exam 2 practice questions

Looking at the​ table, real average hourly earnings in 2020 were..

$10 ( take nominal / CPI x 100)

If real GDP per capita in the United States is​ $8,000, what will real GDP per capita in the United States be after 5 years at an annual growth rate of​ 3.2%? (formula )

$8000 x ( 1 + 3.2) ^ 5 (GDP per capita x (1 + growth rate) to the power of how many years its asking for )

Suppose your grandfather earned a salary of​ $12,000 in 1964. If the CPI is 31 in 1964 and 219 in​ 2022, then the value of your​ grandfather's salary in 2022 dollars is approximately Part 2

$84,775 ( current CPI / Old CPI x Salary)

Formula for CPI

(Cost of CPI market basket at current period prices ÷ Cost of CPI market basket at base period prices) × 100.

A strong negative relationship has been observed between unemployment and inflation. Use the aggregate expenditure formula (GDP=C+I+G+(X-M)), and the aggregate demand- aggregate supply model (AD-AS) to graphically show this relationship.

(if the government increases it spending, AD curve shifts to right, as AD=C+I+G+XN. When AD shifts right, new equilibrium is E', where price and employment rises. In other words, it means that inflation rises (price rise) and unemployment falls (employment rises). Hence, the negative relation is proved.)

How to find Annual growth rate

(new/old) - 1

You borrow​ $10,000 from a bank for one year at a nominal interest rate of​ 5%. The CPI over that year rises from 180 to 200. What is the real interest rate you are​ paying?

-6.1 (new-old / old x 100) - nominal interest rate)

If national income increases by​ $20 million and consumption increases by​ $5 million, the marginal propensity to consume is

0.25

f disposable income falls by​ $50 billion and consumption falls by​ $40 billion, then the slope of the consumption function is

0.80 (Slope of the consumption function = Change in consumption / change in disposable income = -40 billion / -50 billion = 0.80. )

write out the formula and solve: Suppose an economy has only three goods and the typical family purchases the amounts given in the table. If 2018 is the base​ year, then what is the CPI for​ 2022? 2022 (base year) Total expenditure = 1,040 2018 total expenditure = 500

1,040/500 x 100 (base/current x 100 -if total is not given add the prices together from each column and get total)

calculate growth rate of the average price level between 2021 and 2022 2021: Nominal earnings = 10 ; CPI= 105 2022: nominal earnings = 12 CPI= 110 * might be slightly off, go for closet number

110-105 / 105 x 100 = 4.76 (new - old / old x 100 )

Suppose that the data in the table reflect the price levels in the economy. Given that​ data, we can say that the cost of living rose by​ ________ between 2021 and​ 2022? CPI 2021= 100 CPI 2022 = 113

113 - 100 / 100 x 100 = 13% (the problem we have CPI of two years, CPI for 2021 is 100 and CPI for 2022 is 113. CPI is considered as price in this case. We have to calculate percentage rise in CPI in 2013 which implies rise in cost of living.)

Assume the market basket for the consumer price index has two products—meat and potatoes—with the following values in 2015 and 2022 for price and​ quantity: 2015 (base year): Q of meat = 100 ; P of meat =$10 Q of potatoes = 200 P of potatoes = $2 2022: Q of meat= 120 ; P of meat= $12 Q of Potatoes = 180 ; P of potatoes = 3 The Consumer Price Index for 2022 equals:

129 - market basket of current yr/ market basket of base year x100 (find market basket first :) 1. (120(12) + 180(3) / 120(10) + 180(2) ) (then calculate CPI:) 2. (1980/1560 x 100)

Consumption spending is​ $5 million, planned investment spending is​ $8 million, unplanned investment spending is −​$2 ​million, government purchases are​ $10 million, and net export spending is​ $2 million. What is​ GDP?

23 million. (GDP = Personal Consumption + Gross Investment (includes both the planned and unplanned investment) + Consumption of the Government + Net Exports; add all together; since -2 is being added in that makes it 23 rat5her than 27 )

Consumption spending is​ $5 million, planned investment spending is​ $8 million, unplanned investment spending is​ $2 million, government purchases are​ $10 million, and net export spending is​ $2 million. What is aggregate​ expenditure?

25 million ( remember AE is everything EXCEPT unplanned investments)

Assume the average annual CPI values for 2021 and 2022 were 207.3 and​ 215.3, respectively. What was the percent increase in the CPI between these two​ years?

