Chapter 11&12

In an economy in which the multiplier has the value of 4​, the price level has decreased from 115 to 110. As a​ consequence, there has been a movement along the aggregate demand curve from ​$30 trillion in real GDP to ​$36 trillion in real GDP. What is the marginal propensity to​ save?

.25

What was the amount of change in the autonomous expenditures generated by the decline in the price​ level?

1.50 trillion

If the MPC​ = 0.9, the multiplier equals

10

Now assume that autonomous real consumption spending is​ $1 trillion. There is no other autonomous spending presently taking place in the economy. The current real GDP is ​$20 trillion. What is the current amount of real consumption in the​ economy?

16 C= autonomous consumption+ (MPC X Y) MPC= 1-MPS Y= real GDP

Suppose that an economy is in equilibrium at a real GDP of ​$15 trillion at a price level of 100. An increase in autonomous expenditures of ​$0.20 trillion takes place. The current multiplier is 10. If the​ short-run aggregate supply curve is​ horizontal, the new equilibrium value of real GDP will be

17 trillion

The Keynesian Model was supported empirically by data from the decade of the

1930

Suppose that an economy is in equilibrium at a real GDP of ​$15 trillion at a price level of 100. The​ short-run aggregate supply curve is​ upward-sloping and there is an increase in autonomous expenditures of ​$0.20 trillion. This increase in expenditures enabled the real GDP to increase to ​$15.50 trillion. The change in the price level has changed the multiplier to

2.5

If the MPC​ = 0.8, a permanent increase in planned real investment of​ $40 billion will increase real GDP by a total of

200 billion

Given that the MPS in an economy is equal to .25, the multiplier is equal to

4

Equilibrium real GDP can be found by locating the intersection of the total planned real expenditures curve with the _________ reference line. At that level of real GDP per​ year, planned real consumption plus planned real investment plus real government expenditure plus real net exports will equal real GDP.

45 degree

multiplier formula

= 1/ 1-MPC = 1/ MPS

Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short​ run?

A recessionary gap is created.

investment function

AD= C+I+G+X

some relationships

APC+APS= 1 MPC+MPS= 1

EX: income= 54000 C= 49,200 S=4800

APC= 49200/54000

Suppose that an economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. if the US dollar depreciates, which of the following is the best description of the outcome in the​ economy?

Aggregate demand decreases.

An economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. Suppose that the US dollar depreciates ​, which of the following is the best explanation of the​ outcome?

Aggregate demand increases.

Which of the following is the best example of uncounted​ production?

An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine parts.

Which of the following would create​ demand-pull inflation?

An increase in household income.

Which of the following is true concerning shifts of the​ long-run aggregate supply​ curve?

An increase in the​ long-run aggregate supply curve is depicted as a rightward shift and an increase in real GDP.

Which of the following would create​ cost-push inflation?

An increase in wages paid to workers.

Which of the following will occur when aggregate supply remains stable but aggregate demand increases in the short​ run?

An inflationary gap is created.

Which of the following statements best characterizes​ demand-pull and​ cost-push inflation?

Both are short run types of inflation.

Suppose, there are new discoveries of key raw materials. Which of the following best describes the result of this​ event?

Both the​ short-run and​ long-run aggregate supply curves shift outward.

foreign sector

C+I+G+X net exports X equals exports minus imports depends on international economic conditions independent of real national income

Says law fits best in the _______ since this philosophy placed great importance on ________ to determine the ___________

Classical theory; aggregate supple; level of output

In the Modern Keynesian Model the short run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping​ short-run aggregate supply curve by only focusing on the capital​ input?

Existing machinery can be used longer hours.

Which of the following statements is true of the multiplier in the Keynesian model when there is​ a(n) decrease in autonomous expenditures

Expenditures decrease by the same proportion during each round of spending.

A stonger dollar contributes to inflation.

FALSE

Keynes argued that real consumption and saving decisions depend primarily on a​ household's expected future income.

FALSE

The larger the MPS​, the larger the multiplier.

FALSE

The multiplier has a larger effect on equilibrium real GDP when the price level is rising than it does when the price level remains constant.

FALSE

If the MPC equals​ 0.8, an additional​ $500 in disposable income will result in an additional​ $400 saved.

FALSE; it would be 100 saved

How could one explain the shape of the upward sloping​ short-run aggregate supply curve by only focusing on​ profits?

Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.

