Econ 201 - Chapter 12

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Government spending increases. demand decreases demand increases supply decreases supply increases

demand increases

The Interest Rate Effect (why AD is downward sloping)

lower prices also boost consumers' ability to save, lowering interest rates and boosting Investment

Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of: - the AS curve shifting right. - the AS curve shifting left. - the AD curve shifting left. - the AD curve shifting right.

the AD curve shifting left. We know that when an AD curve shifts leftwards it causes both the price level and real GDP to decline, and another way around keeping other variables constant. However, when an AS curve shifts leftwards, it causes the price level to rise and real GDP to decline, and vice versa keeping other variables constant. Thus, the only change that can cause a decline in price and real GDP level is a leftward shift in the AD curve.

The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because - a downsloping aggregate demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed. - a downsloping, single-product demand curve assumes constant prices such that changes in income cause a substitution of a now relatively cheaper product for those whose prices have not changed. - a downsloping aggregate demand curve assumes constant prices such that changes in income cause a substitution of a now relatively cheaper product for those whose prices have not changed. - a downsloping, single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed.

- a downsloping, single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed.

Short-run aggregate supply curves reflect an inverse relationship between the price level and the level of real output. true or false?

false

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? An increase in exports that exceeds an increase in imports (not due to tariffs)

aggregate demand will increase

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A stock market crash reduces people's wealth. demand decreases demand increases supply decreases supply increases

demand decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Consumers become more pessimistic about the economy demand decreases demand increases supply decreases supply increases

demand decreases

The short run as it relates to macroeconomics is a period in which wages - increase. - respond to price-level changes. - do not respond to price-level changes. - decrease.

do not respond to price-level changes.

Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be _____. - higher than it is now - lower than it is now - the same as it is now

higher than it is now

long run

output prices are flexible vertical line (due to the economy always returning to the full-employment output level in the long run)

The distinction between the short run and the long run is important in macroeconomics because of the differences in - exchange rates. - GDP. - policy responses. - the price level.

policy responses.

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. The United States enters into an arms race with China, resulting in a significant increase in military spending. demand decreases demand increases supply decreases supply increases

demand increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Employers are required to provide paid sick leave to part-time as well as full-time employees. demand decreases demand increases supply decreases supply increases

supply decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A new computer chip is developed that is faster and cheaper than previous chips. demand decreases demand increases supply decreases supply increases

supply increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Manufacturing firms expect steel prices to decrease significantly. demand decreases demand increases supply decreases supply increases

supply increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Technological changes enable workers to be more productive. demand decreases demand increases supply decreases supply increases

supply increases

The downsloping aggregate demand curve can be explained by the investment effect, the real-purchases effect, and the foreign purchases effect. the interest-rate effect, the real-balances effect, and the foreign purchases effect. the investment effect, the real-balances effect, and the international effect. the interest-rate effect, the real-purchases effect, and the foreign purchases effect.

the interest-rate effect, the real-balances effect, and the foreign purchases effect.

Assume that the price level is flexible upward but not downward. Assume that the economy is currently operating at its full-employment output. Other things equal, how will it affect the equilibrium price level and equilibrium level of real output in the short run? A decrease in aggregate demand The price level rises rapidly, and there is little change in real output. The price level rises and real output decreases. The price level does not change, but real output declines. The price level increases somewhat, with a relatively large change in output. The price level does not change, but real output increases.

The price level does not change, but real output declines.

Assume that the price level is flexible upward but not downward. Assume that the economy is currently operating at its full-employment output. Other things equal, how will it affect the equilibrium price level and equilibrium level of real output in the short run? Equal increases in aggregate demand and aggregate supply The price level rises rapidly, and there is little change in real output. The price level rises and real output decreases. The price level does not change, but real output declines. The price level increases somewhat, with a relatively large change in output. The price level does not change, but real output increases.

The price level does not change, but real output increases.

Assume that the price level is flexible upward but not downward. Assume that the economy is currently operating at its full-employment output. Other things equal, how will it affect the equilibrium price level and equilibrium level of real output in the short run? An increase in aggregate demand that exceeds an increase in aggregate supply The price level rises rapidly, and there is little change in real output. The price level rises and real output decreases. The price level does not change, but real output declines. The price level increases somewhat, with a relatively large change in output. The price level does not change, but real output increases.

The price level increases somewhat, with a relatively large change in output.

Assume that the price level is flexible upward but not downward. Assume that the economy is currently operating at its full-employment output. Other things equal, how will it affect the equilibrium price level and equilibrium level of real output in the short run? A decrease in aggregate supply, with no change in aggregate demand The price level rises rapidly, and there is little change in real output. The price level rises and real output decreases. The price level does not change, but real output declines. The price level increases somewhat, with a relatively large change in output. The price level does not change, but real output increases.

The price level rises and real output decreases.

Assume that the price level is flexible upward but not downward. Assume that the economy is currently operating at its full-employment output. Other things equal, how will it affect the equilibrium price level and equilibrium level of real output in the short run? An increase in aggregate demand The price level rises rapidly, and there is little change in real output. The price level does not change, but real output increases. The price level does not change, but real output declines. The price level increases somewhat, with a relatively large change in output. The price level rises and real output decreases.

The price level rises rapidly, and there is little change in real output.

Which of the following statements is true concerning the real-balances effect and the wealth effect? - The real-balances effect and the wealth effect cause shifts of the aggregate demand curve. - The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve. - The real-balances effect and the wealth effect explain the shape of the aggregate demand curve. - The real-balances effect causes shifts of the aggregate demand curve, whereas the wealth effect explains the shape of the aggregate demand curve.

The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve.

