MEL 7

Does a change in the price level cause a movement along the aggregate demand curve or a shift of the aggregate demand curve?

A change in the price level causes a movement along the aggregate demand curve.

Does a change in the price level cause a movement along the aggregate expenditure line or a shift of the aggregate expenditure line?

A change in the price level causes a shift in the aggregate expenditure line.

What is stagflation?

A combination of inflation and recession.

What is a supply shock?

A sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.

The SRAS curve slopes upward because

-in the short run, as prices final of goods and services increase, input prices react more slowly -in the short run, prices of final goods and services adjust more slowly because of menu costs -in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase

What is true when the economy is in macroeconomic equilibrium?

-when the economy is at long-run equilibrium, total unemployment = frictional + structural unemployment -when the economy is at long-run equilibrium, SRAS=AD=LRAS -when the economy is at long-run equilibrium, actual GDP=potential GDP

The SRAS will ___________ if there is an increase in the expected price of an important natural resource.

Shift to the left

The SRAS will ___________ if there is an increase in expected future prices.

Shift to the left.

The reason that the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford as many goods and services.

True

Suppose exports become more sensitive to changes in price levels in the US. That is, when the price level in the US rises, exports decline by more than they previously did. This change makes the aggregate demand curve _____

flatter. Explanation: The aggregate demand curve shows the relationship between the price level on the vertical axis and the level of planned aggregate expenditure in the economy on the horizontal axis. If exports become more sensitive to a change in the price level, it implies that aggregate demand has become relatively more elastic, and like the market demand from microeconomics, the aggregate demand curve becomes flatter.

In the short run, an increase in aggregate demand ____________, whereas in the long run an automatic mechanism brings ____________.

increases in the price level and actual GDP beyond potential GDP; the economy back to potential GDP but the price level remains higher.

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases FASTER than potential real GDP, there will be

inflation`

A change in the price level will cause the LRAS curve to

move along a stationary LRAS curve

An increase in the price level will cause a ______________ the aggregate demand curve.

movement up along

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases SLOWER than potential real GDP, there will be

recession

A faster income growth in other countries will cause a ________ the US aggregate demand curve

rightward shift of

An increase in government purchases will cause a _________ the aggregate demand curve.

rightward shift of

The SRAS will __________ if there is an increase in the labor force or capital accumulation

shift the to right

The SRAS will ___________ if there is an increase in the adjustment of workers' and firms' prior underestimation of the price level.

shift to the left

A technological change will cause the LRAS curve to

shift to the right

An increase in the working age population will cause the LRAS curve to

shift to the right

The SRAS will ___________ if there is a technological change.

shift to the right

The SRAS will ___________ if there is an increase in productivity.

shift to the right

To have growth without inflation, what must be true?

AD, SRAS and LRAS must increase by the same amount

Briefly explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.

Aggregate expenditure is the relationship between spending and income, while aggregate demand is the relationship between output and price level.

How would this affect the LRAS? The price level increases.

Because this is a change in the price level, the LRAS will not change.

How would a techological change affect the LRAS?

Because this is a change in the productive capacity of the economy, the LRAS will shift to the right.

How would an increase in the quantity of capital goods affect the LRAS?

Because this is a change in the productive capacity of the economy, the LRAS will shift to the right.

How would this affect the LRAS? The labor force increases.

Because this is a change in the productive capacity of the economy, the LRAS will shift to the right.

Stagflation occurs when...

a supply shock shifts SRAS to the left, increasing the price level and decreasing actual GDP

The LRAS curve is vertical because in the long-run

changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, captial stock and technology

Increases in the interest rate will cause the aggregate demand curve to shift to the

left

An increase in interest rates will cause a __________ the aggregate demand curve.

leftward shift of

An increase in state income taxes will cause a ______ the aggregate demand curve.

leftward shift of

Which of the following is NOT true when the economy is in macroeconomic equilibrium?

when the economy is at long-run economic equilibrium, firms will have excess capacity