Macroeconomics Chapter 13 AS/AD

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Consider the figure to the right. (Figure 13.6) Why does the short run aggregate supply curve slope upward?

Firms and workers fail to predict changes in the price level, Contracts keep wages​ "sticky", Prices of final goods rise more quickly than the prices of inputs.

Why does the failure of workers and firms to accurately predict the price level result in an​ upward-sloping aggregate supply​ curve?

because menu costs make some prices​ "sticky", because contracts between workers and firms make some wages and prices​ "sticky", because firms are often slow to adjust wages

A change in the price level causes a __________ the short run aggregate curve. A change in other factor causes a ___________ the SRAS curve

movement along ; shift in

In the diagram to the right, moving from point A to point B is called a ___________ the AD curve (Figure 13.13) Moving from point A to point C is referred to as a ______ the AD curve

movement along ; shift in

The graph to the right shows the aggregate demand curve for an economy. (downward sloping straight line labeled AD1) Use the line drawing tool to show the effect of a monetary policy change that causes a decrease in interest rates. Properly label this line.

shift AD1 to the right and label it AD2

If the price level increases, than

there will be a movement up along a stationary aggregate demand curve

Consider the​ downward-sloping aggregate demand​ (AD) curve to the right. Which of the following results in a movement from point A to point B​ (a movement up along the AD​ curve) or from point A to point C​ (a movement down along the AD​ curve)? (Figure 13.2)

wealth effect, interest rate effect

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption

According to the dynamic AD-AS model, what is the most common cause of inflation?

AD increases by more than LRAS, Total spending increases faster than total production

Suppose that​ initially, the economy is in​ long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the​ economy, the AD curve will shift from ________ The new​ short-run macroeconomic equilibrium occurs at _________ ​Long-run adjustment will shift the SRAS curve from ______________ as workers adjust to​ lower-than-expected prices. The new​ long-run macroeconomic equilibrium occurs at _________ (Figure 13.9)

AD0 to AD1 point B SRAS0 to SRAS1 point C

Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C. (Figure 13.1)

Increased consumer optimism, lower interest rates, decrease in the US exchange rate relative to other currencies, lower taxes

Why does the​ short-run aggregate supply curve slope​ upward?

Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.

Neutron​ Inc., is one of the leading electric car manufacturers in​ Northbay, a developing economy.​ Neutron's sales increased by more than 20 percent this year compared to the previous​ year, which started a debate within the company about whether the firm should increase prices. Among those in favor of a price hike is Eric​ Johnson, the operations head at Neutron. Eric is of the opinion that given the high demand for​ Neutron's cars, the firm should increase price to improve profits. Mike​ Wilson, the CEO of the​ firm, however, feels that a price increase would adversely affect the demand for​ Neutron's products because he thinks consumers in this industry are more price conscious than brand loyal. Which of the​ following, if​ true, will weaken the case for a price​ increase

Some of​ Neutron's competitors have recently announced price cuts.

Paul Schumer and Jim​ Miller, two analysts at a research​ institute, discuss the rising costs of higher education in their country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher education market. According to​ Jim, however, the rising costs are the result of better quality education being provided by the institutions in recent years. Which of the​ following, if​ true, will strengthen​ Jim's claim?

The gap between the earnings of college graduates and nongraduates is increasing.

Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane​ Wilson, an industry​ analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her​ colleague, Harry​ Gomes, however, disagrees. According to​ Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Which of the​ following, if​ true, will indicate that higher prices will not induce firms to increase​ output?

The increase in the price of inputs outweighed the increase in the price of the final product.

​Almora, a developing open​ economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill​ Hudson, an economist with the Finance Ministry of​ Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with​ Hudson's view. In one of his recent articles in the​ country's leading business​ daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the​ following, if​ true, will support​ Bill's argument? Which of the following statements is Bill and Robin likely to agree​ with?

The number of Almorans who had settled abroad but are coming back to their homeland has been increasing in the last two years. The discovery of oil reserves has resulted in a rightward shift of the​ long-run aggregate supply curve.

Which of the following causes the​ short-run aggregate supply curve to shift to the​ left?

an increase in the expected price of an important natural resource

The aggregate demand curve is downward sloping because

an increase in the price level reduces real money​ holdings, which reduces the amount of expenditures.

Suppose an economy experiences technological progress and this causes a shift in the LRAS curve. Which of the following should not​ occur?

There will be an increase in government purchases as the economy has more income.

Which of the following factors does not cause the aggregate demand curve to​ shift?

a change in the price level

The international trade effect refers to the fact that an increase in the price level will result in

a decrease in exports and an increase in imports

Which of the following would cause a decrease in aggregate​ demand?

a decrease in government spending

__________ would cause a similar shift in the aggregate demand curve

a decrease in taxes

What is the effect of an increase in the price level on the​ short-run aggregate supply​ curve?

a movement up along a stationary curve

Which of the following causes the​ short-run aggregate supply curve to shift to the​ right?

a positive technological change

If the economy adjusts through the automatic​ mechanism, then a decline in aggregate demand causes

a recession in the short run and a decline in the price level in the long run.

Which of the following is usually the cause of​ stagflation?

a supply shock as a result of an unexpected increase in the price of a natural resource

If the economy is initially at​ full-employment equilibrium, then an increase in aggregate demand causes​ _____________ in real GDP in the short run and​ ___________ in the price level in the long run.

an increase ; an increase

How can government policies shift the aggregate demand curve to the​ right?

by increasing government purchases

How does the dynamic model of aggregate supply and aggregate demand explain​ inflation?

by showing that if total spending in the economy grows faster than total​ production, prices will rise

How does an increase in the price level affect the quantity of real GDP supplied in the long​ run?

changes in the price level do not affect the level of GDP in the long run

Aggregate demand​ (AD) is comprised of expenditure components that​ include:

government​ spending, consumption,​ investment, and net exports.

The interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investment

Which of the following is a major difference between the​ AD-AS model and the dynamic​ AD-AS model? The dynamic​ AD-AS model assumes

potential GDP increases​ continually, while the​ AD-AS model assumes the LRAS does not change.

The position of the​ long-run aggregate supply​ (LRAS) curve is determined by

the number of​ workers, the amount of​ capital, and the available technology.

The aggregate demand curve shows the relationship between _________ and _________

the price level ; output demanded


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