Ch 9

if the MPC is 6 and $10million is increased in gov spending, what is the increase in Agg Demand?

$6mil

factors that increase aggregate demand:

- decreases in taxes - increase in government spending - increase in money supply

factors that decrease aggregate demand:

- increase in taxes - decrease in government spending - decrease in the money supply

factors that determine the costs firms must incur to produce output?

- input prices (wages and materials) - the state of technology - taxes, subsidies, or economic regulations

according to real business cycle theory, business cycles are caused by shocks to...

- productivity A - capital stock K - financial markets - taxes on K or L - prices of imported inputs

In one​ year, a​ consumer's income increases by ​$400 and her consumption increases by ​$90. Her marginal propensity to consume is equal to

.225 (c/income)

the sum of the MPS and MPC always is equal to

1

multiplier formula

1 -------------------------- (1 - MPC)

Nearly 1 in __ of labor force participants were unemployed during the Great Dression

1 in 4

the consumption function is comprised of what two parts?

1.) autonomous consumption spending - spending that is constant regardless of income level (a) 2.) MPC - marginal propensity to consume - income that is spent depending on income (b)

as the purchasing power of money changes, the aggregate demand curve is affected in 3 ways:

1.) the wealth effect 2.) the interest rate effect 3.) the international trade effect

multiplier formula

1/MPS

Changes in oil prices and government action against inflation played a role in the recession of

1970s and 1980s

If the MPC is 0.80, the simple multiplier will be equal to....

5

Assume that the US imposes tariffs on steel​ imports, such that the price of steel rises in the US. Steel imports fall​ (as a result of the higher cost of​ imports) more than Investment spending falls​ (as a result of the higher price of capital​ goods). All other things being equal and using the​ AD-AS model from​ class, the most likely of the choices below is A. AD increases and LRAS decreases B. AD decreases and LRAS decreases C. AD increases and LRAS increases D. AD decreases and LRAS decreases

A. AD increases and LRAS decreases

Which of the following is not a component of aggregate​ demand? A. Depreciation. B. State and local government expenditures C. Consumption D. Exports.

A. Depreciation.

Supply shocks are A. external events that shift the aggregate supply curve. B. internal events that shift the aggregate supply curve. C. internal events that cause movements along the aggregate supply curve. D. external events that cause movements along the aggregate supply curve.

A. external events that shift the aggregate supply curve. Supply shocks are external events that shift the aggregate supply curve. Next Question

Under U.S.​ law, it is not legal for firms to export crude oil from domestic wells. Assuming the U.S. has now developed a large oil producing​ industry, removing the export restriction will lead to A. more exports and higher aggregate demand. B. more exports and lower aggregate demand. C. fewer exports and lower aggregate demand. D. fewer exports and higher aggregate demand.

A. more exports and higher aggregate demand. Removing the ban would lead to more exports and higher aggregate demands. Firms that purchase oil for their own productiondash-for ​example, chemical firmsdash-benefit from the export ban because it keeps the price of oil lower in the United States.

The​ short-run aggregate supply curve shows the​ short-run relationship between the A. price level and the willingness of firms to supply output to the economy. B. price level and total demand in the entire economy. C. price level and quantity supplied in one market. D. consumption level and the price level.

A. price level and the willingness of firms to supply output to the economy.

Free Agency and Professional Football Players. In professional​ football, salaries are determined by the league for the first several​ years, but then the athletes have a chance to become free agents and seek employment with other teams. When they are under​ contract, the athletes have A. sticky wages but they become flexible when they become free agents. B. flexible wages but they become sticky when they become free agents. C. no control over any of the terms of the contract. D. more control over their wages because of the contract.

A. sticky wages but they become flexible when they become free agents.

a shock to A, K, or L would simultaneously shift

AS and LRAS and likely also shift LD and AD

aggregate demand

Aggregate demand is the total demand for goods and services in an entire economy. In other​ words, it is the demand for currently produced GDP by​ consumers, firms, the​ government, and the foreign sector.

Consumers in Country A have an MPS of 0.5, while consumers in Country B have an MPS of 0.2. Country __ has the higher value for the multiplier.

B - 1/0.2 =8 vs 1/0.5 = 2

The aggregate demand curve will shift from any of these four​ sources: A. retail​ spending, investment​ spending, government​ purchases, and exports. B. consumption​ spending, investment​ spending, government​ purchases, and net exports. C. consumption​ spending, investment​ spending, international​ purchases, and net imports. D. consumption​ spending, housing​ spending, government​ purchases, and net exports.

