Midterm 3 Macro Review Materials B

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Form 1 Midterm 3 Macro Review Materials B 1. A sudden increase in consumer confidence causes an economic boom and rising prices. How will the short-run aggregate supply curve move in response? a. No shift initially, and then eventually shifts inward over time b. No shift initially, and then eventually shifts outward over time c. No shift initially, and no additional shifts over time d. An immediate inward shift e. An immediate outward shift 2. Suppose that California avocado growers suffer from a prolonged period of drought which permanently reduces the amount of land available to grow avocados. In the short run, the overall price level in the economy _________, and the quantity of output_________. a. decreases; does not change b. increases; increases c. increases; decreases d. decreases; increases e. decreases; decreases 3. Suppose that California avocado growers suffer from a prolonged period of drought which permanently reduces the amount of land available to grow avocados. In the long run, the overall price level in the economy _________, and the quantity of output_________. a. increases; does not change b. decreases; decreases c. does not change; increases d. does not change; decreases e. increases; decreases 4. Assume the simplest form of the tax multiplier, and the marginal propensity to consume is 0.90. If taxes increase by 50, then the shift in aggregate demand aggregate is closest in magnitude to a. 50 b. 100 c. 300 d. 500 e. 700

Form 1 Use the diagram below to answer the following question. 5. Suppose that the economy starts at point A. Then, the government increases spending. In the short run, the economy will move to point ___. In the long run, assuming no intervention, the market will move to point ___. a. B; D b. B; A c. C; D d. C; A e. C; B 6. Assume the simplest form of the multiplier, and the marginal propensity to consume is 0.80. If investment increases by 100, then the aggregate demand shifts out by a. 80 b. 100 c. 400 d. 500 e. 800 7. Which of the following could cause stagflation? a. Reduced consumer confidence leads to an inward shift of aggregate demand curve b. The Federal Reserve increases the money supply c. The Federal Reserve decreases the money supply d. The world-wide price of oil declines e. The price of electricity increases 8. The economy is at its long-run natural rate of unemployment. An increase in the money supply causes a. a decrease in unemployment in the LR b. an increase in unemployment in the SR c. No change in unemployment in the LR

Form 1 d. No change in unemployment in the SR e. Both (b) and (c) 9. If income decreases, then interest rates will a. initially increase then decrease b. not change c. increase d. decrease e. equal to 0 10. If prices increase, then the money demand curve shifts ______ and the interest rate _______. a. out; increases b. out; decreases c. out; does not change d. in; increases e. in; decreases 11. Suppose the money supply decreases. In response households and firms will ________ short term assets. This will drive ________ interest rates. a. sell; up b. buy; down c. neither sell nor buy; up d. sell; down e. buy; up 12. Which of the following correctly describes how an increase in the price level affects consumption spending? a. An increase in the price level increases the amount of money a household needs to buy goods, which raises the interest rate and causes consumption to increase. b. An increase in the price level decreases the amount of money a household needs to buy goods, which raises the interest rate and causes consumption to increase. c. An increase in the price level lowers real wealth, which causes consumption to decrease. d. An increase in the price level raises real wealth, which causes consumption to increase. e. Both (a) and (c) 13. If the Fed conducts contractionary monetary policy, interest rates __________ and the aggregate demand curve ____________. a. decrease; does not shift b. decrease; shifts out c. decrease; shifts in d. increase; does not shift e. increase; shifts in 14. What of the following would NOT cause a shift in the long-run aggregate supply curve? a. A tax credit for investment in research and development b. The Federal reserve begins selling treasury bonds

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Form 1 c. An increase in technological progress to the United States d. Higher structural unemployment e. Both (c) and (d) 15. In the short run, an increase in the nominal interest rate will ______ the real interest rate, for what reason? a. decrease; because price rigidities push down real rates in equilibrium b. decrease; because inflation adjusts one for one with nominal interest rates c. decrease; because inflation expectations are fixed in the short run d. increase; because inflation adjusts one for one with nominal interest rates e. increase; because inflation expectations are fixed in the short run 16. An exogenous increase in the price level leads to a _________ the aggregate demand curve. a. shift left of b. shift right of c. movement up and left along d. movement down and right along e. None of the above 17. You observe that when the government spends 100, GDP increases by a total of 400. Recognizing that interest rate effects are reflected in this increase in GDP, which of the following is true about the MPC, or marginal propensity to consume? a. MPC < 0.40 b. MPC < 0.60 c. MPC = 0.70 d. MPC > 0.75 e. none of the above are true 18. Suppose the Fed sold $500 billion worth of bonds. In the short run, aggregate demand would _______. a. shift right b. shift left c. cause a movement up and left along the curve d. cause a movement down and right along the curve e. remain unchanged 19. If total income decreases, then the money demand curve shifts __________ and the interest rate____________. a. right; increases b. left; increases c. right; decreases d. left; decreases e. up; increases 20. An inward shift of the short-run aggregate supply curve will cause the a. Short-run Phillip’s curve to shift inwards b. Short-run Phillip’s curve to shift outwards

Form 1 c. Aggregate demand curve to shift inwards d. Aggregate demand curve to shift outwards e. LR aggregate supply curve to shift inwards 21. Which of the following statements regarding the AD-AS model is true? a. An exogenous increase in the price level will increase money demand, and shift the AD curve right b. Due to a shift of the SRAS curve, an economy is experiencing stagflation. Monetary policy can restore output back to the natural level by influencing the AD curve, without inducing further inflation c. A tax increase leads to an outward shift in the aggregate demand curve d. When people expect prices to increase, the SRAS curve will shift to the left, but the LRAS will not shift e. Both (b) and (d)

Form 1 Long Question Section: 1. Arborland is initially in long-run equilibrium. Suddenly, there is an increase in consumer confidence. a. (5 points) Use an AD/AS diagram to show what happens to output and the price level as a result of the increased consumer confidence, both in the short run, as well as the long-run. Label the initial equilibrium (E 0 ), short run equilibrium (E SR ), and the long-run equilibrium (E LR ). Indicate whether there is an inflationary or recessionary gap. b. (5 points) Using the sticky wage theory, provide economic intuition in your previous diagram going from E 0 to E SR . Also provide economic intuition for the transition from E SR to E LR . 2. Annville is initially in long-run equilibrium. Suddenly, there is an increase of consumer confidence, and at the same time the price of oil decreases . Suppose you are the Chair of the Federal Reserve. [You will analyze short run effects only in this problem]. a. (5 points) Use an AD/AS diagram to show what happens to output and the price level as a result of the increased consumer confidence and the unexpected oil price decline, in the short run only. Label the initial equilibrium (E 0 ), and the short run equilibrium (E SR ). b. (5 points) As the head central banker of Annville, suppose your primary objective is to maintain the unemployment rate at its natural level. Moreover, assume that you implement monetary policy in the short run. In your diagram from the previous part, illustrate your proposed monetary policy, and label this equilibrium as point C. Explain intuitively how your proposed monetary policy will actually work in Annville’s economy.

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