CH 10 MACRO
A rise in the money wage rate with no change in potential GDP creates ______.
a leftward shift of the SAS curve and no change in the LAS curve
Aggregate demand is the relationship between the quantity of _____ demanded and the _____ when all other influences on expenditure plans remain the same.
real GDP; price level
The table shows the aggregate demand and short-run aggregate supply schedules of Lizard Island in which potential GDP is $600 billion. Price Level RGDP Dem. RGDP Supp. Short Run 100 600 550 110 575 575 120 550 600 130 525 675 Calculate the short-run equilibrium real GDP and price level. The short-run equilibrium real GDP is $_ billion and the price level is _
$575 ; 110
The table shows the aggregate demand and short-run aggregate supply schedules of Lizard Island in which potential GDP is $600 billion. Price Level RGDP Dem. RGDP Supp. Short Run 100 600 550 110 575 575 120 550 600 130 525 675 If real GDP demanded at each price level increases by $50 billion, what is the new short-run macroeconomic equilibrium and the output gap? The new short-run macroeconomic equilibrium is at a real GDP of $__ billion and a price level of ___. The economy has _____ output gap.
$600; 120; no
Describe the policy change that a classical macroeconomist, a Keynesian, and a monetarist would recommend for U.S. policymakers to adopt in response to each of the following events: a. Growth in the world economy slows. b. The world price of oil rises. c. U.S. labor productivity declines.
A classical macroeconomist and a monetarist recommend that taxes be kept low to avoid disincentive effects for all of the events and a Keynesian recommends active fiscal policy and monetary policy to offset all events.
The graph shows an economy's long-run aggregate supply curve. The economy is at an above full-employment equilibrium. Draw an aggregate demand curve and a short-run aggregate supply curve. Label them. Draw a point at the short-run equilibrium.
AD goes down to the right, SAS up to the right, and the equilibrium is to the right of the LAS
The graph shows an aggregate demand curve. Suppose there is a decrease in transfer payments. Draw a new curve to show the effect of this change on aggregate demand. Label the new curve C1. Now suppose that there is an increase in expected inflation. Draw a new curve to show the effect of this change on the original AD curve. Label the new curve C2.
C1 is below the AD curve, and C2 is above the AD curve
The graph shows an aggregate demand curve. Suppose there is a decrease in the quantity of money. Draw a new curve to show the effect of this change on aggregate demand. Label the new curve C1. Now suppose that there is an increase in expected profits. Draw a new curve to show the effect of this change on the original AD curve. Label the new curve C2.
C1 to the left, and C2 to the right
If potential GDP is $1 trillion, the economy has_______ gap.
If this means moving equilibrium to the right, then it would be a recessionary gap. Since the real GDP would be lower than the potential.
If potential GDP is $1 trillion, the economy has moved to _______ equilibrium.
If this moves the equilibrium to the left then its above full-employment
If the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
Increases; short-run
Economic growth results from ______.
a growing supply of labor and increasing labor productivity, which increase long-run aggregate supply
The graph gives a long-run aggregate supply curve and a short-run aggregate supply curve. Potential GDP increases and the full-employment price level remains constant. Draw the new long-run aggregate supply curve and the new short-run aggregate supply curve. Label the curves. Draw a point that shows the new value of potential GDP at the full-employment price level.
LAS To the right with the increased GDP, SAS down with the lower price level, and the equilibrium point is effectively to the right of the old equilibrium point.
The graph gives the long-run aggregate supply curve and the short-run aggregate supply curve for India. Suppose universities in India increase the number of engineering graduates. The full-employment price level does not change. If long-run aggregate supply changes, draw the new long-run aggregate supply curve and label it. If short-run aggregate supply changes, draw the new short-run aggregate supply curve and label it. Draw a point at the full-employment price level at potential GDP following this event.
LAS To the right with the increased GDP, SAS down with the lower price level, and the equilibrium point is effectively to the right of the old equilibrium point.
Long-run aggregate supply is the relationship between the quantity of real GDP supplied and the price level when the _____ changes in step with the price level to maintain full employment.
Money Wage Rate
Short-run aggregate supply is the relationship between the quantity of _____ supplied and the _____ when the money wage rate, the prices of other resources, and potential GDP remain constant.
Real GDP; Price Level
Which of the following statements illustrate monetary policy?
