Econ 2035 CH. 22

This theory views shock to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output

Real business cycle theory

Suppose the U.S. economy is producing at the natural rate of output. A appreciation of the U.S. dollar will cause _____ in real GDP in the short run and _____ in the aggregate price level in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

a decrease; a decrease

Suppose the economy is producing at that natural rate of output. An open market sale of bonds by the Fed will cause _____ in the real GDP in the short run and ______ in the aggregate price level in the short run, everything else held constant.

a decrease; a decrease

Suppose the economy is producing at the natural rate of output. An decrease in the consumer and business confidence will cause _____ in real GDP in the short run and _____ in aggregate price level in the short run, everything held constant.

a decrease; a decrease

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ______ in the unemployment rate in the short run and ______ in the aggregate price level in the short run.

a decrease; a decrease

By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because

a lower price level, holding the nominal quantity of money constant, leads to larger quantity of money in real terms, causes the interest rate to fall, and stimulates planned investment spending

The long-run aggregate supply curve is

a vertical line through the natural rate level of output

Everything else held constant, when output is ______ the natural rate level, wages will begin to ______, decreasing short-run aggregate supply

above; rise

By analyzing aggregate demand via its component parts, we can conclude that changes in the money supply

affect aggregate demand in the same direction as the change in government spending

A theory of aggregate economic fluctuations called real business cycle theory holds that

aggregate supply shocks do affect the natural rate of output

Everything else held constant, which of the following does not cause aggregate demand to increase

an increase in taxes

By analyzing aggregate demand through its component parts, we can conclude that everything else held constant, a decline in the price level causes

an increase in the real money supply, a decline in the interest rates, an increase in investment spending, and an increase in aggregate output demand

Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of deficits. This policy action will cause _____ in the unemployment rate in the short run and ______ in the aggregate price level in the short run, everything else held constant.

an increase; a decrease

Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause _____ in real GDP in the short run and _____ in the aggregate price level in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

an increase; an increase

Suppose the economy is producing at that natural rate of output. An open market purchase of bonds by the Fed will cause _____ in the real GDP in the short run and ______ in the aggregate price level in the short run, everything else held constant.

an increase; an increase

Suppose the economy is producing at the natural rate of output and the government passes legislation that severly restricts a company's ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause _____ in the unemployment rate in the short run and ______ in the aggregate price level in the short run.

an increase; an increase

Suppose the economy is producing at the natural rate of output. An increase in the consumer and business confidence will cause _____ in real GDP in the short run and _____ in aggregate price level in the short run, everything held constant.

an increase; an increase

Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ______ in aggregate ______ is a rise in both the price level and output in the short-run, but in the long-run the only effect is a rise in the price level

an increase; demand

The aggregate demand curve slopes downward because a decrease in the price level means _____ in the real money supply and therefore a _____ level of real spending.

an increase; higher

Everything else held constant, when output is ______ the natural rate level, wages begin to ______, increasing short-run aggregate supply

below; fall

One way to derive aggregate demand is by looking at its four component part, which are;

consumer expenditures, planned investment spending, government spending, and net exports

Everything else held constant, an increase in net taxes ______ aggregate ______

deceases; demand

According to the quantity theory of money, and decrease in the money supply ______ aggregate _____, everything else held constant.

decreases; demand

Everything else held constant, a decrease in government spending ______ aggregate ______

decreases; demand

Everything else held constant, a decrease in planned investment expenditure ______ aggregate ______

decreases; demand

Everything held constant, a decrease in net exports ______ aggregate ______

decreases; demand

Everything else held constant, an increase in the cost of production ______ aggregate ______

decreases; supply

According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and 1978-1980 had the effect of

decreasing aggregate output, raising unemployment, and raising the price level

A group of economists believe that the natural rate of output is affected by aggregate _____ shocks. They contend that the natural rate level of unemployment and output are subject to _____, a departure from full employment levels as a result of past high unemployment.

demand; hystersis

The aggregate demand curve is the total quantity of an economy's

final goods and services demanded at different price levels

The aggregate supply curve is the total quantity of

final goods and services offered for sale at different price levels

The short-run aggregate supply curve is upward sloping because in the short run, costs of many factors that go into producing goods and services are ______, meaning that the price for a unit of output will ______ relative to input prices and the profit per unit will rise.

fixed; rise

A reduction of aggregate demand may raise the natural rate of unemployment above the full employment level, meaning that the self-correcting mechanism will only be able to return the economy to the natural rate level of ouput and unemployment not to the full employment levels. Such a view is consistent with

hysterisis

Everything else held constant, a balanced budget increase in government spending (that is, an increase in government spending that is matched by an identical increase in net taxes) will

increase aggregate demand, but not by as much as if just government spending increases

