ECO 110 CH 13
c. A positive technological change occurs
1
Upper A change in the price level will cause the long-run aggregate supply curve to _____
move along a stationary LRAS curve
A change in the price level causes a _____ the short-run aggregate supply (SRAS) curve. In the figure, this is shown by moving from point _____. A change in any other factor causes a _____ the SRAS curve. In the figure, this is shown by moving from point _____.
movement along A to B shift in B to C
Consider the variables that shift long-run aggregate supply and the variables that shift short-run aggregate supply. Match each of the following scenarios with one of the following three graphs of long-run aggregate supply and short-run aggregate supply. a. A decrease in the expected future price level
3
Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. a. An increase in the price level will cause a _____ the aggregate demand curve.
movement up along
According to the dynamic AD-AS model, what is the most common cause of inflation?
A and B only.
After the adjustment of aggregate supply is complete, the economy returns to equilibrim at
A.
At the new long-run equilibrium,
real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be
recession
The SRAS curve will _____ if there is _____.
shift to the left an increase in expected future prices
The SRAS curve will _____ if there is _____.
shift to the left an increase in the adjustment of workers' and firms' prior underestimation of the price level
The long-run equilibrium point will be at point _____.
C
If firms want to reduce workers wages over time, they have to reduce
the cash or nominal value, of wages.
The 2007-2009 recession was a clear example of
the effect that a decrease in aggregate demand can have on the economy.
The Austrian school is best known for arguing the superiority of government economic planning over the market system.
False
The real business cycle model focuses on changes in the quantity of money to explain fluctuations in real GDP.
False
Source: Christina Romer and Jared Bernstein, The Job Impact of the American Recovery and Reinvestment Plan, January 9, 2009. Why would the causes of a recession and its severity affect the accuracy of forecasts of when the economy would return to potential GDP?
Models used for forecasting are based on historical experience and the relationships in the model can change.
Suppose that the economy grows from 2019 to 2020 without inflation. Which of the following graphs correctly shows this situation? (Note: 2020 positions are shown with green dashed lines.)
SRAS/ 3 lines
Sources:U.S. Bureau of Labor Statistics; and U.S. Bureau of Economic Analysis. a. In 1969, actual real GDP was greater than potential real GDP. Which of the following best explains this?
The economy can produce a level of GDP above potential GDP in the short run.
[Related to Solved Problem #1] A reporter for the Wall Street Journal wrote, "A strong dollar and weak growth overseas portend downward pressure on U.S. exports." Source: Jon Hilsenrath, "Rising Dollar and Falling Oil Could Be Recipe For a U.S. Asset Boom," Wall Street Journal, December 11, 2014. A "strong dollar" means that the
U.S. dollar exchanges for more units of foreign currencies.
Which of the following factors does not cause the aggregate demand curve to shift?
a change in the price level
c. The table does not give the inflation rates for 1969 and 1970. If the inflation rate for 1970 is greater than the inflation rate for 1969, it is likely that the recession was caused by _____ rather than _____.
a negative supply shock an increase in aggregate demand
Which of the following causes the short-run aggregate supply curve to shift to the right?
a positive technological change
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
a recession in the short run and a decline in the price level in the long run.
If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run.
an increase; an increase
Consider the two aggregate demand curves in the graph at right. A movement from point A to point B on AD1 could be the result of a
change in the price level.
The long-run aggregate supply curve is vertical because in the long run,
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
Stagflation is a
combination of inflation and recession
b. Match one or more of the four graphs to each of the following scenarios: i. The economy experiences a recession ii. The economy experiences short-term inflation iii. The economy experiences stagflation
1,3 1,4 1
What does the article mean by firms reducing the "cash value" of workers' wages?
It means firms found it difficult to cut nominal wages.
Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C. (Mark all that apply.)
Lower taxes Decrease in the U.S. exchange rate relative to other currencies Increased consumer optimism Lower interest rates
c. The price level that is currently higher than expected will _____ the SRAS curve because this is a change in an adjustment to past errors in _____.
decrease (shift leftward) an adjustment to past errors in expectations about future prices
The SRAS curve will _____ if there is _____.
shift to the right a technological change
A movement from point A to point C could be the result of a change in
the labor force.
Use the graph on the right to answer the following questions. a. Which of points A, B, C, or D can represent a long-run equilibrium?
A and C
How does an increase in the price level affect the quantity of real GDP supplied in the long run?
Changes in the price level do not affect the level of GDP in the long run.
Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.
b. Even though real GDP in 1970 was slightly greater than real GDP in 1969, the unemployment rate increased substantially from 1969 to 1970. Which of the following explains how unemployment could have increased even though output did not change?
