Exam 12: Policy Effects and Cost Shocks in the Asad Model

12.3 Shocks to the System Refer to the information provided in Figure 12.3 below to answer the questions that follow. Figure 12.3 -Refer to Figure 12.3. Assume the economy is currently at Point A on aggregate supply curve AS₁. A decrease in inflationary expectations that causes firms to decrease their prices

When the economy is near capacity, the Fed would lower the interest rate in response to an increase in government spending.

The United States experienced a zero bound interest rate

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2 -Refer to Figure 12.2. In response to a decrease in net taxes, the Fed would increase the interest rate by the greatest amount when the aggregate demand curve shifts from

If the long-run aggregate supply curve is vertical, the multiplier effect of a change in net taxes on aggregate output in the long run

In a binding situation, a decrease in government spending

Other things equal, demand-pull inflation results in output ________ and the price level ________.

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2 -Refer to Figure 12.2. Firms respond to an increase in government spending by mostly increasing output when the aggregate demand curve shifts from

If an increase in net taxes in the United States resulted in a very large decrease in aggregate output and a very small decrease in the price level, then the U.S. economy must have been

Refer to the information provided in Figure 12.1 below to answer the questions that follow. Figure 12.1 -Refer to Figure 12.1. Suppose the economy is at Point A. A(n) ________ can cause a movement to Point B.

If the aggregate supply curve is vertical in the long-run, then neither monetary nor fiscal policy will affect aggregate output in the long-run.

An increase in inflationary expectations that causes firms to increase their prices shifts the

The economy is in a binding situation when the Fed rule calls for a very high interest rate.

Refer to the information provided in Figure 12.2 below to answer the questions that follow. Figure 12.2 -Refer to Figure 12.2. The tax multiplier is largest (in absolute value) when the aggregate demand curve shifts from

The Fed will raise the interest rate by the greatest amount when the economy is on the ________ part of the AS curve and there is ________.

If a decrease in the Z factors resulted in a very large change in the price level and a very small change in aggregate output,

In a binding situation, equilibrium is where the IS curve crosses the interest rate at zero.

If the economy is on the flat portion of the AS curve,

If the economy is operating at capacity, an increase in government spending will ________ investment.

Related to the Economics in Practice on p. 238: A monsoon destroyed 80% of the Gregorian manufacturing base. The Gregorian government decided to use an expansionary fiscal policy to counter the effects of the monsoon on the economy. The use of the expansionary fiscal policy would have caused