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assign3B - Assignment 3B Hybrid Intro Macro Do the...

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Unformatted text preview: Assignment 3B Hybrid Intro Macro Do the following 3 things before class on 2/9 1. Listen to Franklin d. Roosevelt talk about unemployment on youtube at: http://video.google.com/videosearch?hl=en&client=firefox‐a&rls=org.mozilla:en‐ US:official&hs=0oC&ei=Wy‐ KSd2rKZPHtgeDkoSaBw&resnum=0&q=franklin%20d.%20roosevelt%20fireside%20chats&um=1&ie=UT F‐8&sa=N&tab=wv# (or google videos using: Six FDR 1933 Fireside chats What does he say about unemployment and loss of homes – be prepared to answer questions on this in hw3b below. 2. look at the article below and be prepared to answer some questions in the hw3b below and to define the “paradox of thrift” (look it up in businessdictionary.com) Paradox of thrift Yesterday’s report on consumer incomes, spending, and saving showed a sharp rise in the personal savings rate; it also showed a decline in nominal personal incomes, the third in a row, reflecting the weakening economy. I don’t know who else has made this point, but it’s quite clear that we’re in serious paradox of thrift territory here. Or perhaps more accurately, we’re in a paradox of debt. February 3, 2009 Consumers Are Saving More and Spending Less By JACK HEALY American consumers and businesses are embarking on an era of thrift as the recession deepens, saving more money as they cut spending on purchases as varied as sweaters, new homes and office towers. That was the picture painted by two government reports released on Monday. One showed that Americans cut their spending for a sixth month in December as they worried about losing their jobs and earning less in a deteriorating economy. The personal saving rate in the last three months of 2008 rose to its highest level in six years. …. “If households are shying away from spending, what’s going to cause businesses to start spending again?” asked Aaron Smith, senior economist at Moody’s Economy.com. Putting away money and paying down debt may be good for one family’s kitchen-table economics, but the broader economy suffers in the short term when millions of families do it. A dollar saved does not circulate through the economy and higher savings rates translate into fewer sales and lower revenue for struggling businesses. As Congress considers an $800 billion package of tax cuts and spending plans, policy makers said that the most effective stimulus was money that would be spent quickly. Still, some economists said the rising rate of savings was a natural reaction, penance for America’s spendthrift ways. “If American consumers are less indebted, live within their means and have more money in savings, they are better positioned to spend on a sustainable basis for years to come,” said Greg McBride, senior financial analyst at Bankrate.com. “As painful as that is economically in the short run, these developments will better serve us in the long run.” The personal saving rate of 2.9 percent in the fourth quarter of 2008 was the highest since early 2002, when the country was recovering from the dot-com recession and the shock of the 9/11 attacks. The savings rate rose to 3.6 percent in December, from 2.8 percent in November. The gains have come even as interest rates drop to negligible levels. According to a weekly Bankrate.com survey, the average one-year certificate of deposit paid 1.63 percent interest, while average money-market accounts paid 0.54 percent interest. On average, Americans have saved about 7 percent of their disposable income since 1929, but that figure dropped to virtually nothing several years ago. The Federal Reserve cut interest rates to stimulate growth, and Americans took advantage of easy credit to finance trips to the mall, remodeling projects and new cars. Consumer spending accounts for about 70 percent of growth. But that spending largely dried up as home values fell and credit tightened, and the drought is likely to continue. “The whole economy was leveraged up, and we’re now suffering the consequences,” said Peter Schiff, president of Euro Pacific Capital, who offered early warnings about the current economic calamity. “The problem is, that’s