ECON 2301 - Chapter 10
Aggregate demand is the relationship between the quantity of _____ demanded and the _____ when all other influences on expenditure plans remain the same.
real GDP; price level
The defining feature of the classical view of macroeconomics is that the economy is ______.
self-regulating and always at full employment
When the government of Canada cuts income taxes, Canada's aggregate demand _______. When the United States experiences strong economic growth, Canada's aggregate demand _______. When Canada sets new environmental standards that require power utilities to upgrade their production facilities, Canada's aggregate demand _______.
increases; increases (When the government cuts income taxes, disposable income increases. The greater the disposable income, the greater is the quantity of consumption goods and services that households plan to buy and the greater is aggregate demand. When the United States experiences strong economic growth, U.S. income increases and U.S. consumers buy more goods and services, including goods and services produced in Canada. Canada's exports increase, and Canada's aggregate demand increases.) increases
If the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
increases; short-run
If potential GDP increases, what happens to aggregate supply? When potential GDP increases, ______.
long-run aggregate supply and short-run aggregate supply increase. The LAS and the SAS curve shift rightward graph: https://photos.app.goo.gl/bVDenRGSaicR4g7g7
The table shows the aggregate demand and short-run aggregate supply schedules of Lizard Island in which potential GDP is $600 billion. https://photos.app.goo.gl/74dnxo8zuBM6UDX58 1. Calculate the short-run equilibrium real GDP and price level. 2. The country has _____ gap and its magnitude is $ _____ billion. 3. If real GDP demanded at each price level increases by $50 billion, what is the new short-run macroeconomic equilibrium and the output gap?
)1. The short-run equilibrium real GDP is $575 billion and the price level is 110. 2. a recessionary; 25 (The output gap is the gap between equilibrium real GDP and potential GDP. Equilibrium real GDP is $575 billion and potential GDP is $600 billion, so the output gap is $25 billion. Because potential GDP exceeds equilibrium real GDP, the economy is in a below full-employment equilibrium and the output gap is a recessionary gap. Key Point: A recessionary gap occurs when the economy is in a below full-employment equilibrium. When the economy is in an above full-employment equilibrium, the output gap is an inflationary gap. 3. The new short-run macroeconomic equilibrium is at a real GDP of $600 billion and a price level of 120. The economy has NO output gap.
In the graph, initially the aggregate supply curve is SAS0 and the aggregate demand curve is AD0. Some events change aggregate supply from SAS0 to SAS1. Describe two events that could have created this change in aggregate supply. What is the equilibrium after aggregate supply changed? If potential GDP is $1 trillion, does the economy have an inflationary gap, a recessionary gap, or no output gap? https://photos.app.goo.gl/7W3BaF7dMtVr3bbr8 1. The events which could have changed short-run aggregate supply from SAS0 to SAS1 are ______. 2. Following the change in aggregate supply, the new macroeconomic equilibrium is at ______. 3. If potential GDP is $1 trillion, the economy has_______ gap.
1. a rise in the money wage rate or a rise in the money price of any other factor of production (When the aggregate supply curve shifts leftward from SAS0 to SAS1, there is a decrease in short-run aggregate supply. When the money wage rate or the money price of any other factor of production such as oil rises, aggregate supply decreases.) 2. point A 3. a recessionary
In the graph, the initially the aggregate supply curve is SAS0 and the aggregate demand curve is AD0. Some events change aggregate demand from AD0 to AD1. Describe two events that could have created this change in aggregate demand. What is the equilibrium after aggregate demand changed? If potential GDP is $1 trillion, the economy is at what type of macroeconomic equilibrium? https://photos.app.goo.gl/7W3BaF7dMtVr3bbr8 1. Some events that could have changed aggregate demand from AD0 to AD1 are ______. 2. Following the change in aggregate demand, the new equilibrium is at ______. 3. If potential GDP is $1 trillion, the economy has moved to _______ equilibrium.
