Economics Chapter 11 Flashcards
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Questions and Answers

Which of the following is not included in the study of macroeconomics?

  • GDP growth
  • Market structures (correct)
  • Unemployment
  • Inflation

    • Which of the following is a measure of overall economic well-being for the United States?

  • Market structures
  • GDP growth (correct)
  • Inflation rates
  • The U.S. unemployment rate (correct)

    • All of the following are used to measure a country's economic welfare except:

  • Standard of living
  • A change in relative prices (correct)
  • Unemployment rate
  • GDP

    • Which of the following is a macroeconomic outcome?

    <p>International balance</p> Signup and view all the answers

    Which of the following is a determinant of macroeconomic performance?

    <p>Policy levers</p> Signup and view all the answers

    Which of the following is not a determinant of macroeconomic outcomes?

    <p>Economic growth</p> Signup and view all the answers

    External shocks to an economy include:

    <p>Disruptions in trade, wars, and natural disasters</p> Signup and view all the answers

    Which of the following are policy levers?

    <p>Government regulation, tax policy, and the availability of money</p> Signup and view all the answers

    The Classical view of the economy is characterized by:

    <p>A laissez-faire approach</p> Signup and view all the answers

    Which of the following concepts is not consistent with Classical theory?

    <p>Use of monetary policy</p> Signup and view all the answers

    Self-adjustment of markets is assumed in:

    <p>Classical economic theory</p> Signup and view all the answers

    Which of the following is necessary for an economy to self-adjust fairly quickly, according to classical economists?

    <p>Flexible wages and prices</p> Signup and view all the answers

    The Classical approach dominated economic policy during:

    <p>The period before the Great Depression</p> Signup and view all the answers

    Say's Law implies that:

    <p>The economy will not experience a long-term decrease in output</p> Signup and view all the answers

    Say's Law states that:

    <p>Supply creates its own demand</p> Signup and view all the answers

    Say's Law implies that:

    <p>Whatever is produced will be sold</p> Signup and view all the answers

    Say's Law is consistent with the _______ view of the economy.

    <p>Classical</p> Signup and view all the answers

    Which theories of the economy lead to the assertion that markets 'self-adjust' to deviations from their long-term growth trend?

    <p>Classical theories</p> Signup and view all the answers

    According to Say's Law, all goods produced will be sold:

    <p>If prices are flexible and free to change</p> Signup and view all the answers

    During the Great Depression, classical theorists believed that:

    <p>Decreases in production were temporary</p> Signup and view all the answers

    Unlike the Classical economists, Keynes asserted that:

    <p>The economy was inherently unstable</p> Signup and view all the answers

    According to Keynes:

    <p>Government intervention in the economy is necessary at times</p> Signup and view all the answers

    Keynes and classical economists disagree about whether:

    <p>Government intervention should be used to correct business cycles</p> Signup and view all the answers

    Keynesian theory became important when classical economic theory did not adequately explain a prolonged period of:

    <p>Deflation with high unemployment</p> Signup and view all the answers

    A critical macroeconomic controversy is whether a market economy is inherently:

    <p>Stable or unstable</p> Signup and view all the answers

    The various quantities of output that all market participants are willing and able to buy at alternative price levels in a given time period is:

    <p>Aggregate demand</p> Signup and view all the answers

    Aggregate demand refers to:

    <p>The collective behavior of all buyers</p> Signup and view all the answers

    The difference between market demand and aggregate demand is that:

    <p>Aggregate demand applies to all goods and market demand applies to a specific good</p> Signup and view all the answers

    The value of output in constant prices is measured by:

    <p>Real GDP</p> Signup and view all the answers

    The aggregate demand curve shows the relationship between the volume of purchases and:

    <p>The price level</p> Signup and view all the answers

    The aggregate demand curve is:

    <p>Downward sloping to the right</p> Signup and view all the answers

    Ceteris paribus, based on the aggregate demand curve, if the price level _______ the quantity of real output _______ increases.

    <p>Decreases; demanded</p> Signup and view all the answers

    The aggregate demand curve is downward sloping because, ceteris paribus:

    <p>People are willing and able to buy more goods and services at lower average prices</p> Signup and view all the answers

    Which of the following is not a reason for the downward slope of the aggregate demand curve?

