ch 10

During 2007 and 2008, housing prices fell sharply. Use the AD-AS model to illustrate the impact of these price declines on output and employment. The AD-AS model indicates that the decrease in housing prices decreased wealth, reduced aggregate demand, and caused an economic recession.

*****didnt do the graph oops true

Which is more likely to result in a temporary spurt in the growth of real output?

A shift of the SRAS curve, but not the LRAS curve.

Both union and management representatives agree to a 10% to wage increase because they expect prices to rise by 10% during the next year. Assume that their expectations are met, i.e., that the inflation rate is 10% over the following year. Why would the unemployment rate probably increase if the actual rate of inflation next year is only 3%?

Prices in the goods and services will fall relative to resource prices. In the short run, profit margins will fall and firms will cut back on output. This will cause layoffs and increase unemployment.

These two changes would result in a temporary decrease in output.

Prices will increase causing production costs, which will reduce aggregate supply. In the long run, a new equilibrium will emerge at a higher price level and an output consistent with the economy's sustainable capacity.

During 2015, there was a substantial increase in stock prices, as well as a reduction in the world price of crude oil. The following graph shows the aggregate demand (AD) curve in blue, as well as the short run aggregate supply (SRAS) curve in orange and the long run aggregate supply (LRAS) curve in green. Use the following graph to help you answer the question that follows. You may shift the AD curve, the SRAS curve, the LRAS curve, or any combination of the three curves. You will not be graded by any changes you make to the graph. How did these two changes influence aggregate demand and aggregate supply in the United States? Check all that apply.

The increase in stock prices would cause the AD curve to shift to the right. The decrease in the world price of crude oil would cause the SRAS curve to shift to the left. The decrease in the world price of crude oil would cause the LRAS curve to shift to the left.

Suppose that unexpectedly rapid growth in real income abroad leads to a sharp increase in the demand for American exports. What impact will this change have on the price level, output, and employment in the long run in the United States?

The price level will increase, with no change in output and employment.

When an economy dips into a recession, consumers will often be relatively pessimistic about the future for an extended period of time. Use the following exhibit showing the consumer sentiment index for the 1978-2015 period (Exhibit 2 in your textbook) in your response to this question. True or False: Pessimism about the future of the economy exerts a positive effect on the speed and strength of the recovery. Investors and consumers save more by cutting back on their current spending to avoid overextending themselves. This leads to an increase in aggregate demand, shifting the AD curve to the right.

false

When an economy's production possibilities curve shifts outward due to capital formation or a technological advancement, the long-run aggregate supply curve

shifts to the right

Consider an economy with the following aggregate demand (AD) and aggregate supply (AS) schedules. These schedules reflect the fact that, prior to the period we're examining, decision makers entered into contracts and made choices anticipating that the price level would be P105 Why isn't the economy in long-run equilibrium? How will the unemployment rate during the current period compare with this economy's natural rate of unemployment? What will tend to happen to resource prices in the future? Will the rate of GDP produced during this period be sustainable into the future?

the actual price level is different from the expected price level, entailing further adjustments. Unemployment will be below the natural rate. Resource prices will rise, shifting SRAS to the left. Real GDP is not sustainable at $4.5 trillion; it will tend to fall.