According to aggregate demand and supply analysis, the rising oil prices coupled with the subprime financial crisis in 2007-2008 caused the unemployment rate to _____ and the level of real aggregate output to _____

increase; decrease

According to the quantity theory of money, and increase in the money supply ______ aggregate _____, everything else held constant.

increases; demand

Everything else held constant, a decrease in net taxes ______ aggregate ______

increases; demand

Everything held constant, an increase in government spending _____ aggregate ______

increases; demand

Everything held constant, an increase in net exports ______ aggregate ______

increases; demand

Everything held constant, an increase in planned investment expenditure ______ aggregate ______

increases; demand

Everything else held constant, a decrease in the cost production ______ aggregate ______

increases; supply

According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999 had the effect of

increasing aggregate output, lowering unemployment, and lowering inflation

According to aggregate demand and supply analysis, America's involvement in the Vietnam War had the effect of

increasing aggregate output, lowering unemployment, and raise the price level

The positively sloped short-run aggregate supply curve reflects the assumption that factor prices are

less flexible that output prices

By looking at aggregate demand through its component parts, we can conclude that a ______ price level _____ the real quantity of money, ______ higher spending.

lower; expands; encouraging

The long-run rate of unemployment to which an economy always gravitates is the

natural rate of unemployment

A decrease in the availability of raw materials that increases the price level is called a ______ shock

negative supply

Suppose the economy is producing at that natural rate of output. An open market sale of bonds by the Fed will cause _____ in the real GDP in the long run and ______ in the aggregate price level in the long run, everything else held constant.

no change; a decease

Suppose the U.S. economy is producing at the natural rate of output. A appreciation of the U.S. dollar will cause _____ in real GDP and _____ in the aggregate price level in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

no change; a decrease

Suppose the economy is producing at the natural rate of output. An decrease in the consumer and business confidence will cause _____ in real GDP in the long run and _____ in aggregate price level in the long run, everything held constant.

no change; a decrease

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ______ in the unemployment rate in the long run and ______ in the aggregate price level in the short run.

no change; a decrease

Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause _____ in real GDP in the long run and _____ in the aggregate price level in the long run, everything else constant.

no change; an increase

Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause _____ in real GDP and _____ in the aggregate price level in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

no change; an increase

Suppose the economy is producing at that natural rate of output. An open market purchase of bonds by the Fed will cause _____ in the real GDP in the long run and ______ in the aggregate price level in the long run, everything else held constant.

no change; an increase

Suppose the economy is producing at the natural rate of output. An increase in the consumer and business confidence will cause _____ in real GDP in the long run and _____ in aggregate price level in the long run, everything held constant.

no change; an increase

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ______ in the unemployment rate and ______ in the aggregate price level in the long run.

no change; no change

Everything else held constant, aggregate demand increases when

planned investment spending increases

Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations, they do not see much need for activist policy to eliminate high unemployment. "They refers to proponents of

real business cycle theory

The aggregate demand-supply framework indicates that the long-run effect of a ______ in the money supply is an increase in ______, everything else held constant

rise; the price level

If workers demand and receive higher real wages (a successful wage push), the cost of production ______ and the short-run aggregate supply curve shifts ______.

rises; leftward

Everything else held constant, a change in the workers' expectations about the aggregate price level will cause ______ to change.

short-run aggregate supply

A negative supply shock causes ______ to ______

short-run aggregate supply, decrease

A positive supply shock causes ______ to ______

short-run aggregate supply, increase

Everything else held constant, if workers expect an increase in the price level, ______ aggregate supply ______.

short-run; decreases

Everything else held constant, when actual output exceeds the natural rate of output ______ aggregate supply ______

short-run; decreases

Everything else held constant, aggregate demand increases when

taxes are cut

The total quantity of an economy's final goods and services demanded at different price levels is

the aggregate demand curve

As approached through the quantity theory of money, aggregate demand is derived from

the equation of exchange

The quantity theory of money is dervied from

the equation of exchange

The long-run aggregate supply curve is a vertical line passing through

the natural rate of output

The aggregate supply curve shows the relationship between

the price level and the level of aggregate output supplied

The fact that an economy always returns to the natural rate level of output is known as

the self-correcting mechanism

Which of the following increases aggregate supply to in the short-run, everything else held constant?

A technological improvement that increases worker productivity