Chapter 13 Review Questions

Refer to Figure 13-3. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume Y1 represents potential GDP.

B and D

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

Point A to point B

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

Point B to point A

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Short-run aggregate supply will shift to the left.

Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will decline

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.

All of the following would be considered a positive addition to household wealth except

A credit card balance

Refer to Figure 13-1. Ceteris paribus, a decrease in the value of the domestic currency relative to foreign currencies would be represented by a movement from

AD1 to AD2

Refer to Figure 13-1. Ceteris paribus, an increase in personal income taxes would be represented by a movement from

AD2 to AD1

Refer to Figure 13-1. Ceteris paribus, an increase in the growth rate of domestic GDP relative to the growth rate foreign GDP would be represented by a movement from

AD2 to AD1

Refer to Figure 13-1. Ceteris paribus, an increase in the value of the domestic currency relative to foreign currencies would be represented by a movement from

AD2 to AD1

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

Aggregate demand curve

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.

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.

Which of the following would cause the short-run aggregate supply curve to shift to the left?

An increase in inflation expectations

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

An increase in interest rates

Which of the following best describes the "interest rate effect"?

An increase in the price level raises the interest rate and chokes off investment and consumption spending.

An increase in aggregate demand results in a(n) _______ in the _______.

Expansion; short run

The international trade effects state that a(n) ______ 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

An increase in investment causes the price level to _______ in the short run and _______ in the long run.

Increase; increase further

A decrease in the price level results in a(n) _______ in the quantity of real GDP demanded because a lower price level _______ consumption, investment, and net exports.

Increase; increases

Stagflation occurs when

Inflation rises and GDP falls.

When the price level falls from 135 to 120, the aggregate level of GDP supplied falls from $140 billion to $125 billion. This _______ relationship represents the _______ relationship between GDP and the price level.

Positive; Short-run

The level of real GDP in the long run is

Potential GDP

The long-run aggregate supply curve shows the relationship between the _______ and _______.

Price level; quantity of real GDP supplied

According to the "wealth effect:, when the _______ falls, the _______ rises.

Price level; the real value of household wealth

Refer to Figure 13-2. Ceteris paribus, a decrease in the expected price of an important natural resource would be represented by movement from

SRAS1 to SRAS2

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

SRAS2 to SRAS1

Suppose the U.S. GDP growth rate is slower relative to other countries' GDP growth rates. This will

Shift aggregate demand curve to the right.

If, due to a recession, foreign workers begin to leave the United States to search for temporary work in their home countries until the recession has ended, this will

Shift the short-run aggregate supply curve of the home country to the left.

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.

The basic aggregate demand and aggregate supply curve model helps explain _______ fluctuations in real GDP and the price level.

Short-term

A negative supply shock in the short run causes

The aggregate supply curve to shift to the left.

If technological change occurs in the economy,

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

Changes in _______ do not affect the level of aggregate supply in the long run.

The price level

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.

In the long run,

Unemployment is at its natural rate.