a painful process. When you have an economy that’s used to all this spending and borrowing and you take it away, it’s going to go through some pains.” In the last three months of 2008, the economy contracted at its fastest pace in a quarter-century. As Americans spent less, companies cut jobs and reduced their investment in equipment, software and buildings to trim their costs. “The weakness is feeding on itself,” said James O’Sullivan, an economist at UBS. “You’ve had the spread of weakness from housing to Wall Street to main street. You’ve got a credit crunch, which is now affecting every part of the economy, including the consumer.” … Over all, personal spending fell 1 percent or an annualized $102.4 billion in December, after a drop of $77.8 billion in November, the Commerce Department reported. … “Consumers are rational,” said Joshua Shapiro, chief United States economist at MFR. “They respond to incentives and conditions, and right now the conditions and incentives are: spend as little as you can, and pay down as much as you can. You hunker down. That’s what the consumer’s doing.” 3. review the questions in red that many got wrong on hw 3 and the explanations in CAPITALS that I provided. You will be tested on these in hw3b below. 1. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) n the macroeconomic short run, I 1) _______ A) he unemployment rate is zero. t B) ctual real GDP may be less than or more than potential GDP. a C) ctual real GDP always equals potential GDP. a D) he economy is always moving away from full employment. t 2) n aggregate supply curve depicts the relationship between A 2) _______ A) ousehold expenditures and household income. h B) he price level and nominal GDP. t C) he price level and the aggregate quantity supplied. t D) he price level and the aggregate quantity demanded. t DEFINITION – S CURVE SHOWS HOW MUCH WILL BE SUPPLIED (QUANTITY SUPPLIED) AT DIFFERENT PRICE LEVELS 3) he short-run aggregate supply curve T 3) _______ A) as a negative slope. h B) s vertical. i C) s horizontal. i D) as a positive slope. h 4) he short-run aggregate supply curve is upward sloping because T 4) _______ A) ost business firms operate with long-term contracts for output m but not labor. B) oney wage rates do not immediately change when the price m level changes. C) lower price level creates a wealth effect. a D) ower taxes motivate people to work more. l HIGHER PRICES INDUCE GREATER QUANTITY SUPPLIED **IF ** OTHER COSTS, INCLUDING WAGES, DON’T INCREASE AND WE ASSUME WAGES DO NOT IMMEDIATELY CHANGE WHEN PRICES DO IN THE SR 5) oving along the short-run aggregate supply curve, ________. M 5) _______ A) eal GDP equals potential GDP r B) eal GDP equals nominal GDP r C) he real wage rate is constant t D) he money wage rate, the prices of other resources, and potential t GDP remain constant SEE ABOVE – WE ASSUME ONLY PRICE INCREASES, NOT COSTS OR WAGES IN THE SR 6) ther things equal, along the aggregate demand curve, a higher price O 6) _______ level is associated with A) n increase in the quantity of real GDP demanded. a B) decrease in the quantity of nominal GDP demanded. a C) decrease in the quantity of real GDP demanded. a D) igher income levels. h 7) our real wealth is measured as the Y A) mount of goods you have divided by the price level. a B) mount of money you have. a C) mount of assets you have in dollar terms. a D) mount of goods and services your wealth will buy. a 8) f you are have $1,000 of money in the bank and the price level rises 5 I percent, your A) oney is worth less in terms of what it can purchase. m B) urchasing power has risen. p C) oney is worth the same in terms of what it can purchase. m D) oney is worth more in terms of what it can purchase. m 9) ne reason that the aggregate demand curve has a negative slope is O because A) irms supply more when prices rise. f B) irms supply less when prices rise. f C) eople buy more foreign goods when the domestic price level p rises. D) he amount of money in the economy increases when the price t level rises. P UP ‐> IMPORTS (M) UP ‐> LESS QUANTITY DEMANDED SINCE D=C+I+G+X‐M (NOT ESSENTIAL TO KNOW THIS) 10) hich of the following does NOT shift the aggregate demand curve? W A) n increase in the price level a B) decrease in