Econ2030 Ch. 13, 14

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result;

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

Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from

AD1 to AD2

Ceteris paribus, an increase in personal income taxes would be represented by a movement from

AD2 to AD1 - Increase in personal income tax will reduce the disposable income (Y-T) which reduces the level of consumption. This will shift the AD curve to the left.

Which of the following is one explanation as to why the aggregate demand curve slopes downward?

Decreases in the price level raise real wealth and increase consumption spending.

When the price level rises from 110 to 115, the aggregate level of GDP supplied rises from $80 billion to $120 billion. This ________________ relationship represents the _______________ relationship between the quantity of real GDP firms are willing to supply and the price level.

Positive; short-run

Ceteris paribus, an increase in workers and firms adjusting to having previously overestimated the price level would be represented a movement from

SRAS1 to SRAS2 - Workers and firms realized that the price level has actually decreased compared to their earlier expectation. So workers and firms will adjust their expectation by lowering wages and output prices. This adjustment will shift the SRAS curve to the right.

Ceteris paribus, an increase in the expected price of an important natural resource would be represented by a movement from

SRAS2 to SRAS1 - An expected increase in natural resource (like oil) will increase the firm's costs (like wages, transportation cost). This will make the SRAS curve shift to the left.

Suppose the economy is at 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. - As firms are producing above their capacity, they will accumulate inventories. This forces the firms to reduce production and employment. Due to lowering output and increasing unemployment the firms and the workers are willing to accept lower prices and wages. This will shift the SRAS curve to the left until the economy reaches the potential GDP