B. consumption​ spending, investment​ spending, government​ purchases, and net exports.

All other things being​ equal, and using the​ AD-AS model from​ class, lower taxes on capitalist income tends to A. increase real wages and lower GDP B. increase both real wages and GDP C. decrease both real wages and GDP D. decrease real wages and increase GDP

B. increase both real wages and GDP

Workers often have​ ______ contracts and so their wages are​ _________. A. ​short-term; sticky B. long​ term; sticky C. ​short-term; flexible D. long​ term; flexible

B. long​ term; sticky

Supermarket Prices. In a​ supermarket, prices for tomatoes change​ quickly, but prices for mops tend to not change as rapidly because A. tomatoes are priced by the​ retailer, whereas the price of mops is set by the manufacturer. B. the supply of tomatoes fluctuates frequently whereas the supply of mops does not. Your answer is correct. C. the demand for tomatoes fluctuates frequently whereas the demand for mops does not. D. tomatoes are a food product and mops are not.

B. the supply of tomatoes fluctuates frequently whereas the supply of mops does not. Because the supply of tomatoes changes with weather and​ season, the availability will significantly influence the price.

For most​ firms, the biggest cost of doing business is A. interest cost B. wages C. energy cost. D. the cost of materials.

B. wages

The aggregate demand curve is downward sloping because of the A. wealth​ effect, the investment​ effect, and the international trade effect. B. wealth​ effect, the interest rate​ effect, and the international trade effect. C. wealth​ effect, the interest rate​ effect, and the inflation effect. D. consumption​ effect, the interest rate​ effect, and the international trade effect.

B. wealth​ effect, the interest rate​ effect, and the international trade effect. The aggregate demand curve is downward sloping because of the the wealth​ effect, the interest rate​ effect, and the international trade effect.

If wages are​ sticky, A. the economy will adjust to disruptions more easily because wages and prices do not change. B. ​firms' product prices will be sticky and reduce the​ economy's ability to bring demand and supply into balance in the short run. C. the supply of labor will​ increase, and put downward pressure on prices. D. prices will adjust more quickly and profits will change more easily

B. ​firms' product prices will be sticky and reduce the​ economy's ability to bring demand and supply into balance in the short run. If wages are​ sticky, firms' overall costs will be sticky as well. This means that​ firms' product prices will remain​ sticky, too. Sticky wages cause sticky prices and hamper the​ economy's ability to bring demand and supply into balance in the short run.

Suppose gasoline prices increased sharply and consumers became fearful of owning too many expensive cars. As a​ consequence, they cut back on their purchases of new cars and decided to increase their savings. Assuming a​ short-run aggregate supply​ curve, this behavior shifts the aggregate demand curve to the.. A. ​right, leading to a large increase in output and a small increase in price. B. ​left, leading to a large decrease in output and a small decrease in price. C. ​left, leading to a large increase in output and a small increase in price. D. ​right, leading to a large decrease in output and a small decrease in price.

B. ​left, leading to a large decrease in output and a small decrease in price When consumers became fearful and cut back on their purchases of new​ cars, and instead increased their​ savings, aggregate demand decreased. With a​ short-run aggregate supply​ curve, the decrease in aggregate demand leads to a large decrease in output but a small decrease in price.

the components of aggregate demand:

C, I, G, NE

Assume that the US imposes tariffs on steel​ imports, such that the price of steel rises in the US. Steel imports fall​ (as a result of the higher cost of​ imports) more than Investment spending falls​ (as a result of the higher price of capital​ goods). All other things being equal and using the​ AD-AS model from​ class, the most likely of the choices below is A. Prices increase and GDP falls in the short run B. Prices and GDP both decrease in the short run C. Prices and GDP both increase in the short run D. Prices decrease and GDP rises in the short run

C. Prices and GDP both increase in the short run

All other things being​ equal, lower taxes on capitalist income tends to A. cause AD to shift to the right and AS to disappear entirely B. cause AD to shift to the right and AS to shift up and to the left C. cause AD to shift to the right and AS to shift down and to the right D. cause AD to shift to the left and AS to shift up and to the left

C. cause AD to shift to the right and AS to shift down and to the right

Suppose a foreign​ country, which had allowed the United States to export to it comma suddenly closes had allowed the United States to export to it, suddenly closes its marketits market. In this​ case, aggregate demand will A. increase because exports are indirectly related to shifts in aggregate demand. B. decrease because exports are part of aggregate supply. C. decrease because exports are directly related to shifts in aggregate demand. D. not change since consumption expenditures will fall by an equal amount

C. decrease because exports are directly related to shifts in aggregate demand. Any change in demand from​ households, firms, or the foreign sector will also change aggregate demand. For​ example, if a foreign​ country, which had allowed the United States to export to it comma suddenly closes its marketits market​, U.S. aggregate demand will decrease

In​ 2014, China decided to cut back on its economic growth in order to prevent imbalances from occurring in their economy. With slower economic growth in​ China, there is A. less opportunity for imports from​ China, so aggregate demand in the rest of the world will increase. B. more opportunity for exports to​ China, so aggregate demand in the rest of the world will decline. C. less opportunity for exports to​ China, so aggregate demand in the rest of the world will decline. D. more opportunity for imports to​ China, so aggregate demand in the rest of the world will increase.

