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Homework 4

1. In class we described how consumption (C) is influenced by "transfer payments." If these payments increase, then so

do taxes, so as a result consumption is unchanged.

true

false

2. In general, capital is NOT a final good.

true

false

3. In this part of the course, we're using AD and SRAS to explain what happens to the economy, which means to real GDP

(symbol: Y) and the GDP deflator (symbol: P). Let's say that last you found out that real GDP grew by 2%, prices rose by

1%, and that the budget deficit is 4% of GDP. With this information, can you calculate what happened to the

unemployment rate last year?

yes

4. Which of the following would change the natural rate of unemployment? There might be more than one correct

answer.

Apps are developed and widely used to more quickly and efficiently connect job seekers and firms wishing to

hire.

Software is quickly introduced that replaces about half of all teachers.

A recession hits and suddenly many lose their jobs.

5. Please recall how the following terms are closely related: inflation, deflation, and disinflation. Which of the following

is the best example of disinflation?

real GDP goes from $17 trillion to $17.8 trillion to $18 trillion

the CPI goes from 260 to 266 to 278

nominal GDP goes from $18 trillion to $17 trillion to $17.5 trillion

GDP deflator goes from 133 to 143 to 146

the labor force grows from 160 million to 170 million to 190 million

the GDP deflator goes from 110 to 105 to 107

6. Which of the following is most accurate if real GDP is less than potential GDP?

The economy would be sure to be in a recession.

The economy might be in a recession.

7. Equilibrium in our graph of AD and SRAS occurs where AD = SRAS. Unless otherwise specified, we assume that the

economy rapidly moves to equilibrium. What ensures that the economy is in equilibrium?

fiscal policy is used by the government (i.e. Congress and the President)

AD shifts but SRAS does not until AD = SRAS

monetary policy is used by the Fed (i.e. the Federal Reserve ‐‐ our country's "central bank")

SRAS shifts but AD does not until AD = SRAS

There is inflation or deflation until SRAS = AD. As this happens, you move along the AD and SRAS curves.

8. Recall how the SRAS curve slopes upward ‐‐ as P (the prices of all final goods and services) grows, there is then more

production (i.e., Y grows). When we are describing this relationship, are we concerned with are there sufficient buyers

to buy what is produced?

yes

9. Which of the following would increase potential GDP? There might be more than one answer.

Suddenly all college student quit school and start looking for a job.

The government starts to build more infrastructures (roads, bridges, ports, and airports).

Workers decide to retire later than they planned.

Interest rates fall and there is more demand for cars, houses, and capital goods.

Software is used that makes businesses more efficient.

10. Consider the SRAS curve (i.e., the Short Run Aggregate Supply curve). You move down along the SRAS curve (to the

lower left of the graph). Thus, the SRAS curve is not shifting. This would be most likely be caused by which of the

following?

firms investing more due to lower interest rates

firms investing less due to higher interest rates

firms produce more due to higher prices for produced goods

firms produce less due to lower prices for produced goods

firms cut production due to a higher price of oil (which is turned into gasoline for cars, kerosene for airplanes,

and diesel for trucks)

firms increase production due to a lower price of oil (which is turned into gasoline for cars, kerosene for

airplanes, and diesel for trucks)

prices fall and total spending rises

prices rise and total spending falls

11. In this section of the course we use AD (Aggregate Demand) and SRAS (Short Run Aggregate Supply) extensively.

Recall how jointly they determine the values of P and Y. Thus, we need to fully understand these terms. With this in

mind, which of the following is true about P? More than one of the following may be correct.

It measures costs that businesses face.

We measure it with the GDP deflator.

It is measured by real GDP.

It is measured by nominal GDP.

It is the price of oil.

It is the price of all final goods and services.

12. In this part of the course we deal a lot with aggregate demand (AD) and short run aggregate supply (SRAS). Knowing

how to use both of them is an essential skill. Thus, this question: can a shift in the SRAS curve shift the AD curve?

yes

13. In this part of the course production by all firms in the short run, or Short Run Aggregate Supply (SRAS) is really

important. Which of the following would be sure to shift it to the right? Note that there might be more than one correct

answer.

P rises

oil prices fall

G grows and T falls

G grows and T grows

interest rates fall and household wealth falls

businesses become more efficient

the dollar falls in value and foreign income rises

14. Here we'll consider the impact of part of fiscal policy on the economy. Recall that fiscal policy is made up of

purchases (G) and taxes (T). By "economy" we specifically mean the impact on prices, which we measure with the GDP

deflator (symbol: P) and real GDP (symbol: Y). If T rises, which of the following is true? There is more than one answer.

Hint: Be sure to draw the relevant graph with the AD and SRAS curves and remember that we assume that the economy

is in equilibrium (i.e. AD = SRAS) and this tells you the resulting values of P and Y.

P rises

P falls

Y rises

Y falls

production rises

production falls

15. Total spending, or aggregate demand (AD) is an essential part of our model of the economy. Which of the following

would be sure to cause it to shift left? Note that there might be more than one correct answer.

P falls

oil prices rise