Chapter 9: Aggregate Supply & Aggregate Demand Learning Curve.

What occurs at macroeconomic equilibrium?

The economy neither contracts nor expands. The economy neither contracts nor expands at macroeconomic equilibrium.

According to the following diagram, which of the following shifts indicate a government's increasing taxes to combat demand-pull inflation?

point a to point e The shift from point a to point e indicates the shift in aggregate demand that would occur if a government increased taxes to combat demand-pull inflation.

Which of these events would be most likely to cause the shift from AD0 to AD1 in the following diagram depicting the U.S. economy?

the Vietnam War in the 1960s The Vietnam War in the 1960s pushed aggregate demand to the right and caused a period of demand-push inflation.

If the marginal propensity to consume is 0.5 and new spending is $300, then total spending will increase by:

$600. The spending multiplier is 2. The equation is: Multiplier = 1/(1 − 0.5).

Which of the following shifts would represent an increase in government spending in order to move an economy out of recession?

point b to point c

in the short run, ceteris paribus, what happens to the output when price level increases?

It increases. Other things held constant, the price level increases in the short run when output increases.

The Revenue Act of 1932, signed by President Herbert Hoover, increased taxes across the board on individuals and corporations. The top income tax rate on high earners increased a staggering amount, from 25% to 63%. How would this affect aggregate demand?

It would cause the aggregate demand curve to shift to the left. Factors that decrease aggregate demand at any given price level will cause the aggregate demand curve to shift to the left.

The Economic Recovery Act of 1981, signed by President Ronald Reagan, decreased taxes on individuals and corporations and slashed the estate tax. The top income tax rate on high earners fell from 70% to 50%. How would aggregate demand be affected?

It would cause the aggregate demand curve to shift to the right. Factors that increase aggregate demand at any given price level will cause the aggregate demand curve to shift to the right.

Suppose a drought in Australia has seriously impaired agricultural productivity. How would that impairment in productivity affect short-run aggregate supply?

It would cause the short-run aggregate supply curve to shift to the left. Droughts that reduce agricultural productivity will cause the short-run aggregate supply curve to shift to the left.

Suppose the cost of capital were to increase. How would that affect short-run aggregate supply?

It would cause the short-run aggregate supply curve to shift to the left. Factors that decrease short-run aggregate supply at any given price level will cause the short-run aggregate supply curve to shift to the left.

France is known to have a relatively inflexible labor market. In February of 2000, France instituted a new policy. Any hours worked beyond 35 in a week were considered overtime. What was the likely effect on France's short-run aggregate supply curve?

It would cause the short-run aggregate supply curve to shift to the left. Regulations that increase the cost of labor for employers will cause the short-run aggregate supply curve to shift to the left.

What would be the likely effect of government actions that would decrease the concentration of industries?

It would cause the short-run aggregate supply curve to shift to the right. Market power causes firms to restrict supply in order to increase profits. By reducing firms' market power, the government can increase short-run aggregate supply.

In the mid- to late-1990s, huge productivity gains were realized from the adoption of information technology by firms. How would that affect short-run aggregate supply?

It would cause the short-run aggregate supply curve to shift to the right. The IT-led productivity boom in the late-1990s caused the short-run aggregate supply curve to shift to the right. It also caused the long-run aggregate supply curve to shift to the right.

According to the wealth effect, what will happen to output demanded when aggregate price levels increase?

Output demanded will decrease. According to the wealth effect, output demanded will decrease when aggregate price levels increase.

Which of the following will cause the aggregate demand curve to shift to the right?

a decrease in household debt A decrease in household debt will cause people to purchase more goods at any given price level, pushing the aggregate demand curve to the right.

Rising inflationary expectations can cause:

a shift to the left of the entire short-run aggregate supply curve. An increase in inflationary expectations will increase production costs as higher wages are demanded. This causes the short-run aggregate supply curve to shift to the left.

In much of 2011, rising commodity prices (particularly corn, copper, and cotton) were in the news. The effect of these higher commodity prices on the economy would be illustrated by:

a shift to the left of the entire short-run aggregate supply curve. Such commodities are inputs, and higher input prices mean the entire short-run aggregate supply curve would shift to the left.

