Intro to Macro Exam 2 Study Guide CH 11

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The aggregate demand curve slopes downward because

an increase in the price level causes the demand for money to​ rise, driving up the interest rate and discouraging​ investment, which causes aggregate demand to fall

The level of aggregate output ​(Y0)

potential output or potential GDP.

The derivation of an​ economy's aggregate demand (AD) curve

requires knowledge regarding the interaction between the goods market and the money market.

When the interest rate​ falls, the planned aggregate expenditure curve shifts​ ________ because planned investment is​ ________.

up; higher

A decrease in government spending shifts the​ ________, and a decrease in the price level shifts the​ ________.

IS curve to the​ left; Fed rule to the right

Which of the following will generate an increase in aggregate​ demand?

Increased government expenditures for war.

exogenous

relating to or developing from external factors.

Which of the following events would NOT produce a rightward shift in the​ short-run AS​ curve?

A significant decrease in the​ country's labor force participation rate.

real wealth effect

The change in consumption brought about by a change in real wealth that results from a change in the price level.

True/False The Fed rule is an equation that shows how the interest rate behavior of the Fed depends on the state of the economy.

True

True/False The IS curve shows the relationship between output and the interest rate.

True

The relationship between the price level and aggregate output​ (income)

aggregate supply curve

A sudden increase in oil prices results in a supply​ shock, shifting the​ short-run aggregate supply curve to the​ ________, resulting in society getting a​ ________ aggregate output at any price level.

left; smaller

According to the real wealth effect ​(or real balance​ effect), an increase in the price level

decreases ​consumers' expenditures due to a decrease in the purchasing power of household wealth

The negative slope of a simple demand curve

depends on the price of a single product relative to other product prices

the​ short-run aggregate supply curve​ (AS) is​ upward-sloping. This positive slope is explained in part by the fact that

in the​ short-run, input prices—particularly wage rates—are slower to adjust to increasing aggregate demand than are output prices.

The​ Fed's tendency to​ "lean against the​ wind" occurs when it​ _______ the money supply to​ _______ interest rates to counteract contraction of the​ economy, and​ _______ the money supply to​ _______ interest rates to counteract rapid expansion. These policies are designed to​ _______ the economy.

increases; lower;​ decreases; raise; stabilize

The​ long-run aggregate supply curve

is vertical because all prices​ (both input and output​ prices) change at the same rate in the long run.

The somewhat unique shape of the short run​ aggregate supply curve is based in part on how firms respond to an increase in aggregate demand. As firms and the economy move closer to full​ capacity, the response of firms is likely to change from

mainly increasing output to mainly increasing prices.

The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very steep portion of AS​ curve, when

the economy is operating at or near full employment and output level is above full capacity.

All of the following are exogenous variables to the aggregate​ supply-aggregate demand model except

the price level.

The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very flat portion of AS​ curve, when

there exists considerable excess capacity and high unemployment in the economy.

In​ reality, however, the​ short-run aggregate supply curve​ isn't flat and then vertical.​ Rather, it becomes steeper as we move from left to right. This somewhat unique shape of the​ short-run aggregate supply curve is based in part on the fact that

when the economy has excess​ capacity, input prices are slow to adjust whereas output adjusts quickly to increases in aggregate​ demand; as the economy approaches full capacity prices increase at a faster rate than does output.


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