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

Suppose the economy is initially operating at the potential level of output. Graphically illustrate and explain what effect a one- time permanent reduction in the money supply will have on output and the price level in the short run and in the long run.

Monetary neutrality:

The reduction in investment demand that results when an expansionary fiscal policy raises the real interest rate is called the:

The consumption tax in Japan in 1997 was primarily due to high inflation.

Friedman believes that the aggregate supply curve is vertical at the full employment level of output.

Figure 15.2 -Refer to Figure 15.2. This economy cannot continue to produce Y₁ at point B because:

Figure 15.2 -Refer to Figure 15.2. If the economy is currently producing at point A and the Fed decreases the money supply, the economy will move to Point _______ in the short run and to Point _______ in the long run.

A liquidity trap is a situation in which interest rates are so high that no one can afford to borrow funds.

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions: -We can infer from the application that the increase in living standards today may cause a drop in living standards in the long run.

What will happen to the price level and wages if the economy is producing exactly at full employment?

Recall Application 1, "Avoiding a Liquidity Trap," to answer the following questions: -What was the policy adopted by the Fed in response to the looming liquidity trap?

Briefly discuss the classical view of the labor market. Specifically, to what extent can unemployment occur based on the classical view? Explain.

When the aggregate demand pushes production above full employment in the short run, then:

The long- run aggregate supply curve is vertical because:

Suppose an economy is currently producing at a level below full employment. Explain what will likely happen to wages and prices.

The reduction in investment spending in the long run resulting from an increase in government expenditures is called:

According to the classical economists, the economy:

What is the difference between the long- run aggregate supply curve and the short- run aggregate supply curve?

Whenever the unemployment rate is pushed _______ the natural rate, wages begin to _______ , thus pushing _______.

Suppose that the natural rate of unemployment for the economy is 6 percent and the economy is currently experiencing a 4 percent unemployment rate. Explain what will likely happen to wages and prices as the economy adjusts to the long- run equilibrium.