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    Econ HW 10 Flashcards

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    Econ HW 10

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    A change in the expected price level is likely to cause...

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    a shift in the short run aggregate supply curve

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    According to classical macroeconomic theory, changes in the money supply affect

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    variables measured in terms of money but not variables measured in terms of quantities or relative prices

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    Terms in this set (20)

    A change in the expected price level is likely to cause...

    a shift in the short run aggregate supply curve

    According to classical macroeconomic theory, changes in the money supply affect

    variables measured in terms of money but not variables measured in terms of quantities or relative prices

    Aggregate demand includes...

    the quantity of goods and services the government, households, firms, and customers abroad want to buy.

    Aggregate demand shifts left if

    government purchases decrease and shifts left if stock prices fall

    An unexpected increase in the price level that temporarily lowers real wages and induces more employment and output in an economy, occurs in

    sticky-wage theory

    As the price level rises

    people will want to hold more money, so the interest rate rises.

    During a recession the economy experiences

    falling employment and income

    if output is above its natural rate, then according to sticky-wage theory...

    will strike bargains for higher wages. In response to the higher wages firms will produce less at an given price level

    Most economists believe that in the short run

    real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend.

    Most economists believe that money neutrality

    does not hold in the short run

    Other things the same, an increase in the price level makes consumers feel

    less wealthy, so the quantity of goods and services demanded falls.

    Other things the same, if the price level is lower than expected, then some firms believe that the relative price of what they produce has

    decrease, so they decrease production

    Suppose the economy is in long run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will

    fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

    The classical dichotomy and monetary neutrality are represented graphically by

    a vertical long-run aggregate-supply curve

    The equation: quantity of output supplied = natural rate of output + z (actual price level - expected price level), where z is a positive number, represents

    an upward- sloping short-run aggregate supply curve

    The misconceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has

    increase, so they increase priduction

    The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected

    production is more profitable and employment rises.

    When taxes decrease, consumption

    increases as shown by a shift of the aggregate demand curve to the right.

    When the Fed buys bonds

    the supply of money increases and so aggregate demand shifts right.

    This shifts short run aggregate supply left

    an increase in price expectations

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    Verified questions

    ECONOMICS

    The price is $10, the quantity demanded is 100 units, and the quantity supplied is 130 units. For each dollar decline in price, quantity demanded rises by 5 units and quantity supplied falls by 5 units. What is the equilibrium price?

    Verified answer ECONOMICS

    Beleaguered State Bank (BSB) holds $250 million in deposits and maintains a reserve ratio of 10 percent. a. Show a T-account for BSB. b.Now suppose that BSB’s largest depositor with draws$10 million in cash from her account. If BSB decides to restore its reserve ratio by reducing the amount of loans outstanding, show its new T-account. c. Explain what effect BSB’s action will have on other banks. d. Why might it be difficult for BSB to take the action described in part (b)? Discuss another way for BSB to return to its original reserve ratio.

    Source : quizlet.com

    [Solved] The Classical Dichotomy and Monetary Neutrality Are Represented Graphically by

    [Solved] The classical dichotomy and monetary neutrality are represented graphically by A) an upward-sloping long-run aggregate-supply curve. B) a vertical long-run aggregate-supply curve. C) an upward-sloping short-run aggregate-curve. D) a downward-sloping aggregate-demand curve.

    [Solved] The Classical Dichotomy and Monetary Neutrality Are Represented Graphically by

    Question 213 Multiple Choice Question 213

    The classical dichotomy and monetary neutrality are represented graphically by

    A) an upward-sloping long-run aggregate-supply curve.

    B) a vertical long-run aggregate-supply curve.

    C) an upward-sloping short-run aggregate-curve.

    D) a downward-sloping aggregate-demand curve.

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    Classical dichotomy

    Classical dichotomy

    From Wikipedia, the free encyclopedia

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    In macroeconomics, the classical dichotomy is the idea, attributed to classical and pre-Keynesian economics, that real and nominal variables can be analyzed separately. To be precise, an economy exhibits the classical dichotomy if real variables such as output and real interest rates can be completely analyzed without considering what is happening to their nominal counterparts, the money value of output and the interest rate. In particular, this means that real GDP and other real variables can be determined without knowing the level of the nominal money supply or the rate of inflation. An economy exhibits the classical dichotomy if money is neutral, affecting only the price level, not real variables.[] As such, if the classical dichotomy holds, money only affects absolute rather than the relative prices between goods.

    The classical dichotomy was integral to the thinking of some pre-Keynesian economists ("money as a veil") as a long-run proposition and is found today in new classical theories of macroeconomics. In new classical macroeconomics there is a short-run Phillips curve which can shift vertically according to the rational expectations being reviewed continuously. In the strict sense, money is not neutral in the short-run, that is, classical dichotomy does not hold, since agents tend to respond to changes in prices and in the quantity of money through changing their supply decisions. However, money should be neutral in the long run, and the classical dichotomy should be restored in the long-run, since there was no relationship between prices and real macroeconomic performance at the data level. This view has serious economic policy consequences. In the long-run, owing to the dichotomy, money is not assumed to be an effective instrument in controlling macroeconomic performance, while in the short-run there is a trade-off between prices and output (or unemployment), but, owing to rational expectations, government cannot exploit it in order to build a systematic countercyclical economic policy.[1]

    Keynesians and monetarists reject the classical dichotomy, because they argue that prices are sticky. That is, they think prices fail to adjust in the short run, so that an increase in the money supply raises aggregate demand and thus alters real macroeconomic variables. Post-Keynesians reject the classic dichotomy as well, for different reasons, emphasizing the role of banks in creating money, as in monetary circuit theory.

    References[edit]

    ^ Galbács, Peter (2015). . Contributions to Economics. Heidelberg/New York/Dordrecht/London: Springer. doi:10.1007/978-3-319-17578-2. ISBN 978-3-319-17578-2.

    Further reading[edit]

    Roy Green (1987). "Classical theory of money," , v. 1, p. 449.

    Don Patinkin, (1987). "Neutrality of money," , v. 3, pp. 639–644.

    Huw Dixon, Of Coconuts, decomposition and a Jackass: the genealogy of the Natural Rate, Surfing Economics, Chapter 3.

    Categories: Monetary economicsClassical economicsMacroeconomic theoriesDichotomies

    Source : en.wikipedia.org

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