Keynesian with gov added

G: C+I+G federal, state and local does not include transfer payments is autonomous lump-sum taxes=G

change in equilibrium real

GDP= multiplier X change in autonomous spending

investment consists of expenditures on new buildings and equipment

GPD invetment has been violated consider the panned investment function and shifts in the funtion

The Modern Keynesian​ short-run aggregate supply curve is best described by which of the following​ statements?

It is very flat at low levels of real​ GDP; increases slightly as real GDP​ grows; and becomes very steep as real GDP surpasses full employment.

Which of the following is a possible explanation for sticky​ prices?

Labor contracts cause wages to be fixed over the contract period.

Maya's internet service is contemplating an investment of $50,000 in new computer servers and related hardware. Management of this company predict a 8.8 percent annual return on this investment. The current market rate of interest is 6.2 percent. Maya's internet service will

Make the investment since the cost is less than the expected return

The _______ propensity to consume is equal to the change in planned real consumption divided by the change in real disposable income. The _______propensity to save is equal to the change in planned real saving divided by the change in real disposable income.

Marginal; marginal

Which of the following statements is true concerning the foreign sector in the simple Keynesian​ model?

Net exports are autonomous.

Which of the following is not one of the four major assumptions of the classical​ model?

People suffer from money illusion.

A temporary change in input prices will shift only the

SRAS curve

Which of the following statements best reflects the relationship between saving and savings​?

Saving is a flow​ variable; savings is a stock variable.

________is a​ flow, something that occurs over time. It equals disposable income minus consumption. In​ contrast, _________are a stock. They are the accumulation resulting from saving. _________is also a flow. It includes expenditure on new​ machines, buildings, and equipment and in business inventories.

Saving; savings; Investment

​"The multiplier effect means that an increase in one component of aggregate demand will result in a larger increase in total aggregate​ demand," your economics professor states.​ "Moreover, the multiplier effect also works in​ reverse." What does your professor mean when she says that the multiplier effect works in​ reverse?

She means that a decrease in some component of aggregate demand will result in a larger decrease in total aggregate demand.

Any permanent decrease in autonomous real spending will cause even larger decreases in real GDP per year.

TRUE

At any point where the consumption function intersects the​ 45-degree reference​ line, C​ = Y.

TRUE

Because of the multiplier​ effect, a relatively small change in planned investment can trigger a much larger change in equilibrium real GDP per year.

TRUE

Equilibrium has to occur at the intersection of the planned saving and planned investment schedules.

TRUE

In the United​ States, resourse-using federal government expenditures account for almost 20 percent of real GDP.

TRUE

The classical economists believed that the leakage of saving would be matched by the injection of business investment.

TRUE

The difference between real exports and real imports is called real net exports.

TRUE

The level of employment in an economy determines its real GDP.

TRUE

When including​ consumption, investment, government​ expenditures, and net​ exports, the equilibrium level of real GDP is found at the intersection of the C​ + I​ + G​ + X curve and the​ 45-degree reference line.

TRUE

Suppose that disposable income increases in an economy. Which of the following relationships must always be​ true?

The change in disposable income is equal to the change in saving plus the change in consumption.

Which of the following is a key macroeconomic effect of the growing relative economic importance of large​ firms?

The increasing share of real GDP contributed by large​ companies' sales has caused swings in these​ firms' sales to generate greater portions of shocks to the aggregate demand and aggregate supply curves.

Which of the following statements is true when considering an economy with an​ upward-sloping short-run aggregate supply​ curve?

The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap.

Which of the following best exemplifies​ Say's Law?

The production of a​ $4000 plasma TV set creates demand for other goods and services valued at​ $4000.

In the modern Keynesian Model the​ short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor​ input?

The workers are switched from uncounted production to counted​ production, thus enabling the firm to expand output as the price level expands.

Suppose that the value of the US​ $ yesterday was​ $1 = 4 euroseuros. Today the exchange rate changed such that​ $1 = 55 euroseuros. One can say the

US​ $ appreciated.

Suppose that the value of the US dollar​ ($) yesterday was​ $1 = 4 yen. Today the exchange rate changed such that​ $1 = 3 yen. One can say that the

US​ $ depreciated.

Which of the following will increase both the​ short-run and​ long-run aggregate supply​ curves?

Younger workers in the labor force receive better and more training than their predecessors.

All of the following can cause the investment function to shift except

a change in the rate of interest.

