Chapter 10 Questions

When the price level rises, the​ real-balance effect, the interest rate effect and the open economy effect work together to generate __________ movements along the​ economy's aggregate demand curve.

upward

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of a decrease in equilibrium real GDP with no change in the equilibrium price level. A. ​Long-run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the left by an equal amount. B. ​Long-run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the right. C. ​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right. D. ​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the left.

A. Long-run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the left by an equal amount.

Consider this​ statement: "Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the​ long-run aggregate supply​ curve." This statement is describing A. ​demand-side inflation. B. ​supply-side inflation. C. Both​ demand-side and​ supply-side inflation. D. None of the above.

A. demand-side inflation.

Supply-side inflation can be caused by a continual A. decrease in aggregate supply while aggregate demand has significant decreases. B. decrease in aggregate supply while aggregate demand remains unchanged. C. increase in aggregate demand while aggregate supply remains unchanged. D. increase in aggregate supply while aggregate demand remains unchanged.

B. decrease in aggregate supply while aggregate demand remains unchanged.

Inflation can be caused by A. decreases in the​ long-run aggregate supply curve or decreases in the aggregate demand curve. B. decreases in the​ long-run aggregate supply curve or increases in the aggregate demand curve. C. increases in the​ long-run aggregate supply curve or increases in the aggregate demand curve. D. increases in the​ long-run aggregate supply curve or decreases in the aggregate demand curve.

B. decreases in the​ long-run aggregate supply curve or increases in the aggregate demand curve.

The​ long-run aggregate supply curve A. is vertical because a change in real GDP has no effect on the price level. B. is vertical because changes in the price level have no effect on real output. C. shows the various amounts of real output businesses are willing to consume at each price level. D. is downward sloping because a higher price level causes businesses and consumers to reduce spending.

B. is vertical because changes in the price level have no effect on real output.

In the accompanying graph if the price level is 140 A. real GDP equals total planned expenditures. B. real GDP exceeds total planned expenditures. C. total planned expenditures exceed real GDP. D. the price level will rise.

B. real GDP exceeds total planned expenditures. At a price level of​ 140, the total of planned real expenditures​ (read from the AD​ curve) is exceeded by the​ full-employment real GDP​ (read from the LRAS​ curve).

Which of the following will generate an increase in aggregate​ demand? A. A tax increase. B. A decrease in the price level. C. Government spending for the onset of a war. D. An increase in the foreign exchange value of the dollar.

C. Government spending for the onset of a war The onset of a war will necessitate increases in federal government purchases. This heightened spending occurs at any possible price level and hence is an increase​ (shift to the​ right) in aggregate demand.

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP and increase in the equilibrium price level. A. ​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the left. B. ​Long- run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the left. C. ​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by a larger amount. D. ​Long- run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the right.

C. Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by a larger amount.

Long-run equilibrium in the economy will occur A. at the point of secular inflation. B. where the production possibilities curve intersects the demand curve. C. at the price level where total planned real expenditures equals real GDP at full employment. D. at the output level consistent with the vertical aggregate demand curve.

C. at the price level where total planned real expenditures equals real GDP at full employment.

The​ long-run aggregate supply curve shifts outward when A. there are changes in the power of government. B. the​ real-balance effect takes hold. C. there is economic growth. D. there is increased demand of real goods and services.

C. there is economic growth.

If there is persistent inflation in a growing​ economy, A. the​ long-run aggregate supply is shifting to the right at a faster rate than aggregate demand. B. there is an excess of total planned expenditures. C. the​ long-run aggregate supply is shifting to the right at a slower rate than aggregate demand. D. the​ long-run aggregate supply is constant.

C. the​ long-run aggregate supply is shifting to the right at a slower rate than aggregate demand.

According to the​ real-balance effect, an increase in the price level A. does not affect the real value of cash balances in the​ short-run. B. does not affect the real value of cash balances in the​ long-run. C. increases an​ individual's expenditures due to an increase in the real value of cash balances. D. reduces an​ individual's expenditures due to a decrease in the real value of cash balances.

