Ch.13 Review:

Which of these factors will cause the aggregate demand curve to shift?

A change in the expectations of households and firms A change in the expectations of households and firms will cause the aggregate demand curve to shift. A household's expectation of an increase or a decrease in income can change their consumption habits and shift aggregate demand. By the same token a business can increase or decrease investment in capital based on expectations about the future which will also cause a shift in aggregate demand. A change in the price level is simply a movement along an existing aggregate demand curve. And, an increase in productivity impacts aggregate supply.

Which of these factors will shift the short-run aggregate supply to the left?

A decrease in the size of the labor force A decrease in the size of the labor force will shift the short-run aggregate supply to the left. When the available labor force shrinks not as many goods and services can be produced so short-run AS shifts to the left. A change in the price level is a movement up or down the existing aggregate supply curve. And, if production costs fall firms will produce more units and aggregate supply will shift to the right.

How can government policies shift the aggregate demand curve to the right?

By increasing government purchases Government policies can shift the aggregate demand curve to the right by increasing government purchases. When the government enters the market and buys more goods and services, it shifts the aggregate demand outward and to the right. Decreasing government purchases would have the opposite effect and shift aggregate demand to the left. Raising personal taxes would also shift the aggregate demand to the left since that lowers the amount of disposable personal income available for consumption.

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.

According to the graph, an increase in government spending, all else equal, will shift the AD curve from the initial AD curve to the curve labeled:

Increased AD

Which of these shifts the aggregate demand curve to the right?

Lower interest rates Lower interest rates will shift the aggregate demand curve to the right. Lower interest rates stimulate investment spending since more projects will now be acceptable. This increase in investment spending increases aggregate demand and shifts it to the right. Falling exports decrease aggregate demand and will shift the AD curve to the left. An increase in exports would shift AD to the right. A fall in the price level is a movement along the existing aggregate demand curve.

Which of these policies affects the economy through intended changes in the money supply?

Monetary policy Monetary policy affects the economy through intended changes in the money supply. Monetary policy includes any action by the Federal Reserve to expand or contract the economy using increases or decreases in the money supply. Fiscal policy deals with the government's ability to affect economic change through taxation and spending. Tax policy is a fiscal policy tool.

Which of these factors will cause the long-run aggregate supply curve to shift to the right?

The accumulation of more machinery and equipment The accumulation of more machinery and equipment will cause the long-run aggregate supply curve to shift to the right. The long-run aggregate supply curve is vertical but can shift outward when technological change occurs, when the economy adds more physical capital, and when the number of workers increases.

Which of these factors contributed to the recession of 2007-2009?

The end of the housing bubble One of the primary factors that contributed to the recession of 2007-2009 was the end of the housing bubble. Falling home prices led to mortgage defaults, which ultimately created the financial crisis that pushed many banks into insolvency. Higher oil prices also led to lower levels of disposable income for consumers. High levels of unemployment and lower output were the end result of the United States recession of 2007-2009. The recession that started in the United States spread to Europe and, ultimately, most other countries.

If firms reduce investment spending and the economy enters a recession, which of these contributes to the adjustment that causes the economy to return to its long-run equilibrium?

The eventual agreement by workers to accept lower wages If firms reduce investment spending and the economy enters a recession, the eventual agreement by workers to accept lower wages contributes to the adjustment that causes the economy to return to its long-run equilibrium. As prices fall, workers will eventually adjust and be willing to accept lower wages because the purchasing power of the dollar has gone up. In addition, the unemployment caused by the recession will make workers willing to accept a lower wage rate. Higher prices and higher wages would make the situation worse and keep the economy below the potential real GDP output.

The aggregate demand curve shows the relationship between:

The price level and the quantity of real GDP demanded The aggregate demand curve shows the relationship between the price level and the quantity of real GDP demanded. The AD curve is constructed by plotting the quantity demanded of real GDP at each and every price level. While interest rate changes can shift AD due to the impact on investment, interest rates are not plotted in this relationship. The AD curve does not have any impact on the quantity of real GDP supplied.

Which of these best represents the impact of a decrease in government spending through the multiplier process?

The shift from c to b, and then to a The shift from c to b, and then to a best represents the impact of a decrease in government spending through the multiplier process. The initial shift from c to b is equal to the decrease in government spending. But, after a brief period of time, total aggregate demand will fall even further as the decrease in government spending in turn decreases worker income that was used for consumption.

An unexpected change in the price of oil would be called __________ by economists.

a supply shock An unexpected change in the price of oil would be called a supply shock by economists. When an unexpected increase or decrease in the price of an important raw material occurs, it is known as a supply shock. The change in the price of an input impacts the supply and not the demand. Stagflation occurs when the economy has simultaneous high inflation and declining economic growth.

According to the graph, in this economy there will be a tendency for:

both wages and prices to rise over time According to the graph, in this economy there will be a tendency for both wages and prices to rise over time. Aggregate demand intersects the short-run aggregate supply curve at an output level that exceeds the potential level of output. In other words, this economy is booming. As firms compete for labor and raw materials, there will be a tendency for both wages and prices to increase over time.

