Macroeconomics Ch. 12 and 13

the economy's short-run AS curve is line ___, and its long-run AS curve is line ___.

2; 1

In the accompanying graph, which line might represent an immediate-short-run aggregate supply curve?

3 (horizontal)

True or False: If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.

False

True or False: In the real world, decreases in AD normally lead to decreases in both output and the price level.

False

Which of the following explains why the aggregate demand curve slopes downward?

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

Which of the following help to explain why the aggregate demand curve slopes downward?

When the domestic price level rises, our goods and services become more expensive to foreigners; When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines

Which one of the following would not shift the aggregate demand curve?

a change in the price level

If the dollar depreciates in value relative to foreign currencies, then aggregate

demand increases.

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the

determinants of aggregate demand.

A movement upward along a given aggregate demand curve is equivalent to a(n)

downward shift in the aggregate expenditures schedule.

An increase in productivity will

increase aggregate supply.

Other things equal, a reduction in personal and business taxes can be expected to

increase both aggregate demand and aggregate supply.

If the price level decreases, then the aggregate expenditures schedule will shift. This translates into a

movement down along the aggregate demand curve

The real-balance effect pertains to the effect of

price changes on aggregate demand, while the wealth effect refers to the impact of changes in wealth on aggregate demand

The short-run version of aggregate supply assumes that

product prices are flexible, while resource prices are fixed

The labels for the axes of an aggregate supply curve should be

real domestic output for the horizontal axis and price level for the vertical axis

The labels for the axes of the aggregate demand graph should be

real domestic output on the horizontal axis and the price level on the vertical axis.

Which would most likely shift the aggregate supply curve? A change in the prices of

resources

According to the "wealth effect," a change in consumer wealth causes a

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

Other things equal, an improvement in productivity will

shift the aggregate supply curve to the right

The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because 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 fall in labor costs will cause aggregate

supply to increase.

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

immediate-short-run aggregate supply curve

the price level is fixed; a horizontal line

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because

there are large amounts of unused capacity and idle human resources

The shape of the short-run aggregate supply curve is

upsloping, because wages adjust more slowly than the price level, increasing profits and output

In the diagram, the economy's long-run aggregate supply curve is shown by line

vertical

long-run aggregate supply curve

vertical line; output is fixed

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

The foreign purchases, interest rate, and real-balances effects explain why the

aggregate demand curve is downward sloping.

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)?

an appreciation of the U.S. dollar

Which of the following would not shift the aggregate supply curve?

an increase in the price level

The multiplier

causes an initial change in spending to generate an even larger change in the aggregate demand curve {1/(1-MPC) or 1/MPS}

An increase in the price level, other things equal, will shift the

consumption, investment, and net exports schedules of the aggregate expenditures model downward.

According to the "real-balances effect," if prices

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

An expected increase in the prices of consumer goods in the near future will

increase (or shift right) in aggregate demand now.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will

increase U.S. imports and decrease U.S. exports.

An increase in the aggregate expenditures schedule

increases aggregate demand by the amount of the initial increase in aggregate expenditures times the multiplier

Which of the following will shift the aggregate demand curve to the left?

Interest rates rise; The government raises corporate profit taxes

In the accompanying graph, which line might represent an aggregate demand curve?

4 (negative)

In the diagram, the economy's relevant aggregate demand and long-run aggregate supply curves, are lines

4 and 1, respectively

Suppose that an economy produces 2,400 units of output, employing 60 units of input, and the price of the input is $30 per unit. The level of productivity in this economy is

40

Government Spending Consumer Expectations Degree of Excess Capacity Personal Income Tax Rates Productivity National Income Abroad Business Taxes Domestic Resource Availability Prices of Imported Products Profit Expectations on Investments Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. A change in which factor is most likely to change both aggregate demand and aggregate supply?

Business Taxes

Which of the following will shift the aggregate supply curve to the right?

Business taxes fall; A new networking technology increases productivity all over the economy

Real-Balances Effect Household Expectations Interest-Rate Effect Personal Income Tax Rates Profit Expectations National Incomes Abroad Government Spending Foreign Purchases Effect Exchange Rates Degree of Excess Capacity Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. Changes in which two of the factors would most likely cause a shift in aggregate demand due to a change in consumer spending?

Household Expectations; Personal Income Tax Rates

Which of the following will not tend to happen if the U.S. dollar depreciates against the euro?

Many Europeans will switch and buy their own products instead of imports from the U.S.

Which of the following statements is true concerning the real-balances effect and the wealth effect?

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

The relationship between the aggregate demand curve and the aggregate expenditures model is derived from the fact that

a decrease in the price level shifts the aggregate expenditures schedule upward and increases equilibrium GDP.

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? a. A widespread fear by consumers of an impending economic depression. b. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output. c. A reduction in interest rates at each price level. d. A major increase in spending for health care by the federal government. e. The general expectation of coming rapid inflation. f. The complete disintegration of OPEC, causing oil prices to fall by one-half. g. A 10 percent across-the-board reduction in personal income tax rates. h. A sizable increase in labor productivity (with no change in nominal wages). i. A 12 percent increase in nominal wages (with no change in productivity). j. An increase in exports that exceeds an increase in imports (not due to tariffs).

a. Aggregate demand will decrease b. Aggregate supply will decrease c. Aggregate demand will increase d. Aggregate demand will increase e. Aggregate demand will increase f. Aggregate supply will increase g. Aggregate demand will increase h. Aggregate supply will increase i. Aggregate supply will decrease j. Aggregate demand will increase

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? a. An increase in aggregate demand. b. A decrease in aggregate supply, with no change in aggregate demand. c. Equal increases in aggregate demand and aggregate supply. d. A decrease in aggregate demand. e. An increase in aggregate demand that exceeds an increase in aggregate supply.

a. The price level rises rapidly and there is little change in real output. b. The price level rises and real output decreases c. The price level does not change, but real output increases d. The price level does not change, but real output declines. e. The price level increases somewhat, with a relatively large change in output

The aggregate supply curve (short run)

is steeper above the full-employment output than below it.

A decline in investment will shift the AD curve to the

left by a multiple of the change in investment.

short-run aggregate supply curve

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