Most economists agree that the fainter response of household spending on services during the most recent recovery resulted from

a decline in overall household net wealth.

All of the following will cause the planned investment function to shift rightward expect _________________________ and an increase in the interest rate causes

a decrease in the interest rate. a decrease in the amount of real planned investment.

Suppose that the wage rate of labor increased temporarily. The result of this would be best described by

a decrease in the​ short-run aggregate supply curve only.

​Cost-push inflation arises due to

a decrease in the​ short-run aggregate supply curve.

According to the classical​ model, if the economy starts at full employment an increase in aggregate demand will cause all of the following to occur except

a decrease in wage rates.

A depreciation of the U.S. dollar should result in

a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and​ short-run aggregate supply curves.

With respect to real​ GDP, planned investment is autonomous and is therefore represented graphically as

a horizontal line.

An appreciation of the US​ $ should result in

a lower price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and​ short-run aggregate supply curves.

Suppose that an economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD. Given that the US dollar appreciates, the new short run position of the economy finds itself in is termed

a recessionary gap.

When aggregate demand decreases while aggregate supply is​ stable, ________ gap can​ occur, defined as the difference between how much the economy could be producing if it were operating on its LRAS and the equilibrium level of real GDP. An increase in aggregate demand leads to ______ gap.

a recessionary gap; inflationary gap

lump-sum tax

a tax that does not depend on income or the circumstances of the taxpayer

All of the following will shift the​ short-run aggregate supply and the​ long-run aggregate supply except for

a temporary change in input prices.

In the labor​ market, full employment occurs at __________at which quantity demanded equals quantity supplied. That particular level of employment is associated with the​ full-employment level of real GDP per year.

a wage rate

saving

act of not consuming all of one's current income whatever is not consumed out of spendable income is saved saving is an action of measured over time (flow) savings are a stock, an accumulation resulting from the act of saving in the past

According to​ Keynes, when there is excess capacity in an​ economy, the equilibrium level of real GDP per year is determined by

aggregate demand.

The growing importance of large firms has

altered the ways in which aggregate demand and aggregate supply shocks occur within the economy and influence real GDP.

​Demand-pull inflation arises due to

an increase in money supply

Between early 2005 and late​ 2007, total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation. From a​ short-run Keynesian​ perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were

an increase in the price level along with an increase in equilibrium real GDP.

Given that the economy is currently in a long run equilibrium where SRAS​ = LRAS​ = AD the US dollar depreciates the economy would then experience

an inflationary gap.

The resulting spending gap between early 2005 and late 2007 when total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation can best be described as

an inflationary gap.

The amount of planned real investment in the economy has _________ relationship with the rate of interest.

an inverse

aggregate demand shock

any event that causes the aggregate demand curve to shift inward or outward

aggregate supply shock

any event that causes the aggregate supply curve to shift inward or outward

The Classical model assumes prices _________so that the aggregate supply curve is_______ and the economy is always ________

are flexible; vertical; at full employment

keynesian theory of consumption and saving

argues that real consumption and saving decisions depend primarily on households current real disposable income

At which of the market rates of interest below would maya's internet services be inclined to make the investment

at any of these interest rates listed.

For​ simplicity, we assume that real investment is ________ with respect to real GDP and therefore unaffected by the level of real GDP per year.

autonomous

We assume that the consumption function has an ____________ part that is independent of the level of real GDP per year. It is labeled ​"___________ ​consumption."

autonomous; autonomous

The ______propensity to consume is equal to real consumption divided by real disposable income. The _________ propensity to save is equal to real saving divided by real disposable income.

average; average

unplanned decreases in business inventories

business will increase production of goods and services and increase employment there will be an increase in real GDP

simplify the determination model

businesses pay no indirect taxes businesses distribute all profits to shareholders no depreciation economy is closed, no foreign trade

the dollar becomes weaker against other world currencies

causes a shift inward to the left in the short run AS curve causes in equilibrium real GDP to fall causes price level to rise tend to cause employment to decrease contributes to inflation

The C ​+ I ​+ G​ + X ​curve, is drawn with the price level held​ constant, whereas the AD curve allows the price level to ________. Each different price level generates a new C ​+ I ​+ G​ + X curve.

change

equating desired saving and investment in the classical model

changes in saving and investment create a surplus or shortage in the short run, in the long run this is offset by changes in the interest rate this interest rate adjustment returns the market to equilibrium, where S=I