taxes a C) n increase in investment a D) decrease in the quantity of money a 11) n increase in government expenditure on goods and services A A) ecreases aggregate demand. d B) ncreases aggregate demand. i C) ecreases the aggregate quantity demanded. d D) ncreases the aggregate quantity demanded. i 12) ower taxes L A) ncrease aggregate demand. i B) ecrease the aggregate quantity demanded. d C) ncrease the aggregate quantity demanded. i D) ecrease aggregate demand. d 13) n increase in the quantity of money A A) ncreases the aggregate quantity demanded. i B) ecreases aggregate demand. d C) ecreases the aggregate quantity demanded. d D) ncreases aggregate demand. i 7) _______ 8) _______ 9) _______ 10) ______ 11) ______ 12) ______ 13) ______ MS (MONEY SUPPLY) UP‐>INTEREST RATES DOWN‐ >INVESTMENT UP‐>D UP 14) rise in the exchange rate of the dollar A A) ecreases the aggregate quantity demanded. d B) ecreases aggregate demand. d C) ncreases aggregate demand. i D) ncreases the aggregate quantity demanded. i $ UP ‐> X UP (FOREIGN GOODS ARE CHEAPER OFR US BECAUSE $ BUYS MORE FOREIGN CURRENCY) ‐> D UP (SINCE D=C+I+G+X‐M) 14) ______ 15) n the above figure, the economy is initially at point B. If taxes I increase, there is A) movement to point A. a B) movement to point C. a C) shift to AD1. D) shift to AD2. a a 16) isposable income ________ when ________. D A) ecreases; aggregate income increases d B) ecreases; taxes increase d C) ncreases; government expenditures decrease i D) ecreases; transfer payments increase d 17) n example of monetary policy is an increase in ________ by the A ________, which ________ aggregate demand. A) he quantity of money; Federal Reserve; increases t B) he quantity of money; Federal Reserve; decreases t C) he quantity of money; government; increases t D) axes; government; increases t 18) change in ________ creates a movement along the aggregate demand A 15) ______ 16) ______ 17) ______ cur ve, while a 18) change in ________ shifts the aggregat e demand curve. A) oreign income; the foreign exchange rate f B) eal wealth; human capital r C) he price level; government expenditures t D) xpected profits; tax rates e 19) n short-run macroeconomic equilibrium I A) eal GDP and the price level are determined by short-run r aggregate supply and aggregate demand. B) eal GDP is less than potential GDP. r C) eal GDP equals potential GDP and aggregate demand r determines the price level. D) he price level is fixed and short-run aggregate supply t determines real GDP. AGG D&S ‐> Y AND P; B IS WRONG SINCE REAL GDP CAN BE < > = TO POTENTIAL IN THE SR C IS WRONG BECAUSE REAL GDP CAN DIFFER FROM POTENTIAL AND AGG D **&** AGG S TOGETHER DETERMINE P AND Y D IS WRONG BECAUSE OF REASONS GIVE ABOVE ___ ___ 19) ______ 20) ased on the figure above, short-run equilibrium occurs at the price B level of A) 20 and real GDP of $4 trillion. 1 B) 40 and real GDP of $12 trillion. 1 C) 30 and real GDP of $8 trillion. 1 D) 30 and real GDP of $12 trillion. 1 20) ______ 21) he above figure illustrates T A) n inflationary gap. a B) recessionary gap. a C) n equilibrium at the economyʹs physical limits. a D) full-employment equilibrium. a 21) ______ 22) he above figure illustrates T A) full-employment equilibrium. a B) n equilibrium at the economyʹs physical limits. a C) n inflationary gap. a D) recessionary gap. a 22) ______ Aggreg ate deman d (trillio ns of 2000 dollars) 140 130 120 110 100 Shortrun aggreg ate supply (trillio ns of 2000 dollars) Longrun aggreg ate supply (trillio ns of 2000 dollars) 9.0 11.5 10.0 9.5 11.0 10.0 10.0 10.5 10.0 10.5 10.0 10.0 11.0 9.5 10.0 23) he data in the above table indicate that the economy will be in a T short-run macroeconomic equilibrium at a price level A) etween 130 and 121. b B) etween 119 and 111. b C) f 110. o D) f 120. o 24) f the actual real GDP is less than potential real GDP, the economy is I A) t full employment. a B) n a below full-employment equilibrium. i C) ot in macroeconomic equilibrium. n D) n an above full-employment equilibrium. i 25) hort-run macroeconomic equilibrium occurs when the quantity of S real GDP demanded ________. A) quals potential GDP e B) quals the quantity of real GDP supplied e C) oes not equal full-employment GDP d D) quals full-employment