According to the "wealth effect," a change in consumer wealth causes - a shift in consumer spending and a shift of the aggregate demand curve. - a change in the price level and a shift of the aggregate demand curve. - a shift in consumer spending and a movement along the aggregate demand curve. - a change in the price level and a movement along the aggregate demand curve.

a shift in consumer spending and a shift of the aggregate demand curve.

A strong negative wealth effect from, say, a precipitous drop in house prices could cause a recession even though productivity is surging if - aggregate demand and aggregate supply both shift left. - aggregate demand and aggregate supply both shift right. - aggregate demand shifts left while aggregate supply shifts right. - aggregate demand shifts right while aggregate supply shifts left.

aggregate demand shifts left while aggregate supply shifts right.

The long-run aggregate supply curve assumes that nominal wages are fixed. true or false?

false

The Exchange Rate Effect (why AD is downward sloping)

lower prices lead to a fall in the value of the currency, boosting exports.

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A hurricane destroys manufacturing plants. demand decreases demand increases supply decreases supply increases

supply decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A revolution in Iran results in a significant reduction in the world's supply of oil. demand decreases demand increases supply decreases supply increases

supply decreases

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A 10 percent across-the-board reduction in personal income tax rates

Aggregate demand will increase.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A major increase in spending for health care by the federal government

Aggregate demand will increase.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? The general expectation of coming rapid inflation

Aggregate demand will increase.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output

Aggregate supply will decrease.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A sizable increase in labor productivity (with no change in nominal wages)

Aggregate supply will increase.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? The complete disintegration of the Organization of the Petroleum Exporting Countries (OPEC), causing oil prices to fall by one-half

Aggregate supply will increase.

Real GDP is below the full-employment level and prices have risen recently. - Demand-pull inflation - Cost-push inflation

cost-push inflation

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A reduction in interest rates

Aggregate demand will increase.

In the long run, an increase in the price level will result in an increase in nominal wages. true or false?

true

short run

upsloping curve output prices are flexible, but input prices are fixed

According to the "real-balances effect," if prices - decline, the purchasing power of assets will decrease, so spending at each income level should rise. - increase, the purchasing power of assets will decrease, so spending at each income level should rise. - increase, the purchasing power of assets will rise, so spending at each income level should rise. - decline, the purchasing power of assets will rise, so spending at each income level should rise.

- decline, the purchasing power of assets will rise, so spending at each income level should rise.

The long-run aggregate supply curve is vertical because the economy's potential output is determined by - the availability and productivity of real resources, not by the price level. - changes in wages, and these are unchanged in the long run. - changes in prices and output that occur in the long run. - the availability and productivity of real resources, not by the output level.

- the availability and productivity of real resources, not by the price level.

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because - resources are difficult to bring into production. - there are large amounts of unused capacity and idle human resources. - there are shortages of labor. - there are shortages of capital.

- there are large amounts of unused capacity and idle human resources.

Immediate short run

A horizontal line. The price level is fixed. input and output prices are fixed

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A widespread fear by consumers of an impending economic depression

Aggregate demand will decrease.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A 12 percent increase in nominal wages (with no change in productivity)

aggregate supply will decrease

The multiplier - causes an initial change in spending to generate an even larger change in the aggregate demand curve. - reduces the impact of spending changes on the aggregate demand curve. - equalizes the change in spending and the change in aggregate demand. - causes an initial change in spending to generate an equal change in saving.

causes an initial change in spending to generate an even larger change in the aggregate demand curve.

the wealth effect (why AD is downward sloping)

lower prices boost consumers' purchasing power, raising Consumption expenditures.

Which of the following will shift the aggregate demand curve to the left? - Interest rates rise. - The government raises corporate profit taxes. - There is an economic boom overseas that raises the incomes of foreign households. - The government reduces personal income taxes.

- An increase in interest rates will cause aggregate demand to shift to the left by raising borrowing costs and thereby reducing both investment spending and aggregate demand. - - An increase in corporate profit taxes causes aggregate demand to shift to the left by reducing firms' after-tax profits. This will cause firms to invest less, thereby reducing aggregate demand.

The shape of the short-run aggregate supply curve is - upsloping, because wages adjust more slowly than the price level. - vertical, because wages adjust at the same rate as the price level. - upsloping, because wages adjust more rapidly than the price level. - horizontal, because wages adjust at the same rate as the price level.

- upsloping, because wages adjust more slowly than the price level.

Which of the following help to explain why the aggregate demand curve slopes downward? - There is an inverse relationship between consumer expectations and personal taxes. - When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines. - When government spending rises, the price level falls. - When the domestic price level rises, our goods and services become more expensive to people living abroad.

- when the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines. - When the domestic price level rises, our goods and services become more expensive to people living abroad.

Why does the Aggregate Demand Curve slope downwards?

The Wealth Effect The Interest Rate Effect The Exchange Rate Effect: lower prices lead to a fall in the value of the currency, boosting exports.

The U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s can be explained by - a leftward shift of aggregate demand and a leftward shift of aggregate supply. - a rightward shift of aggregate demand and a leftward shift of aggregate supply. - a leftward shift of aggregate demand and a rightward shift of aggregate supply. - a rightward shift of aggregate demand and a rightward shift of aggregate supply.

a rightward shift of aggregate demand and a rightward shift of aggregate supply.

At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is: - above equilibrium. - equilibrium. - below equilibrium. - more information is needed.

above equilibrium

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. The spread of democracy around the world increases consumer confidence in the United States. demand decreases demand increases supply decreases supply increases

demand increases

Real GDP is above the full-employment level and prices have risen recently. - Cost-push inflation - Demand-pull inflation

demand-pull inflation