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

According to Keynes, which of the following determines the level of employment in the economy?

In order to shorten a recession when the economy is producing below full employment, the monetary authority could:

Those who believed in Say's Law believe that saving will:

The adjustment- process model used in this chapter, which highlights the speed at which the economy goes back to potential GDP, was first developed by:

Because the long- run aggregate supply curve is drawn as a vertical line, then we effectively assume that the level of production in the economy is determined solely by:

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions: -According to the application, health- care expenditures as a proportion of GDP has risen from 1950- 2000 from:

Why do classical economists believe that the labor market always clears?

What type of fiscal policy will lead to crowding out in the long run?

Which of the following curves is drawn as a vertical line?

Figure 15.2 -Refer to Figure 15.2. For this economy to produce Y₁ and sustain that level of output without inflation:

What causes investments to increase when the production in the economy is below full employment?

If wages are sticky downward, an increase in labor:

Assuming that the economy is in the long run equilibrium at full employment, changes in the money supply affect:

If crowding out occurs in the long run and the government increases spending for infrastructure projects such as roads and bridges, then the additional government spending:

Rising wages and input prices:

If Say's Law holds true, then if households save more of their incomes,

Briefly discuss how recessions can occur in a Keynesian model.

Keynes believed that, without government intervention, the liquidity trap could prevent economies from recovering from a recession.

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

AN UNFORTUNATE GAMBLE What explained the decision by the Japanese government to increase taxes in the 1990s when the economy was still suffering from a recession? The Japanese government sharply increased taxes on consumption in 1997—just as Japan was in the midst of its prolonged recession. Why did the government do this? The reasons were clear. As the economy slumped, fiscal deficits were increasing, as taxes fell and government spending rose. Policy makers understood that their society was aging rapidly and that this would mean even more demands on the public sector in the near future. They became convinced that the current fiscal deficits plus the inevitable future demands on the government would lead to long-run increases in government spending. To avoid crowding out of investment in the future, they decided to tax consumption in order to reduce it. Their goal was to match the increases in government spending with decreases in consumption spending and therefore not experience crowding out of investment. Although policy makers were right to consider the long-run consequences of increases in government spending, they made the unfortunate gamble that the short-run effects of the tax increase would not hinder the economy’s recovery. They were wrong, because the tax increase prolonged the recession. Although it is important to consider the long-run consequences of policy, it is important to understand the short-run consequences as well. -According to the application, what was the reason why the Japanese government increased consumption taxes in the 1990s?