3.86 (old-new / old x 100)

The CPI in 1990 was​ 131, and the CPI in 2010 was 218. If you earned a salary of​ $40,000 in​ 1990, what would be a salary with equivalent purchasing power in​ 2010?

66,565 (218/131 x 40,000)

Human capital refers to which of the​ following? Part 2 A. the accumulated knowledge and skills workers acquire from education and training or from their life experiences B. manufactured goods that are used to produce other goods and services C. physical equipment that is made by human​ laborers, not machines D. the quantity of goods and services that can be produced by one worker or by one hour of work

A

Which of the following would cause the short run aggregate supply curve to shift to the​ right?

A technological advance. (Short run aggregate supply curve is upward sloping. A technological advance would cause the short-run aggregate supply curve to shift to the right.)

Suppose the economy is at a​ short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential​ GDP? A. Short-run aggregate supply will shift to the right. B. Prices will increase. C. Unemployment will rise. D. Output will decrease.

A.

in a closed​ economy, what is the relationship between saving and​ investment? A.Investment is equal to saving. B.Saving is greater than investment. C.Investment is greater than saving. D.Investment may be greater or smaller than saving.

A.

f government purchases are​ $400 million, taxes are​ $700 million, and transfers are​ $200 million, which of the following is​ true? Part 2 A. Public saving is​ $100 million. B. The budget deficit is​ $500 million. C. The budget deficit is​ $100 million. D. Public saving is​ $500 million.

A. (Public saving= taxes-G-Transfer. 700-400-200 =100

Consider the following data for a closed​ economy: Y​ = $12 trillion C​ = $8 trillion I​= $2 trillion G​ = $2 trillion TR​ = $2 trillion T​ = $3 trillion Based on the information​ above, what is the level of private saving in the​ economy? A.$3 trillion B.$4 trillion C.$5 trillion D.$8 trillion

A. (Y + TR -T -C)

If real GDP in a closed economy is​ $40 billion, consumption is​ $20 billion, and government purchases are​ $10 billion, what is​ investment? ( show formula for investment) A.$10 billion B.$30 billion C.$40 billion D.$70 billion

A. 20 + 10 + investment = 40 (real GDP = Consumption + Gov. purchases + investment. 20 + 10 + 10 = the GDP therefore it has to be 10. )

The formula for aggregate expenditure is

AE​ = C​ + I​ + G​ + NX.

If firms find that consumers are purchasing less than​ expected, which of the following would you​ expect?

Aggregate expenditure will likely be less than GDP. ( if purchasing more, than GDP will be more)

In the long​ run, a country will experience an increasing standard of living only if it experiences

B

In a closed​ economy, which of the following equations reflects​ investment? (Y​ = GDP, C​ = Consumption, G​ = Government​ purchases, T​ = Taxes, and TR​ = Transfers) A. C​ + G −T B. Y − C − G C. Y − T​ + TR D. Y − C − T

B.

Which of the following equations is​ correct? Part 2 A.Real interest rate​ = Nominal interest rate​ + Inflation rate B.Real interest rate​ = Nominal interest rate × Inflation rate C.Real interest rate​ = Nominal interest rate − Inflation rate D.Real interest rate​ = Nominal interest rate ÷ Inflation rate

C

Which of the following is not one of the key services provided by the financial​ system? Question content area bottom Part 1 A.liquidity B.generating information C.decreasing taxes D.risk sharing

C

Which of the following individuals would be most negatively affected by anticipated​ inflation? A. a full−time employee at a pizza parlor who makes more than the minimum wage B.a student who borrows​ $10,000 at a nominal interest rate of​ 5% to finance educational expenses C. a retired railroad engineer who receives a fixed income payment every month D. a union contractor whose pay is adjusted based on changes in the CPI

C (Anticipated inflation implies the rate of inflation that people expect to rise in the next time period. Inflation always destroys the purchasing power. A person with fixed income (not adjusted for inflation) always lose due to inflation as purchasing power of such income decreases due to inflation.)

Financial securities that represent promises to repay a fixed amount of funds are known as A. pension funds. B. stocks. C. bonds. D. insurance premiums.

C.

If aggregate demand just​ increased, which of the following may have caused the​ increase? A. an increase in the price level B. an increase in the interest rate C. an increase in government purchases D. an increase in imports

C.