1. an increase in transfer payments or an increase in the quantity of money (Aggregate demand increases when there is an increase in transfer payments. And aggregate demand increases when there is an increase in the quantity of money.) 2. point C 3. an above full-employment
It's a Recession—75 Percent of Americans Say In a telephone poll of over 1,000 adult Americans, 75 percent said they believe the nation is now in a recession. Of those who think the economy is in a recession, 27 percent said they believe we are in a serious recession. Americans are less confident in the future of the economy than they were in March. The poll showed that 23 percent believe the downturn will last more than two years, up from 19 percent in March. CNN, July 7, 2008 1. The graph shows the aggregate demand curve and the short-run aggregate supply curve. Draw a curve that shows the effects of a decrease in consumer confidence. Label it. Draw a point at the new short-run macroeconomic equilibrium. 2. Suppose the economy had been operating at a full- employment equilibrium. After the fall in consumer confidence, the economy moves to ______ equilibrium and ______ gap emerges.
1. https://photos.app.goo.gl/9ENpBsWoLq7fPqqP6 2. a below full-employment; a recessionary
Weak Dollar Helps Shrink Trade Deficit The United States trade deficit narrowed in May as exports climbed to records. Exports of American- made goods and services totaled $157.6 billion in May, a 0.9 percent increase from April. The declining value of the dollar relative to other currencies, especially the euro, is helping to make American exports cheaper and more attractive to foreign buyers. Growth in exports has been one of the few bright spots for the economy, which has been pounded by housing, credit and financial crises. Tax rebates also are energizing shoppers. The New York Times, July 12, 2008 1. The graph shows the aggregate demand curve and the short-run aggregate supply curve in the U.S. economy. Draw a curve that shows the effect of depreciation of the dollar. Label it. Draw a point at the new short-run macroeconomic equilibrium. 2. Tax rebates ______ aggregate demand and the housing, credit, and financial crises ______ aggregate demand.
1. https://photos.app.goo.gl/EPnQb8jdiZTXQvug8 (Other things remaining the same, a fall in the exchange rate increases U.S. exports because U.S. exports become cheaper. And when U.S. exports increase, aggregate demand increases. Real GDP increases and the price level rises.) 2. increase; decrease
t's a Recession—75 Percent of Americans Say In a telephone poll of over 1,000 adult Americans, 75 percent said they believe the nation is now in a recession. Of those who think the economy is in a recession, 27 percent said they believe we are in a serious recession. Americans are less confident in the future of the economy than they were in March. The poll showed that 23 percent believe the downturn will last more than two years, up from 19 percent in March. CNN, July 7, 2008 1. The graph shows the economy when consumers experience a decrease in consumer confidence. Draw a curve that shows how the economy returns to a full-employment equilibrium with no intervention by the government or central bank. Label it. Draw a point at the new long-run macroeconomic equilibrium. 2. The economy returns to a full-employment equilibrium as _______.
1. https://photos.app.goo.gl/YQDCgvZQq2WoNvpz9 2. the money wage rate falls
Weak Dollar Helps Shrink Trade Deficit The United States trade deficit narrowed in May as exports climbed to records. Exports of American- made goods and services totaled $157.6 billion in May, a 0.9 percent increase from April. The declining value of the dollar relative to other currencies, especially the euro, is helping to make American exports cheaper and more attractive to foreign buyers. Growth in exports has been one of the few bright spots for the economy, which has been pounded by housing, credit and financial crises. Tax rebates also are energizing shoppers. The New York Times, July 12, 2008 Under what circumstances will aggregate demand increase? If aggregate demand remains constant explain why a recessionary gap will eventually emerge over time. 1. Aggregate demand will increase if ______. 2. A recessionary gap eventually emerges even if aggregate demand remains constant because over time ______.
1. the effect of the tax rebates and the change in the foreign exchange rate outweigh the effect of the housing, credit, and financial crises 2. potential GDP increases
Describe the policy change that a classical macroeconomist, a Keynesian, and a monetarist would recommend for U.S. policymakers to adopt in response to each of the following events: a. Growth in the world economy slows. b. The world price of oil rises. c. U.S. labor productivity declines. Choose the statement that is correct.
