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What is a depository institution, and what types of depository institutions are found in the United States?
Fiat Money Most economists believe that the better fiat money serves as a store of value, the more acceptable it is. How could people lose faith in money?
Why do you think rice was chosen to serve as money in medieval Japan? What would happen to the price level if there was particularly good rice harvest one year?
Why is universal acceptability such an important characteristic of money? What characteristics can you think of that might be important to market participants?
Functions of Money If an economy had only two goods (both nondurable), there would be no need. What important function of money does this statement disregard?
What is the natural rate of unemployment? Where is the economy operating relative to its potential GDP?
Do such shocks affect the short-run aggregate supply curve, the long-run aggregate supply curve, or both? What is the resulting impact on potential GDP?
Long-Run Adjustment In the long run, why does an actual price level that exceeds the expected price level lead to changes in the nominal wage?
What are some explanations for the coordination failures that prevent workers and employers from reaching agreements?
What does it imply about actual price level relative to expected price level? What must happen to real and nominal wages in order to close a recessionary gap?
In interpreting the short run aggregate supply curve, what does the adjective short-run mean? Explain the role of labor contracts along the SRAS curve.
Explain why recessionary gaps occur only in the short run and only when the actual price level is below what was expected.
Discuss some instances in your life when your actual production for short periods exceeded what you considered your potential production.
Potential Output Define the economy's potential output. What factors help determine potential output?
Short-Run Aggregate Supply In the short run, prices may rise faster than costs. How would such adjustments affect the slope of the aggregate supply curve?
What is the simple spending multiplier? What is real GDP demanded? What would happen to real GDP demanded if government purchases increased to $40 billion?
This chapter assumes that investment is autonomous. What would happen to the size of the multiplier if investment increases as real GDP increases? Explain.
What is the sum of saving and net taxes when desired spending equals real GDP? Explain. Why the multiplier is related to the slope of the consumption function.
Simple Spending Multiplier Suppose that the MPC is 0.8 and that $14 trillion. By how much would GDP have to increase government purchases to achieve this goal?
How do events, such as the World Trade Center and Pentagon attacks described in the case study The Ripple Effects of 9/11 affect the aggregate expenditure line?
How does the multiplier interact with the price change to determine the new real GDP demanded?
What are three reasons given for a second round of federal spending to follow the 2009 stimulus plan?
Multipliers Suppose investment, in addition to having an autonomous component. How would GDP affect the size of the government purchase and net tax multipliers?
How could a tax cut achieve the same result? Would the tax cut have to be larger than the increase in government purchases? Why or why not?
Illustrate this on an AD-AS diagram, assuming that the government changes its purchases by exactly the amount necessary to close the gap.