D. reduces an​ individual's expenditures due to a decrease in the real value of cash balances.

Consider the accompanying diagram when answering the questions that follow. Suppose that the current price level is P2. In this​ case, the price will fall toward P1 because A. inventories of unsold goods would begin to accumulate. B. actual real GDP would be greater than total planned real expenditures. C. firms would stand ready to offer more services than people wish to purchase. D. All of the above. E. A and​ B, but not C.

D. All of the above

The​ long-run aggregate supply curve is determined by A. the real value of cash balances. B. the relationship between price and quantity supplied. C. the amount of inflation in the economy. D. the​ full-employment level of real output.

D. the full-employment level of real output.

An increase in the U.S. price level can be caused by all of the following except A. increases in the security of U.S. jobs. B. lower U.S. interest rates. C. a tax decrease. D. worsening economic conditions in Asia.

D. worsening economic conditions in Asia. Worsening economic conditions in Asia will reduce U.S. aggregate​ demand, leading to a lower equilibrium price level.

Suppose that an economy is initially producing at the full-employment level of output. Now suppose there is a reduction in the money supply. Other things being equal we can expect demand-side inflation. supply-side inflation. cost-pull inflation. deflation.

deflation.

When the economy is in​ long-run equilibrium, the price level adjusts to equate total planned real _____________ by​ individuals, businesses, the​ government, and foreign​ (non-U.S.) residents with total planned ___________ by firms.

expenditures; production

In an economy in which aggregate demand is stable and a period of sustained and significant productivity growth occurs, there will be a constant price level. a shift of aggregate supply to the left. secular deflation. secular inflation.

secular deflation.

From the list​ below, match the letter of the outcome each of the following events produces upon the LRAS curve. A Shifts to right B Shifts to left C Movement up along D Movement down along ​(Enter a letter​ A, B,​ C, or​ D.) 1. Last​ year, businesses invested in new capital​ equipment, so this year the​ nation's capital stock is higher than it was last year. 2. There has been an 8 percent increase in the quantity of money in circulation that has shifted the AD curve. 3. A hurricane of unprecedented strength has damaged oil​ rigs, factories, and ports all along the​ nation's coast. 4. Inflation has occurred during the past year as a result of rightward shifts of the AD curve.

1. A 2. C 3. B 4. C

For each event​ below, suppose that the economy begins at the​ long-run equilibrium point A in the figure to the right. Identify which of the other points on the diagram −points B​, ​C, D, or E — could represent a new ​long-run equilibrium after the described events take place and move the economy away from point A. Events a. Significant productivity improvements​ occur, and the quantity of money in circulation increases​: b. No new capital investment takes​ place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same​ time, the government imposes a large tax increase on the​ nation's households: c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.

1. B 2. C 3. E

From the list​ below, match the letter of the outcome each of the following events produces upon the AD curve. A Shifts to right B Shifts to left C Movement up along D Movement down along Type in a single letter​ (A, B, C or​ D). 1. Deflation has occurred during the past year. 2. Real GDP levels of all the​ nation's major trading partners have declined. 3. There has been a decline in the foreign exchange value of the​ nation's currency. 4. The price level has increased this year.

1. D 2. B 3. A 4. C

1. A rise in the equilibrium price level could be caused by a _________ in​ long-run aggregate supply.​ Hence, one possible reason for persistent inflation inflation would be continual __________ in economywide production. Using the line drawing​ tool, draw a new LRAS curve that shows the effects of economic growth on the​ economy's long-run equilibrium in the absence of a change in aggregate demand. Label your line ​'LRAS2​.' Using the point drawing tool​, indicate the​ economy's new​ long-run equilibrium price and level of real GDP. Label this point ​'E2​.' Carefully follow the instructions​ above, and only draw the required objects. ​2. Thus, in a nation that generally experiences economic growth over the long​ run, we would ________________ a decline in LRAS could explain persistent inflation.