A classical macroeconomist and a monetarist recommend that taxes be kept low to avoid disincentive effects for all of the events and a Keynesian recommends active fiscal policy and monetary policy to offset all events
Krugman on Monetary and Fiscal Policy Nobel Laureate economist Paul Krugman has launched an all-out attack on the monetary policy actions and inactions of Fed Chairman Ben Bernanke. Bernanke has increased the quantity of money by historically large amounts and in mid-2012 was cautiously trying to determine whether more stimulation was needed. Krugman says Bernanke is too cautious and should print money faster and move the inflation rate upward. Krugman also wants Congress to cut taxes and increase spending. Sources: The New York Times, Washington Post, and other papers and blogs, April, 2012 Explain which macroeconomic school of thought Paul Krugman most likely represents in the views described above. Explain which macroeconomic school of thought supports Ben Bernanke's actions described above. Based on this news clip, Paul Krugman most likely follows the ______ school of thought and Ben Bernanke most likely follows the ______ school of thought.
Keynesian or new Keynesian; Keynesian or new Keynesian
Adding Up the Cost of Obama's Agenda In more than a year of campaigning, Barack Obama has made a long list of promises for new federal programs costing tens of billions of dollars. Obama has said he would strengthen the nation's bridges and dams ($6 billion a year), extend health insurance to more people (part of a $65-billion-a-year health plan), develop cleaner energy sources ($15 billion a year), curb home foreclosures ($10 billion in one-time spending) and add $18 billion a year to education spending. In total a $50-billion plan to stimulate the economy through increased government spending. A different blueprint offered by McCain proposes relatively little new spending and tax cuts as a more effective means of solving problems. Source: Los Angeles Times, July 8, 2008 Based upon this news clip, explain what macroeconomic school of thought Barack Obama most likely follows. Based upon this news clip, explain what macroeconomic school of thought John McCain most likely follows. Based on this news clip, Barack Obama most likely follows the ______ school of thought and John McCain most likely follows the ______ school of thought.
Keynesian or new Keynesian; classical or new classical
Geithner Urges Action on Economy Treasury Secretary Timothy Geithner is reported as having said that the United States can no longer rely on consumer spending to be the growth engine of recovery from recession. Washington needs to plant the seeds for business investment and exports. "We can't go back to a situation where we're depending on a near short-term boost in consumption to carry us forward," he said. Source: The Wall Street Journal, September 12, 2008 Which school of thought do you think Timothy Geithner most likely follows? Treasury Secretary Timothy Geithner most likely follows the _______.
Keynesian school of thought if he is recommending an active policy of tax cuts to combat the recession
Which of the following statements illustrate monetary policy?
The Fed has raised the federal funds rate by 0.3 percent. (Monetary policy includes changing the quantity of money and the interest rate.)
Which of the following statements illustrate fiscal policy?
The US government has proposed a hike in the corporate tax rate. (Fiscal policy includes changing taxes, transfer payments, and government expenditure on goods and services.)
A macroeconomic equilibrium in which real GDP is less than potential GDP is _____ equilibrium. And one in which real GDP equals potential GDP is _____ equilibrium. The graph shows an economy's long-run aggregate supply curve. The economy is at an above full-employment equilibrium. Draw an aggregate demand curve and a short-run aggregate supply curve. Label them. Draw a point at the short-run equilibrium.
a below full-employment; a full-employment https://photos.app.goo.gl/Y9RBTXevLbo4CPpB7
A macroeconomic equilibrium in which real GDP equals potential GDP is _____ equilibrium. And one in which real GDP exceeds potential GDP is _____ equilibrium. The graph shows an economy's long-run aggregate supply curve. The economy is at a below full-employment equilibrium. Draw an aggregate demand curve and a short-run aggregate supply curve. Label them. Draw a point at the short-run equilibrium.
a full-employment; an above full-employment https://photos.app.goo.gl/kXACiqnUUce6XyY17
Economic growth results from ______.
a growing supply of labor and increasing labor productivity, which increase long-run aggregate supply
If the money wage rate rises and potential GDP remains the same, does the LAS curve or the SAS curve shift or is there a movement along the LAS curve or the SAS curve? A rise in the money wage rate with no change in potential GDP creates ______. A.
a leftward shift of the SAS curve and no change in the LAS curve (When the money wage rate changes, short-run aggregate supply changes but long-run aggregate supply does not change.)
