Chapter 13 Review - Econ 110

Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2

1.8%

The basic aggregate demand and aggregate supply curve model helps explain

short term fluctuations in real GDP and the price level.

A negative supply shock in the short run causes

the aggregate supply curve to shift to the left.

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result

the long-run aggregate supply curve will shift to the right

The long-run adjustment to a negative supply shock results in

the short-run aggregate supply curve shifting to the right.

________ of unemployment during ________ make it easier for workers to ________ wages.

Low levels; an expansion; negotiate higher

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run

Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise

Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP

B and D

How do lower taxes affect aggregate demand?

They increase disposable income, consumption, and aggregate demand.

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve

They will shift the aggregate demand curve to the right.

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve

This will shift the aggregate demand curve to the left.

If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve

This will shift the aggregate demand curve to the right.

Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will decline.

Which of the following best describes the "wealth effect"?

When the price level falls, the real value of household wealth rises.

Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand

Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices

Stagflation occurs when

inflation rises and GDP falls.

On the long-run aggregate supply curve

a decrease in the price level has no effect on the aggregate quantity of GDP supplied.

Because of the slope of the aggregate demand curve, we can say that

a decrease in the price level leads to a higher level of real GDP demanded.

Which of the following would cause the short -run aggregate supply curve to shift to the right?

a technological advance

Long-run macroeconomic equilibrium occurs when

aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run supply curve

The international trade effect states that

an increase in the price level will lower net exports.

Which of the following is considered a negative supply shock?

an unexpected decrease in the refining capacity for oil

An increase in the price level will

move the economy up along a stationary aggregate demand curve.

An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________

decrease; a higher price level reduces consumption, investment, and net exports

A decrease in investment causes the price level to ________ in the short run and ________ in the long run

decrease; decrease further

Changes in the price level

do not affect the level of aggregate supply in the long run.

An increase in aggregate demand results in a(n) ________ in the ________.

expansion; short run

an increase in the price level would be represented by a movement from ad

point B to point A (along)

an increase in the price level would be represented by a movement from

pointA to point B (along)

The short- run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly

positive; final goods and services; inputs

When the price level rises from 110 to 115, the aggregate level of GDP supplied rises from $80 billion to $120 billion. This ________ relationship represents the ________ relationship between the quantity of real GDP firms are willing to supply and the price level

positive; short-run

When the price of oil rises unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run

rises; rises

Suppose the U.S. GDP growth rate is faster relative to other countries' GDP growth rates. This will

shift the aggregate demand curve to the left.

Workers expect inflation to rise from 3% to 5% next year. As a result, this should

shift the short-run aggregate supply curve to the left

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply

Aggregate demand and potential real GDP decrease continuously.

Ceteris paribus, a decrease in government spending would be represented by a movement from

AD2 to AD1 (left)

an increase in personal income taxes would be represented by a movement from

AD2 to AD1 (left)

an increase in the value of the domestic currency relative to foreign currencies would be represented by a movement from

AD2 to AD1 (left)

Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long- run equilibrium be?

A

Ceteris paribus, a decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from

AD1 to AD2 (right)

an increase in households' expectations of their future income would be represented by a movement from

AD1 to AD2 (right)

Ceteris paribus, a decrease in firms' expectations of the future profitability of investment spending would be represented by a movement from

AD2 to AD1 (left)

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium

GDP will be below potential GDP.

The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did this technological change do the short -run supply curve

It shifted the short-run aggregate supply curve to the right

Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise?

SRAS and AD do not shift

Ceteris paribus , an increase in workers and firms adjusting to having previously overestimated the price level would be represented by a movement from

SRAS1 to SRAS2 (right)

Ceteris paribus , a decrease in the capital stock would be represented by a movement from

SRAS2 to SRAS1 (left)

an increase in the expected price of an important natural resource would be represented by a movement from

SRAS2 to SRAS1 (left)

German luxury car exports were hurt in 2009 as a result of the recession. How would this decrease in exports have affected Germany's aggregate demand curve

The aggregate demand curve would have shifted to the left.

When the economy enters into a recession, your employer is ________ to reduce your wages because ________

unlikely; output and input prices generally fall during recession