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Question
The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their wealth in checking accounts. Use the aggregate demand"aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.Answer
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Related questions
Q:
If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run.
A) only prices; only output
B) only output; only prices
C) both prices and output; only prices
D) both prices and output; both prices and output
Q:
The long run refers to a period:
A) of decades.
B) during which capital and labor are sometimes not fully employed.
C) during which prices are flexible.
D) during which output deviates from the full-employment level.
Q:
The aggregate demand curve tells us possible:
A) combinations of M and Y for a given value of P.
B) combinations of M and P for a given value of Y.
C) combinations of P and Y for a given value of M.
D) results if the Federal Reserve reduces the money supply.
Q:
All of the following are suggested by the results of Alan Blinder's survey of firms except:
A) there is only one theory of price stickiness.
B) coordinating wage and price setting could improve welfare.
C) reasons for price stickiness vary by industry.
D) activist monetary policy can be used to cure recessions.
Q:
Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.
A) real
B) nominal
C) real and nominal
D) neither real nor nominal
Q:
Business cycles are:
A) regular and predictable.
B) irregular but predictable.
C) regular but unpredictable.
D) irregular and unpredictable.
Q:
Define the terms: i) adverse supply shocks, ii) favorable supply shocks.
Q:
Monetary policy can be either a stabilizing influence on the economy or a source of instability. Give an explanation for both possibilities.
Q:
An economy is initially in long-run equilibrium. The introduction of an electronic payments system dramatically reduces the demand for money in the economy.
a. What is the short-run impact on prices and output of the new system?
b. What can the central bank do, if anything, to counteract the short-run changes in output and prices?
c. If the central bank does not take any policy actions, what will be the long-run impact of the electronic payments system on prices and output?
Q:
A central bank reduces the money supply in an economy initially in long-run equilibrium.
a. What will happen to output and prices in the short run?
b. What will happen to unemployment in the short run?
c. What will happen to output and prices in the long run?
Q:
The economy of Macroland is initially in long-run equilibrium. A severe drought causes an adverse supply shock.
a. What happens to prices and output in the short run?
b. What would happen to prices and output in the long run if there is no policy accommodation?
c. If the Central Bank of Macroland wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?
Q:
Suppose that droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. Use the aggregate demand"aggregate supply model to illustrate graphically the impact in the short run and the long run of this adverse supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.
Q:
Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500.a. If the economy is initially in long-run equilibrium, what are the values of P and Y?b. What is the velocity of money in this case?c. Suppose because banks start paying interest on checking accounts, the aggregate demand function shifts to Y = (1.5)(M/P). What are the short-run values of P and Y?d. What is the velocity of money in this case?e. With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what are P and Y?f. What is the velocity now?
Q:
Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:
A) 5 percent in both the short run and the long run.
B) 2.5 percent in both the short run and the long run.
C) 5 percent in the short run but will return to its natural rate in the long run.
D) 2.5 percent in the short run but will return to its natural rate in the long run.
Q:
If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and:
A) prices will remain unchanged in the long run.
B) output will fall 5 percent in the long run.
C) prices will fall 5 percent in the long run.
D) output will remain unchanged in the long run.
Q:
If the demand for money increases, this will:
A) increase velocity.
B) decrease velocity.
C) have no effect on velocity.
D) cause the Fed to increase the money supply.
Q:
Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by:
A) increasing the money supply, but at the cost of permanently higher prices.
B) decreasing the money supply, but at the cost of permanently lower prices.
C) increasing the money supply, which would restore the original price level.
D) decreasing the money supply, which would restore the original price level.
Q:
Exhibit: Shift in Aggregate Demand (Exhibit: Shift in Aggregate Demand) Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) ______ in the money supply or a(n) ______ in velocity.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q:
Which of the following is an example of a demand shock?
A) a large oil-price increase
B) the introduction and greater availability of credit cards
C) a drought that destroys agricultural crops
D) unions obtain a substantial wage increase
Q:
Evaluate the rate of saving to determine the policies that could promote growth. What can be the forms of capital other than the traditional ones to promote growth of an economy?
Q:
With technological progress, how is the Golden Rule of capital defined in steady state?
Q:
According to the theory of liquidity preference, if the demand for real money balances exceeds the supply of real money balances, individuals will:
A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
C) purchase fewer goods and services.
D) be content with their portfolios.
Q:
According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will:
A) sell interest-earning assets in order to obtain non-interest-bearing money.
B) purchase interest-earning assets in order to reduce holdings of non-interest-bearing money.
C) purchase more goods and services.
D) be content with their portfolios.
Q:
According to the theory of liquidity preference, the supply of nominal money balances:
A) is chosen by the central bank.
B) depends on the interest rate.
C) varies with the price level.
D) changes as the level of income changes.
Q:
One argument in favor of tax cuts over spending-based fiscal stimulus is that:
A) tax cuts increase the MPC by a larger amount than government spending.
B) tax cuts temporarily increase planned spending, but government spending permanently increases private spending.
C) in theory the tax multiplier is larger than the government spending multiplier.
D) historically tax cuts have been more successful than spending-based fiscal stimulus.
Q:
An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:
A) downward and to the left.
B) upward and to the right.
C) upward and to the left.
D) downward and to the right.
Q:
According to the Solow model, persistently rising living standards can only be explained by:
A) population growth.
B) capital accumulation.
C) saving rates.
D) technological progress.
Q:
In the Solow growth model with population growth and technological change, the steady-state growth rate of income per person depends on:
A) the rate of population growth.
B) the saving rate.
C) the rate of technological progress.
D) the rate of population growth plus the rate of technological progress.
Q:
If the labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a 2 percent rate, then the number of effective workers is growing at a rate of:
A) 2 percent.
B) 3 percent.
C) 5 percent.
D) 6 percent.
Q:
Assuming that technological progress increases the efficiency of labor at a constant rate is called:
A) endogenous technological progress.
B) the efficiency-wage model of economic growth.
C) labor-augmenting technological progress.
D) the Golden Rule model of economic growth.