    <p>The cost effect</p> Signup and view all the answers

    According to the real balances effect, when the price level:

    <p>Falls, cash is worth more and therefore people buy more</p> Signup and view all the answers

    Ceteris paribus, if the average price level falls, then the _____ effect will result in _____ in the purchases of goods and services.

    <p>Real balances; an increase</p> Signup and view all the answers

    Ceteris paribus, based on the real balances effect, if the price level falls:

    <p>Purchasing power increases</p> Signup and view all the answers

    Which of the following is an example of the real balances effect, assuming the U.S. price level decreases?

    <p>The purchasing power of money increases and people buy more goods</p> Signup and view all the answers

    The foreign trade effect states that, ceteris paribus:

    <p>The quantity demanded of domestic goods rises when the domestic price level falls</p> Signup and view all the answers

    When the U.S. price level increases relative to the price level in foreign economies, U.S. consumers tend to buy:

    <p>More imported goods and fewer domestically produced goods, ceteris paribus</p> Signup and view all the answers

    According to the foreign trade effect, when the U.S. price level decreases, U.S. consumers are likely to buy:

    <p>More American-made products</p> Signup and view all the answers

    Which of the following is an example of the foreign trade effect, assuming the U.S. price level decreases?

    <p>U.S. goods are less expensive for Americans so they buy fewer imports and more domestic goods</p> Signup and view all the answers

    Which of the following suggests that lower average prices stimulate more borrowing?

    <p>The interest rate effect</p> Signup and view all the answers

    The aggregate demand curve is downward sloping because, other things being equal:

    <p>A lower average price level causes lower interest rates, which stimulate loan-financed purchases</p> Signup and view all the answers

    Which of the following is an example of the interest-rate effect, assuming the U.S. price level decreases?

    <p>The demand for loans decreases so interest rates decline and loan-financed purchases increase</p> Signup and view all the answers

    The total amount of output producers are willing and able to produce at alternative price levels in a given time period is known as:

    <p>Aggregate supply</p> Signup and view all the answers

    The short-run aggregate supply curve is:

    <p>Upward sloping to the right</p> Signup and view all the answers

    Ceteris paribus, based on the aggregate supply curve, if the price level _______ the quantity of real output _______ increases.

    <p>Increases; produced</p> Signup and view all the answers

    The aggregate supply curve is positively sloped because as the price level increases:

    <p>Profit margins increase in the short run</p> Signup and view all the answers

    One explanation for why production costs tend to rise as output increases is that producers:

    <p>May have to pay overtime wages to workers</p> Signup and view all the answers

    Which of the following is an explanation of why the aggregate supply curve slopes upward, assuming the price level increases?

    <p>Production costs increase and producers charge higher prices for their goods</p> Signup and view all the answers

    The intersection of the aggregate demand and supply curves definitely establishes:

    <p>Macro equilibrium</p> Signup and view all the answers

    At the intersection of the aggregate supply and aggregate demand curves, the economy is experiencing:

    <p>Macro equilibrium</p> Signup and view all the answers

    At macro equilibrium:

    <p>Aggregate demand equals aggregate supply</p> Signup and view all the answers

    Macro equilibrium always occurs:

    <p>When aggregate demand equals aggregate supply at the average price level</p> Signup and view all the answers

    Which of the following results if the aggregate quantity supplied exceeds the aggregate quantity demanded?

    <p>A surplus pushes the average prices down to macro equilibrium</p> Signup and view all the answers

    If the price level is:

    <p>Above equilibrium, this results in excess supply</p> Signup and view all the answers

    Which of the following will occur if the aggregate quantity supplied is less than the aggregate quantity demanded?

    <p>There will be a shortage</p> Signup and view all the answers

    Which of the following will occur if the price level is below the equilibrium level?

    <p>Consumers will bid the price level up by competing for goods</p> Signup and view all the answers

    Which of the following is definitely true if the economy is in macro equilibrium?

    <p>The price level and the output level may or may not be optimal</p> Signup and view all the answers

    The inability of labor-force participants to find jobs is known as:

    <p>Unemployment</p> Signup and view all the answers

    An increase in the average level of prices of goods and services is known as:

    <p>Inflation</p> Signup and view all the answers

    Ceteris paribus, a leftward shift of the aggregate supply curve will cause the equilibrium price level to _______ and equilibrium real output to ______.

    <p>Increase; decrease</p> Signup and view all the answers

    Which of the following is likely to cause a leftward shift in the aggregate supply curve, ceteris paribus?