GDP e 26) hen the economy is at an above full-employment equilibrium, W ________. A) ominal GDP exceeds real GDP n B) eal GDP is less than potential GDP r C) recessionary gap exists a D) n inflationary gap exists a 27) he business cycle is actually a continuous series of different T ________. A) hort-run macroeconomic equilibriums TRUE ‐ DEFINITION s B) ominal GDP values n C) ull-employment equilibriums f 23) ______ 24) ______ 25) ______ 26) ______ 27) ______ D) otential GDP values p 28) ast year in the country of Union, the price level increased and real L GDP increased. Such an outcome might have occurred because shortrun aggregate supply ________ and aggregate demand ________. A) ncreased; did not change i B) ecreased; decreased d C) ncreased; decreased i D) id not change; increased d SKETCH THIS AND YOU WILL SEE 29) he Great Depression , in which real GDP fell and unemployment T rose, can be characterized as a ________. A) ecessionary gap r B) ong-run equilibrium l C) ull-employment equilibrium f D) nflationary gap i 28) ______ 29) ______ 30) he figure illustrates aggregate demand and aggregate supply in T Sparta. Which of the following events will decrease Spartaʹs real GDP in the short run? A) decrease in government expenditure a B) fall in resource prices a C) decrease in taxes a D) n increase in investment a 31) _______ economists believe that the economy is self-regulating and _ always at full employment. A) lassical C B) onetarist M C) ll A D) eynesian K 32) _______ economists believe that the economy is self-regulating and _ will be at full employment as long as monetary policy is not erratic. 30) ______ 31) ______ 32) ______ A) ll A C) lassical C B) onetarist M D) eynesian K 33) _______ economists believe that active help from fiscal and monetary 33) ______ _ policy is needed to insure that the economy is operating at full employment. A) lassical C B) eynesian K C) onetarist M D) ll A 34) n increase in the money supply will cause planned investment to A 34) ______ __________ and consumption to __________. A) ncrease; increase i B) ecrease; increase d C) ncrease; decrease i D) ecrease; decrease d GENERALLY MS UP ‐> i (INTEREST RATES) DOWN ‐> INVESTMENT (AND CONSUMPTION OF DURABLES LIKE CARS) UP (INCREASE) 35) hen the quantity of money supplied decreases, W 35) ______ A) he aggregate demand curve shifts rightward. t B) he aggregate demand curve shifts leftward. t C) he economy moves along the aggregate demand curve. t D) he aggregate demand does not change. t Refer to the information provided in Figure 13.2 below to answer the questions that follow. Figure 13.2 36) Refer to Figure 13.2. An aggregate demand shift from AD0 to AD2 can 36) ______ be caused by A) decrease in the price a B) n increase in the price a level. level. C) n increase in money a D) n increase in taxes. a supply. 37) Refer to Figure 13.2. An aggregate demand shift from AD0 to AD1 can 37) ______ be caused by A) n increase in the price level. a B) decrease in the price level. a C) decrease in government spending. a D) n increase in money supply. a 38) efer to Figure 13.2. Suppose the economy is at Point A, an increase in R the price level can 38) ___ cause a ___ moveme nt to Point A) . D B) . B C) . E D) . C 39) t is very important to distinguish between the short run and the long 39) ______ I run when we are discussing A) he aggregate demand. t B) he aggregate supply. t C) he aggregate expenditures. t D) hanges in the price level. c AGGREGATE SUPPLY – AGGREGATE DEMAND IS SIMILAR IN THE SR AND LR, BUT AGG SUPPLY IS UPSLOPING IN THE SR AND VERTICAL IN THE LR (LATER WE WILL LOOK AT THE LR) 40) oal is used as a source of energy in many manufacturing processes. C 40) ______ Assume a long strike by coal miners reduced the supply of coal and increased the price of coal. This would cause A) he short-run aggregate supply curve to become nearly vertical at t all levels of output. B) he short-run aggregate supply curve to become flatter. t C) he short-run aggregate supply curve to shift to the right. t D) he short-run aggregate supply curve to shift to the left. t 41) ll of the following shift the short-run aggregate supply curve A 41) ______ EXCEPT A) change in the price of oil. a B) change in wages as a result of a labor