In economic​ terminology, personal disposable​ income, or income after​ taxes, can be either

consumed or saved.

unplanned increases in business inventories

consumers purchase fewer goods and services than anticipated this leaves firms with unsold products and inventories will rise business reason by butting back production and reducing employment

If actual saving exceeds planned​ investment, all of the following will occur except

consumers will purchase more goods than had been anticipated by businesses.

accounting identity

consumption+saving= disposable income saving=disposable income- Consumption

With stable aggregate​ demand, an abrupt shift inward in SRAS may lead to what is called

cost push inflation

Whenever total planned real expenditures exceed real​ GDP, there will be unplanned ________ in inventories. Production of goods and services will​ increase, and a higher level of equilibrium real GDP will prevail. Whenever total planned real expenditures are less than real​ GDP, there will be unplanned __________ in inventories. Production of goods and services will​ decrease, and equilibrium real GDP will decrease.

decrease; increases

​Cost-push inflation is caused by persistent

decreases in​ short-run aggregate supply.

If we assume that the economy is operating on a horizontal​ short-run aggregate supply​ curve, the equilibrium level of real GDP per year is completely ___________ determined

demand

With stable aggregate​ supply, an abrupt outward shift in AD may lead to what is called

demand pull inflation

changes that decrease in aggregate supply

depletion of raw materials decreased competiton an increase in international trade more regulatory impediments to business decrease in labor supplied decrease in training and edu increase in tax rates increase in input prices

classical model was first attempt to explain

determinants of price level national levels of real GDP employment consumption saving investment

say's law

dictum of economist J.B say that supply creates its own demand, producing goods and services generates the means and the willingness to purchase other goods and services

changes that cause an increase in aggregate supply

discoveries of new raw materials increased competition a reduction in international trade barriers fewer regulatory impediments to business an increase in the supply labor increase training and education a decrease in marginal tax rates a reduction in input prices

Saving is the portion of

disposable income that is not consumed.

The consumption function shows the relationship between planned rates of real consumption and real ______ per year. he saving function is the complement of the consumption function because real saving plus real _______ must equal real disposable income.

disposable income; consumption

In the Keynesian model equilibrium national income

equals planned​ consumption, investment,​ government, and net export expenditures.

the _______ level of real GDP can be found where planned savings equals planned investment.

equilibrium

Keynesian model

equilibrium GDP is demand determined keynesian SRAS shows sources of price rigidities

The​ non-interest-rate determinants of planned investment are _________, nnovation and technological​ changes, and ________

expectations, business taxes

In this situation in which there is a decrease in autonomous​ expenditures, in each successive round that the multiplier is applied

expenditures decrease

real GDP rises as the price level increases

firms use worked more intensively (work harder) existing capital equipment is used more intensively (using machines longer) if wage rates are held constant, a higher price level leads to increased profits, which leads to lower unemployment as firms hire more

consumption is a ______ variable

flow

inflationary gap

gap that exists whenever equilibrium real GDP per year is greater than full-employment real GDP, as shown by the position of the LRAS curve

recessionary gap

gay that exists whenever equilibrium real GDP per year is less than full-employment real GDP, as shown by the position of the LRAS curve

At any given​ time, swings in sales of a few large firms can

generate significant net effects on aggregate demand and aggregate supply.

consumption goods

goods bought by households to use up, food and movies

The​ short-run Keynesian aggregate supply curve is

horizontal

Keynesians believe that the aggregate supply curve is

horizontal in the short run

The marginal propensity to consume is 0.60. At the market interest rate of 8 ​percent, planned investment spending is ​$100 billion. The slope of the C​ + I function is _______the slope of the consumption function

identical to; autonomous

One of the main conclusions of​ Say's Law was that

if people supply goods in order to then demand​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

consequences of the assumptions

if role of gov in economy is minimal, if pure cimpetition previals and all prices and wages are flexible, if people are self-interested and do not experience money illusion then problems in the economy will be temporary and the market will correct itself

Shifts in short and long run aggregate supply

include any change in endowments of the factors of production

shifts in SRAS

include changes in production input prices, particularly those caused by temporary external events

Use the​ identity: Yd​ = C​ + S as a basis to answer the following questions. In the Keynesian​ model, if disposable income were to increase households would

increase both their consumption and saving.