The cost to firms of changing prices.. A. does not exist if inflation is perfectly anticipated. B. is small even when there is rapid inflation. C.is called a menu cost. D. all of the above.

C.

Which of the following goods would see the largest decline in demand during a​ recession? A. clothing B. food C. automobiles D. haircuts

C. ( automobiles are luxury goods whose income elasticity of demand is greater than one, i.e., elastic. Now, during the recession, the nominal income decreases, which will highly affect the demand for non-necessary goods, especially the luxury goods.)

1.If intermediate goods and services were included in GDP * A. The GDP would then have to be deflated for changes in the price level B. Nominal GDP would exceed real GDP C. The GDP would be overstated because of double counting D. The GDP would be understated 2.When inflation occurs and the income is constant then * A. The purchasing power increases B. The purchasing power stay constant C. The purchasing power decreases D. Inflation does not affect income. The purchase of a new house is included in

C. (GDP includes value of only final goods and services, does not include intermediate goods as it would lead to double counting) C. (Because of inflation more money needs to be spent to purchase the same goods and services hence purchasing power decreases)

Which of the following will decrease aggregate expenditure in the United​ States? A. a decrease in the value of the dollar B. a decrease in interest rates C. a decrease in government purchases D. a decrease in the price level

C. (Government purchases is a part of aggregate expenditure. if there is a decline in government purchases then aggregate expenditure will decrease as well)

The most widely used measure of inflation is based on which of the following price​ indices?

CPI

Which of the following price indices comes closest to measuring the cost of living of the typical​ household?

CPI

​________ are financial securities that represent promises to repay a fixed amount of funds. A. Interest rates B. Mutual funds C. Stocks D. Bonds

D

When aggregate expenditure is more than​ GDP, which of the following is​ true? Part 2 A. Firms spent less on capital goods than they planned. B. There was an unplanned decrease in inventories. C. Households bought fewer new homes than they planned. D. All of the above must be true when aggregate expenditure is more than GDP.

D (Firms will suffer loss due to unfulfillness of demand as they will not reach their target inventories. Households will bought fewer new homes than they planned because there is not excess stock in the market. Consumer will spend less on capital goods than they planned because they will prefer more consumer goods as there will be less production of capital goods.)

During the expansion phase of the business​ cycle, which of the following eventually​ increases? A.employment B. production C. income D. all of the above

D.

Which of the following is one explanation as to why the aggregate demand curve slopes​ downward? Part 2 A. Decreases in the U.S. price level relative to the price level in other countries lower net exports. B. Decreases in the price level raise the interest rate and increase investment spending. C. Decreases in the price level raise the interest rate and increase consumption spending. D. Decreases in the price level raise real wealth and increase consumption spending.

D.

If the growth rate of real GDP rises from​ 3% to​ 4% per​ year, then the number of years required to double real GDP will decrease from Part 2 A. 11.2 years to 10.8 years. B. 23.3 years to 20.6 years. C. 28.0 years to 21.0 years. D. 23.3 years to 17.5 years.

D. (When the rate of growth was 3% then real GDP doubles in 70/3 = 23.3 years. When teh rate of growth becomes 4% then real GDP doubles in 70/4 = 17.5 years. So, the number of years required to double real GDP decreases from 23.3 years to 17.5 years)

how do deficits affect supply

Deficits decrease the supply of loanable funds; surpluses increase the supply of loanable funds.

how to deficits affect demand

Deficits increase the demand for loanable funds; surpluses decrease the demand for loanable funds.

What is real GDP

GDP adjusted for inflation

In the long​ run,

GDP​ = potential GDP.

How do changes in income tax policies affect aggregate​ demand?

Higher taxes reduce disposable​ income, consumption, and aggregate demand.

If aggregate expenditure is greater than​ GDP, how will the economy reach macroeconomic​ equilibrium?

Inventories will​ decline, and GDP and employment will rise.

Relationship between MPC and MPS

MPC + MPS = 1 ( if asks you to find one, just subtract from 1)

how to tell when purchasing power inc/dec

PP is decreases when prices increase. (government regulations, inflation, and natural and manmade disasters.) PP increases when prices decrease. ( deflation and technological innovation.)

what is used to measure price level

Price index (

When production in an economy grows more quickly than the population in that​ economy, which of the following must be​ occurring?

