Macroeconomics Exam: Chapter 13

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3 variables that shift the aggregate demand curve

1. changes in monetary policy and fiscal policy 2. changes in the expectations of households and firms 3. changes in foreign variables

3 potential explanations for why the SRAS's is upward sloping

1. contracts make some wages and prices sticky 2. firms are often slow to adjust wages 3. menu costs make some prices sticky

5 most important variables that cause the short run curve to shift

1. increases in the labor force and in the capital stock 2. technological change 3. changes in expected future price level 4. adjustments of workers and firms to errors in past expectations about the price level 5. unexpected changes in the price of an important natural resource

basic aggregate demand and aggregate supply models provide misleading results sometimes, however it assumes that

1. price levels were constant (no inflation) 2. there was no long run growth

2 assumptions abut recessions, expansions and supply shocks

1. the economy hasn't been experiencing any inflation. the price level is currently 115, and workers and firms expect it to remain at 115 in the future 2. the economy isn't experiencing any long run growth, potential gdp is $20.0 trillion and will remain at that level in the future

stagflation

A combination of inflation and recession, usually resulting from a supply shock.

According to the dynamic​ AD-AS model, what is the most common cause of​ inflation?

AD increases by more than LRAS. Total spending increases faster than total production.

Suppose that​ initially, the economy is in​ long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the​ economy, the AD curve will shift from ____

AD0 to AD1

Refer to the figure to the right. Ceteris​ paribus, an increase in​ households' expectations of their future income would be represented by a movement from

AD1 to AD2.

Refer to the figure to the right. Ceteris​ paribus, an increase in interest rates would be represented by a movement from

AD2 to AD1.

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short​ run?

Aggregate demand will​ rise, the equilibrium price level will​ rise, and the equilibrium level of GDP will rise.

supply shock

An unexpected event that causes the short-run aggregate supply curve to shift often caused by unexpected increases/ decreases in the prices of important natural resources that cause costs to be different than expected

financial crisis

As many people defaulted on their mortgages, many financial institutions took heavy losses. This financial crisis led to a credit crunch, decreasing consumption and investment spending

How does an increase in the price level affect the quantity of real GDP supplied in the long​ run?

Changes in the price level do not affect the level of GDP in the long run.

Consider the figure to the right. Why does the​ short-run aggregate supply curve​ (SRAS) slope​ upward?

Contracts keep wages​ "sticky". Prices of final goods rise more quickly than the prices of inputs. Firms and workers fail to predict changes in the price level.

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

Decreases in the price level raise real wealth and increase consumption spending.

The end of the housing bubble

House prices rose in the early 2000s—initially due to low interest rates, but then due to speculation. In 2006, the speculative bubble began to deflate, and the spending on residential investment fell.

Changes in Foreign Variables

If firms and households in other countries buy fewer U.S. goods or if firms and households in the United States buy more foreign goods, net exports will fall, and the aggregate demand curve will shift to the left.

Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C. ​(Mark all that​ apply.) A. Lower interest rates B. Decrease in the price level C. Inflation D. Decrease in the U.S. exchange rate relative to other currencies E. Increased consumer optimism F. Lower taxes

Lower interest rates Decrease in the U.S. exchange rate relative to other currencies Increased consumer optimism Lower taxes

contracts make some wages and prices sticky

Prices and wages are said to be "sticky" when they do not respond quickly to changes in demand or supply. Some firms and workers fail to predict price level changes, and hence do not correctly build them into long-term contracts. SRAS - upward sloping

Long-run adjustment will shift the SRAS curve from _____ as workers adjust to​ lower-than-expected prices.

SRAS 0 to SRAS 1

Refer to the figure to the right. Ceteris paribus​, an increase in productivity would be represented by a movement from

SRAS1 to SRAS2.

Refer to the figure to the right. Ceteris paribus​, an increase in the expected future price level would be represented by a change from

SRAS2 to SRAS1.

rapid increase in oil prices during 2008

Several factors combined to increase the price of oil from $34 per barrel in 2004 to $140 per barrel in mid-2008. This supply shock exacerbated the ongoing recession.

