Question

ECO - 252 -- Macroeconomics

7. True/False statements. Simply state if the statement is true or false. No explanation required.

a. In the AD-AS Model, the wealth effect refers to a decrease in the interest rate that in turn increases consumption and investment.

b. Ceteris Paribus, a decrease in the price level causes the interest rate to decrease, which leads to a depreciation of the dollar in the foreign-currency exchange.

c. The aggregate demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.

d. An increase in the money supply shifts the short-run aggregate supply to the right.

e. The AD-AS Model can be used to show that in the short-run, money is not neutral.

f. When OPEC reduced the supply of oil in the mid-1970s, the U.S. suffered from stagflation.

g. John Maynard Keynes argued that fiscal policies could help the economy if the economy was hit by a negative demand shock.

h. In the long run, real output depends on the amount of money available.

i. The Fed can accommodate a decrease in the short run aggregate supply by conducting open market purchases.

Answer 1

a. True. In AD-AS model, wealth effect refers to a decrease in the interest rate that in turn increases consumption and investment.

b.True. Ceteris paribus, a decrease in price level causes interest rate to decrease which leads to depreciation of dollars in foreign currency exchange.

c.False. Aggregate demand slopes downwards to show the inverse relationship between price level and quantity demanded.

d.False. An increase in money supply means more money is with the public to buy goods and services implies aggregate demand will increase. Over time wages and price levels would revise upwards in response to excess demand and short-run aggregate supply will shift leftwards.