ECO: 2013- Chapter 16 Homework

Place the following items in order of the magnitude of the effect on the aggregate demand curve, starting with the greatest effect and descending to the least. Keep in mind that there will be an item which has zero effect on the AD curve (because it causes movement along the curve).

1. Development of computer-based technologies from the 1940s to now. 2. State governments in the 2010s cut their budgets for teachers, infrastructure, police, and other government expenditures. 3. Prices of tech stocks increase in the late 1990s as a result of a speculative bubble. 4. People notice prices rising and an associated decrease in purchasing power. 5. A trade war with China in the late 2010s leads to a decrease in trade.

Place the three components of aggregate demand in order of relative size, starting with the one representing the largest component of GDP.

1. consumption 2. investment 3. net exports

Since 1970, the highest monthly unemployment rate in the United States was ______; this happened in ______. Following the recession of 1991-1992, GDP growth was generally strong, at one point exceeding 4% for four consecutive ______.

10.8% 1982 quarters

Since the year 1900, the United States has experienced ______ recessions. Since 1970, ______ recessions have occurred.

22 7

Consider the following graph. Assuming that the U.S. economy begins with an aggregate demand curve equal to AD1, click on the aggregate demand curve you would expect to see following a rise in the U.S. price level.

AD1 In the aggregate demand-aggregate supply model, the price level plays a similar role to that of the price in the market for a specific good or service. An increase in the price level in the economy impacts the quantity of aggregate demand, but does not shift the aggregate demand curve.

The U.S. economy's initial aggregate demand curve is AD1. Drag the description of each event to the curve that would result from that event. (It is possible the curve does not shift.)

AD1: -Price level increases -New communication technologies lower the production cost of many services AD2: -Foreign incomes increase -U.S. consumer wealth increases AD3: -The value of the U.S. dollar increases relative to other currencies

Which of these scenarios would cause the U.S. short-run aggregate supply curve to shift to the left?

Correct Answer(s): -A mysterious chronic disease kills off half of the nation's corn crop. -Many workers signed contracts last year assuming 1% future inflation. This year, it was revealed that current inflation is nearly 5%. Incorrect Answer(s): -After the FDA announces a new set of regulations for next year, consumers expect all grocery prices to fall. -Foreign buyers experience a decrease in income. -Most workers signed contracts last year assuming 3% future inflation. This year, it was revealed that current inflation is only 1%.

Which of these are conditions for long-run equilibrium in the aggregate demand-aggregate supply model?

Correct Answer(s): -Long-run aggregate supply equals aggregate demand. -Short-run aggregate supply equals aggregate demand. Incorrect Answer(s): -u < u* -u > u*

Which of these are consequences of an increase in long-run aggregate supply?

Correct Answer(s): -an increase in full-employment output -an increase in short-run aggregate supply Incorrect Answer(s): -a decrease in the long-run rate of unemployment u* -an increase in the price level

Which of the following phenomena help explain why the short-run aggregate supply curve is upward sloping instead of vertical?

Correct Answer(s): -menu costs -money illusion -sticky prices Incorrect Answer(s): -supply shocks -the wealth effect -technological advancements

Recessions in the United States occur with regular, predictable frequency; hence the term "business cycle." T/F?

False Recessions do not occur on a fixed schedule. For one thing, in the United States, recessions have been less common in the past few decades than at any other period in the nation's history.

Assuming the U.S. economy's initial aggregate supply curve is LRAS1, label the other two curves with the event most likely to cause a shift to each curve.

Left of LRAS 1 line: A new law prohibits employers from hiring anyone under the age of 21. Right of LRAS 1 line: Oil prospectors discover a previously unknown large reservoir of oil in California.

Classify each event either as shifting the aggregate demand curve or as causing movement along the curve

Shifts the Aggregate Demand Curve: -State governments cut their budgets for infrastructure maintenance. -Technological advances generate wealth in a broad range of industries. Causes Movement Along the Aggregate Demand Curve: -People notice prices going up and their purchasing power going down as a result. -As inflation drops to nearly zero, people save more and therefore more loanable funds are available.

There are three reasons for the downward slope of the demand curve: the wealth effect, the interest rate effect, and the international trade effect. Match each effect with the component of aggregate demand it most closely impacts.

The International Trade Effect --- Net Export The Wealth Effect --- Consumption The Interest Rate Effect --- Investment

What is the meaning of a leftward shift in the long-run aggregate supply (LRAS) curve? The unemployment rate has not changed, but workers are less productive. The unemployment rate has gone down. The unemployment rate has not changed, but workers are more productive. The unemployment rate has gone up.

The unemployment rate has not changed, but workers are less productive.

With the figure for reference, follow the indicated shifts of the curves to match each shift to the expected consequence on aggregate output (Y), the price level (P), and the unemployment rate (u).

Y (real GDP) decreases, P (price level) ---increasesThe economy experiences a permanent decline in resources. Y (real GDP) falls, P (price level) falls---The income of people in foreign nations falls. u (unemployment rate) falls, P (price level) falls---Input prices fall. Y (real GDP) increases, P (price level) increases---Consumers expect higher future income.

This graph illustrates an economy, initially in long-run equilibrium, which then experiences a decrease in short-run aggregate supply (from SRAS1 to SRAS2). Label the two short-run equilibria (before and after the shift) with the appropriate relation between u, the short-run equilibrium unemployment rate, and u*, the natural long-run rate.

Y1: U > U* Y*: U = U*

The initial temporary lockdown that occurred in March 2020 would be described as a(n) ______ shock, which led to an increase in firms' production costs, causing a(n) ______ in aggregate supply.

exogenous supply decrease

A simple model of a firm describes it as an entity that buys ______ (for example, labor) and sells ______ (goods and services). A firm's input prices, which affect costs, are generally ______ in the short run, while a firm's output prices, which affect revenue, are ______. Therefore, an increase in the short-run price level raises revenue ______ than costs, so firms produce more in the short run. Consequently, the SRAS curve slopes upward.

inputs outputs sticky flexible more

When the U.S. price level increases, Americans increase their demand for German cars, while Germans demand fewer American cars. This is an example of the ______.

international trade effect

Please attach the most appropriate label to the curve in the graph below. Note that the curve is perfectly vertical.

long-run aggregate supply