Real GDP capita is rising

what influences purchasing power

Real income, employment levels

public savings formula

T − G − TR (refer government's money left after paying all spending. Or, it equals to revenue (tax revenue) minus government spending)

demand for loanable funds

The demand for loanable funds represents the behavior of borrowers and the quantity of loans demanded. ( The lower the interest rate, the less expensive it is to borrow.)

The economic growth model predicts that

The economic growth model predicts that all poor countries tend to grow rich faster than rich countries. (This is because the rich countries tend to have the diminishing productivity of capital whereas the poor tend to have the increasing productivity. The catch up effect tells that the poor countries tend to grow faster than rich countries.)

You earned​ $30,000 in​ 2015, and your salary rose to​ $80,000 in 2022. If the CPI rose from 82 to 202 between 2015 and​ 2022, which of the following is true​? A. The purchasing power of your salary fell between 2015 and 2022. B. There was deflation between 2015 and 2022. C. The purchasing power of your salary remained constant between 2015 and 2022. D. The purchasing power of your salary increased between 2015 and 2022.

The purchasing power of your salary increased between 2015 and 2022.

If taxes are less than transfers plus government​ spending, then..

There is public dissaving

what does it mean when aggregate expenditure is less than​ GDP

There was an unplanned increase in inventories.

Why does the short run aggregate supply curve shift to the right in the long​ run, following a decrease in aggregate​ demand?

Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices. (Post the shift of the AD curve to the left, the SRAS curve will shift rightwards to remain in long run equilibrium. The prices are revised downwards.)

Why does the short−run aggregate supply curve shift to the left in the long​ run, following an increase in aggregate​ demand?

Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices. (Short run supply curve shift to the left as wages increase so the price as people increase their consumption as wages increase make them to spend more in Long run. So the increase in wages make people to demand more as compare to supply increase so the price increases shift supply curve leftward)

private savings formula

Y​ + TR − C − T. (maximum amount of savings all of the private individuals of a country can save)

Under which of the following circumstances would private saving be positive in a closed economy? A) Y = $10 trillion C = $5 trillionTR = $2 trillionG. = $2 trillion public saving = $1 trillion B) Y = $9 trillion C = $5 trillionTR = $1 trillionG. = $1 trillion public saving = $3 trillion C) Y = $8 trillion C = $2 trillionTR = $4 trillionG. = $2 trillion public saving = $4 trillion D) Y = $6 trillion C = $2 trillionTR = $8 trillionG. = $3 trillion Public saving = $1 trillion

a (Y - C - T + TR, has to be greater than 0)

Countries with high rates of economic growth tend to have

a labor force that is more productive.

Which of the following describes situations in which the person is hurt by​ inflation?

a person paid a fixed income during an inflationary period

The Congressional Budget Office reported that federal budget deficits in the United States were likely to increase during the next​ decade, and due to these higher​ deficits, "the​ nation's capital stock ultimately would be​ smaller, and productivity and income would be lower than would be the case if the debt was​ smaller." This higher budget deficit would be represented graphically by.. (explain)

a shift in the supply curve for loanable funds to the left. (When the federal government runs high budget deficits, it would use up a higher share of the available loanable funds through issuing government securities. This results in a decrease in the supply of loanable funds for private firms and individuals. Such a crunch in the supply of a loanable funds results in lowering of private investment in the economy. This effect is called crowding out effect) (**As the supply of loanable funds decreases in the market, the supply curve shifts to it's left**)

Equilibrium for loanable funds

achieved when the quantities of loans that borrowers want are equal to quantity of savings that savers provide. (The interest rate adjusts to make these equal.)

The​ ________ shows the relationship between the price level and quantity of real GDP demanded.

aggregate demand curve (AD)

Firms in a small economy anticipated that inventories would grow over the past year by​ $750,000, and over that​ year, inventories grew by exactly​ $750,000. This implies that

aggregate expenditure and GDP were equal that year.

Firms in a small economy planned that inventories would grow over the past year by​ $300,000. Over that​ year, inventories actually grew by​ $400,000. This implies that..

aggregate expenditure was equal to GDP. (Whatever the firm thought to sell, it was able to sell off, had it been less, there would have been unplanned inventories, or had it been more, the inventories would run down. In this scenario, there would be no inventory stock by the firm, as whatever was produced, was sold, this is only possible when GDP (income) = aggregate expenditure/demand.)