"Cloud" technology means that firms can store their data "in the cloud" instead of on servers that they would have to own and maintain. The effect of this on the economy would be illustrated by:

a shift to the right of the entire short-run aggregate supply curve. Cloud technology could mean lower costs or increasing productivity. The impact would be illustrated by a different aggregate supply curve to the right of the original curve.

Demand-pull inflation occurs when _____ expands so much that equilibrium output exceeds full employment output and the price level rises.

aggregate demand Demand-pull inflation occurs when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises.

The aggregate demand curve is downward sloping due to the:

effect of prices on exports. The aggregate demand curve is negatively sloped because of three factors. When the aggregate price level rises, household purchasing power is lowered; that's the wealth effect. A rising aggregate price level also lowers the amount of exports because our goods are now more expensive. Furthermore, a rising aggregate price level increases the demand for money and so drives up interest rates, which reduces business investment and reduces the quantity demanded of real GDP. In each case, as the aggregate price level rises, the quantity demanded of real GDP falls.

The aggregate demand curve is downward sloping due to the:

effect of prices on household purchasing power. The aggregate demand curve is negatively sloped because of three factors. When the aggregate price level rises, household purchasing power is lowered; that's the wealth effect. A rising aggregate price level also lowers the amount of exports because our goods are now more expensive. Furthermore, a rising aggregate price level increases the demand for money and so drives up interest rates, which reduces business investment and reduces the quantity demanded of real GDP. In each case, as the aggregate price level rises, the quantity demanded of real GDP falls.

The aggregate demand curve is downward sloping due to the:

effect of prices on the demand for money. The aggregate demand curve is negatively sloped because of three factors. When the aggregate price level rises, this lowers household purchasing power; that's the wealth effect. A rising aggregate price level also lowers the amount of exports because our goods are now more expensive. Furthermore, a rising aggregate price level increases the demand for money and so drives up interest rates, which reduces business investment and reduces the quantity demanded of real GDP. In each case, as the aggregate price level rises, the quantity demanded of real GDP falls.

Which of the following had the greatest percentage decrease from 1929 to 1932?

investment The greatest percentage drop from 1929 to 1932 occurred in investment. It dropped nearly 80%.

What happens to long-run aggregate supply when the aggregate price level decreases?

it stays the same. Long-run aggregate supply stays the same when the aggregate price level decreases.

If the economy is at both short-run and long-run macroeconomic equilibrium, then:

neither the price level nor GDP will change. The economy neither contracts nor expands at macroeconomic equilibrium; there are therefore no changes in the price level or GDP.

In the Keynesian model:

prices can be considered as fixed when aggregate demand is increasing, as long as there is excess productive capacity. The Keynesian fixed-price model assumes that increasing production would occur without a rise in prices. Keynes's analysis was based on the facts of the Great Depression, during which significant industrial capacity was going unused and unemployment was high.

When the aggregate price level increases, this causes interest rates to:

rise. As aggregate prices rise, people need more money to buy things, and this will increase the cost of borrowing money.

Economic growth is illustrated by a:

shift of the long-run aggregate supply curve to the right. Economic growth is illustrated by a shift of the long-run aggregate supply curve to the right.

An increase in the number of monopoly firms and a decrease in the number of competitive firms would cause the ____ curve to shift to the _____.

short-run aggregate supply; left A change in the number of firms will affect the production and hence the supply. In this case, there is less competition, and hence less production.

Improving technology will cause the _____ curve to shift to the _____.

short-run aggregate supply; right

A decrease in the number of monopoly firms and an increase in the number of competitive firms would cause the _____ curve to shift to the _____.

short-run aggregate supply; right A change in the number of firms will affect the production and hence the supply. In this case, there is more competition, and hence more production.

Aggregate demand is

the output of goods and services demanded at different price levels. Aggregate demand pertains to the output of goods and services demanded.

It would cause the short-run aggregate supply curve to shift to the right. Market power causes firms to restrict supply in order to increase profits. By reducing firms' market power, the government can increase short-run aggregate supply.

...

If the marginal propensity to consume is 0.7, then the marginal propensity to save is:

0.3.

If the marginal propensity to consume is 0.7, then the marginal propensity to save is:

0.3. The marginal propensities to save and to consume add up to 1. 0.7 + 0.3 = 1

if the marginal propensity to save is 0.5, then the marginal propensity to consume is:

0.5