Whenever planned saving exceeds planned​ investment, there will be unplanned inventory __________ ​, and real GDP will fall as producers cut production of goods and services. Whenever planned saving is less than planned​ investment, there will be unplanned inventory ___________​, and real GDP will rise as producers increase production of goods and services.

increases; decreases

cost push inflation

inflation caused by decreases in short run AS, line moves to the right

demand pull inflation

inflation caused by increases in AD not matched by increases in AS

Real GDP can be expanded in the short run because firms can use existing workers and capital equipment more ________. Also, in the short​ run, when input prices are​ fixed, a higher price level means __________ profits, which induce firms to hire more workers.

intensively; higher

The planned investment schedule shows the relationship between real investment and the ________; it slopes _________

interest rate; downward

The relationship between the MPC and the MPS indicates that the entire increase in household disposable income

is distributed between consumption and saving.

SRAS

is horizontal shows the relationship between total planned economy wide production and the price level in the short run if prices adjust incompletely in the short run, the curve is positively sloped

The model of​ long-run equilibrium

is the same as the Classical Model.

Since the modern Keynesian Model allows for some price​ response, the aggregate supply curve

is upward sloping.

Real GDP and the price level

keynes argued that in a depressed economy, increased aggregate spending can increase output without raising prices

45 degree reference line

line along which planned real expenditure equal real GDP per year

Any change in factors influencing _____-run output, such as _______, capital, or _______, will shift both the SRAS curve and the LRAS curve.

long; labor; technology

The multiplier is equal to 1 divided by the ________ propensity to ______

marginal; save

The multiplier effect implies​ that, for a​ $100 increase in some autonomous component of aggregate​ demand, the total increase in aggregate demand will be

more than​ $100

in keynesian short run, when the price level rises partially, rela GDP can expand beyond the level consistent with its long-run growth path because

most labor contracts allow for flexibility in the total number of hours worked the existing capital stock can be used more intensely if wages are constant when prices rise, a firm is more profitable in it operations

the life-cycle theory of consumption

most realistic theory, considers how a person varies saving and consumption as income ebbs and flow throughout an entire life span predicts that people will predit a higher income in the future, he or she will consume more and save less in the current period than would have been the case otherwise

Any change in real disposable income will cause the planned rate of consumption to change. This is represented by a ________ the consumption function. Any change in a nonincome determinant of consumption will cause a __________ the consumption function

movement along; shift in

Any change in autonomous spending shifts the expenditure curve and causes a ________ effect on equilibrium real GDP pear year.

multiplier

If an excess quantity of labor is supplied at a particular wage​ level, the wage level

must be above equilibrium.

dissaving

negative saving, a situation in which spending exceeds income, can occur when a household is able to borrow or use up existing assets

would unemployment be a problem in the classical model

no, classical economist assumed that wages would always adjust to the full employment level

The Keynesian model argues that prices are sticky. One reason supporting this argument is that

nominal wages are inflexible downwards.

causes of shifts in consumption function

non income determinants: population wealth

panned vs, actual saving investment

only at equilibrium real GDP will planned saving equal actual saving planned investment equals actual investment planed saving is equal to planned investment

autonomous consumption

part of consumption that is independent of the level of disposable income, changes in autonomous consumption shift the consumption function

In modern Keynesian​ theory, the ​short-run aggregate supply​ curve, SRAS​, shows the relationship between the price level and real GDP without full adjustment or full information. It is upward sloping because it allows for ______ price adjustment in the short run

partial

In order to understand the outcomes of a model it is necessary to know the assumptions of a model. In the Keynesian​ model, businesses

pay no indirect taxes.

Consumption goods are

physical goods or services that households purchase and then use up.

When we add autonomous​ investment, I​, and autonomous government​ spending, G​, to the consumption​ function, we obtain the C ​+ I ​+ G​ curve, which represents total ___________ for a closed economy. In an open​ economy, we add the foreign​ sector, which consists of exports minus​ imports, or net​ exports, X. Total planned expenditures are thus represented by the C​ + I​ + G​ + X curve.

planned expenditures

The Keynsian model assumes that international trade

plays no role in the simple model.