Potential GDP increased significantly, but actual GDP did not, and thus there is unemployment.
Consider the downward-sloping aggregate demand (AD) curve to the right. Which of the following results in a movement from point A to point B (a movement up along the AD curve) or from point A to point C (a movement down along the AD curve)? (Mark all that apply.)
Wealth effect Interest rate effect
The result of a strong dollar will be
a leftward shift of the U.S. aggregate demand curve because it reduces exports, a spending component of aggregate demand.
At the new short run equilibrium, the unemployment rate will _____ compared to the unemployment rate at the initial equilibrium, prior to the increase in exports.
be lower
How can government policies shift the aggregate demand curve to the right?
by increasing government purchases
Explain how each of the following events would affect the short-run aggregate supply curve. a. An increase in the price level will _____ the SRAS curve because this is a change in _____.
not change the price level
Explain how each of the following events would affect the long-run aggregate supply curve. a. The price level increases. Because this is a change in _____ , the LRAS curve will _____.
the price level not change
b. The labor force increases. Because this is a change in _____ , the LRAS will _____.
the productive capacity of the economy shift to the right
c. There is an increase in the quantity of capital goods. Because this is a change in _____ , the LRAS will _____.
the productive capacity of the economy shift to the right
d. Technological change occurs. Because this is a change in _____ , the LRAS will _____.
the productive capacity of the economy shift to the right
Increases in personal income taxes or business taxes will make the aggregate demand curve shift
to the left
Could these firms have reduced their labor costs by the same, or possibly more, if they laid off fewer workers while cutting wages?
No, because workers would become disgruntled with wage cuts and reduce their productivity, resulting in higher production costs.
Which of the following best explains how the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level.
In the diagram to the right, moving from point A to point B is called a _____ the AD curve. Moving from point A to point C is referred to as a _____ the AD curve.
movement along shift in
e. A faster income growth in other countries will cause a _____ the U.S. aggregate demand curve.
rightward shift of
Increases in households' expectations of their future incomes will make the aggregate demand curve shift _____.
to the right
Economists Mary Daly, Bart Hobijn, and Timothy Ni of the Federal Reserve Bank of San Francisco argue that "employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions." Source: Mary C. Daly, Bart Hobijn, and Timothy Ni, "The Path of Wage Growth and Unemployment," Federal Reserve Bank of San Francisco Economic Letter, July 15, 2013. Employers are hesitant to cut workers' salaries because wage cuts
upset workers and lower their productivity.
The wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption.
a. Match the following scenarios to the appropriate graph. i. An increase in the expected price level An increase in households' expectations of their future income iii. A decrease in the price of an important natural resource iv. A decrease in firms' expectations of the future profitability of investment spending
1 4 2 3
The SRAS curve will _____ if there is _____.
shift to the right an increase in productivity
Consider the figure to the right. Why does the short-run aggregate supply curve (SRAS) slope upward?
All of the above.
[Related to the Chapter Opener] Jet fuel is the largest operating cost for Delta Air Lines. In 2015, Delta's CEO Richard Anderson announced that the firm was likely to save more than $2 billion during the year because of lower fuel prices. Source: Paul R. La MonicaBob Sechler, "Delta Air Lines Is Saving $2 Billion on FuelFedEx Earnings: Hurt by Restructuring Charges," money.cnn.com, January 20, 2015. Are firms like airlines that have costs that are dependent on raw material prices likely to be more or less affected by the business cycle than firms like automobile companies whose costs are not as dependent on raw material prices?
They would be more affected, because raw material prices are very cyclical and are the largest operating cost for airlines.
A supply shock is
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.
Which of the following is usually the cause of stagflation?
a supply shock as a result of an unexpected increase in the price of a natural resource
Stagflation occurs when
a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP
In a speech in late 2011, President Barack Obama argued that: "Probably the single greatest cause of the financial crisis and this brutal recession has been the housing bubble that burst four years ago." Source: Laura Meckler, "Obama Says Plan Will Cut Mortgage Payments for Millions," Wall Street Journal, October 24, 2011. By "housing bubble" President Obama referred to an increase in the price of housing caused by
an increase in the demand for housing based on the expectation that prices will continue to increase.
From August 2009 to May 2017, the Standard & Poor's Index of 500 stock prices increased by more than 135 percent, while the consumer price index increased by less than 15 percent. These changes would have caused
an increase in the real value of household wealth, which shifted the aggregate demand curve to the right.
The interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investment.
In the new short-run equilibrium, the unemployment rate is _____ the unemployment rate in the initial equilibrium prior to the increase in the price of oil.
higher than
The short-run aggregate supply curve slopes upward because of all of the following reasons except
in the short run, an unexpected change in the price of an important resource can change the cost to firms.
Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. The SRAS curve will _____ if there is _____.
shift to the right an increase in the labor force or capital accumulation
c. The U.S. economy experiences 4 percent inflation. Because this is a change in _____, it will cause a _____ the aggregate demand curve.
the price level movement along
If the price level increases, then
there will be a movement up along a stationary aggregate demand curve.
Increases in the interest rate will make the aggregate demand curve shift _____.
to the left
Increases in the value of the dollar relative to foreign currencies will make the aggregate demand curve shift
to the left
Increases in firms' expectations of their future profitability and investment spending will make the aggregate demand curve shift
to the right
Increases in government purchases will make the aggregate demand curve shift
to the right
If menu costs were eliminated, the short-run aggregate supply curve will be _____ because of _____.
upward sloping wage price stickiness and slow wage adjustment by firms
b. Workers and firms adjust to having previously underestimated the price level
2
The aggregate demand curve slopes downward for all of the following reasons except:
A lower price level makes imports from other countries less expensive, and U.S. citizens buy more imports.
Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from _____. The new short-run macroeconomic equilibrium occurs at _____. Long-run adjustment will shift the SRAS curve from _____. as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at _____.
AD 0 to AD 1 point B SRAS 0 to SRAS 1 point C
Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from _____. The new short-run macroeconomic equilibrium occurs at _____. Long-run adjustment will shift the SRAS curve from _____ as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at _____.
AD 0 to AD 1 point B SRAS 0 to SRAS 1 point C
To have growth without inflation, which of the following must be true?
AD, SRAS, and LRAS must increase by the same amount.
Which of the following are views new classical macroeconomists hold?
All of the above.
Which of the following factors brought on the recession of 2007-2009?
All of the above.
Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
All of the above.
Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
All of the above.
b. Suppose that initially the economy is at point A. Then aggregate demand increases from AD1 to AD2. The new short-run equilibrium will be at point _____.
D
Which of the following statements is correct if real GDP in the United States declined by more during the 2007-2009 recession than did real GDP in Canada, China, and other trading partners of the United States?
Imports to the United States fell more than the U.S. exports, leading to an increase in net exports.
Find out which one of the following is not one of the key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model.
In the dynamic AD-AS model, the economy does not experience long-run growth, whereas in the basic AD-AS model, the economy experiences both continuing inflation and growth.
Which of the following statements is true?
In the long run, changes in the price level do not affect the level of real GDP.
Why does the short-run aggregate supply curve slope upward?
Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.
b. Recall that the Great Depression began due to increased pessimism of households and firms, causing a fall in aggregate expenditures. Which of the following dynamic aggregate demand and supply graphs best shows this situation, as based on the information shown in the table? (1930 positions shown with green dashed lines.)
SRAS/ 3 lines left dot
Which of the following best explains how and why the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices.
Suppose the economy enters a recession. If government policymakersdashCongress, the president, and members of the Federal Reservedashdo not take any policy actions in response to the recession, what is the likely result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long run?
Statement ii is correct.
Explain whether you agree with the following statement: "The dynamic aggregate demand and aggregate supply model LOADING... predicts that a recession caused by a decline in AD will cause the inflation rate to fall. I know that the 2007minus2009 recession was caused by a fall in AD, but the inflation rate was not lower after the recession. The prices of most products were definitely higher in 2008 than they were in 2007, so the inflation rate could not have fallen."
The statement is wrong because it is confusing the price level with the inflation rate.
b. An increase in government purchases will cause a _____ of the aggregate demand curve.
rightward shift
A student was asked to draw an aggregate demand and aggregate supply graph LOADING... to illustrate the effect of an increase in aggregate supply. The student drew the following graph: The student explained the graph as follows: "An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, P3, as being lower than the initial price level, P1." Which of the following is a correct statement about the student's analysis?
The student is incorrect because the aggregate demand curve does not shift because of the price level change.
The combination of a strong U.S. dollar and weak growth overseas might result in lower U.S. exports because
U.S. exports become more expensive for foreign buyers while income, and purchasing power, in other countries is rising only slowly.
Which one of the following is not true when the economy is in macroeconomic equilibrium?
When the economy is at long-run equilibrium, firms will have excess capacity.
The international-trade effect refers to the fact that an increase in the price level will result in
a decrease in exports and an increase in imports.
What is the effect of an increase in the price level on the short-run aggregate supply curve?
a movement up along a stationary curve
Which of the following causes the short-run aggregate supply curve to shift to the left?
an increase in the expected price of an important natural resource
How does the dynamic model of aggregate supply and aggregate demand explain inflation?
by showing that if total spending in the economy grows faster than total production, prices will rise
A movement from point A to point C could be the result of a
change in the expectations of households.
