2) Aggregate Demand & Aggregate Supply - ECO 202 (Exam #3)

We use ___________ to talk about the price and quantity of a single good or service produced in a specific market. We use ___________ to describe the overall, or total, demand for all final goods and services produced in an economy.

demand, aggregate demand

The two main sources of inflation are _________-pull and ____________-push, which both result in a higher price level.

demand, cost

If ___________-pull inflation is occurring, it is because the aggregate ___________ curve is shifting to the __________ resulting in higher output and higher prices.

demand, demand, right

Exports from the U.S. will tend to ___________ when foreign incomes increase.

increase

If consumers ___________ the amount of spending, aggregate demand curve shifts to the right.

increase

Higher U.S. incomes tend to __________ U.S. imports and __________ net exports.

increase, decrease

If the government ____________ the amount of spending, aggregate demand shifts to the right.

increases

Both recessions and expansions can cause ___________ or a general increase in the level of prices.

inflation

____________ prices, like wages, tend to be sticky and take time to adjust to a change in the economy.

input

If the short-run aggregate supply curve and the aggregate demand curve intersect at the full employment level of output the economy:

is in its short and long run equilibrium.

Input prices tend to be sticky because:

labor contracts might commit firms to paying a certain wage over multiple years.

A negative demand shock shifts the aggregate demand to the _____________.

left

If consumers decrease the amount of spending, aggregate demand shifts to the _________.

left

If the government decreases the amount of spending, aggregate demand shifts to the __________.

left

If the government decreases the amount of spending, aggregate demand shifts to the ___________.

left

Stagflation is caused by negative shocks such as rising input costs that shift aggregate supply to the _________.

left

When foreign incomes fall, aggregate demand shifts to the ____________.

left

When incomes decrease in foreign countries, foreigners may be ___________ (less/more) willing and able to purchase goods and services produced in the United States.

less

In the _________ run, the level of real GDP is determined by the long-run aggregate _____________ curve.

long, supply

Full-employment real GDP is often used to describe:

long-run aggregate supply.

The natural rate of real GDP is often used to describe:

long-run aggregate supply.

A trough is the ____________ point in the business cycle.

lowest

According to the real-balances effect, when the price level rises the real value of ___________ falls and people are less willing or able to buy goods and services.

money (or savings)

According to the interest rate effect, when the price level rises, people need more money to make the same number of purchases, so the demand for ___________ increases. As a result, interest rates ____________ , which ____________ consumption and investment, causing the quantity of real GDP demanded to _____________.

money, increases, decreases, decrease

According to the interest rate effect, when the price level rises, people need:

more money to make the same number of purchases causing interest rates to rise reducing consumption investment and the quantity of real GDP demanded resulting in a downward sloping aggregate demand curve.

If consumption or gross investment is increasing because of the lower price level, that's a:

movement along the aggregate demand.

A(n) ____________ shock causes aggregate demand or supply to fall at every price level.

negative

When there is a(n) ____________ demand shock, real GDP falls below the full-employment level and unemployment is higher than the natural rate.

negative

The short-run equilibrium level of real GDP is:

not necessarily the full-employment level of output that is consistent with the long run.

Improved productivity means that we can produce more __________ with fewer __________.

outputs, inputs

A movement along the aggregate supply curve is due to a change in the ____________ level.

price

A negative shock causes aggregate demand or supply to fall at every __________ level.

price

Input _________ tend to be sticky.

prices

If ____________ costs rise, each additional unit of output will cost more to produce.

production (or resource, input)

Improved ___________ means that we can produce more output with fewer inputs.

productivity

_____________ is defined as the total amount of output produced with a given level of inputs.

productivity

Government _____________ refer only to those payments made by the government for final goods and services that it consumes.

purchases (spending)

Aggregate demand and aggregate supply are connected to the business cycle through __________ GDP.

real

When the price level rises, the real value of savings falls and people are less willing or able to buy goods and services. As a result, consumption falls and the quantity of real GDP demanded decreases. This describes the:

real balances effect

If consumers increase the amount of spending, aggregate demand shifts to the __________.

right

Recessions and expansions can cause inflation or a general ___________ in the level of prices.

rise

When the price level rises, people need more money to make the same number of purchases, so the demand for money increases. As a result, interest rates rise, which lowers consumption and investment causing the quantity of real GDP demanded to decrease. This describes the:

the interest rate effect

The determination of the the long-run equilibrium occurs where the AD and SRAS curves intersect the:

the long-run aggregate supply curve.

