D) the stock market.

24. If an economy is open, this means that:
A) anyone can immigrate to the country.
B) trading with other countries makes up a portion of itseconomy.
C) it does not trade with other countries.
D) it will experience a drop in its real GDP.

25. Inflation is a situation where:
A) the average price level falls.
B) the average price level increases.
C) the average price level becomes negative.
D) the real price level falls.

26. The topics studied in macroeconomics include:
A) the price of a motorcycle.
B) the wages of engineers.
C) the average price level in the economy.
D) how much ice cream consumers buy.

27. A period of rising real GDP is a(n):
A) peak.
B) trough.
C) expansion.
D) recession.

28. The modern tools of macroeconomic policy are:
A) tax policy and antitrust policy.
B) fiscal policy and monetary policy.
C) monetary policy and exchange rate policy.
D) capital policy and labor policy.

29. A ârubber neckingâ traffic jam is an example of:
A) microeconomics in action.
B) individual behavior that has a large aggregate impact.
C) the paradox of thrift.
D) an outcome smaller than the sum of its parts.

30. The most painful consequence of a recession is:
A) rising unemployment.
B) increasing inflation.
C) increasing aggregate output.
D) higher interest rates.

31. Per capita economic growth is:
A) economic growth per unit of capital.
B) economic growth per person.
C) economic expansion over the business cycle.
D) sustained increase in aggregate output.

32. Keynesian economics stressed:
A) total spending.
B) the self-regulating power of free markets.
C) the long run.
D) that the Depression should run its course to bring down the highcost of living.

33. When an economy's overall production grows faster than itspopulation, this is referred to as:
A) long-run growth per capita.
B) an increase in nominal GDP.
C) deflation.
D) the paradox of thrift.

34. Fiscal policy attempts to affect the overall level of spendingin the economy through:
A) changes in the inflation rate.
B) changes in the quantity of money or the interest rate.
C) changes in tax policy or government spending.
D) discretionary regulation of profits and wages.

35. With regard to the aggregate price level, economists generallybelieve:
A) price stability is a desirable goal.
B) inflation is worse than deflation.
C) deflation is worse than inflation.
D) inflation actually benefits most retired people.

36. Recessions are periods when:
A) output rises.
B) the aggregate price level rises.
C) the unemployment rate is falling.
D) output and employment are falling.

37. Monetary policy attempts to affect the overall level ofspending in the economy by changes in:
A) taxes.
B) taxes and spending.
C) taxes and interest rates.
D) interest rates and the quantity of money.

38. The basic difference between an economic recession and economicdepression is that:
A) the latter is a shorter economic downturn than the former.
B) during recessions output falls faster than duringdepressions.
C) during depressions employment falls faster than duringrecessions.
D) the former is a longer economic downturn than the latter.

39. The central mission of modern macroeconomics is to prevent_____ from happening again.
A) recessions
B) inflation
C) deflation
D) anything like the Great Depression

40. Fiscal policy refers to:
A) the control of interest rates.
B) the control of government spending and taxations.
C) the control of the quantity of money.
D) the control of interest rates and of government spending.

byzantiumant655

In periods of high inflation,

A) people want to hold as much money as possible
B) the purchasing power of money is decreasing
C) nobody wants to work and earn income
D) low nominal interest rates are likely to result
E) nobody wants to buy goods and services

Which of the following is not an effect of hyperinflation?

A) Price differences among sellers of the same product become larger.
B) People hold on to currency only for very short periods of time.
C) People tend to exchange the currency that is subject to high inflation for a more stable currency.
D) More resources are used efficiently to overcome inflation's effects on transactions costs.
E) Inflation-induced activity that is rational for individuals often has a detrimental effect on the economy as a whole.

Construction workers at times face high rates of unemployment because their work is both seasonal and subject to wide swings over the business cycle.

A) True
B) False

The view that union wage demands may be a source of inflation would be best associated with the

A) supply shock view of inflation
B) demand pull view of inflation
C) cost push view of inflation
D) demand push view of inflation
E) monetary view of inflation

Unemployment rates __________ during contractions and __________ during expansions.

