Homewor, (CH20)

As the price level falls, the cost of borrowing money will ________, causing the quantity of output demanded to ___________. This phenomenon is known as the__________ effect.

Fall, Rise, Interest Rate

The vertical axis of the aggregate demand and aggregate supply model measures the overall__________

Price Level

In the long run, as a result of the business pessimism, the price level__________ , the quantity of output__________ the natural level of output, and the unemployment rate _________the natural rate of unemployment.

decreases; returns to ; returns to

The short-run economic outcome resulting from the increase in production costs is known as______________

stagflation .

Notice that real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as___________

the business cycle .

In the short run, the decrease in investment spending associated with business pessimism causes the price level to___________he price level people expected and the quantity of output to__________the natural level of output. The business pessimism will cause the unemployment rate to__________the natural rate of unemployment in the short run.

Fall Below, Fall Below, Rise Above

Suppose the government passes a law that reduces unemployment benefits in a way that causes unemployed workers to seek out new jobs more quickly. The policy will cause the natural rate of unemployment to_____ , which will:

Fall, Shift the long-run aggregate supply curve to the right

For example, an increase in the money supply, a______ variable, will cause the price level, a ________variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a________ variable. The distinction between real variables and nominal variables is known as .

Nominal , Nominal, Real, The Classical Dichotomy

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. The government allows more immigration of working-age adults who find work. A scientific breakthrough significantly increases food production per acre of farmland. A government-sponsored training program increases the skill level of the workforce.

Right ; RIght ; Right

Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion, before the decrease in investment spending associated with business pessimism. During the transition from the short run to the long run, price-level expectations will_________ and the ____________ supply curve will shift to the______

adjust downward ; short-run aggregate ; RIght

Suppose the economy produces real GDP of $70 billion when unemployment is at its natural rate.

vertical line intersecting point (70, 0)

In the long run, when the government does nothing, the output in the economy will be $________billion and the price level will be____________.

120 ; 120

The following graph shows a decrease in short-run aggregate supply (AS) in a hypothetical economy where the currency is the dollar. Specifically, the short-run aggregate supply curve shifts to the left from AS1AS1 to AS2AS2, causing the quantity of output supplied at a price level of 100 to fall from $200 billion to $150 billion. Input prices________ Tax rates_________ Burdensome regulations______

Increase, Increase, Increase

Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1950? Check all that apply.

Corporate profits increased. The unemployment rate declined.

Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to______ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore _______ , and the number of foreign products purchased by domestic consumers and firms (imports) will________. Net exports will therefore_______, causing the quantity of domestic output demanded to________ . This phenomenon is known as the_________ rate effect.

Fall, Rise, Fall, Rise, Rise, Exchange Rate

The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right from AD1AD1 to AD2AD2, causing the quantity of output demanded to rise at all price levels. For example, at a price level of 140, output is now $400 billion, where previously it was $300 billion. Consumer expectations about future profitability Government spending Expected rate of return on investment Incomes in other countries

Improve, Increase, Increase, Increase,

In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 110. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will ________and firms that rely on catalogs will respond by_________the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected increase in the price level causes the quantity of output supplied to_____________the natural level of output in the short run.

Rise ; Increase ; Rise above

The aggregate_________ curve shows the quantity of goods and services that firms produce and sell at each price level.

Supply

The Greek letter αα represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that α=$2 billionα=$2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 110. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 100, 105, 110, 115, and 120.

The correct answer is the LRAS line to be vertical intersecting point (60, 0) The five points are (40, 100), (50, 105), (60, 110), (70, 115), (80, 120)

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply.

The price level The inflation rate (Money does not influence the long-run level of output)

True or False: Short-term fluctuations in real GDP are irregular and unpredictable.

True

The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level______ the price level that people expected.

falls below