Chapter 34 Aggregate Supply and Demand. Macroeconomics

Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1950? Check all that apply.

Corporate profits increased Total Income Released The unemployment rate declined

Fill in the missing values in the table by selecting the change in each scenario required to increase aggregate demand. Change required to increase AD: Expected rate of return on investment : Incomes in other countries: Consumer expectations about future profitability Government spending

Increase Increase Increase Increase

Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increase in money growth will affect which of the following? Check all that apply.

Inflation rate Price level

A majority of economists believe that in the long run, real economic variables and nominal economic variables behave independently of one another. For example, an increase in the money supply, a ________ A majority of economists believe that in the long run, real economic variables and nominal economic variables behave independently of one another. For example, an increase in the money supply, 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 notion that an increase in the quantity of money will impact the price level but not the output level is known as __________

Nominal Nominal real monetary neutrality

The graph included below approximates United States business cycles between quarter one of 1947 and quarter three of 1951. The shaded region denotes periods of six or more consecutive months of declining real gross domestic product (real GDP). 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

business cycle

Suppose now the government passes a law that significantly increases the minimum wage. This change in policy will cause the natural rate of unemployment to ________ , which will:

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

The graph below shows the aggregate demand (AD) curve for a hypothetical economy. At point X, the quantity of output demanded is $500 billion, and the price level is 120. Moving up along the AD curve from point X to point Y, the quantity of output demanded falls to $300 billion, and the price level rises to 140. 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

Additionally, as the price level rises, 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

rise fall rise fall fall exchange rate

However, in the short run, 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. In the questions that follow you will identify some of the missing labels. The aggregate ________ curve shows the quantity of goods and services that firms produce and sell at each price level.

supply

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

True

Complete the following table by determining how each event impacts the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: A government-sponsored training program increases the skill level of the workforce. Many workers leave to pursue more lucrative careers in foreign economies. Left A scientific breakthrough significantly increases food production per acre of farmland

Right Left Right

Suppose when unemployment is at its natural rate the economy produces a level of real GDP equal to $50 billion. Using the purple points (diamond symbol) plot the economy's long-run aggregate supply (LRAS) curve on the graph.

Straight vertical line on $50 billion

The horizontal axis of the aggregate demand and aggregate supply model measures the overall

quantity of output