Macroeconomics Chapter 12

A major reason for the end of the Great Depression was an increase in government spending:

associated with the World War II effort.

The short run in macroeconomic analysis is a period:

in which many production costs can be taken as fixed.

In the long run (as the economy self-corrects), an increase in aggregate demand will cause the price level to _______ and potential output to _______ .

rise; remain stable

An increase in government spending, all other things unchanged, will cause the aggregate demand curve to:

shift to the right.

When demand declined in the Great Depression of 1929-1933:

the GDP deflator decreased by 26%.

(Figure: An Increase in Aggregate Demand.) Because of the pressures existing at the short-run equilibrium at Y2 and P2:

the SRAS curve will shift to the left

As a result of a decrease in the value of the dollar in relation to other currencies, American imports decrease and exports increase. Consequently, there is a(n):

increase in aggregate demand

Suppose that the stock market crashes. Which of the following is most likely to occur?

the aggregate demand curve shifts to the left

The aggregate supply curve shows the relationship between:

the aggregate price level and the quantity of aggregate output supplied.

(Figure: The Multiplier) If this economy is currently at Y1 and investment spending increases, then:

AD1 will shift to the right, reflecting a multiplied increase in the real GDP at every price level

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

An increase in the interest rate.

The components of aggregate demand are:

C (consumption), I (investment), G (government) expenditures, and X - IM (net exports).

(Figure: Aggregate Supply) If the economy is at point E, which of the following describes the likely adjustment process?

Nominal wages increase, and the short-run aggregate supply curve shifts left until actual and potential output are equal.

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

SRAS and aggregate demand.

Suppose that consumer expectations about the future improve. How will this affect the aggregate demand curve?

The aggregate demand curve shifts to the right.

An event that shifts the aggregate demand curve is called:

a demand shock

(Figure: The Multiplier) If this economy is currently at Y1 and the price level decreases, then:

a downward movement along the AD1 will take place, reflecting a decrease in the price level.

Unexpectedly rising commodity prices lead to:

a negative supply shock.

(Figure: Inflationary and Recessionary Gaps) The intersection of AD with SRAS in panel (B) indicates:

a short-run equilibrium.

(Figure: Aggregate Supply) If the economy is at point E:

actual output is more than potential output.

The _____ curve shows the negative relationship between the aggregate price level and the quantity of aggregate output demanded in the economy.

aggregate demand

Raising taxes shifts the:

aggregate demand curve to the left.

(Figure: Macroeconomic Equilibrium) Refer to the accompanying figure called Macroeconomic Equilibrium. Curve 1 refers to _____, curve 2 refers to _____, and curve 3 refers to _____.

aggregate demand; long-run aggregate supply; short-run aggregate supply

(Figure: Inflationary and Recessionary Gaps) The intersection of SRAS with AD in panel (a) indicates:

an economy experiencing a recessionary gap.

Stagflation may result from:

an increase in the price of imported oil.

If the SRAS curve intersects the aggregate demand curve to the right of LRAS, the result will be:

an inflationary gap.

The aggregate demand curve is negatively sloped in part because of the impact of interest rates on:

consumption and investment.

The Great Depression was caused by _______ shocks, and the recession of 1979-82 was caused by ______ shocks

demand; supply

In the long run, changes in the aggregate price level will be accompanied by:

equal proportional changes in input prices.

Which of the following represent the three consequences of the decline in demand during the Great Depression?

falling prices, declining output, and a surge in unemployment

In the short run, a positive demand shock:

increases aggregate output and the aggregate price level.

According to the wealth effect, when prices decrease, the purchasing power of assets:

increases and consumer spending increases.

Stagflation is a combination of:

increasing unemployment and increasing inflation

If the Fed increases the quantity of money in circulation:

interest rates decrease, investment increases, and the aggregate demand curve shifts to the right

The point where the long-run aggregate supply curve intercepts the horizontal axis:

is the economy's potential output.

(Figure: Inflationary and Recessionary Gaps) Yp in panel B:

is the potential output for this economy.

A natural disaster that destroys part of a country's infrastructure is a type of _________ and therefore shifts the _________ to the _________.

negative supply shock; short-run aggregate supply curve; left

In 2008, Ben Bernanke, the Federal Reserve Chairman, faced:

the threat of stagflation, and had a difficult time stabilizing the economy as stabilization policies are less effective in managing negative supply shocks.

The long-run aggregate supply curve is:

vertical.

The short-run aggregate supply curve slopes upward because of:

wage and price stickiness

If the economy is currently in a recessionary gap, real GDP will be ________ potential output.

below

In the long run, wages and prices are considered to be:

flexible.

(Figure: Aggregate Supply) At point F, potential output is:

greater than actual output and unemployment is high.

The short-run aggregate supply curve is positively sloped because:

higher prices lead to higher profit and higher output.

In the long run, the aggregate price level has:

no effect on the quantity of aggregate output.

In the long run, inflationary and recessionary gaps are self-correcting because, eventually:

nominal wages rise in order to close an inflationary or fall in order to close a recessionary gap.

The long-run level of output is known as:

potential output.

(Figure: An Increase in Aggregate Demand.) The short-run equilibrium at Y2 and P2:

results in an inflationary gap.

(Figure: Inflationary and Recessionary Gaps) The level of income associated with Y1 in panel B:

reveals an inflationary gap compared with Yp.

Inflationary and recessionary gaps are closed by self-correcting adjustments that shift:

the SRAS curve.