Thus, according to the Keynesian model full employment is

possible but not guaranteed

An important difference between the Classical Model and the Keynesian Model is that

prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in the Keynesian Model.

capital goods

producer durables; non consumable goods that firms use to make other goods

If real GDP falls below total planned expenditures the economy will see

production and employment increases

The classical model assumes that​

pure competition wages and prices are flexible motivated by self interest cannot be fooled by money illusion

assumptions of the classical model

pure competition exists wages and prices are flexible people are motivated by self-interest people cannot be fooled by money illusion

The multiplier is weakened in inflationary gaps because of

rapid price level increases.

Planned real investment is determined by the

rate of interest.

multiplier

ratio of change in equilibrium level of real national income to the change in autonomous expenditures

MPC- marginal propensity to consume

ratio of change in real consumption to the change in real disposable income MPC= change in real consumption/ change in real disposable income

Marginal propensity to save- MPS

ration of the change in saving to the change in disposable income =change in real saving/ change in real disposable income

The Keynesian model indicates that the economy will find an equilibrium however the economy will not always

reach full employment

money illusion

reacting to changes in money prices rather than relative prices.. if a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion

real disposable income

real GDP minus net taxes or after tax real income

effects of price level increase?

real balance effect interest rate effect open economy effect

APC- average propensity to consume

real consumption divided by real disposable income the proportion of total disposable income that is consumed APC= Real consumption/ real disposable income

APS- average propensity to save

real saving divided by real disposable income save proportion of real DI APS= real saving/ real disposable income

Since the nominal wage is deemed​ inflexible, a decrease in aggregate demand causes firms to

reduce their workforce.

The horizontal​ short-run aggregate supply curve has been called the Keynesian​ short-run aggregate supply curve because Keynes believed that many​ prices, especially​ wages, would not be ______ even when AD decreased

reduced

consumption function

relationship between the amount consumed and disposable income indicates how much people plan to consume at various levels of disposable income

So as the amount of planned investment decreases​, the slope of the C​ + I function

remains constant

During the recovery from the most recent​ recession, real consumption expenditures

rose slowly and weakly because households boosted their spending on services much less than their expenditures on physical goods.

The smaller the marginal propensity to ________ ​, the larger the multiplier. Otherwise​ stated, the larger the marginal propensity to ________ ​, the larger the multiplier.

save; consume

Current disposable income held to buy consumption goods in the future is referred to as

saving.

When saving is introduced into the​ model, equilibrium occurs in the credit market through changes in the interest rate such that desired ________ equals desired ________ at the equilibrium rate of interest

saving; investment

All of the following are flow concepts except

savings.

Changes in factors of production that influence economic growth will

shift SRAS and LRAS.

A​ short-lived change in production input prices will

shift SRAS but not LRAS.

Any change in the​ non-interest-rate determinants of planned investment will cause a ____________ he planned investment function so that at each and every rate of interest a different amount of planned investment will be made.

shift in

Given that the US dollar has depreciated the​ short-run aggregate supply in the United States should

shift to the left.

Suppose that the value of the US dollar​ ($) yesterday was​ $1 = 4 pesos. Today the exchange rate changed such that​ $1 = 6 pesos. Given that the US​ $ has​ appreciated, the aggregate demand in the United States should

shift to the left.

Given that the US​ $ has​ appreciated, the​ short-run aggregate supply in the United States should

shift to the right

Suppose that the value of the US dollar​ ($) yesterday was​ $1 = 4 yen. Today the exchange rate changed such that​ $1 = 2 yen. Given that the US dollar has​ depreciated, the aggregate demand in the United States should

shift to the right.

If real investment increases by​ $500 billion, the C​ + I​ + G​ + X curve will

shift up vertically by​ $500 billion.

Any unanticipated shifts in aggregate demand or supply are called aggregate demand or aggregate supply

shocks

If the prices were​ sticky, according to​ Keynes, this would then imply that the

short-run aggregate supply is horizontal.

_______ run equilibrium occurs at the intersection of the aggregate demand​ curve, ​AD, and the​ short-run aggregate supply​ curve, SRAS. ______run equilibrium occurs at the intersection of AD and the​ long-run aggregate supply​ curve, LRAS.

