Exam 15: Modern Macroeconomics: From the Short Run to the Long Run

-Refer to Figure 15.3. At full employment equilibrium, investment would increase from $10 million to $15 million if:

Suppose that the natural rate of unemployment for the economy is 6 percent and the economy is currently experiencing a 9 percent unemployment rate. Explain what will likely happen to wages and prices as the economy adjusts to the long- run equilibrium.

Recall Application 2, "Elections, Political Parties, and Voter Expectations," to answer the following questions: -There is little evidence to support the view that political parties have different goals and preferences.

Recall Application 1, "Avoiding a Liquidity Trap," to answer the following questions: -What is the reason why the Fed started paying interest on bank reserves in 2008?

Classical economists believe that prices are generally sticky.

Which policy is effective in getting the economy out of a recession if the economy is in a liquidity trap? Which policy is ineffective?

According to the classical model, an excess supply of labor would drive up wages to a new equilibrium level and therefore unemployment would not persist.

Because the long- run aggregate supply curve is vertical, firms will produce all they can in the long run

Does crowding out occur in the long run or the short run? Explain.

For crowding out to occur in the long run, an increase in government spending must cause the money demand curve to _______ in order to _______ the interest rate.

Figure 15.3 -Refer to Figure 15.3. At full employment equilibrium, investment would decrease from $18 million to $15 million if:

The reduction in investment spending in the long run results from an increase in government expenditures because:

The government can use contractionary fiscal policies to prevent a wage- price spiral.

Suppose the economy is producing above the potential output. Explain how money demand and investments will change to bring the economy back to potential output.

Recall Application 1, "Avoiding a Liquidity Trap," to answer the following questions: -Which of the following is the warning sign that the economy was facing a looming liquidity trap?

The Keynesian aggregate supply curve is:

Friedman believed that economic policies are ineffective because they don't affect the aggregate demand in the economy.

Which of the following sequence of events follows an expansionary fiscal policy?

In macroeconomics, the "long run" denotes the time period:

The Keynesian short- run aggregate supply curve is vertical.