C. less opportunity for exports to​ China, so aggregate demand in the rest of the world will decline. With slower economic growth in​ China, there is less opportunity for exports to China so aggregate demand in the rest of the world will decline. Next Question

The Internet Crashes. Suppose that computer hackers managed to crash the Internet in the United States for a week and no one had computer access. This might be considered a negative supply shock because A. fewer people would trust the Internet in the future. B. most people use the Internet. C. less output will be able to be produced at any price. D. there would be more phone use during this time.

C. less output will be able to be produced at any price. Supply shocks are external events that shift the aggregate supply curve. The​ short-run aggregate supply curve shifts left with the supply shock because output falls for every price level. If workers cannot access the​ Internet, this would represent a significant decrease in the ability to produce.

In early 2015 after the decline in oil​ prices, major U.S. oil companies announced that they planned to cut back their investment spending for at least several years. With lower oil​ prices, investments are A. more​ profitable, and it would shift the aggregate demand curve to the right. B. more​ profitable, and it would shift the aggregate demand curve to the left. C. less​ profitable, and it would shift the aggregate demand curve to the left. D. less​ profitable, and it would shift the aggregate demand curve to the right.

C. less​ profitable, and it would shift the aggregate demand curve to the left. With lower oil​ prices, their investments would be less profitable. It would shift the aggregate demand curve to the left.

During​ recessions, state governments often will have to raise taxes and cut spending in order to keep their own budgets balanced. If a large number of states do​ this, at the national​ level, the aggregate demand curve will A. shift to the right since higher taxes will bring in more revenue. B. not shift because the tax increases and spending cuts offset each other. C. shift to the left since both of these actions are contractionary. D. shift in an indeterminate way.

C. shift to the left since both of these actions are contractionary.

Recessions occur because of A. real negative shocks to K B. real negative shocks to technology C. coordination failures in labor markets D. all of these reasons

D. all of these reasons

What are the fundamental factors that determine output in the long-run?

KAL

Aggregate Supply Curve

a curve that shows the relationship between prices and the quantity of output supplied

Aggregate Demand Curve (AD)

a curve that shows the relationship between the level of prices and the quantity of real GDP demanded

stagflation

a decrease in real output with increasing prices

a decrease in taxes

a decrease in taxes will increase aggregate demand and shift the aggregate demand curve to the right

short-run aggregate supply curve

a relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short-run and that firms adjust production to meet demand

Long-run aggregate supply curve

a vertical aggregate supply curve that reflects the idea that in the long run output is determined solely by the factors of production and technology

any other change in demand from households, firms, or the foreign sector will also change

aggregate demand

Vegetables, fruits, and food products are ___________ prices

auction

to determine price and output (GDP) we need to know..

both aggregate demand and aggregate supply

recessions do not all have the same _________ and _________________

causes and characteristics

In the short-run prices are determined by

demand

In the short​ run, when prices are slow to adjust to changes in and​ supply, _____________ determines production.

demand

In the short-run ___________, not prices determine the output level and prices are slow to adjust

demand determines

business cycles

economic fluctuations over time

aggregate demand is a macroeconomic term because it refers to the _________ economy rather than parts of it

entire economy

supply shocks

external events that shift the aggregate supply curve ex: oil prices increased sharply

Both during the Great Depression and the 2007 recession there were massive failures of ________________ ____________________

financial institutions

the short run aggregate supply curve has a relatively ________ slope

flat

in the long run, output (y) is determined solely by the supply of...

human and physical capital and the supply of labor, not the price level

an increase in the supply of money in an economy will

increase the supply of money in the economy increase aggregate demand and shift aggregate demand curve to the right

What did Keynes say was the major problem causing the Great Depression

insufficient demand for goods and services

what happens to the aggregate demand curve if a variable OTHER than price changes?

it will shift to the left or to the right

a decrease in government spending will shift the aggregate demand curve to the

left because the government is purchasing less meaning their is less overall aggregate demand

The ________​-run aggregate supply curve is a __________ aggregate supply curve that reflects the idea that in the ________​run, output is determined solely by the factors of production and technology

long, vertical, long The​ long-run aggregate supply curve is a vertical aggregate supply curve that reflects the idea that in the long​ run, output is determined solely by the factors of production and technology.