short; long

The multiplier effect implies that if government wants to cause an increase in aggregate demand of​ $500 million, it can do so by increasing government spending by an amount

smaller than​ $500 million

investment

spending by businesses on things such as machines and buildings, which can be used to produce goods and services in the future the investment part of real GDP is the portion that will be used in the process of producing goods in the future

consumption

spending on new goods or services out of a households income whatever is not consumed is saved

net wealth

stock of assets owned by a person, household, firm or nation for households, wealth can consist of house,cars, personal belongings, stocks, bonds, bank accounts and cash (minus any debts owed)

a _______ dollar will reduce the cost of imported​ inputs, thereby causing SRAS to shift outward to the right. At the same​ time, a ________dollar will lead to lower net​ exports, causing the aggregate demand curve to shift inward. The equilibrium price level definitely​ falls, but the net effect on equilibrium real GDP depends on which shift is larger.

stronger; stronger

the permanent income hypothesis

suggests that income level that matters for a persons decision about current consumption and saving is permanent income, expected average lifetime income thus if a persons flow of income temporarily rises without an increase in average income, the person responds by saving moo and leaving consumption unchanged

​Say's law asserts that

supply creates its own demand

​Say's law states that _______ creates its own _________and therefore desired expenditures will equal actual expenditures.

supply; demand

The modern Keynesian Model assumes that

that prices respond to changes in aggregate demand but not fully.

With regard to the relationship between the C​ + I​ + G​ + X curve and the aggregate demand​ curve, changes in the price level cause

the C​ + I​ + G​ + X curve to shift while it causes a movement along the aggregate demand curve.

Persistent inflation arises due to

the aggregate demand curve increasing by a larger proportion than the​ long-run aggregate supply curve.

When government spending and net exports are added into the Keynesian model

the aggregate expenditures function shifts.

Inflation in an economy implies that

the average price level has increased over a stated period of time.

For any given level of real​ income, the proportion of total real disposable income that is consumed is called

the average propensity to consume.

the C​ + I​ + G​ + X curve intersects the​ 45-degree reference line at​ $4 trillion. If the price level rises

the equilibrium real national income falls because consumption falls​, investment falls​, and net exports decrease​, shifting the C​ + I​ + G​ + X curve down.

The greater the value of the marginal propensity to consume

the greater the value of the multiplier.

in the classical model, the supple of saving was determined by the rate of interest

the higher rate, the more people wanted to save and the less they wanted to consume

keynesian short run aggregate supply curve SRAS

the horizontal portion of the aggregate supply curve in which there is excessive unemployment and unused capacity in the economy

keynes argued that

the interest rate is not most important factor in saving and consumption decisions, rather real saving and consumption decisions depend on a households real disposable income a persons anticipation about future flows of income influences how much of current income is allocated to consumption and how much is allocated to saving

The economic concept that part of each additional dollar earned will be​ spent, and that this spending will provide additional income of which part will again be​ spent, is known as

the multiplier principle

how can a 100 billion increase in investment generate 500 billion increase in equilibrium real GDP?

the multiplier process

Nominal GDP is dependent on

the price level and output.

The​ long-run aggregate supply curve will not shift if there is a change in

the price level.

The investment function is represented as an inverse relationship between the value of planned real investment and

the rate of interest.

The greater the value of the marginal propensity to save

the smaller the value of the multiplier.

The extent to which real GDP responds to changes in the price level along the​ short-run aggregate supply curve is largely determined by

the speed with which input prices adjust and people become more fully informed. the ability of firms to hire additional​ inputs, particularly workers. the ability of firms to use existing workers and capital more intensively.

If C+I+G+X greater than Y

unplanned decrease in inventories businesses raise output Y returns

According to modern Keynesian​ analysis, the​ short-run aggregate supply curve is

upward sloping.

In the classical​ model, because LRAS is ________he equilibrium level of real GDP is supply determined. Any changes in aggregate demand simply change the ____________

vertical; price level

If the price level rises the multiplier effect on real GDP will be

weaker than if the price level were constant.

equilibrium in the credit market

when income is saved, it is not reflected in product demand it is a type of leakage from the circular flow of income and output because saving withdraws funds form the income stream, therefore total planned consumption spending can fall short of total current real GDP

What did Keynes mean when he said that prices are​ sticky?

​Prices, especially the price of​ labor, are inflexible downward.

The AD curve is drawn with the price level​ ________, and the C​ + I​ + G​ + X curve is drawn with the price level​ ________.

​changing; held constant

The lower the rate of​ interest, the​ ________ profitable it is to invest and the​ ________ the level of desired investment.

​more; higher

As the dollar becomes stronger in international foreign exchange​ markets, the​ short-run aggregate supply curve will shift to the​ ________ and the aggregate demand curve will shift to the​ ________.

​right; left