Stagflation is a:

combination of inflation and recession Stagflation is a combination of inflation and recession. Stagflation is caused by a supply shock in a major production input like oil. It is a combination of rising prices and declining output. Stagflation will have a high level of unemployment.

In the short run, a supply shock as a result of an unexpected decrease in oil prices will:

decrease the price level but increase real GDP In the short run, a supply shock as a result of an unexpected decrease in oil prices will decrease the price level but increase real GDP. A decrease in the price of oil will shift the short-run aggregate supply curve to the right and result in a lower price level and an increase in quantity (i.e., real GDP).

A higher domestic price level will result in:

higher imports A higher domestic price level will result in higher imports. A higher price level makes domestic goods more expensive relative to foreign goods. As domestic goods become more expensive, exports will fall and imports will rise, thereby making the trade balance worse.

The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point:

on the long-run aggregate supply curve The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point on the long-run aggregate supply curve. The long-run aggregate supply curve represents the potential real GDP. When the short-run aggregate supply and the aggregate demand curve intersect at a point above or below the level of potential real GDP, the economy will eventually adjust back to that level which is the long-run equilibrium.

Which of the following is a major difference between the​ AD-AS model and the dynamic​ AD-AS model? The dynamic​ AD-AS model assumes

potential GDP increases​ continually, while the​ AD-AS model assumes the LRAS does not change.

The long-run aggregate supply curve:

shifts to the right as technological change occurs The long-run aggregate supply curve shifts to the right as technological change occurs. Other factors that shift the long-run aggregate supply are increases in capital stock or the number of workers. The long-run aggregate supply curve is vertical. The short-run aggregate supply curve is positively sloped.

The aggregate demand and aggregate supply model explains:

short-run fluctuations in real GDP and the price level The aggregate demand and aggregate supply model explains short-run fluctuations in real GDP and the price level. The real GDP and the price level are determined by the intersection of the aggregate demand and aggregate supply curves. Fluctuations in real GDP and the price level are caused by shifts in the aggregate demand curve or the aggregate supply curve. Long-run economic growth and the standard of living are impacted by productivity and modeled using the aggregate production function. Investment spending is impacted by the interest rate and interest rate changes can shift the aggregate demand curve. However, that relationship is not explained by the AD / AS model but is instead an outside factor that can shift AD to create a new equilibrium real GDP and price level.

According to the graph, the situation of this economy after the supply shock can be called:

stagflation According to the graph, the situation of this economy after the supply shock can be called stagflation. Stagflation occurs when the economy has simultaneous high inflation and declining output as shown in this graph. Supply shocks, like a large unexpected increase in the price of oil, can cause stagflation. Economic growth and excess supply would both lead to an increase in output.

The fact that wages and prices may not rapidly adjust to changes in demand or supply is called:

sticky wages and prices. The fact that wages and prices may not rapidly adjust to changes in demand or supply is called sticky wages and prices. Various factors including vendor contracts, union agreements, and menu costs can lead to wages and prices not adjusting rapidly. For example, excess demand may lead a firm to raise product prices while not raising wages due to a recent union bargaining agreement that will last a few more years. Menu costs are the costs to the firm of changing prices and are one of the reasons prices are sticky. A timing problem is not a phrase used in this context.

The 1974-1975 recession was a result of a:

supply shock that caused a leftward shift of the short-run aggregate supply curve The 1974-1975 recession was a result of a supply shock that caused a leftward shift of the short-run aggregate supply curve. OPEC formed and pushed the price of oil significantly higher. This increased production costs for all products and pushed prices higher. This in turn made consumers worse off so they were forced to reduce consumption. The shift was not a long-run shift since the economy was operating well below potential output. The 2007-2009 recession was caused by a housing bubble collapse that caused a leftward shift of the aggregate demand curve.

The 2007-2009 recession was a clear example of the impact:

that a decrease in aggregate demand can have on the economy The 2007-2009 recession was a clear example of the impact that a decrease in aggregate demand can have on the economy. Following the end of the housing bubble, spending on residential construction sharply declined. The collapse of the housing market then led to a financial crisis which caused a credit crunch that led to declines in consumption and business investment. The overall impact was a large decline in aggregate demand that has aftereffects that continue to linger. A positive supply shock would have stimulated growth and shifted the short-run aggregate supply to the right.

In the long-run, the level of output is:

the full-employment level of output In the long-run, the level of output is the full-employment level of output. In the long-run, the level of output is independent of the price level. It does however depend solely on the supply factors or the availability of labor and capital, and on the state of technology. In the long-run, the economy will operate at the full-employment level of output with any deviation lasting only in the short-run.

The wealth effect refers to the fact that:

when the price level falls, the real value of household wealth rises, and so will consumption The wealth effect refers to the fact that when the price level falls, the real value of household wealth rises, and so will consumption. Your wealth remains the same but the value of it rises since the dollar will now purchase more. The increase in consumption due to the increase in the value of your wealth is called the wealth effect. The nominal value of your assets should fall if the price level falls since you could now buy the same asset for less money.