MPC

marginal propensity to consume; how much consumption changes with income additional consumption ----------------------- additional income

MPS

marginal propensity to save additional savings --------------------- additional income

in the long run _____________ is independent of the price level

output y

auction prices

prices that adjust nearly on a daily basis ex: fresh fruit, vegetables and other food products (NON-STICKY PRICES)

custom prices

prices that take longer to adjust over time ex: industrial commodities like steel rods, machine tools (STICKY PRICES)

Recessions and excess unemployment occurs when

real GDP falls

Massive failures in economic coordination

recession

adverse supply shocks can cause a

recession

Keynes believed that as government spending increases, the aggregate demand curve shifts to the _______

right

if firms become optimistic about the economic future and increase their investment spending, this will shift the AD curve to the

right

if the Chinese economy rapidly grows and they purchase more from the U.S., this will shift the AD curve to the

right

an increase in government spending will shift the aggregate demand curve to the

right - the government is purchasing more and has demand for more goods

factors that decrease aggregate demand shift the curve to the _____ and price may even remain ___________

shift to the left and prices may even stay constant

The ______ run in macroeconomics is the period in which prices do not change or do not change very much. In the macroeconomic _______ ​run, both formal and informal contracts between firms mean that changes in demand will be reflected primarily in changes in _______​, not ______

short run, short run, output, prices The short run in macroeconomics is the period in which prices do not change or do not change very much. In the macroeconomic short ​ run, both formal and informal contracts between firms mean that changes in demand will be reflected primarily in changes in​ output, not prices.

The​ _____-run aggregate supply curve is a relatively ______aggregate supply curve that represents the idea that prices do not change very much in the ______ run and that firms adjust production to meet demand.

short, flat, short The​ short-run aggregate supply curve is a relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand.

state, government, and union workers have wages that adjust very

slowly

steel rods and machine tools are input prices because they are used in production of other products, this means that their prices (similar to labor) adjust _________

slowly

Because of other economic​ factors, such as​ taxes, the multiplier in the United States is __________ than 2.50.

smaller than; it is 1.5 When we take into account taxes and interest rate effects through financial​ markets, the value of the multiplier for the U.S. economy turns out to be around 1.5.

prices always adjust corresponding to the supply and demand of consumer preferences, however sometimes these adjustments take longer than others -- known as price

stickiness

costs of inputs, wages, and costs to consumers all can be ___________ prices

sticky

if wages are sticky, firm's biggest costs are often wages, and this means the costs of the firm overall are _______

sticky

equilibrium in the goods market

the AD-AD framework can be used to think about the equilibrium determination of aggregate prices and quantities. - framework is favored by Keynesians, who are more convinced about the relative importance of AD shocks,

an increase in taxes will shift the aggregate demand curve to

the left

Aggregate Demand curve depends on

the level of taxes, gov spending, and money supply

short-run in macroeconomics

the period in which prices do not change or do not change very much - borth formal and informal contracts between firms mean that changes in demand will be reflected primarily in changes in output not in prices

multiplier

the ratio of the total shift in aggregate demand to the initial shift in aggregate demand

Aggregate demand

the total demands for goods and services in the total economy - it is the demand for currently produced GDP by consumers, firms, the gov, and the foreign sector - refers to the entire economy

why does the aggregate demand curve slope down?

this shows that the quantity of aggregate demand increases as the price level in the economy falls.

The wages of which of the following groups will not adjust​ quickly? A.defense lawyers in private practice. B. self−employed tax accountants. C. university professors. D. rock stars.

university professors Workers such as the high minus school teachers high−school teachers have their wages determined by contracts.​ Thus, their employers cannot change their wages quickly. But for others in the​ economy, such as the movie stars movie stars​, contractors contractors or the self minus employed tax accountants self−employed tax accountants​, wages are affected by conditions of demand and supply and thus their wages can adjust relatively quickly.

The​ long-run aggregate supply curve is __________ .

vertical

Real-Nominal Principle:

what matters to people is the real value or PURCHASING POWER of their money rather than their face value of their money

International trade effect

when prices are lower in the U.S. they are cheaper relative to other countries, meaning that we will export more to other nations and net exports - a component of aggregate demand - will increase

Wealth effect:

when prices fall, money becomes more powerful (purchasing power) therefore they spend more; conversely, when prices rise the real value of money increases and overall demand falls

economic fluctuations

whenever GDP grows too fast or too slow

Interest rate effect:

with a given supply of money in the economy, lower prices will lead to lower interest rates; with lower interest rates, people borrow more and therefore spend more