The determination of the the long-run equilibrium price level and real GDP is found by using:

the long-run aggregate supply curve.

A __________ is the lowest point in the business cycle.

trough

During the Great Recession from 2007 to 2009, most countries increased government expenditures to boost aggregate demand. (True or False)

true

The short-run equilibrium level of real GDP is not necessarily the full-employment level of output that is consistent with the long run. (True or False)

true

The aggregate supply curve slopes ____________ in the short run because input prices are sticky and take time to adjust.

upward

In an aggregate demand model, price level is on the __________ axis and the dollar value of real gross domestic product is on the ___________ axis.

vertical, horizontal

Higher U.S. incomes tend to increase U.S. ___________ and reduce net ___________.

imports, exports

What are the three broad categories of the determinants of aggregate supply?

-Productivity -Resource prices -Social institutions

Suppose that the government increases paperwork and raises fees for starting a business. This will cause aggregate:

-supply to decrease -shifting to the left

Suppose that the the price of oil falls worldwide. This will cause aggregate:

-supply to increase -shifting to the right

Assume an economy starts out in equilibrium. When the price level falls: these impacts happen in this order

1) the purchasing power of assets such as savings stock and bonds increases 2) firms and consumers can purchase more goods and services 3) the aggregate expenditure in the economy increases

Changes in government purchases and net exports directly affect the aggregate demand for real __________.

GDP

If the amount of output firms are willing to produce at each possible price level increases, that's:

a shift of the aggregate supply.

The downward-sloping line that represents the negative or inverse relationship between the rate of inflation and the unemployment rate in the short run is called the ____________ curve.

Phillip's

Price level increasing, causing a movement along the aggregate demand curve, can be explained by:

a decrease in net exports (BECAUSE --> As a result of the foreign-purchases effect, an increase in the price level causes the quantity of exports to decrease and the quantity of imports to increases, which means net exports decreases and the aggregate quantity of real GDP demanded decreases.)

If firms are producing more output because of the higher price level, that's:

a movement along the aggregate supply (AS) curve.

Which of the following explain why the Aggregate Demand (AD) curve slopes downward? (select all that apply): a) The interest-rate effect b) The marginal effect c) The real-balances effect d) The foreign-purchases effect

a) The interest-rate effect c) The real-balances effect d) The foreign-purchases effect

Which of the following statements are true? (select all that apply): a) We use aggregate demand to describe the overall or total demand for all final goods and services produced in an economy. b) We use demand to describe the overall or total demand for all final goods and services produced in an economy. c) We use aggregate demand to talk about the price and quantity of a single good or service produced in a specific market. d) We use demand to talk about the price and quantity of a single good or service produced in a specific market.

a) We use aggregate demand to describe the overall or total demand for all final goods and services produced in an economy. d) We use demand to talk about the price and quantity of a single good or service produced in a specific market.

The relationship between the price level and the amount of real GDP supplied in the economy is called... (select all that apply): a) short-run aggregate supply. b) aggregate supply. c) aggregate demand. d) long-run aggregate demand.

a) short-run aggregate supply b) aggregate supply

Economic contraction can be shown as... (select all that apply): a) the long-run aggregate supply curve shifts to the left. b) the aggregate demand curve shifts to the right. c) an inward shift of the production possibilities frontier. d) the short-run aggregate supply curve shifts up.

a) the long-run aggregate supply curve shifts to the left. c) an inward shift of the production possibilities frontier.

The determination of the the long-run equilibrium price level and real GDP is found by using the long-run ___________ supply curve.

aggregate

_____________ demand includes the demand for goods and services as diverse as food clothing cars health care entertainment and housing.

aggregate

The equilibrium level of real GDP is found at the intersection of the:

aggregate expenditures schedule and the equilibrium line.

If __________-push inflation is occurring, it is because the aggregate ___________ curve is shifting to the __________ resulting in lower output and higher prices.

cost, supply, left

If we increase our resources or productivity.... (select all that apply): a) the aggregate demand curve shifts to the right. b) the long-run aggregate supply curve shifts to the right. c) the production possibilities frontier will shift out. d) the short-run aggregate supply curve shifts up.

b) the long-run aggregate supply curve shifts to the right. c) the production possibilities frontier will shift out.

