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

Suppose Venezuela experiences economic expansion in 2013, yet its unemployment rate is 15 percent, and economists have estimated that the natural rate of unemployment in Venezuela is also approximately 15 percent.. If this is the case, then for the Venezuelan economy in 2013,

Figure 15.3 -Refer to Figure 15.3 If this economy is initially at full employment, a recession would be reflected by movements to point ________ in graph (A), point ________ in graph (B), and point ________ in graph (C).

Wages and prices will decrease when unemployment is below the natural rate.

-Refer to Figure 15.1. The long-run equilibrium occurs at point

If increases in defense spending by the government "crowd out" private investment spending, this will lead to

Figure 15.4 -Refer to Figure 15.4. Suppose that the economy is originally in equilibrium at point a. In the long run, as the supply of money decreases, the economy moves to point

Wages and prices throughout an economy will rise above previous inflation rates when

Recall the Application about Fed Chairman Ben Bernanke's views on how to fight a liquidity trap to answer the following question(s). -The classic political business cycle would have a politician following

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. -Historically, Democrats have been known to be primarily concerned with fighting unemployment. Assuming this is true, then after a Democratic electoral victory, the public could anticipate which of the following economic actions to fight unemployment?

-Refer to Figure 15.2. A movement from point c to point b would be the result of the

Suppose that the unemployment rate is ________ the natural rate. We would expect prices to rise, money demand to rise, interest rates to rise, and total demand to ________.

Explain Say's law from a classical economic perspective.

Suppose that the unemployment rate is ________ the natural rate. We would expect prices to fall, money demand to fall, interest rates to fall, and total demand to ________.

If output is below full employment, we expect wages and prices to fall, money demand to decrease, and interest rates to fall.

If the economy is operating below full employment, falling wages and prices will increase money demand and raise interest rates.

Explain why the flexibility of wages and prices tend to favor the Keynesian economic view in the short run and the classical economic view in the long run.

Figure 15.3 -Refer to Figure 15.3 and explain what happens in each graph when an economy is moving from a recession (point a)back to full employment.

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

An increase in the price level causes an increase in money demand because

A decrease in the money supply will decrease interest rates in the long run.