ec 102 midterm 2 (watson ‘26)

Suppose the economy is at point A. If the economy experiences a negative supply shock, where will the eventual long-run equilibrium be?

Assume the economy is at point C in the figure. All other things being equal, what will happen on the long run?

The short run Phillips Curve will shift to the left

Suppose the economy is at point B in the figure above. Which is true?

The expected rate of inflation is 3%

A decrease in transfer payments (SNAP, Social Security, en employment benefits) will…

…decrease aggregate demand

Suppose the economy is at the natural rate of unemployment. A decrease in investment causes the price level to ____ in the short run and ____ in the long run

Decrease, decrease further

Assume the United States is the “domestic” country and Japan is the “foreign” country. Which of the following might increase the real exchange rate between the U.S. and Japan?

An increase in the price level in the U.S.

What shows the relationship between the price level and aggregate expenditure?

Aggregate demand curve

An increase in U.S. interest rates relative to interest rates in the rest of the world will…

…lower exports and raise imports

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result,

The aggregate long-run supply curve will shift to the right

If a $3 trillion increase in disposable income results in a $1 trillion increase in saving, what is the marginal propensity to consume?

.67

A Big Mac costs $5.75 in the United States and 8 euros in Paris. If the exchange rate is 0.8 euros per dollar, purchasing power parity predicts that…

…the dollar is overvalued (since the euro is 0.8, making is undervalued)

Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point C, which of the following must be true?

Short-run GDP at point C must be above potential GDP.

Long run macroeconomic equilibrium occurs when…

…actual GDP is above potential GDP

Spending on the war in Afghanistan was categorized as government purchases. How did increases in spending on the war in Afghanistan affect the aggregate demand curve?

They shifted the aggregate demand curve to the right

Assume the U.S. is the domestic country, and India is the foreign country. If the exchange rate between the U.S. dollar and the Indian rupee (rupees per dollar) is greater than PIndia/PUS , which of the following would be true?

There are opportunities for profit by purchasing goods in India and then selling them in the United States.

If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the consumption function is

0.80

Suppose the economy is at the natural rate of unemployment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will rise

The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did this technological change do the short-run supply curve?

It shifted the short-run aggregate supply curve to the right

An increase in price level will…

…decrease aggregate expenditure

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. What will occur because of the automatic mechanism adjusting the economy back to potential GDP?

SRAS will shift down

____ usually increases when the U.S. economy is in a recession and decreases when the U.S. economy is expanding (it’s weird but think abt it)

Net Exports

• if we’re in a recession, our imports go down cus we can’t afford to buy foreign goods. but, we still try to export our goods to get back up again, so exports increases and therefore, NX increases

U.S. inventories in 2017 were about $1.98 trillion. In 2018, U.S. inventories were about $1.9 trillion. So, the change in 2018 GDP due to inventory investment was…

…-80B

If inflation in the U.S. is higher than inflation in its trading partners, what will be the effect on U.S. net exports?

Net exports will decrease as U.S. exports decrease

All things being equal, if the Chinese gov allows the RMB (Chinese currency) to appreciate relative to the dollar, how is this likely to affect the U.S. aggregate demand curve?

This will shift the U.S. aggregate demand curve to the right

Investment spending will decrease when…

…business cash flow decreases

You’re traveling in Ireland and thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the exchange rate is 0.85 euros per dollar, what's the highest price in euros you'd be willing to pay for a camera?

106.25 euros

The five most important variables that determine the level of consumption are

Which of the events below would cause the shifts in the supply and demand curves in the market for dollars against the British pound shown in the graph above?

Interest rates rise in England

• demand for USD decreases, supply of USD increases, weaker USD → so interest rates abroad rise

Investment spending includes…

…spending on new capital equipment, change in inventories, spending on new houses

Investment spending does NOT include…

…spending on consumer durable goods