Inflation results from ______.
a persistent increase in aggregate demand at a faster pace than that of the increase in long-run aggregate supply (Inflation occurs when over time, the increase in aggregate demand is greater than the increase in potential GDP. That is, inflation occurs if the AD curve shifts rightward by more than the rightward shift in the LAS curve.)
A macroeconomic equilibrium in which real GDP exceeds potential GDP is _____ equilibrium. And one in which real GDP is less than potential GDP is _____ equilibrium. The graph shows an economy's long-run aggregate supply curve. The economy is at a full-employment equilibrium. Draw an aggregate demand curve and a short-run aggregate supply curve. Label them. Draw a point at the short-run equilibrium.
an above full-employment; a below full-employment https://photos.app.goo.gl/GSDqZUHfJj46Yke1A
The Fed cuts the quantity of money and all other things remain the same. Explain the effect of the cut in the quantity of money on aggregate demand in the short run. In the short run, aggregate demand _______.
decreases because interest rates rise and it is it more difficult to get a loan to buy homes and large consumer goods (A decrease in the quantity of money by the Fed decreases aggregate demand through two main channels: It raises interest rates and makes it more difficult to get a loan. With higher interest rates, businesses plan a smaller level of investment in new capital and households plan smaller expenditure on home improvements, automobiles, and a host of other consumer durable goods. Banks and others who lend raise their standards for making loans and fewer people are able to get home loans and other consumer loans. Aggregate demand decreases.)
The following events have occurred at times in the history of the United States: 1. A deep recession hits the world economy 2. The world oil price rises sharply 3. U.S. businesses expect future profits to fall Explain the effect of each of the following events on aggregate supply and aggregate demand in the United States. Event 1 ______. Event 2 ______. Event 3 ______.
decreases aggregate demand; decreases short-run aggregate supply decreases aggregate demand
Chinese Premier Wen Jiabao has warned Japan that its companies operating in China should raise the pay for their workers. Explain how a rise in wages in China will influence the quantity of real GDP supplied and aggregate supply in China. A rise in wages in China _______ .
decreases China's short-run aggregate supply and the quantity of real GDP supplied does not change
Wages Rising Faster than Prices Paychecks in Kansas are growing, according to the U.S. Department of Labor. Jacqueline Midkiff, with the department's office in Kansas City, says the average overall increase across the board through the Midwest, is 1.9 percent over this time last year, while inflation grew at 1.4 percent for the same time period. Source: Kansas Public Radio, August 1, 2012 Explain how "the average overall increase across the board" wage increase will influence aggregate supply. The "average overall increase across the board" wage increase _______.
decreases short-run aggregate supply because it increases firms' costs
If the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
does not change; long-run
In September 2008, the Bureau of Economic Analysis reported that real GDP during the second quarter of 2008 was $11.7 trillion compared to $11.5 trillion in the same quarter of 2007. The GDP deflator was 122, up from 120 in the second quarter of 2007. The Congressional Budget Office estimated potential GDP to be $11.9 trillion in the second quarter of 2008 and $11.6 trillion a year earlier. The graph shows the U.S. economy in September 2007. Show how the economy arrived at its new equilibrium in 2008. Draw a new aggregate demand curve, a new short-run aggregate supply curve, and a new long-run aggregate supply curve. Label them. Draw a point at the new short-run equilibrium.