1. decline; reductions 2. not anticipate

Suppose that the full employment level of nominal GDP rises in one year from ​$16.8 to $18.0 trillion. The​ long-run equilibrium price​ level, however, remains unchanged at 120. By how much​ (in real​ dollars) has the​ long-run aggregate supply curve shifted to the right from one year to the​ next? ​$____ trillion. ​(Round your answer to two decimal places.​) By how​ much, if​ any, has the aggregate demand curve shifted to the​ right? A. AD has shifted by less than ​$1.2 trillion. B. AD has not shifted. C. AD has shifted exactly by ​$1.00 trillion. D. AD has shifted exactly by ​$1.2 trillion.

1.00; C.

Suppose that during the past 3​ years, equilibrium real GDP in a country rose​ steadily, from ​$420 billion to ​$470 ​billion, but even though the position of its aggregate demand curve remained​ unchanged, its equilibrium price level steadily​ declined, from 109 to 102. What could have accounted for these​ outcomes, and what is the term for the change in the price level experienced by this​ country? A. Economic growth without an increase in aggregate​ demand; secular deflation. B. Increase in aggregate demand without economic​ growth: disinflation. C. Recession with​ inflation; stagflation. D. Economic growth with an increase in aggregate​ demand; secular deflation.

A. Economic growth without an increase in aggregate demand; secular deflation.

Assume that the position of a​ nation's aggregate demand curve has not​ changed, but the​ long-run equilibrium price level has declined. declined. Now consider the following​ factors: Factors a. An increase in labor productivity b.A decrease in the capital stock c. A decrease in the quantity of money in circulation d. The discovery of new mineral resources used to produce various goods e.A technological improvement Other things being​ equal, which of these factors might account for this​ event? A. Factors a, d, and e. B. Factors a, b, and d. C. All factors but c. D. Only factor c.

A. Factors a, d, and e. Factors a, d, and e will produce a lower ​long-run equilibrium price level because each causes a rightward shift in the LRAS curve. Factor c will decrease aggregate​ demand, while factor e lowers the price level.

Suppose that the position of a​ nation's long-run aggregate supply​ (LRAS) curve has not​ changed, but its​ long-run equilibrium price level has decreased. FACTOR a. A fall in the value of the domestic currency relative to other world currencies b. A decrease in the quantity of money in circulation c.An increase in the labor force participation rate d. An increase in taxes e. A fall in real incomes of countries that are key trading partners of this nation f. Increased​ long-run economic growth Of the factors given​ above, which could account for the price level decrease with constant​ LRAS? A. Factors​ b, d, and e. B. Factors​ b, c,​ d, and f. C. Factors​ a, c, and f. D. Factors c and f.

A. Factors b, d, and e. Given a fixed LRAS​ curve, factors​ b, d, and e will decrease ​AD, thus yielding a fall in the price level. Factor a causes movement along the AD​ curve, while factors c and f cause the LRAS to shift.

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP with no change in the equilibrium price level. A. ​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by an equal amount. B. ​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the left. C. ​Long-run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the left. D. ​Long-run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the right.

A. Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by an equal amount.

If economic growth causes the​ long-run aggregate supply curve to shift rightward over​ time, but the aggregate demand curve does not​ change, we expect A. the​ long-run equilibrium price to​ decline, and there will be secular deflation. B. the​ long-run equilibrium price to​ decline, and there will be secular stability. C. the​ long-run equilibrium price to​ rise, and there will be secular inflation. D. the​ long-run equilibrium price to​ rise, and there will be secular deflation.

A. the long-run equilibrium price to decline, and there will be secular deflation. A continually rightward shifting LRAS curve coupled with a stable AD curve will result in a declining long run equilibrium price. This is called secular deflation.

True or false: Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the​ long-run aggregate supply curve.

