Chapter 33 Post-Class Assignment Part II: Aggregate Demand and Aggregate Supply

Now suppose that the government decides not to take any action in response to the short-run economic impact of the severe weather. In the long-run, when the government does nothing, the output in the economy will be $??? billion and the price level will be ???>

110 & 110

Now suppose that the government immediately pursues an accommodative policy by increasing government purchases in response to the short-run economic impact of the higher oil prices. In the long-run, when the government pursues accommodative policy, the output in the economy will be $??? billion and the price level will be ???.

90 & 100

AS Curve=

AS Curve= Quantity of Output Supplied= Natural Level of Output + a x (Price Level Actual - Price Level Expected)

The following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion. Suppose the government increases spending on building and repairing highways, bridges, and ports. Shift the short-run aggregate supply (AS) curve or the aggregate demand (AD) curve to show the short-run impact of the increase in government spending.

Aggregate Demand curve shifts to the right

Now show the long-run impact of the increase in government spending by shifting both the aggregate demand (AD) curve and the short-run aggregate supply (AS) curve to the appropriate positions.

Aggregate Demand curve shifts to the right Aggregate Supply curve shifts to the left

Complete the table by indicating the change in each determinant necessary to decrease aggregate demand.

Change Needed to Decrease AD Consumer expectations about future profitability= Worsen Government spending= Decrease Interest rates= Increase The value of the domestic currency relative to the foreign currency= Appreciate

Fill in the table by indicating the changes in the determinants necessary to increase short-run aggregate supply.

Change Needed to Increase AS Input prices= Decrease Human capital= Improves Burdensome regulations= Decrease

Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1950? Check all that apply. Car sales declined. Corporate profits increased. Total real income increased. Consumer spending declined.

Corporate profits increased. Total real income increased.

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve.

Direction of LRAS Curve Shift Direction of LRAS Curve Shift The government allows more immigration of working-age adults who find work.= Right For environmental and safety reasons, the government requires that the country's nuclear power plants be permanently shut down.= Left An investment tax credit increases the rate at which firms acquire machinery and equipment.= Right

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The inflation rate The quantity of physical capital The size of the labor force The price level

The inflation rate The price level

True or False: Short-term fluctuations in real GDP are irregular and unpredictable.

True

Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion, before the increase in government spending on infrastructure. During the transition from the short run to the long run, price-level expectations will ??? and the ??? curve will shift to the ???.

adjust upwards, short-run aggregate supply, & left

For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will ???, and firms that rely on catalogs will respond by ??? the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the price level causes the quantity of output supplied to ??? the natural level of output in the short run.

fall, reducing, & falls below

Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to ?? in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore ???, and the number of foreign products purchased by domestic consumers and firms (imports) will ???. Net exports will therefore ???, causing the quantity of domestic output demanded to ???. This phenomenon is known as the ??? effect.

fall, rise, fall, rise, rise, & exchange rate

In the long run, as a result of the increase in government spending, the price level ???, the quantity of output ??? the natural level of output, and the unemployment rate ??? the natural rate of unemployment.

increases, returns to, & returns to

Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run. For example, an increase in the money supply, a ??? variable, will cause the price level, a ??? variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a ??? variable. The separation of real variables and nominal variables is known as ???.

nominal, nominal, real, & the classical dichotomy

In the short run, however, most economists believe that real and nominal variables are intertwined. Economists use the model of aggregate demand and aggregate supply to examine the economy's short-run fluctuations around the long-run output level. The following graph shows an incomplete short-run aggregate demand (AD) and aggregate supply (AS) diagram—it needs appropriate labels for the axes and curves. You will identify some of the missing labels in the questions that follow. The horizontal axis of the aggregate demand and aggregate supply model measures the overall ???. The aggregate ??? curve shows the quantity of goods and services that firms produce and sell at each price level.

quantity of output supply

Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to ???, which will: Shift the long-run aggregate supply curve to the right Shift the long-run aggregate supply curve to the left Not affect the long-run aggregate supply curve

rise Shift the long-run aggregate supply curve to the left

The short-run quantity of output supplied by firms will rise above the natural level of output when the actual price level ??? the price level that people expected.

rise above

In the short run, the increase in government spending on infrastructure causes the price level to ??? the price level people expected and the quantity of output to ??? the natural level of output. The increase in government spending will cause the unemployment rate to ??? the natural rate of unemployment in the short run.

rise above, rise above, & fall below

As the price level rises, the cost of borrowing money will ???, causing the quantity of output demanded to ???. This phenomenon is known as the ??? effect.

rise, fall, & interest rate

As the price level falls, the purchasing power of households' real wealth will ???, causing the quantity of output demanded to ???. This phenomenon is known as the ??? effect.

rise, rise, & wealth

The short-run economic outcome resulting from the increase in production costs is known as ???.

stagflation

Notice that real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as ???.

the business cycle