Unit 3 Module 6 Aggregate Supply and Aggregate Demand

A decrease in net export spending caused by an appreciation of the U.S. dollar would cause the aggregate demand curve to shift to the left. True Correct! Net exports are one of the components of aggregate demand. If they decrease, aggregate demand will shift left.

An event that causes the aggregate demand curve to shift inward or outward is one that __________. causes aggregate supply to decrease causes aggregate supply to increase influences spending plans Correct! When consumers change their spending plans, aggregate demand will shift.

Which of the following is an example of consumption expenditure? Production of cell phones that are shipped to Europe and sold to foreign buyers A family's purchase of a durable good, such as a new refrigerator Government spending on building public schools A company's purchases of capital goods, like machines and tools Correct! Consumption expenditure includes spending on consumer durables as well as services and nondurables.

A family spending on electricity is a consumer's expenditure. True Correct! Money that is spent on maintaining a household is considered a consumer's expenditure. Examples could include food, gas, and clothing.

Keynes challenged the classical school during the Great Depression. He suggested that the aggregate supply curve could be Correct! Keynes assumed that aggregate supply was horizontal in the short run. or at least very flat in the . Correct! Keynes assumed that AS is horizontal only on the short run because prices are sticky.

According to Keynes, the government should use its power to and tax people in order to shift aggregate demand to the right, output and employment. Correct! According to Keynes, the government should increase aggregate demand to increase output and employment. Correct! According to Keynes, through spending and taxing the government can affect the aggregate demand curve.

What did classical economists assume? Prices and wages are flexible. Prices are sticky. Prices are not flexible. Correct! According to classical economists, both prices and wages are flexible.

According to the classical model, the income generated by production is __________. insufficient to purchase all the goods and services produced enough to meet the needs of everyone in society *enough to purchase all the goods and services produced fully spent on savings Correct! According to classical economists, production is the source of demand.

What did classical economists assume? *Prices and wages are flexible. Prices are sticky. Prices are not flexible. Correct! According to classical economists, both prices and wages are flexible.

According to the classical model, the income generated by production is __________. insufficient to purchase all the goods and services produced enough to meet the needs of everyone in society enough to purchase all the goods and services produced fully spent on savings Correct! According to classical economists, production is the source of demand.

The aggregate production function shows how much total real output can be produced by various amounts of labor, given the amount of capital and available technology. True Correct! The aggregate production function shows the relationship between the total real output and the inputs available.

An increase in capital or an improvement in technology will shift the aggregate production function. True Correct! Capital and technology are the ceteris paribus factors that will cause a shift of the production function when they change.

There is an inverse relationship between the price level and the quantity demanded of goods and services. True False Correct! The aggregate demand curve, like the demand curves for individual goods, is downward sloping.

As the price level rises, the purchasing power of cash owned by households declines . Correct! If the prices increase, purchasing power is reduced.

In the classical model, aggregate demand and aggregate supply will __________. intersect at less than full employment not exist not intersect *intersect at the point of full employment Correct! Classical economists assume that AD/AS intersect at full employment.

Equilibrium values of the price level and real output are determined by the intersection of aggregate supply and aggregate demand. True Correct! The intersection of aggregate demand and aggregate supply determines the equilibrium values for price level and real output.

Aggregate supply is defined as the total amount of goods and services (real output) produced and supplied by an economy's firms over a period of time. True Correct! Aggregate supply represents the ability of an economy to deliver goods and services to meet demand.

Goods and services for export, such as chemicals, entertainment, and financial services, are also a key component of aggregate supply. True Correct! Traded goods are the components of aggregate supply.

An aggregate supply curve shifts to the right when any non-price-level factor decreases the total cost of production. Correct! A shift of aggregate supply to the right means that AS has increased.

If aggregate demand and nominal GDP increase while the price level is constant, one would conclude that the __________. aggregate demand curve is vertical aggregate supply curve is upward sloping aggregate supply curve is horizontal economy is already at full employment Correct! Graphically, if aggregate supply is horizontal, shifts in aggregate demand can only affect the output level.