When there is a negative demand shock, real GDP lies __________ the full-employment level and unemployment is __________ than the natural rate.

below, above

Suppose there is a negative demand shock. In the short run, the economy moves to a new equilibrium where real GDP is ___________ the full-employment level, and unemployment is ____________ than the natural rate. In the long run, wages and production costs fall. Firms produce more at every price level. The short-run aggregate supply curve shifts to the _____________, moving the economy to a new ____________ equilibrium. The price level falls and real GDP rises. Eventually, the economy returns to its full-employment level of real GDP.

below, higher right, higher

A decrease in aggregate demand:

causes a movement down along the Phillips Curve.

An increase in aggregate demand:

causes a movement up along the Phillips Curve.

A movement along the AD curve is due to:

changes in the price level.

A ___________ in consumer confidence causes aggregate demand to decrease.

decrease

A decrease in consumer confidence causes aggregate demand to ______________.

decrease

Exports from the U.S. will tend to fall when foreign incomes _____________.

decrease

If consumers ____________ the amount of spending, aggregate demand shifts to the left.

decrease

Lower U.S. incomes tend to ____________ U.S. imports and ____________ net exports.

decrease, increase

If resource costs rise, output ___________ at every price level.

decreases

According to the real-balances effect, when the price level rises, the real value of savings ___________ and people are less willing to buy goods and services so consumption falls and the quantity of real GDP demanded ___________ , resulting in a(n) _________-ward sloping aggregate demand curve.

decreases, decreases, downward

One downside of increasing government expenditures is that they increase budget ____________.

deficit

Suppose that an increase in personal income taxes causes aggregate ____________ to decrease so that the economy moves to a new short-run equilibrium. In the recession phase of the business cycle, real GDP declines. The economy will reach a(n) ____________, or the lowest point tin the business cycle. Over time, as nominal wages and costs of other resources fall, the economy begins to recover. Aggregate ___________ shifts to the right so that output expands and the price level falls further. Eventually, the economy moves to a new long-run equilibrium at a(n) ___________ price level and full-employment output.

demand, trough, supply, decreased (lower)

Aggregate demand is:

downward sloping

The equilibrium level of real GDP is found at the intersection of the aggregate expenditures schedule and the ____________ line.

equilibrium

The equilibrium level of real GDP is found at the intersection of the aggregate __________ schedule and the equilibrium line.

expenditure

If the price level rises, aggregate expenditure:

falls the aggregate expenditure line shifts down and there is a movement to a higher point along the aggregate demand line.

According to the real-balances effect, when the price level rises, the real value of savings:

falls, consumption falls, the quantity of real GDP demanded decreases, resulting in a downward sloping aggregate demand curve.

Payments made by the government for only final goods and services are called:

government purchases

According to the interest rate effect, when the price level ____________ , people need more money to make the same number of purchases, so the demand for money _____________. As a result, interest rates increase, which lowers consumption and investment, causing the quantity of real ____________ demanded to _____________.

rises, increases, GDP, decrease

If consumption gross investment or net exports are increasing because of some non-price change, there will be a:

shift of the AD curve

If consumption or gross investment increase for any reason other than the price level, that's a:

shift of the aggregate demand.

Supply shocks cause a __________ the aggregate supply curve. A change in the price level would cause a __________ the aggregate supply curve.

shift of, movement along

A decline in investment will:

shift the AE line downward AND shift the AD curve to the left.

In the ___________ run, input prices are fixed and do not adjust along with other prices in the economy.

short

Aggregate _____________ illustrates how the total amount of goods and services produced in an economy relates to the price level.

supply

Generally changes to social institutions that inhibit production decrease aggregate:

supply

Higher resource costs will shift the aggregate ____________ curve to the left.

supply

Stagflation is caused by negative shocks such as rising input costs that shift aggregate ___________ to the left.

supply

The aggregate ___________ curve slopes upward in the short run because input prices are sticky and take time to adjust.

supply

The determination of the the long-run equilibrium price level and real GDP is found by using the long-run aggregate ___________ curve.

supply

The downward-sloping line that represents the negative or inverse relationship between the rate of inflation and the unemployment rate in the short run is called:

the Phillips Curve

As nominal wages and the costs of other resources fall during a recession...

the aggregate supply curve shifts to the right real output grows and the price level falls further.

Suppose there is an economy-wide decrease in business taxes. What can we expect to see in the business cycle model?

the business cycle enters an expansion

The Phillips Curve refers to:

the downward-sloping line that represents the negative or inverse relationship between the rate of inflation and the unemployment rate in the short run.