ECON 214 Ch 12 HW

The following graph shows a decrease in short-run aggregate supply (AS) in a hypothetical economy where the currency is the dollar. Specifically, the short-run aggregate supply curve shifts to the left from AS1AS1 to AS2AS2, causing the quantity of output supplied at a price level of 100 to fall from $200 billion to $150 billion. Change Necessary to Decrease AS: Technology Human capital Inflation expectations

Declines Declines Higher

Change Required to Decrease AD: Expected rate of return on investment Incomes in other countries Wealth Taxes

Decrease Decrease Decrease Increase

The graph below is associated with a hypothetical country. Consider an increase in aggregate demand (AD). Specifically, aggregate demand shifts to the right from AD1AD1 to AD2AD2, causing the quantity of output demanded to rise at each price level. For instance, at a price level of 140, output is now $400 billion, where initially it was $300 billion. Change Required to Increase AD: Interest rates Domestic currency value relative to the foreign currency Consumer expectations about future profitability Government spending

Decrease Depreciate Improve Increase

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 output that households, firms, the government, and foreign customers want to buy at each price level. The vertical axis of the aggregate demand and aggregate supply model measures the overall ____________.

Demand 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 __________ variable, will cause the price level, 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 distinction between real variables and nominal variables is known as the _____________.

Nominal Nominal Real Classical dichotomy

The graph included below approximates United States business cycles between quarter one of 1955 and quarter three of 1959. 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. A period of declining real GDP, such as the blue-shaded period in 1957, is known as ______________. True or False: Small ups and downs in real GDP follow a consistent, predictable pattern. Which of the following probably occurred as the U.S. economy experienced declining real GDP in 1957? Check all that apply.

Recession False Consumer spending declined. The unemployment rate increased.

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. The government allows more immigration of working-age adults who find work. This economy's primary source of foreign oil decides to cease exports for political reasons.

Right Right 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 falls, the purchasing power of households' real wealth will _______, causing the quantity of output demanded to ________. This phenomenon is known as the _______ effect. Additionally, as the price level falls, 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 de

Rise Rise Wealth Fall Rise Fall Rise Rise Exchange

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

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.

The inflation rate The price level