If firms sell exactly what they expected to​ sell, all of the following will be true except: A. inventories will not​ change, and GDP and employment will remain stable. B. there is no unplanned change in inventories. C. aggregate expenditure will be greater than GDP. D. aggregate expenditure will be equal to GDP.

aggregate expenditure will be greater than GDP.

Which of the following will shift the aggregate demand curve to the​ right, ceteris paribus​? A. an increase in net exports B. a decrease in disposable income C. a decrease in expected profits for firms D. an increase in interest rates

an increase in net exports (Suppose the U.S. GDP growth rate is faster relative to other​ countries' GDP growth rates. U.S. imports will therefore increase faster than U.S.​ exports, and this will shift the aggregate demand curve to the left.)

On the long−run aggregate supply​ curve..

an increase in the price level has no effect on the aggregate quantity of GDP supplied.

what is the demand for loanable funds based on?

borrowing. (The interaction between the supply of savings and the demand for loans determines the real interest rate and how much is loaned out.)

The marginal propensity to save formula

change in saving/change in income

What shifts the supply of loanable funds?

changes in capital inflows, spending and public savings. (The supply of loanable funds is the same as SAVINGS. More savings means supply shifts right. )

what shifts the demand for loanable funds

changes in expectations, changes in technology, changes in the demands for goods and services, changes in relative factor prices, and changes in tax policy. (The interest rate is determined in the market for loanable funds.)

If the price level rose in three consecutive years from 100 to 120 to​ 140, then the annual inflation rate over those years would.. (explain why and solve)

decrease. ​​​​​​In the year 1 the price level was 100. In year 2, price level rose to 120. So, annual inflation rate is [(120-100)/100]*100 = 20% In the year 3, price level was 140. So, the inflation rate in that year is [(140-120)/120]*100 = 16.67%. The annual inflation was initially 20% and in the next year the inflation rate fell to 16.67%. Therefore, the annual inflation rate over those years would decrease.

A recession often begins with​ a(n) ________ in spending by firms on capital goods and​ a(n) ________ in spending on durable goods by households.

decrease; decrease

what is the impact of supply and demand on interest rates?

deficits increase the real interest rate and surpluses decrease the real interest rate.

if technological change increases the profitability of new investments for​ firms, then the​ ________ curve for loanable funds will shift to the​ ________. Why?

demand ; right (We know that higher investments will increase the demand for loanable funds within a market. If new technology is introduced within the market, then the level of investments will rise. This will cause the demand for loanable funds to rise and hence the demand curve will shift to the right.)

what is potential GDP

estimate value produced by the maximum possible employment

If your nominal wage rises more slowly than the price​ level, we can say your real wage has​ ________ and the purchasing power of a dollar has​ ________.

fallen; fallen

finding approximately average growth rate

find growth rate for each year (new/old - 1) add all percentages together and divide by the number of years there are.

Actual real GDP will be above potential GDP if

firms are producing above capacity.

Refer to the diagram. Which of the following is consistent with the​ diagram? (S1 is above D2; shift to the left)

government begins running a budget surplus.

supply for loanable funds

he supply of loanable funds represents the behavior of all of the savers in an economy. (The higher interest rate that a saver can earn, the more likely they are to save money. As such, the supply of loanable funds shows that the quantity of savings available will increase as the interest rate increases.)

A decrease in the real interest rate will.. WHY? ***

increase the amount of investment spending and consumption. (The investment demand slopes downward and to the right because lower real interest rates: enable more investment projects to be undertaken profitably.)

Inflation tends to​ ________ during the expansion phase of the business cycle and​ ________ during the recession phase of the business cycle.

increase; decrease

Policies to promote growth by increasing saving and investment work through

increasing the supply of loanable​ funds, lowering the interest​ rate, raising the level of investment in physical capital.

what increases labor productivity?

inventions of new machinery, equipment, or software

Suppose that an increase in capital per hour worked from​ $15,000 to​ $20,000 increases real GDP per hour worked by​ $500. If capital per hour worked increases further to​ $25,000, by how much would you expect real GDP per hour worked to increase if there are diminishing​ returns? A. by more than​ $500 but less than​ $5,000 B. by less than​ $500 C. by exactly​ $500 D. by more than​ $5,000 but less than​ $20,000

less than $ 500. ( diminising return implies that as we increase our inputs the quantity of our output goes on diminishing.Here the diminising return has already started ,therefore addtional unit of output will only decrease due to increase in additional unit of input.)

