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

Explain what is meant by the "wage-price spiral." Does it always work in one direction?

When GDP is below potential output, prices fall because

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

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s). -Recall the Application. If nominal interest rates are ________ and the inflation rate is expected to be ________, the result will be negative real interest rates.

In ________, monetary policy can change the level of output.

What is a liquidity trap, and what happens if it occurs?

In the short run, decreases in government spending will

-Refer to Figure 15.2. An increase in wages is represented by a movement from point ________ to point ________.

In the long run

Figure 15.3 -Explain the "crowding out" criticism of Keynesian policies of increasing government spending to stimulate the economy.

How long do economists think it takes the U.S. economy to move from the short run to the long run?

-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 ________.

Figure 15.5 -Refer to Figure 15.5. If GDP exceeds potential output, the effect on the money market is represented by movement from point ________ to point ________.

Explain the political business cycle.

The "long-run neutrality of money" is when the increase of the supply of money has no effect on the real interest rates, investment or output.

Suppose that GDP is ________ potential output. We would expect prices to rise, money demand to rise, interest rates to rise, and total demand to ________.

Classical economics is often associated with Say's law, the doctrine that "supply creates its own demand."

Assuming an upward-sloping short-run aggregate supply curve, a decrease in taxes results in ________ in output and ________ in prices in the short run.

Money demand increases as the price level decreases in the economy.

A liquidity trap refers to a situation when interest rates are so high, they cannot legally go any higher.