If taxes increase and the aggregate supply curve is upward sloping, then output falls and the price level falls. True Correct! An increase in taxes causes a decrease in aggregate demand. The new equilibrium will show a fall in output and fall in the price level.

If aggregate demand increases and the aggregate supply curve is upward sloping and unchanged, price rises Correct! When the aggregate demand shifts to the right, the new equilibrium will be at a higher price level. orrect! When the aggregate demand shifts to the right, the new equilibrium will be at a higher real output.

Generally, when firms increase output using existing resources, higher costs lead to higher prices, resulting in an upward-sloping supply curve. Which explanation does not help to explain why costs tend to increase with output? If firms are using machines and tools more, they wear out faster and break down more often. When more entrepreneurs are trying to start or expand businesses, there is greater competition for loans, so interest rates rise. Businesses purchasing more raw materials may be given volume discounts. In order to raise production with given resources, some labor has to work overtime at higher pay. Correct! Volume discounts result in a lower cost of materials, so this does not help explain why costs increase with output.

If changes in the price level have no effect on real output, aggregate supply is __________. vertical downward-sloping horizontal upward-sloping Correct! A fixed real output level and a variable price level imply a vertical aggregate supply curve.

As the domestic price level rises, the demand for imports increases. True Correct! As the domestic price level rises, foreign‐made goods become relatively cheaper, so that the demand for imports increases.

If the price level increases, then net exports, assets, government spending, and household wealth all decrease. True Correct! When the price level increases, the economy will move up and to the left on the aggregate demand curve.

The slope of the aggregate supply curve depends on how costs change when firms change the level of production or quantity of output supplied. True Correct! When costs go up as firms attempt to increase output, the AS curve is upward-sloping.

If wages do not change, improvements in productivity stemming from improved technology will decrease business costs, improve profitability, and encourage more production. True Correct! If the wage of a labor remains the same, the improvement in technology will decrease business costs and improve profitability because the output per hour of work is increased.

Classical economists thought that the economy tended naturally toward full . Correct! Classical economists assumed that the economy always tended back to a full-employment equilibrium. The classical aggregate supply curve was . Correct! Classical economists assumed that the aggregate supply curve is vertical because prices will adjust so that output is always at full employment. The classical school advocated a laissez-faire approach. That means no government intervention, as the market will . Correct! Classical economists believed that the market self-regulated and tended back to full employment.

Keynes challenged the classical school during the Great Depression. He advocated government intervention in the form of fiscal policy to shift aggregate demand. True Correct! Keynes advocated government intervention to bring the economy back to equilibrium by shifting aggregate demand, while classical theorists believed the market self-regulated.

What is aggregate demand? It is the total demand for final goods and services in an economy at a given time and price level. It is the sum of all goods and services in the economy that will be purchased at all possible price levels. This is the same as the expenditure approach to determine GDP.

So the equation used is: AD=C+I+G+(X−M) .

A key component of the Keynesian model is that __________. prices are flexible prices are sticky wages are flexible Correct! Keynes assumed that prices were sticky.

The Keynesian short-run aggregate supply (SRAS) curve is __________. vertical horizontal downward sloping upward sloping Correct! For Keynes, SRAS is horizontal in the short run.

The aggregate demand curve (AD) shows the quantity of total real output that all buyers in an economy will purchase at various price levels. Figure 6.1 shows an aggregate demand curve. On the vertical axis, P represents the price level. On the horizontal axis, Y represents real output, or the value of output adjusted for changes in the price level. Economists generally believe that the aggregate demand curve has a negative slope,

The aggregate supply curve (AS) is the relationship between the quantity of total real output supplied and the price level when all other factors influencing production plans are held constant. These other factors include the costs of inputs used to produce the good or service, and government regulations regarding production. With these factors held constant, when the price level rises, the quantity of real GDP supplied increases, and when the price level falls, the quantity of real GDP supplied falls.

The relationship between the number of workers and output, with a fixed amount of capital, is __________. positive and proportional *positive and decreasing positive and increasing Correct! Every additional worker will produce less output than the previous one with the resources available.