Consider the short-run aggregate supply curves in the graph at right. A movement from point A to point B on SRAS1 could be the result of a
change in the price level.
b. The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in _____, it will cause a _____ the aggregate demand curve.
consumption shift to the left in
b. An increase in what the price level is expected to be in the future will _____ the SRAS curve because this is a change in _____.
decrease (shift leftward) expectations about future prices
d. An unexpected increase in the price of an important raw material will _____ the SRAS curve because this is a change in _____ resource.
decrease (shift leftward) the price of an important natural
An economics student makes the following statement: "It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, thereby decreasing total spending in the economy." This statement is false because the aggregate demand curve is
downward sloping because as prices rise, consumer real wealth declines, interest rates rise, and exports become more expensive.
The aggregate demand curve slopes downward _____, and the demand curve for an individual product slopes downward _____.
due to the wealth effect, the interest-rate effect, and the international-trade effect due to consumers substituting the more expensive product for cheaper goods
"Weak growth overseas" means that
foreign economies are growing more slowly than the U.S. economy.
Edward Leamer of UCLA has argued that "housing is the business cycle." Spending on housing is likely to fluctuate more than spending by households on consumer durables, such as automobiles or furniture, or spending by firms on plant and equipment because
housing is very sensitive to interest rate changes, which are cyclical.
An article in the Economist magazine noted that: "the economy's potential to supply goods and services [is] determined by such things as labour force and capital stock, as well as inflation expectations." Source:"Money's Muddled Message" Economist, May 19, 2009. This list of the determinants of potential GDP is
incorrect since changes in the expected price level affect short run aggregate supply but not the long run aggregate supply.
e. An increase in the labor force will _____ the SRAS curve because this is a change in _____.
increase (shift rightward) the productive capacity of the economy
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be
inflation
Explain whether each of the following will cause a shift of the AD curve or a movement along the AD curve. a. Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in _____, it will cause a _____ the aggregate demand curve.
investment shift to the right in
c. An increase in state income taxes will cause a _____ the aggregate demand curve.
leftward shift of
d. An increase in interest rates will cause a _____ the aggregate demand curve.
leftward shift of
The American Trucking Association anticipates a shortage of trucker drivers in coming years as the number of retirees exceeds the number of new drivers who enter the profession. The number of train boxcars is also expected to fall by over 40 percent in coming years because federal regulations limit boxcars to 50 years of service and many currently in use will reach that limit by 2020. Lumber and paper producers that depend on boxcars for their shipments fear that they will have to depend more on trucks for transportation, which will cost as much as 20 percent more than shipping by rail. Sources: Lindsay Ellis and Laura Stevens, "International Paper Focuses on Improving Shipment Planning, Wall Street Journal, July 30, 2015; and Bob Tita, "Why Railroads Can't Keep Enough Boxcars in Service," Wall Street Journal, June 21, 2015. The reduction in the number of trucks and boxcars will
likely increase transportation costs and shift the short-run aggregate supply curve to the left.
Milton Friedman argued that the Federal Reserve should adopt a ________ to reduce fluctuations in real GDP, employment, and inflation.
monetary growth rule
When the economy returns to long-run equilibrium again
real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.
The end of the housing bubble can bring on a recession because
reduced demand for housing lowers investment, which in turn lowers aggregate demand and income.
An increase in the labor force or capital stock is illustrated as a _____. An increase in the expected price of an important natural resource is indicated by _____. An improvement in technology is shown as a _____. An increase in the expected future price level causes _____.
shift from A to B a shift from B to A shift from A to B a shift from B to A
The SRAS curve will _____ if there is _____.
shift to the left an increase in the expected price of an important natural resource
Consider the following information about menu costs. Menu costs are
the costs to firms of changing prices.
What relationship is shown by the aggregate demand curve? The aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded by households, firms, and the government.
What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between
the price level and the quantity of real GDP supplied by firms.
Sources: U.S. Bureau of Labor Statistics; and U.S. Bureau of Economic Analysis. a. The information in the table is different from what we would expect to have happened in a recession in the past 50 years because
the price level decreased
An article in the Economist discussing the 2007-2009 recession states that "employers found it difficult to reduce the cash value of the wages paid to their staff. (Foisting a pay cut on your entire workforce hardly boosts morale.)" Source: "Careful Now," Economist, April 11, 2015. During a recession, some firms lay off some of their workers, while not cutting the wages of the workers they continue to employ, because the workers they continue to employ
would likely react by becoming less productive if their wages are cut.
