Assignment 6

The real interest rate effect provides a partial explanation for why the aggregate demand curve slopes downward. Which of the following statements best explains the real interest rate effect?

At a lower price level, the real interest rate tends to be lower; thus, the quantity of investment goods demanded is larger.

The long-run aggregate supply is vertical because in the long run changes in the price level do NOT:

affect the number of workers, the capital stock, or technology.

Pessimism Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. Which curve shifts and in which direction?

aggregate demand shifts left

Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers, people become more optimistic about the future and stay this way for some time. Refer to Optimism. Which curve shifts and in which direction?

aggregate demand shifts right

Which of the following would cause prices and real GDP to rise in the short run?

aggregate demand shifts right

The price level rises in the short run if

aggregate demand shifts right or aggregate supply shifts left.

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

aggregate demand to the right.

Refer to the figure below. The economy's GDP could find itself below potential GDP in short-run macroeconomic equilibrium as a result of:

an increase in oil prices

If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level

is lower and output is the same as the original long-run equilibrium.

The real interest rate effect and wealth effect are important because they help to explain

the downward-sloping nature of the aggregate demand curve.

Factors that influence the long-run aggregate supply curve are

- resource availability and technology. - improvements in productivity. - labor, capital, and equipment.

Suppose the price of crude oil falls substantially. Which of the following is the most likely effect of the decrease in fuel prices on the economy?

A decrease in the equilibrium price level and an increase in equilibrium real GDP.

Which of the following will NOT shift a nation's long-run aggregate supply curve to the right?

A decrease in the nominal wage rate.

During the 1990-91 recession, consumers decided to decrease consumption to repay a larger portion of household debt. What happened?

Aggregate demand declined, resulting in lower levels of real output and employment.

Which of the following will NOT increase potential real GDP over the long run?

An increase in demand.

Which of the following helps to explain the downward-sloping nature of the aggregate demand curve?

Falling prices put downward pressure on real interest rates, causing business investment to increase.

Which of the following would cause the short-run aggregate supply curve to be upward sloping?

Labor contracts make wages sticky.

When looking at a graph of aggregate demand, which of the following is correct?

The variable on the vertical axis is nominal; the variable on the horizontal axis is real

According to the aggregate demand/aggregate supply model, one possible cause of a recession is:

a decrease in demand for investment goods by businesses.

Which of the following would increase output in the short run?

a. an increase in stock prices makes people feel wealthier b. government spending increases c. firms chose to purchase more investment goods

he appearance of the long-run aggregate-supply (LRAS) curve

a. is consistent with the concept of monetary neutrality. b. is consistent with the idea that point A represents a long-run equilibrium and a short-run equilibrium when the relevant short-run aggregate-supply curve is SRAS1. c. indicates that Y1 is the natural rate of output.

Which of the following effects helps to explain the slope of the aggregate-demand curve?

a. the exchange-rate effect b. the wealth effect c. the interest-rate effect

An increase in the price of a key input, such as labor, will result in

both increase in prices and decrease in national production.

Which of the following decreases in response to the interest-rate effect from an increase in the price level?

both investment and consumption

If aggregate supply remains unchanged, a decrease in aggregate demand may

cause a recession.

Other things the same, continued increases in technology lead to

continued increases in real GDP and continued decreases in the price level.

Suppose government spending is cut. Other things being equal, the aggregate demand for national production will

fall.

If aggregate demand shifts right then in the short run

firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.

Aggregate demand shifts right if

government purchases increase and shifts left if stock prices fall.

An increase in the price level will

move the economy up along a stationary aggregate demand curve.

As the price level falls

people will want to buy more bonds, so the interest rate falls.

In the basic aggregate demand and aggregate supply model, which of the following could cause a recession? An increase in:

personal income taxes.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,

production is more profitable and employment rises.

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the change in output?

real wages rise, so firms choose to produce less

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected,

relative to prices wages are higher and employment falls.

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level

rises, shifting aggregate supply left.

In the mid-1970s the price of oil rose dramatically. This

shifted aggregate supply left, the price level rose, and real GDP fell.

Other things the same, an increase in the expected price level shifts

short-run aggregate supply left.

Suppose the economy is in long-run equilibrium. If there is a sharp decline in government purchases combined with a significant increase in immigration of skilled workers, then in the short run,

the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

When production costs rise,

the short-run aggregate supply curve shifts to the left.

When the Fed buys bonds

the supply of money increases and so aggregate demand shifts right.

If output is above its natural rate, then according to sticky-wage theory

workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.