The amount of real output that can be produced by various amounts of labor can be represented by a(n) aggregate production function. If an attempt is made to use aggregate supply to increase output, prices should increase at a decreasing rate.

A decrease in aggregate demand will cause __________. prices to fall and unemployment to increase, according to both classical economists and Keynes aggregate supply to fall, according to classical economists, and prices to fall, according to Keynes aggregate supply to fall, according to Keynes, and unemployment to increase, according to classical economists *prices to fall, according to classical economists, and unemployment to increase, according to Keynes Correct! For classical economists, the SRAS is upward sloping and a decrease in aggregate demand will cause a fall in prices. For Keynes, a decrease in aggregate demand will only cause an increase in unemployment, since SRAS is assumed to be horizontal and the shift will have no impact on prices.

The classical theory claims that most government economic policies are ineffective, ill timed, or downright harmful, and that the market system works best in macroeconomics, as well as microeconomics, when left alone. True Correct! Classical economists assumed that the market is self-regulating and that no government intervention is necessary.

Many private firms, such as those in construction, IT, and pharmaceuticals, rely on contracts to supply to the public sector. True Correct! Goods and services produced by private firms for use by central or local government are a significant component of aggregate supply.

The relationship between price level and aggregate supply is positive . Correct! At higher price levels across the economy, firms expect that they can sell their final products at higher prices.

A shift of the aggregate demand curve to the right will have the greatest impact on the price level if the aggregate supply curve is horizontal. True Correct! Since the aggregate supply curve is horizontal, there will be no impact on the price level that remains constant

The relationship between the inputs employed by a firm and the maximum output that it can produce with those inputs is the firmʹs __________. marginal product of labor *production function supply curve average product of labor Correct! A production function shows how much a firm can produce with the inputs available.

The vertical axis of the aggregate demand curve represents the price level . Correct! The aggregate demand curve represents the total quantity of all goods and services demanded by the economy at different price levels.

The total of all planned expenditures in the entire economy is __________. aggregate demand aggregate supply long-run aggregate supply the open economy effect Correct! The aggregate demand curve is the total planned expenditures in an economy.

An aggregate demand curve shifts to the right when any non-price-level factor increases total planned real spending. Correct! An increase in aggregate demand means the curve has shifted to the right.

True or False. A change in the price level will not shift the aggregate supply curve. True Correct! A change in the price level does not cause a shift of the aggregate supply curve.

Which of the following will cause an increase in aggregate supply? Increased marginal tax rates Decreased input prices Decreased competition Correct! A decrease in input prices makes it cheaper to produce goods and increases aggregate supply.

Which of the following decreases aggregate supply? A decrease in labor supply Discoveries of new raw materials An increase in training and education An increase in competition Correct! If there is less input of production, aggregate supply will decrease.

The supply curve for an individual good is drawn under the assumption that __________. input prices vary over the time period input prices remain constant quantity demanded varies over the time period quantity demanded is constant Correct! As the price of Good X rises, sellers' per unit costs of providing Good X do not change.

Which of the following is not a component of aggregate supply? Public and merit goods Capital goods Government spending Consumer goods Correct! Government spending is a part of aggregate demand.

The composite aggregate supply is vertical in the classical region horizontal, in the Keynesian region, and upward sloping in between these two regions.

Which of the following would cause aggregate demand to decrease? The government increases personal income taxes. There is a decrease in the foreign exchange value of the dollar. Businesses and households believe that the economy is growing and feel secure about their jobs. Correct! When the government increases personal income taxes, consumers' spending plans will decrease as they have less disposable income.

One possible result of a fall in aggregate demand coupled with a stable short-run aggregate supply is a(n) __________. increase in employment rise in the stock market *recession economic expansion Correct! When aggregate demand decreases, the graph shows a recessionary gap in which employment is below its natural level.

f the aggregate supply curve shifts to the right and the aggregate demand curve shifts to the left, what happens to the price level and real output? The price level rises, but the effect on real output cannot be determined. The price level rises, and real output falls. *The price level falls, but the effect on real output cannot be determined. The price level rises, and real output rises. Correct! If both curves shift in opposite directions, in general, we cannot determine the real output without knowing the extent of the shifts.