ECON QUIZ CH 10, 11, 12

when price falls, the purchasing power of existing financial balances rises, which can increase spending.

real balances effect

when price level falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports and also decrease import spending in favor of US products that compete with imports.

foreign purchases effect

a decline in price level means lower interest rates that can increase levels of certain types of spending

interest-rate effect

a. Price level rises rapidly and little change in real output. b. Price level rises and real output decreases. c. Price level does not change, but real output increases. d. Price level does not change, but real output declines. e. Price level increases somewhat, as does real output.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?

a. above equilibrium

At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is:

False

Decreases in AD normally lead to decreases in both output and the price level.

False

If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.

a. vertical line: long run b. the price level is fixed: immediate-shot-run c. output price are flexible, but input price are fixed: short-run d. a horizontal line: immediate-short-run e. an up-sloping curve: short-run f. output is fixed: long-run

Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve.

rightward by $15 billion; rightward by $60 billion.

Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 4. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by two percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?

a. AD curve left, output down and price level down (assuming no ratchet effect). b. AS curve left, output down and price level up. c. AD curve right, output and price level up. d. AD curve right, output and price level up (any real improvements in health care resulting from the spending would eventually increase productivity and shift AS right). e. AD curve right, output and price level up. f. AS curve right, output up and price level down. g. AD curve right, output and price level up. h. AS curve right, output up and price level down. i. AS curve left, output down and price level up. j. AD curve right (increased net exports); AS curve left (higher input prices)

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? In each case use a diagram to show the expected effects on the equilibrium price level and the level of real output, assuming that the price level is flexible both upward and downward.

The multiplier acts on an "initial change in spending" to generate an even greater shift in the aggregate demand curve.

What role does the multiplier play in shifts of the aggregate demand curve?

a. when the domestic price level rises, our goods and services become more expensive to foreigners. d. when the price level rises, the real value of financial assets declines.

Which of the following help to explain why the aggregate demand curve slopes downward?

b. interest rates rise and c. the government raises corporate profit taxe

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

a. a new networking technology increases productivity all over the economy c. business taxes fall

Which of the following will shift the aggregate supply curve to the right?

-interest-rate effect -real balances effect -foreign purchases effect

Why is the aggregate demand curve down sloping?