When the economy enters a​ recession, your employer is unlikely to reduce your wages because​ ________ during a recession.

lower wages increase your incentive to find employment elsewhere

When aggregate expenditure​ = GDP.. what happens?

macroeconomic equilibrium occurs.

what is capital per hour worked

measure of labor productivity

Workers in high−income countries have​ ________ to work with than do workers in low−income countries.

more physical capital

Disposable income is defined as

national income​ + transfers −taxes.

Refer to the diagram. Which of the following is consistent with the​ diagram? (D1 is above D2; shifted to the left )

new government regulations decrease the profitability of new investments

Knowledge capital is​ ________ in production and​ ________. As a​ result, firms​ ________ free ride on other​ firms' research and development.

nonrival; nonexcludable; can

When the price level rises from 110 to​ 115, the aggregate level of GDP supplied rises from​ $80 billion to​ $120 billion. This​ ________ relationship represents the​ ________ relationship between the quantity of real GDP firms are willing to supply and the price level.

positive, short run (Price and Quantity Supplied both are moving in the same direction which creates positive relationship. It shows a short run relationship as in long run supply is fixed and long run supply curve is vertical.)

Labor productivity will increase if the​ ________ increases and​ ________.

quantity per capita worked; technology improves

Enforcing property rights in an economy will

raise the level of investment.

formula for Real GDP per capita

real GDP/ total population

nominal interest rate formula

real interest rate+inflation

what is private savings in a. closed economy

saving must equal investment. This is a matter of definition. Saving is defined as income less consumption. All output is defined as either being consumer goods or capital goods

Technological change is illustrated in the per−worker production function by what kind of movement

shifts upwards (this implies that the capital per hour worked has become more productive and efficient. (downward means decreasing and inefficient)

The basic aggregate demand and aggregate supply curve model helps explain​ ________ fluctuations in real GDP and the price level.

short−term (In AD amd AS model, fluctuation in price deal gdp occur in short run and long run. Because if there will be any change in AD and AS it will affect the price level and real gdp of an economy in short run but in long run If there will be any change in AD, it will only affect the price level not real gdp.)

Examples of assets that are included in household wealth would be

stocks bonds and savings accounts

what is real GDP capita

takes into account the average GDP per person in the economy.

According to new growth​ theory,

technological change is influenced by economic incentives.

what happened under the Soviet system of​ communism...

technological progress was slow because managers had little incentive to develop new technologies.

If stricter immigration laws are imposed and many foreign workers in the United States are forced to go back to their home​ countries,

the LRAS will shift to the left (it will shift to the left as the workers are forced to move to their home countries which would result in the firms resources.it will observe decline in its AS in the long run.)

Where the aggregate demand curve and the​ short-run aggregate supply curve​ intersect...

the economy is in​ short-run macroeconomic equilibrium.

U.S. net export spending rises when

the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.

The key idea of the aggregate expenditure model is that in any particular​ year, the level of GDP is determined mainly by..

the level of aggregate expenditure.

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a​ result,

the long run aggregate supply curve will shift to the right. (EXPLAINATION: Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result the LRAS curve will shift to the right. As with increase in investment and machinery equipments in developing country supply in long run as well as for short run both will increase though its impact will be more profoundly noticeable in long run.)

The rule of 70 states that

the number of years it takes an economy to double in size is 70 divided by the growth rate.

Ceteris paribus​, in the long​ run, a negative supply shock causes

the price level to rise initially, and then return to its lower level. (Due to supply shock initially Aggregate supply curve will shift leftward causing price level to rise with lower output. But overtime economy will adjust so that supply curve shifts until long-run equilibrium is reached at a lower price level and output is unchanged.)

marginal propensity to consume (MPC)

the proportion of an aggregate raise in pay that a consumer spends on consumption. ( change in consumption / change in income)

Deflation occurs when..

there is a decline in the price level.

Agreggate Supply/Demand

total supply/demand of goods and services produced/consumed within an economy at a given overall price in a given period.

what happened if the aggregate expenditure is more than GDP?

unplanned decrease in inventories

An increase in aggregate demand results in​ a(n) ________ in the​ ________.

​expansion; short run

The increase in quality bias in the consumer price index refers to the idea that price increases in the CPI reflect pure​ inflation, but​ ______ quality increases. This causes the CPI to​ ______ the cost of the market basket.

​not; overstate