Test 3 pt2

Question 1

IS-LM model analyzes the ______, when the price level is assumed ____.

However, a change in P would shift the ____ curve and therefore affect Y.

(The __________ curve captures d relationship between P and Y)

Answer 1

short run; fixed
LM

aggregate demand

Question 2

The force that moves the economy from the short run to the long run is the gradual adjustment of ______.

Answer 2

prices

Question 3

Y> Y (constant)

Y < Y (constant)

Y = Y (constant)

Answer 3

PL rises

PL falls

PL remains constant

Question 4

A negative IS shock shifts IS and AD _____, causing Y to ____.

Y < Y (constant) causing PL to ____
- SRAS to move down
- M/P to increase, which causes LM to move down

Answer 4

left; fall

fall

Question 5

wealth effect caused by deflation

Answer 5

pigou effect

Question 6

The stabilizing effects of deflation:
decrease P….

Pigou effect:
decrease P

Answer 6

increase (M/P ); LM shifts right; increase Y

increase (M/P ); increase consumers’ wealth; increase C; IS shifts right; increase Y

Question 7

The destabilizing effects of unexpected deflation: Debt-deflation theory

fall in P (unexpected) (3)

Answer 7

transfers purchasing power from borrowers to lenders

borrowers spend less, lenders spend more

if borrowers’ propensity to spend is larger than lenders, then aggregate spending falls, the IS curve shifts left, and Y falls

Question 8

The destabilizing effects of expected deflation:

decrease π^e (expected deflation)
(4)

Answer 8

r increases for each value of i

I falls

planned expenditure & agg. demand fall

income & output fall

Question 9

The Fed knows better than to let M ____ so much, especially during a contraction.

Fiscal policymakers know better than to ____ taxes or cut spending during a contraction.

Answer 9

fall

raise

Question 10

_______ make fiscal policy expansionary during an economic downturn.

Answer 10

Automatic stabilizers