Chapter 12

what is the problem in an inflationary gap?

inflation

Between 1979 and 1980, the short run aggregate supply curve shifted to the _____ because oil prices ________.

left rose When commodity prices, such as oil, increase, the costs of production increase, which causes a decrease in aggregate supply, shown by a shift of the curve to the left.

True or False? If wages are sticky, they are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.

True

True or False? Stabilization policy is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions.

True

True or False? If the value of consumers' assets increases because of a decrease in the price level, the aggregate demand curve will shift to the right.

False → If the value of assets increases because of a decrease in the price level, this causes an increase in consumption which is represented by a movement down a stationary aggregate demand curve. If the value of assets increases for any other reason than a decrease in the price level, then the aggregate demand curve will shift to the right.

True or False? If workers become more productive, the short-run aggregate supply curve is not affected.

False → If workers become more productive, the short-run aggregate supply curve shifts to the right.

True or False? The aggregate demand curve is downward sloping because as the price level rises, consumers reduce expenditures because of the law of demand.

False → This describes what happens in a market and is the rationale for a downward-sloping market demand curve, but it is not the rationale for a downward-sloping aggregate demand curve.

Assume that the economy experiences a negative demand shock. Which of the following is the best course of action for policy makers?

Policy makers should try to shift the aggregate demand curve to the right. → If a negative demand shock causes the aggregate demand curve to shift left, then policy makers can use monetary and fiscal policy to shift the aggregate demand curve back to the right.

The ___________ curve shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, government, and the rest of the world.

aggregate demand

The _________ curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy.

aggregate supply

An event that shifts the aggregate demand curve is a(n) ___________.

demand shock

The aggregate demand curve is derived from the income-expenditure model in the following way. As the price level rises, real wealth declines. This shifts the aggregate expenditure line ____________ and ___________ the equilibrium level of real GDP demanded.

down decreases

True or False? If actual output is above potential output, nominal wages will decrease.

false

If actual output is above potential output, the short-run aggregate supply curve will shift to the ______.

left → If actual output is above potential output, nominal wages will increase and shift the short-run aggregate supply curve to the left.

If the price level rises and all prices are fully flexible, the amount of real GDP supplied in the long run

remains constant

if the price level rises

the quantity of real GDP demanded decreases. → An increase in the price level causes a movement up the demand curve and the quantity of real GDP demanded decreases. no change in aggregate demand