4 major alternative models

The Monetarist Model The New Classical Model The real business cycle the Austrian model

How do lower taxes affect aggregate​ demand?

They increase disposable​ income, consumption, and aggregate demand.

Consider the​ downward-sloping aggregate demand​ (AD) curve to the right. Which of the following results in a movement from point A to point B​ (a movement up along the AD​ curve) or from point A to point C​ (a movement down along the AD​ curve)? ​(Mark all that​ apply.) A. Inflation effect B. Multiplier effect C. Wealth effect D. Interest rate effect

Wealth effect Interest rate effect

the interest rate effect

When the price level increases, lenders need to charge higher interest rates to get a REAL return on their loans. Higher interest rates discourage consumer spending and business investment.

An increase in the value of which of the following would not increase household​ wealth? A. a credit card balance B. the equity in​ one's home C. 500 shares of Google stock D. the balance in your savings account

a credit card balance

aggregate demand curve (downward sloping)

a curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government (both inside and outside of the country)

long run aggregate curve

a curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied curves a vertical line

short run aggregate supply curve (upward sloping)

a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms

On the​ long-run aggregate supply​ curve,

a decrease in the price level has no effect on the aggregate quantity of GDP supplied.

Why is the aggregate demand curve downward sloping?

a fall in the price level increases the quantity of real gdp demanded wealth effect interest rate effect the international trade effect

aggregate demand and aggregate supply model

a model that explains short-run fluctuations in real GDP and the price level fluctuations in real GDP and the price level are caused by shifts in the aggregate demand curve / aggregate supply curve

An increase in the expected future price level causes

a shift from B to A

An increase in the expected price of an important natural resource is indicated by

a shift from B to A

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

aggregate demand curve

The Monetarist Model

aka neo quantity theory of money model developed in 1940's by Milton Friedman the idea that the quantity of money should be increased at a constant rate argued that the Keynesian approach overstates the amount of macroeconomic instability in the economy also argued most fluctuations in real output were caused by fluctuations in money supply therefore, the federal reserve should concentrate less on interest rates and more on following a monetary growth rate, a plan for increasing the quantity of money at a fixed rate that doesn't respond to changes in economic conditions

Karl marx's theory of value

all the value of a good or service to the labor embodied in it market system will eventually be replaced by communist economy (workers control production) bc workers would rebel against exploitation by large firms, unable to afford an above subsitence standard of living

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

an increase in net exports

increases in the labor force and in the capital stock

as labor force and the capital stock grow, firms will supply more output at every price level and the SRAS will shift right decrease in labor force: SRAS will shift left

the recession of 2007-2009

began december 2007, ended with economic expansion in november 2001

fiscal policy

changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

4 components of real GDP

consumption investment gov purchases net exports

Austrian Model

created by the austrian school of economics, advanced by ludwig von rises and fredwich von hayes argues for the superiority of the market system over economic planning particularly argued that only the price system could make use of all the dispersed info to achieve efficiency also developed a theory of the business cycle where in central bank induced low interest reared cause the business cycle by prompting over investment

The Wealth Effect: How a Change in the Price Level Affects Consumption

current income: most important variable determining consumption by households, but also depends on household wealth income rises= consumption rises, income falls = consumption falls implication: higher price level leads to lower consumption

Higher personal income taxes

decrease aggregate demand

The New Classical Model

developed in mid 1970's by group of economists the idea that workers and firms have rational expectations (they form their expectations of the future values of economic variables and use all available info) workers develop expectations abt price levels. if these expectations were wrong, then the real wage will be too high or too low, causing firms to reduce or increase employment respectively

real business cycle model

focuses on real, rather than monetary, causes of the business cycle adherents to this model also believe that workers and firms form rational expectations about prices and wages, which adjust quickly to supply and demand main source of fluctuations in real GDP: temporary productivity stocks

firms are often slow to adjust wages

if firms are slow to adjust wages, a rise in the price level will increase the profitability of hiring more workers and producing more output a fall in the price level: will decrease the profitability of hiring more workers and producing more output also, firms are slower to cut wages than to increase them

changes in expected future price level

if workers believe the price level's gonna increase by a certain percent they'l adjust wages and prices accordingly, resulting in a shift to the left so that any level of real GDP's now associated w a price level that _% higher

menu costs make some prices sticky

many firms base their prices partly on what they expect future prices to be and list the prices of their products on their website if they wanna change the price, they have to make new menus or adjust website a small optimal change in price may not be worth the hassle for a firm to perform