A) rise, fall
B) fall, fall
C) rise, stay the same
D) stay the same, fall
E) fall, rise

The metropolitan with the lowest unemployment rate is

A) Detroit
B) Atlanta
C) San Diego
D) Honolulu
E) Portland

Uncertainty about inflation

A) shifts the attention of business managers away from exchange rate movements and toward concerns about productivity
B) reduces the difficulty of making international business decisions
C) creates uncertainty about the value of the dollar relative to foreign currencies
D) enhances money's importance as a link between the present and the future
E) makes contracts easier to negotiate

Which of the following is not consistent with full employment?

A) an unemployment rate of 5 percent or 6 percent
B) seasonal unemployment
C) structural unemployment
D) cyclical unemployment
E) frictional unemployment

Which of the following groups has historically had the highest unemployment rate?

A) professional workers
B) white teenagers
C) black teenagers
D) black adults
E) white adults

10.

An increase in a person's real wage necessarily means

A) greater purchasing power
B) a lower nominal wage
C) a lower nominal wage after payment of taxes
D) a higher nominal wage
E) a higher nominal wage after payment of taxes

11.

A decrease in the interest rate, other things constant, will

A) shift the supply of loanable funds curve to the left
B) shift the supply of loanable funds curve to the right
C) decrease the quantity of loanable funds demanded
D) decrease the quantity of loanable funds supplied
E) shift the demand for loanable funds curve to the right

12.

Inflation is defined as a sustained increase in the price level.

A) True
B) False

13.

The official unemployment rate would be higher if it included the existence of hidden unemployment or individuals who are

A) on unemployment compensation
B) not working
C) working part-time but prefer full-time work
D) voluntarily retired
E) unemployed and looking for work

byzantiumrhinoceros988

QUESTION 41

The consumer price index is intended to measure the cost of all goods purchased in the economy over time.

True

False

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QUESTION 42

When an economy has reached a zero unemployment rate, it is said to have reached full employment.

True

False

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QUESTION 43

The official unemployment rate is a useful but not altogether accurate measure of joblessness.

True

False

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QUESTION 44

The two types of reserves are federal reserves and required reserves.

True

False

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QUESTION 45

Automatic stabilizers, such as tax revenues and transfer payments, eliminate fluctuations in the business cycle.

True

False

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QUESTION 46

When the actual rate of unemployment is equal to the natural rate of unemployment, we conclude that there is no cyclical unemployment.

True

False

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QUESTION 47

Increased government regulation can cause the aggregate supply curve to shift to the left.

True

False

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QUESTION 48

The price index in the base year is normalized so that it equals 100.

True

False

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QUESTION 49

If the Federal Reserve wants to increase the money supply, it should raise the required reserve ratio.

True

False

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QUESTION 50

The aggregate supply curve in the long run is vertical because wages and other input prices respond completely to a change in price level.

True

False

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QUESTION 51

Public choice analysis helps us to understand why deficits seem inevitable, since we always pay the full costs of government programs today.

True

False

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QUESTION 52

Expansionary demand-side fiscal policies set up a tradeoff between increasing output at the expense of raising prices.

True

False

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QUESTION 53

Cathy works part-time as a bookkeeper but would like to have a full-time position. She has been actively searching for months but so far has not found a job. According to the Bureau of Labor Statistics, Cathy is unemployed.

True

False

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QUESTION 54

The real rate of interest is the nominal rate of interest times the inflation rate.

True

False

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QUESTION 55

The time required to comprehend that a recession has in fact begun is called the recognition lag.

True

False

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QUESTION 56

If an economy is in long-run equilibrium, it is also in short-run equilibrium.

True

False

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QUESTION 57

Policymakers can increase output by enacting policies that expand government spending, consumption, investment, or net exports or reduce taxes.

True

False

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QUESTION 58

When Disney builds a new amusement park in the United States, it is counted as part of GDP.

True

False

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QUESTION 59

The oil shock of 1973 led to demand-pull inflation.

True

False

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QUESTION 60

Casey is a 16-year-old high school student who has no marketable skills. He has been browsing the want-ads in the local newspaper for months but finally got so discouraged that he quit looking. According to the Bureau of Labor Statistics, Casey is unemployed.

True

False

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ECON 1012 Lecture Notes - Lecture 22: Natural Disaster, New Keynesian Economics, Rational Expectations

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