The Fed has raised the federal funds rate by 0.3 percent.
Which of the following statements illustrate fiscal policy?
The US government has proposed a hike in the corporate tax rate.
Following the change in aggregate demand, the new equilibrium is at ______.
The new intersection of AD1 and SAS0
Following the change in aggregate supply, the new macroeconomic equilibrium is at ______.
Where SAS1 intersects with AD0
A macroeconomic equilibrium in which real GDP is less than potential GDP is _____ equilibrium. And one in which real GDP equals potential GDP is _____ equilibrium.
a below full-employment; a full-employment
Inflation results from ______.
a persistent increase in aggregate demand at a faster pace than that of the increase in long-run aggregate supply
The events which could have changed short-run aggregate supply from SAS0 to SAS1 are ______. (SAS0 is down to the right of SAS1)
a rise in the money wage rate or a rise in the money price of any other factor of production
Some events that could have changed aggregate demand from AD0 to AD1 are ______. (AD0 is below AD1)
an increase in expected future income, a fall in the exchange rate, an increase in expected future inflation, an increase in foreign income
The table shows the aggregate demand and short-run aggregate supply schedules of Lizard Island in which potential GDP is $600 billion. Price Level RGDP Dem. RGDP Supp. Short Run 100 600 550 110 575 575 120 550 600 130 525 675 Does the country have an inflationary gap or a recessionary gap and what is its magnitude? The country has _____ gap and its magnitude is $ _____ billion.
a recessionary; 25
The Fed cuts the quantity of money and all other things remain the same. In the short run, aggregate demand _______.
decreased because interest rates rise and it is more difficult to get a loan to buy homes and large consumer goods
A rise in the wage rate _______.
decreases short-run aggregate supply and does not change long-run aggregate supply
If the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
does not change; long-run
When Canada sets new environmental standards that require power utilities to upgrade their production facilities, Canada's aggregate demand _______.
increases
The Fed increases the quantity of money and all other things remain the same. In the short run, aggregate demand _______.
increases because interest rates fall and it is easier to get a loan to buy homes and large consumer goods
Starting from a full-employment equilibrium, an increase in aggregate demand ______, and creates ______ gap.
increases real GDP above potential GDP; an inflationary
Starting from a full-employment equilibrium, a decrease in short-run aggregate supply ______ the price level and ______ potential GDP.
increases; decreases real GDP below
The increase in investment ______ aggregate demand. The decrease in government spending _______ aggregate demand.
increases; decreases
A rise in labor productivity _______.
increases long-run aggregate supply and short-run aggregate supply
The aggregate demand curve slopes downward because _______.
of the wealth effect and the substitution effect
Keynesian macroeconomists recommend ______.
policies that actively offset changes in aggregate demand that bring recession
Monetarist macroeconomists recommend ______.
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
Classical macroeconomists recommend ______.
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
The defining feature of the Keynesian view of macroeconomics is that the economy is ______.
rarely at full employment
The defining feature of the classical view of macroeconomics is that the economy is ______.
self-regulating and always at full employment
The defining feature of the monetarist view of macroeconomics is that the economy is______.
self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
When the money wage rate rises _______. When the price level in India increases _______.
short-run aggregate supply decreases; the quantity of real GDP supplied increases
The aggregate demand curve shows the relationship between the quantity of real GDP demanded and ______ when everything else remains the same.
the price level
A movement along the aggregate demand curve occurs if _______.
the price level changes and all other factors remain unchanged
Aggregate demand _______ when a decrease in the quantity of money occurs. Aggregate demand _______ when an increase in expected profits occurs.
decreases; increases
Aggregate demand _______ when an increase in interest rates occurs. Aggregate demand _______ when an increase in expected inflation occurs.
decreases; increases
The increase in the personal consumption expenditures ______ aggregate demand. The increase in exports ______ aggregate demand.
increases; increases
When the government of Canada cuts income taxes, Canada's aggregate demand _______. When the United States experiences strong economic growth, Canada's aggregate demand _______.
increases; increases
When potential GDP increases, ______.
long-run aggregate supply and short-run aggregate supply increase. The LAS and the SAS curve shift rightward
In the long run, the money wage rate ______, short-run aggregate supply ______, and the economy returns to a full-employment equilibrium.
rises; decreases