    <p>An increase in the cost of natural gas</p> Signup and view all the answers

    Which of the following is likely to occur if a terrorist attack stops air travel in a country for some time, ceteris paribus?

    <p>Aggregate supply will decrease or shift to the left</p> Signup and view all the answers

    Ceteris paribus, a rightward shift of the aggregate supply curve will cause the equilibrium price level to _______ and equilibrium real output to ______.

    <p>Decrease; increase</p> Signup and view all the answers

    Which of the following is likely to occur if OPEC increases the amount of oil it supplies and domestic energy prices fall, ceteris paribus?

    <p>Aggregate supply will increase or shift to the right.</p> Signup and view all the answers

    Ceteris paribus, a leftward shift of the aggregate demand curve will cause the equilibrium price level to _______ and equilibrium real output to ______.

    <p>Decrease; decrease</p> Signup and view all the answers

    If the stock market plunged over the next week, consumers would:

    <p>Demand fewer goods and services</p> Signup and view all the answers

    Which of the following would cause the aggregate demand curve to decrease, ceteris paribus?

    <p>An increase in income taxes.</p> Signup and view all the answers

    Which of the following is likely to occur if people reduce their spending because they are worried about an economic downturn, ceteris paribus?

    <p>Aggregate demand will decrease or shift to the left</p> Signup and view all the answers

    The aggregate demand curve is most likely to shift to the right when:

    <p>Taxes fall</p> Signup and view all the answers

    Macro controversies focus primarily on the:

    <p>Potential to shift aggregate demand and supply</p> Signup and view all the answers

    Controversies between Keynesian, monetarist, supply-side, and eclectic theories focus on:

    <p>The shape and sensitivity of aggregate supply and aggregate demand curves</p> Signup and view all the answers

    Keynesian theory is referred to as a:

    <p>Demand-side theory</p> Signup and view all the answers

    If an economy is experiencing a recession, the Keynesian approach to achieving full employment is to:

    <p>Employ expansionary fiscal policy</p> Signup and view all the answers

    Keynes viewed the economy as inherently unstable and suggested that during a recession, policymakers should:

    <p>Cut taxes and/or increase government spending</p> Signup and view all the answers

    According to Keynes, which of the following should occur because of a decrease in government expenditure, ceteris paribus?

    <p>A leftward shift of the aggregate demand curve.</p> Signup and view all the answers

    Which of the following is a mechanism Keynes advocated for dealing with a situation of depressed output?

    <p>Increasing government expenditure</p> Signup and view all the answers

    If an economy is experiencing a recession, the Keynesian approach to achieving full employment is to:

    <p>Use tax cuts or more government spending or both</p> Signup and view all the answers

    Which of the following economic theories focus on aggregate demand to explain changes in unemployment and inflation?

    <p>Keynesian and monetarist</p> Signup and view all the answers

    Both Keynesian and monetarist theories believe that _______ aggregate _______ causes inflation.

    <p>Excessive; demand</p> Signup and view all the answers

    Monetary theory is referred to as:

    <p>A demand-side theory</p> Signup and view all the answers

    According to monetary theories, an increase in the money supply shifts the aggregate:

    <p>Demand curve to the right</p> Signup and view all the answers

    According to monetary theories, a decrease in the money supply shifts the aggregate:

    <p>Demand curve to the left</p> Signup and view all the answers

    According to supply-side theories, an increase in supply incentives shifts the aggregate:

    <p>Supply curve to the right</p> Signup and view all the answers

    According to supply-side theories, if producers are less willing and able to supply goods at prevailing prices, then aggregate:

    <p>Supply shifts to the left</p> Signup and view all the answers

    According to supply-side theories, if the costs of production rise, then aggregate:

    <p>Supply shifts to the left</p> Signup and view all the answers

    Which of the following explanations of the business cycle focuses on both aggregate supply and aggregate demand shifts?

    <p>Eclectic explanations</p> Signup and view all the answers

    If an economy is experiencing a recession, the classical approach to achieving full employment is to:

    <p>Do nothing and wait for natural market forces to improve the economy</p> Signup and view all the answers

    Which of the following stresses the inability of the government to improve short-run market outcomes?