https://photos.app.goo.gl/XSg8YpYUFvgkLT8Z6
The Bureau of Economic Analysis reported that real GDP during the second quarter of 2007 was $11.5 trillion and the GDP deflator was 120. The Congressional Budget Office estimated potential GDP to be $11.6 trillion in 2007. For the year 2007, draw: 1) the long-run aggregate supply curve 2) the aggregate demand curve 3) the short-run aggregate supply curve. Make the curves consistent with the numbers above and label them. Draw a point at the short-run equilibrium.
https://photos.app.goo.gl/pqpEPuLHbom6aqEo8
Click on the icon to study the Economics in the News article. Then answer the following questions. 6. Use the AS-AD model to show the changes in aggregate demand and aggregate supply that would occur if the economy moved into an inflationary gap. Show the short-run and the long-run effects. The graph shows the economy in the second quarter of 2017. Draw an aggregate demand curve that illustrates the economy with an inflationary gap. Label it. Draw a point at the new short-run macroeconomic equilibrium. Label it 1. Draw a short-run aggregate supply curve that illustrates the economy in long-run equilibrium if the government and Fed take no action. Label it. Draw a point at the new long-run equilibrium. Label it 2.
https://photos.app.goo.gl/tDgeYayHZmFVwGaD6
The graph shows the U.S. economy in long-run equilibrium. The following events occur: 1. A deep recession hits the world economy. 2. The world oil price rises by a large amount. 3. U.S. businesses expect future profits to fall. Draw a new AD curve and a new SAS curve that show the combined effects of the three events. Label the curves. Draw a point at the new equilibrium.
https://photos.app.goo.gl/yfac3pARs5jN2j7v7
The Fed increases the quantity of money and all other things remain the same. Explain the effect of the increase in the quantity of money on aggregate demand in the short run. In the short run, aggregate demand _______.
increases because interest rates fall and it is it easier to get a loan to buy homes and large consumer goods
Starting from a full-employment equilibrium, an increase in aggregate demand ______, and creates ______ gap. In the long run, the money wage rate ______, short-run aggregate supply ______, and the economy returns to a full-employment equilibrium. Starting from a full-employment equilibrium, a decrease in short-run aggregate supply ______ the price level and ______ potential GDP.
increases real GDP above potential GDP; an inflationary rises; decreases increases; decreases real GDP below
Gross Domestic Product for the First Quarter of 2017 The increase in real GDP in the first quarter primarily reflected increases in personal consumption expenditures, exports, and investment. Government spending decreased. Source: Bureau of Economic Analysis, June 29, 2017 Explain how the items in the news clip influence U.S. aggregate demand. The increase in the personal consumption expenditures ______ aggregate demand. The increase in exports ______ aggregate demand. The increase in investment ______ aggregate demand. The decrease in government spending _______ aggregate demand.
increases; increases (The quantity of real GDP demanded is the sum of real consumption expenditure, investment, government expenditure, and exports minus imports. The increases in personal consumption expenditures and exports increase aggregate demand.) increases; decreases
Labor productivity is rising at a rapid rate in China and wages are rising at a similar rate. Explain how a rise in labor productivity and wages in China will influence the quantity of real GDP supplied and aggregate supply in China. A rise in labor productivity _______. A rise in the wage rate _______.
increases long-run aggregate supply and short-run aggregate supply decreases short-run aggregate supply and does not change long-run aggregate supply
Long-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when the _____ changes in step with the price level to maintain full employment.
money wage rate
The aggregate demand curve slopes downward because _______.
of the wealth effect and the substitution effect (When the price level rises but other things remain the same, real wealth decreases.)
Initially, the short-run aggregate supply curve is SAS0 and the aggregate demand curve is AD0. Some events change aggregate demand from AD0 to AD1, and short-run aggregate supply from SAS0 to SAS1. What is the new macroeconomic equilibrium? https://photos.app.goo.gl/7W3BaF7dMtVr3bbr8 The new macroeconomic equilibrium is at ______.
point D
Keynesian macroeconomists recommend ______.
policies that actively offset changes in aggregate demand that bring recession
Monetarist macroeconomists recommend ______.