strike. a C) change in the price of raw material. a D) change in the price level. a Refer to the information provided in Figure 13.6 below to answer the questions that follow. Figure 13.6 42) efer to Figure 13.6. Which of the following causes the economy to R move from Point A to Point E? A) n oil embargo that increases the price of oil A B) n increase in the price level A C) n influx of immigrants A D) echnological progress T 43) efer to Figure 13.6. Suppose the economy is at Point A, an increase in R 42) ______ agg regate demand 43) ___ moves ___ the economy to Point A) . B B) . C C) . E D) . D CORRECTED – In an earlier posting of this, I indicated the tesatbank was wrong – I MISREAD THE QUESTION – CHOICE B IS CORRECT – AN INCREASE IN **DEMAND*8 MEANS WE MOVE TO A NEW POINT ON THE ORIGINAL SUPPLY CURVE. 44) efer to Figure 13.6. Suppose the economy is at Point A, an oil price R 44) ______ increase could move the economy to Point A) . E B) . B C) . D D) . C 45) he rationale underlying policies to deregulate the economy is that T 45) ______ these policies would shift the A) ggregate demand curve to the right. a B) ggregate demand curve to the left. a C) hort-run aggregate supply curve to the left. s D) hort-run aggregate supply curve to the right. s THIS IS AN APPROACH RELATED TO **SUPPLY‐SIDE ECONOMICS** IN WHICH POLICIES TO LOWER COSTS OF PRODUCTION AND PROVIDE TAX AND OTHER INCENTIVES TO EXPAND OUTPUT IN THE **SHORT‐RUN** Refer to the information provided in Figure 13.7 below to answer the questions that follow. Figure 13.7 46) efer to Figure 13.7. Suppose the equilibrium output is $600 billion, R 46) ______ an expansionary monetary policy __________ equilibrium output and __________ the price level. A) eaves unchanged; l B) ncreases; decreases i increases C) ncreases; increases i D) ecreases; leaves d unchanged MS UP ‐>I DOWN ‐> I UP ‐> D UP‐> P,Y UP (AGG D SHIFTS TO THE RIGHT) 47) efer to Figure 13.7. Suppose the equilibrium output is $600 billion, R 47) ______ an oil embargo would probably A) ncrease the equilibrium output and decrease the price level. i B) ecrease both the equilibrium output and the price level. d C) ncrease both the equilibrium output and the price level. i D) ecrease the equilibrium output and increase the price level. d 48) efer to Figure 13.7. Suppose the equilibrium output equals $600 R 48) ______ billion, a decrease in wages and an increase in government spending will, for sure, increase A) he price level. t B) oth the equilibrium output and the price level. b C) quilibrium output and decrease the price level. e D) quilibrium output. e DECREASE IN WAGES LOWERS THE COSTS OF PRODUCTION AND SHIFTS AGG S DOWN OR TO THE RIGHT. INCREASE IN G SHIFTS AGG D TO THE RIGHT. THE TWO TOGETHER DEFINITELY INCREASES OUTPUT, BUT PRICE CAN GO UP OR DOWN DEPENDING ON THE RELATIVE SIZES OF THE SHIFTS (SKETCH). Refer to the information provided in Figure 13.10 below to answer the questions that follow. Figure 13.10 49) efer to Figure 13.10. Assume the economy is at Point A. Higher oil R prices shift the aggregate supply curve to AS2. If the government 49) ______ decides to counter the effects of higher oil prices by increasing government spending, then the price level will be __________ than P2 and output will be __________ than Y2. A) reater; less g B) reater; greater g C) ess; less l D) ess; greater l HIGHER OIL PRICES SHIFTS S UP AND REDUCES OUTPUT AND RAISES PRICES. IF THE GOV’T SPENDING IS INCREASED TO OFFSET THE REDUCTION IN OUTPUT, THEN IT WILL MAKE PRICES EVEN HIGHER (AGAIN, SKETCH) 50) or an economy to experience both a recession and inflation at the F same time, A) he aggregate demand curve must shift to the right. t B) he aggregate supply curve must shift to the right. t C) he aggregate demand curve must shift to the left. t D) he aggregate supply curve must shift to the left. t STAGFLATION – UPWARD (OR LEFTWARD) SHIFT IN AGG S 50) ______ 1) B 2) C 3) D 4) B 5) D 6) C 7) D 8) A 9) C 10) A 11) B 12) A 13) D 14) B 15) D 16) B 17) A 18) C 19) A 20) C 21) B 22) C 23) B 24) B 25) B 26) D 27) A 28) D 29) A 30) A 31) A 32) B 33) B 34) A 35) B 36) D 37) D 38) C 39) B 40) D 41) D 42) A 43) A 44) A 45) D 46) C 47) D 48) D 49) B 50) D ...
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