CH13 MACRO

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

B

Which of the points in the above graph are possible short-run equilibrium but not long-run equilibrium? Assume Y1 represents potential GDP.

B and D.

Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be?

C

According to Marx, which of the following factors of production did not contribute anything of value to production?

Entrepreneurship

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium,

GDP will be below potential GDP.

What is potential GDP?

It is the level of real GDP in the long run.

The invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the information age. What did this technological change do the short-run supply curve?

It shifted the short run aggregate supply curve to the right

A decrease in aggregate demand results in a(n) _____ in the _____.

Recession; short run

Refer to Figure 13-2. Ceteris paribus, an increase in the number of workers and firms adjusting to having previously overestimated the price level would be represented by a movement from

SRAS1 to SRAS2

Ceteris paribus, an increase in productivity would be represented by a movement from

SRAS1 to SRAS2.

Ceteris paribus, an increase in the labor force would be represented by a movement from

SRAS1 to SRAS2.

Ceteris paribus, a decrease in the capital stock would be represented by a movement from

SRAS2 to SRAS1.

Figure 13-2 Ceteris paribus, an increase in the expected future price level would be represented by a movement from

SRAS2 to SRAS1.

Refer to Figure 13-2. Ceteris paribus, a decrease in productivity would be represented by a movement from

SRAS2 to SRAS1.

Refer to Figure 13-2. Ceteris paribus, a decrease in the capital stock would be represented by a movement from

SRAS2 to SRAS1.

Refer to Figure 13-2. Ceteris paribus, a decrease in the size of the labor force would be represented by a movement from

SRAS2 to SRAS1.

The long-run adjustment to a negative supply shock results in

The short-run aggregate supply curve shifting to the right

How do lower taxes affect aggregate​ demand?

They increase disposable​ income, consumption, and aggregate demand.

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

They will shift the aggregate demand curve to the right.

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?

This will shift the aggregate demand curve to the left.

Which of the following best describes the "wealth effect"?

When the price level falls, the real value of household wealth rises.

Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.

Why does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand?

Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices

On the​ long-run aggregate supply​ curve,

a decrease in the price level has no effect on the aggregate quantity of GDP supplied.

Because of the slope of the aggregate demand curve, we can say that

a decrease in the price level leads to a higher level of real GDP demanded.

When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred.

a housing bubble

Long-run macroeconomic equilibrium occurs when

aggregate demand equals short-run aggregate supply and they intersect at a point on the long- run supply curve.

Which of the following will shift the aggregate demand curve to the​ right, ceteris paribus​?

an increase in net exports

Which of the following is considered a negative supply shock?

an unexpected decrease in the refining capacity for oil

The level of aggregate supply in the long run is not affected by

changes in the price level.

Higher personal income taxes

decrease aggregate demand.

An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________.

decrease; a higher price level reduces consumption, investment, and net exports.

A decrease in investment causes the price level to ________ in the short run and ________ in the long run.

decrease; decrease further

When the price level in the United States falls relative to the price level of other​ countries, ________ will​ fall, ________ will​ rise, and​ ________ will rise.

imports; exports; net exports

The international trade effect states that an _____ in the price level will _____ net exports.

increase; decrease

Suppose there has been an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run.

increase; decrease to its initial value

After an unexpected _____ in the price of oil, the long-run adjustment decreases the price level and _____ the unemployment rate as they return to their original levels.

increase; decreases

According to the real business cycle model

increases in aggregate demand do not affect GDP.

Stagflation occurs when

inflation rises and GDP falls.

The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off

investment and consumption spending.

The long-run aggregate supply curve

is vertical.

if full employment GDP is equal to $4.2 trillion, what does the long run aggregate supply curve look like?

it is a vertical line at 4.2 trillion of GDP

When the economy enters a recession, your employer is unlikely to reduce your wages because ________ during a recession.

lower wages increase your incentive to find employment elsewhere.

A decrease in the price level will

move the economy down along a stationary aggregate demand curve.

Figure 13-2 Ceteris paribus, an increase in price level would be represented by a movement from

point A to B.

Figure 13-1 Ceteris paribus, an increase in price level would be represented by a movement from

point B to point A.

The short-run aggregate supply curve has a(n) _____ slope because as prices of _____ rise, prices of _____ rise more slowly.

positive; final goods and services; inputs

Full-employment GDP is also known as

potential GDP

Potential GDP refers to the level of

real GDP in the long run

An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.

real GDP; the price level

Suppose the U.S. GDP growth rate is faster relative to other countries' GDP growth rates. U.S. imports will therefore increase faster than U.S. exports, and this will

shift the aggregate demand curve to the left.

Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should

shift the short run aggregate supply curve to the right

Workers expect inflation to fall from 4% to 1% next year. As a result, this should

shift the short-run aggregate supply curve to the right.

Which aggregate supply curve has a positive slope?

short run only

The basic aggregate demand and aggregate supply curve model helps explain

short-term fluctuations in real GDP and the price level.

The new Keynesians emphasize the importance of

sticky wages and prices

Stagflation usually results from

supply shock

A negative supply shock in the short run causes

the aggregate supply curve to shift to the left.

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

the economy experiences technological change.

Suppose a developing country experiences a reduction in machinery and capital equipment as foreign entrepreneurs decrease the amount of investment in the economy. As a result

the long-run aggregate supply curve will shift to the left.

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 long-run aggregate supply curve will shift to the right

Ceteris Paribus, in the long-run, a negative supply shock causes

the price level to rise initially, and then return to its lower level

Which of the following models focuses on how productivity shocks explain fluctuations in real GDP?

the real business cycle model

Workers and firms both expect that prices will be 2.5% higher next year than they are this year. As a result,

the short-run aggregate supply(SRAS) will shift left as wages increase.

The new classical model has as its central idea that

workers and firms have rational expectations

Ceteris paribus, a decrease in government spending would be represented by a movement from

AD2 to AD1.

Ceteris paribus, a decrease in interest rates would be represented by a movement from

AD2 to AD1.

Short-run macroeconomic equilibrium occurs when

Aggregate demand and short-run aggregate supply intersect

The​ ________ shows the relationship between the price level and quantity of real GDP demanded.

Aggregate demand curve

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?

Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.

Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be?

A

Figure 13-3 Which of the points in the above graph are possible long-run equilibria?

A and C.

Which of the points in the above graph are possible short-run equilibrium?

A,B,C, and D.

Ceteris paribus, a decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented in a movement from

AD1 to AD2.

Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from

AD1 to AD2.

Ceteris paribus, a decrease in firms' expectations of the future profitability of investment spending would be represented by a movement from

AD2 to AD1.