A change in the price level causes a ______ the​ short-run aggregate supply​ (SRAS) curve.

movement along

unexpected changes in the price of an important natural resource

oil prices effect a lot of things so when oil prices rise, so do all those things bc firms face rising costs they'll supply the same level of output only if they receive higher prices and curve will shift left expectation of higher price level: shift to left other factors: shift right

Refer to the figure to the right. Ceteris paribus​, an increase in the price level would be represented by a movement from

point A to point B.

technological change

positive technological change = productivity of workers and machinery increases = firms can produce more goods and services, which reduces the firm's cost of production ad allows them to produce more output = SRAS shifts right

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

movement along the AD curve:

price level changes but other variables that affect the willingness of households, firms and the government to spend are unchanged (up or down)

The long run aggregate supply curve shows the relationship between the​ ________ and​ ________.

price​ level; quantity of real GDP supplied

Potential GDP refers to the level of

real GDP in the long run

An improvement in technology is shown as a

shift from A to B

An increase in the labor force or capital stock is illustrated as a _____

shift from A to B

A change in any other factor causes a ______ the SRAS curve.

shift in

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.

adjustments of workers and firms to errors in past expectations about the price level

sometimes incorrect predictions are made about the price level and will attempt to compensate for the errors if workers and firms across the economy are adjusting to the price level being higher than expected, the SRAS curve will shift left if they adjust lower than expected, it'll shift right

Short run agregate supply

tells us the short run relationship between the price level and quantity of goods and services firms are willing to supply, holding constant all other variables that affect the willingness of firms to supply goods and services if price level changes: up or down if any other variable besides price level changes: shift

monetary policy

the actions the Federal Reserve takes to manage the money supply and interest rates to achieve macroeconomic's policy objectives

​Long-run macroeconomic equilibrium occurs when

the aggregate demand and​ short-run aggregate supply curves intersect at a point on the​ long-run aggregate supply curve.

changes in the expectations of households and firms

the aggregate demand curve slopes downward bc a higher price level reduces the real value of household wealth, which decreases consumption raises interest rates, which decreases investment and consumption makes U.S. exports more expensive and foreign imports less expensive, which decreases net exports

menu costs

the costs to firms of changing prices

wealth effect

the effect of the price level on consumption, one of the reasons aggregate demand curve's downward sloping

interest rate effect

the effect of the price level on investment and consumption

international trade effect

the effect of the price level on net exports

main factors that caused the recession

the end of the housing bubble the financial crisis rapid increase in oil prices during 2008

automatic mechanism

the process of adjustment back to potential GDP bc it occurs without any actions by the gov

Aggregate Supply

the quantity of goods and services that firms are willing and able to supply

short-run aggregate supply curve

upward sloping curve bc price level increases, quantity of goods and services firms are willing to supply will increase 2 reasons: as prices of final goods and services rise, prices of inputs- aka the wage of workers or the price of natural resources - rise more slowly some firms are slow to adjust their prices when the price level rises or falls

the international trade effect

when US price levels rise, US exports become more expensive and imports become relatively cheaper fewer exports and more imports = net exports fall

shift along the AD curve:

when any other variable that's not the price level changes (ex. change in gov purchases)

An increase in the price level results in​ a(n) ___________ in the quantity of real GDP demanded because​ ___________.

​decrease; a higher price level reduces​ consumption, investment, and net exports.

The automatic mechanism​ _________ the price level in the case of​ ________ and​ ________ the price level in the case of​ ________.

​lowers; recession;​ raises; expansion

The short run aggregate supply curve has​ a(n) ________ slope because as prices of​ ________ rise, prices of​ ________ rise more slowly.

​positive; final goods and​ services; inputs


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