True

In the above figure, a movement from point B to point A can be explained by a drop in the price level. an increase in the demand for manufacturing goods due to new technology. an increase in spending due to a war. an increase in spending due to increases in education expenditures.

a drop in the price level.

The aggregate demand curve would shift to the right as a result of a drop in the price level. an increase in the U.S. real interest rate. tax increases. a decrease in the amount of money in circulation.

an increase in the U.S. real interest rate.

All of the following would shift the LRAS curve to the right EXCEPT an improvement in technology. a net inflow of human capital. an increase in the overall price level. an increase in the size of the labor force.

an increase in the overall price level.

Refer to the above figure. A movement from B to C would be NOT be the result of an increase in consumption spending. an increase in government spending. an increase in worker productivity. an increase in foreign income levels.

an increase in worker productivity.

Long-run aggregate supply and a country's production possibility curve (PPC) are examples of microeconomic models. have no relationship. are inversely related. are closely related.

are closely related.

Secular deflation cannot exist in a capitalistic economy. has been a serious problem during the last three decades in the United States. although present, has not been a problem during the last three decades in the United States. has not been present in the United States since 1959.

has not been present in the United States since 1959.

Suppose that during a given​ year, the quantity of U.S. real GDP that can be produced in the long run falls from ​$13 trillion to ​$12.5 ​trillion, measured in base-year dollars During the​ year, no change occurs in the various factors that influence aggregate demand. As a​ result, the U.S.​ long-run equilibrium price level during this particular year will __________.

increase

The long-run aggregate supply will increase when tax rates increase. the price level increases. international trade barriers are removed. labor supply decreases.

international trade barriers are removed.

The __________ rate of unemployment occurs at the​ long-run level of real GDP per year given by the position of the LRAS.

natural

Assume that the economy is in​ long-run equilibrium with complete information and that input prices adjust rapidly to changes in the prices of goods and services. If there is a sudden rise in the price level induced by an increase in aggregate​ demand, real GDP will ___________.

not change If there is full information and rapid adjustment of input prices to the rise in the price​ level, will firms want to change their production​ plans?

If the current price level is lower than the equilibrium price level, then it must be true that total planned government spending exceeds total planned tax revenues. government spending is less than total planned tax revenues. real expenditures exceed total planned production. real expenditures are less than total planned production.

real expenditures exceed total planned production.

The ______________ effect occurs because price level changes alter the real value of cash​ balances, thereby causing people to desire to spend more or​ less, depending on whether the price level decreases or increase

real-balance

A rightward shift of long-run aggregate supply without any change in aggregate demand will leave real GDP unchanged. results in a lower price level. increases the price level along with an increase in real GDP. increases the price level without any change in real GDP.

results in a lower price level.

Suppose there is an increase in the capital stock... The​ long-run aggregate supply curve will shift to the ________, the equilibrium price level will _________, and equilibrium GDP will _________.

right; decrease; increase

The figure to the right shows an economy in an initial​ long-run equilibrium at point A. a. Using the line drawing tool​, show​ how, if at​ all, the equilibrium real GDP and the​ long-run equilibrium price level are affected by a decrease in the value of the home currency in terms of the currencies of other nations. Properly label this line. Carefully follow the instructions​ above, and only draw the required objects. b. According to your​ graph, the equilibrium price level _________ while the equilibrium real GDP ___________.

rises; remains unchanged

A persistently declining price level resulting from economic growth and unchanged aggregate demand is called demand-side deflation. secular deflation. ozian deflation. supply-side deflation.

secular deflation.

When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply curve there will be pressures that will lead to a shift of either the aggregate demand or the long run aggregate supply curves. there will be no price level change. total planned real expenditures will exceed actual real GDP, and the price level will increase. total planned real expenditure will be lower than actual real GDP, and the price level will increase.

total planned real expenditures will exceed actual real GDP, and the price level will increase.