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
Classical macroeconomists recommend ______.
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
The defining feature of the Keynesian view of macroeconomics is that the economy is ______.
rarely at full employment
Short-run aggregate supply is the relationship between the quantity of _____ supplied and the _____ when the money wage rate, the prices of other resources, and potential GDP remain constant.
real GDP; price level
The defining feature of the monetarist view of macroeconomics is that the economy is______.
self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
What does the aggregate demand curve show? What factors change and what factors remain the same when there is a movement along the aggregate demand curve? The aggregate demand curve shows the relationship between the quantity of real GDP demanded and ______ when everything else remains the same. A movement along the aggregate demand curve occurs if _______.
the price level the price level changes and all other factors remain unchanged
Mexico trades with the United States. Explain the effect of each of the following events on the quantity of real GDP demanded and aggregate demand in Mexico. When the U.S. economy goes into a recession, ______. When Mexico decreases the quantity of money, Mexico's aggregate demand ______. When the price level in Mexico falls, _______.
Mexico's exports to the United States decrease, Mexico's aggregate demand decreases, and Mexico's AD curve shifts (A recession in the United States lowers income in the United States. U.S. consumers purchase fewer goods and services produced domestically and produced by other countries. Mexico's exports to the United States decrease. Mexico's aggregate demand curve shifts leftward.) decreases and its AD curve shifts leftward the quantity of real GDP demanded in Mexico increases
Mexico trades with the United States. Explain the effect of each of the following events on the quantity of real GDP demanded and aggregate demand in Mexico. When the U.S. economy goes into an expansion, ______. When Mexico decreases the quantity of money, Mexico's aggregate demand ______. When the price level in Mexico rises, _______.
Mexico's exports to the United States increase, Mexico's aggregate demand increases, and Mexico's AD curve shifts rightward decreases and its AD curve shifts leftward the quantity of real GDP demanded in Mexico decreases
How do a decrease in transfer payments and an increase in expected inflation change aggregate demand? Aggregate demand _______ when a decrease in transfer payments occurs. Aggregate demand _______ when an increase in expected inflation occurs. The graph shows an aggregate demand curve. Suppose there is a decrease in transfer payments. Draw a new curve to show the effect of this change on aggregate demand. Label the new curve C1. Now suppose that there is an increase in expected inflation. Draw a new curve to show the effect of this change on the original AD curve. Label the new curve C2.
decreases; increases graph: https://photos.app.goo.gl/3hmrtxv62JZq3tWo7
Wages Could Hit Steepest Plunge in 18 Years A bad economy is starting to drag down wages for millions of workers. The average weekly wage of private-sector workers has fallen 1.4% this year through September. Colorado will become the first state to lower its minimum wage since the federal minimum wage law was passed in 1938, when the state cuts its rate by 4 cents an hour. Source: USA Today, October 16, 2009 Explain how the fall in the average weekly wage and the minimum wage will influence aggregate supply. The fall in the average weekly wage rate ______ short-run aggregate supply and ______ long-run aggregate supply. The fall in the minimum wage ______ short-run aggregate supply and ______ long-run aggregate supply.
increases; does not change Your answer is correct. increases; increases
Explain the influence of the following events on the quantity of real GDP supplied and aggregate supply in India. When fuel prices rise _______. When the price level in India increases _______.
short-run aggregate supply decreases; the quantity of real GDP supplied increases The graph gives the long-run aggregate supply curve and the short-run aggregate supply curve for India. Suppose Wal-Mart and Starbucks open in India. The full-employment price level does not change. If long-run aggregate supply changes, draw the new long-run aggregate supply curve and label it. If short-run aggregate supply changes, draw the new short-run aggregate supply curve and label it. Draw a point at the full-employment price level at potential GDP following this event. https://photos.app.goo.gl/EKNVzTB9hHz9CDh66