    <p>New classical economics</p> Signup and view all the answers

    According to Keynesian theory, the correct fiscal policy action to stimulate the economy would be to:

    <p>Increase government expenditures to increase aggregate demand</p> Signup and view all the answers

    Keynesian policy levers include:

    <p>Fiscal policy</p> Signup and view all the answers

    A tax cut can best be characterized as:

    <p>Both fiscal and supply-side policy</p> Signup and view all the answers

    Monetary policy:

    <p>Is controlled by the Federal Reserve</p> Signup and view all the answers

    Monetary policy can best cure a recession by:

    <p>Reducing interest rates, which shifts aggregate demand to the right</p> Signup and view all the answers

    Individual employment and training programs are levers most likely to be advocated by:

    <p>Supply-side economists</p> Signup and view all the answers

    Which of the following is an example of supply-side policy?

    <p>The tax cuts in 1981</p> Signup and view all the answers

    Which of the following causes the aggregate supply curve to shift to the left, ceteris paribus?

    <p>An increase in the cost of labor</p> Signup and view all the answers

    Study Notes

    Macroeconomics Overview

    • Macroeconomics excludes market structures from its scope.
    • Measures of economic well-being include the U.S. unemployment rate and GDP growth.
    • Economic welfare metrics do not include changes in relative prices.
    • Key macroeconomic outcomes encompass aspects like international balance.

    Determinants and Theories

    • Macro performance is influenced by policy levers, which include government regulation, tax policies, and money supply availability.
    • Economic growth is not viewed as a determinant of macroeconomic outcomes.
    • External shocks to economies consist of trade disruptions, wars, and natural disasters.
    • The Classical view promotes a laissez-faire approach and assumes self-adjustment of markets is possible with flexible wages and prices.

    Say's Law

    • Say's Law states that supply creates its own demand, implying that whatever is produced will be sold if prices remain flexible.
    • Classical economics holds that markets self-adjust to maintain long-term growth, suggesting that decreases in production are temporary.

    Keynesian Perspective

    • Keynes contended the economy is inherently unstable and advocates for government intervention to stabilize it during recessions.
    • Keynesian theory emerged during the Great Depression, aimed at addressing prolonged deflation and high unemployment not explained by Classical theory.
    • Keynes argued for expansionary fiscal policies, including tax cuts and increased government spending, to combat recessionary periods.

    Aggregate Demand and Supply

    • Aggregate demand reflects the total output that all market participants seek to purchase at various price levels.
    • The aggregate demand curve is downward-sloping, indicating that lower prices stimulate higher total demand.
    • Real balances effect explains that a lower price level increases purchasing power, hence boosting demand.
    • The foreign trade effect suggests that lower domestic prices lead to increased demand for locally produced goods over imports.
    • Aggregate supply indicates the total output producers are willing to create at different price levels and typically slopes upward.

    Market Equilibrium

    • Macro equilibrium occurs where aggregate demand equals aggregate supply, but the price level and output may not be optimal.
    • Surpluses occur when aggregate supply exceeds demand, driving down prices to restore equilibrium.
    • Shortages arise when demand surpasses supply, prompting price increases as consumers compete for limited goods.

    Economic Shifts

    • Economic conditions like natural disasters can shift aggregate supply or demand curves left or right, impacting equilibrium prices and output.
    • For instance, increased production costs or crises like terrorist attacks decrease aggregate supply.
    • Conversely, factors like reduced energy prices can shift aggregate supply outward.

    Economic Theories and Policies

    • Controversies in economics often revolve around the stability of market economies, with differing views from Keynesian, monetarist, supply-side, and eclectic theories.
    • In a recession, Keynesians advocate for active government policies whereas classical economists suggest a passive approach, waiting for market adjustments.
    • Fiscal policy, such as tax cuts, is a prominent lever advocated by both Keynesians and supply-side economists for stimulating economic growth.

    Key Concepts and Policies

    • Monetary policy is crucial for managing economic conditions and is controlled by the Federal Reserve.
    • Supply-side economics emphasizes incentives for production and shifts in aggregate supply in response to production cost changes.
    • Tax cuts can be characterized as both fiscal and supply-side policies aimed at stimulating economic activity.

    Closing Notes

    • Understanding the interplay between aggregate demand and supply, along with the implications of various economic theories, is essential for analyzing macroeconomic trends and policies.

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    Test your knowledge with these flashcards covering key concepts from Chapter 11 of macroeconomics. Each card presents questions about measures of economic well-being in the United States, including GDP growth and unemployment rates. Perfect for revising and reinforcing your understanding of macroeconomic principles.

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