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

Active economic policies are more likely to destabilize the economy if the adjustment process is quick enough.

The level of GDP is determined by the same factors in the long run as in the short run.

In an aggregate supply and aggregate demand diagram, the long-run aggregate supply curve is represented by

If GDP is ________ potential output, then we expect to see ________ wages, causing the short-run aggregate supply curve to shift up.

Figure 15.3 -Refer to Figure 15.3 If this economy is initially in a recession, the change in price level which would bring the economy back to full employment would also change the money demand and interest rates. The change in interest rates will change investment spending, which is reflected by the movement from

If GDP is ________ potential output, the economy is in a ________ and prices and wages will tend to decrease.

Recall the Application about the links between presidential elections and macroeconomic performance to answer the following question(s). Early theories on the links between presidential elections and macroeconomic performance focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other factors. The first innovation was recognizing that political parties can have different goals or preferences on how to manipulate the economy. In the United States, Republicans historically have been more concerned about fighting inflation, whereas Democrats have concentrated on reducing unemployment. The second major innovation was recognizing that the public would anticipate that politicians will try to manipulate the economy before an election. -If Republicans are primarily concerned with controlling inflation and Democrats are primarily concerned with controlling unemployment, then Republicans would tend to focus on ________ economic policies and Democrats would tend to focus on ________ economic policies.

Figure 15.3 -Refer to Figure 15.3 If this economy is initially in a recession, the change in price level which would bring the economy back to full employment would also change the money demand. The change in money demand will change interest rates, which is reflected by the movement from

-Refer to Figure 15.2. The unemployment rate is below the natural rate at point

If the economy was operating below full employment, it could return to full employment

-Refer to Figure 15.2. Adjustment from a short-run equilibrium to the long-run equilibrium is represented by a movement from point ________ to point ________.

-Refer to Figure 15.2. The economy is at full employment and the unemployment rate is at the natural rate at point

-Refer to Figure 15.2. Output is likely to rise and prices are likely to fall if the economy is at point

Suppose GDP ________ the level of potential output. We would expect to see ________ unemployment, rising wages, and rising prices.

-Refer to Figure 15.1. At point b

If increases in government spending on infrastructure projects "crowd out" private investment spending, this will lead to

Figure 15.5 -Refer to Figure 15.5. A decrease in the price level, ceteris paribus, is represented by movement from point ________ to point ________.

Interest rates increase as the price level decreases in the economy.

Suppose Venezuela experiences economic growth in 2013, yet its unemployment rate is 15 percent, which is above the South American average. This indicates that Venezuela's 2013 output is

How can changes in wages and prices restore an economy to full employment?