chapter 13 LRAS and AD LTAS
An unexpected increase in the price of an important raw material will
decrease (shift leftward) the SRAS curve because this is a change in the price of an important natural resource
The price level that is currently higher than expected will
decrease (shift leftward) the SRAS curve because this is a change in an adjustment to past errors in expectations about future prices .
If the price level increases, then
there will be a movement up along a stationary aggregate demand curve.
If firms want to reduce workers wages over time, they have to reduce
the cash or nominal value, of wages.
A faster income growth in other countries will cause a
rightward shift of
An increase in government purchases will cause a
rightward shift of the aggregate demand curve.
A supply shock is
. a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.
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.
Which of the following statements is correct if real GDP in the United States declined by more during the 2007minus2009 recession than did real GDP in Canada, China, and other trading partners of the United States?
Imports to the United States fell more than the U.S. exports, leading to an increase in net exports.
The international-trade effect refers to the fact that an increase in the price level will result in
a decrease in exports and an increase in imports.
Why does the short-run aggregate supply curve slope upward?
Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.
A decrease in the expected future price level
SRAS1 -> SRAS2
"An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, P3, as being lower than the initial price level, P1."
The student is incorrect because the aggregate demand curve does not shift because of the price level change.
Which of the following is usually the cause of stagflation?
a supply shock as a result of an unexpected increase in the price of a natural resource
At the new short run equilibrium, the unemployment rate will
be lower compared to the unemployment rate at the initial equilibrium, prior to the increase in exports.
Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
because menu costs make some prices "sticky" B. because firms are often slow to adjust wages C. because contracts between workers and firms make some wages and prices "sticky" D. All of the above.
How can government policies shift the aggregate demand curve to the right?
by increasing government purchases
A movement from point A to point B on SRAS1 could be the result of a (Up) A movement from point A to point C could be the result of a change in (left to right)
change in the price level. the labor force.
The long-run aggregate supply curve is vertical because in the long run,
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
Stagflation is a
combination of inflation and recession
An economics student makes the following statement: "It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, thereby decreasing total spending in the economy."
downward sloping because as prices rise, consumer real wealth declines, interest rates rise, and exports become more expensive.
The interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investment
Edward Leamer of UCLA has argued that "housing is the business cycle." Spending on housing is likely to fluctuate more than spending by households on consumer durables, such as automobiles or furniture, or spending by firms on plant and equipment because
housing is very sensitive to interest rate changes, which are cyclical.
. Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in
investment , it will cause a shift to the right in the aggregate demand curve.
An increase in interest rates will cause a
leftward shift of the aggregate demand curve.
An increase in state income taxes will cause a _________ the aggregate demand curve.
leftward shift of the aggregate demand curve.
An increase in the price level will
not change the SRAS curve because this is a change in the price level .
The new long-run macroeconomic equilibrium occurs at
point C .
At the new long-run equilibrium,
real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.
The SRAS curve will
shift to the left if there is an increase in expected future prices .
Economists Mary Daly, Bart Hobijn, and Timothy Ni of the Federal Reserve Bank of San Francisco argue that "employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions." Employers are hesitant to cut workers' salaries because wage cuts
upset workers and lower their productivity.
The wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption.
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-AD1
Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.
How does a decrease 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.
Which of the following statements is true?
In the long run, changes in the price level do not affect the level of real GDP.
Which of the following statements is true? Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
In the long run, changes in the price level do not affect the level of real GDP. an increase in the number of workers in the economy B. the accumulation of more machinery and equipment C. technological change D. All of the above.
What does the article mean by firms reducing the "cash value" of workers' wages?
It means firms found it difficult to cut nominal wages
In 2017, an article in the Wall Street Journal on the latest data on U.S. net exports noted that, along with other currencies: "The [the Chinese] yuan has risen this year against the dollar." The article also noted that there had been "Stronger [economic] growth in Asia and Europe..." What does the article mean that the yuan had "risen" against the dollar?
It now takes more dollars to buy one yuan.
In early 2009, Christina Romer, who was then the chair of the Council of Economic Advisers, and Jared Bernstein, who was then an economic adviser to Vice President Joseph Biden, forecast how long they expected it would take for real GDP to return to potential GDP, assuming that Congress passed fiscal policy legislation proposed by President Obama: It should be understood that all of the estimates presented in this memo are subject to significant margins of error. There is the obvious uncertainty that comes from modeling a hypothetical package rather than the final legislation passed by the Congress. But, there is the more fundamental uncertainty that comes with any estimate of the effects of a program. Our estimates of economic relationships . . . are derived from historical experience and so will not apply exactly in any given episode. Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity. Source: Christina Romer and Jared Bernstein, The Job Impact of the American Recovery and Reinvestment Plan, January 9, 2009. Why would the causes of a recession and its severity affect the accuracy of forecasts of when the economy would return to potential GDP?
Models used for forecasting are based on historical experience and the relationships in the model can change.
Long-run adjustment will shift the SRAS curve from
SRAS0-SRAS1 as workers adjust to lower-than-expected prices.
A positive technological change occurs
SRAS1 ->SRAS2 and LRAS1 -> LRAS2
Workers and firms adjust to having previously underestimated the price level
SRAS1 <- SRAS2 (left)
Will the outcome you discussed above result in a movement along the U.S. aggregate demand curve or a shift of the aggregate demand curve? Briefly explain.
Shift of the U.S. aggregate demand curve, because this is not a change in the price level.
Which of the following best explains how and why the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices. at point A. real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.
Suppose the economy enters a recession. If government policymakersdashCongress, the president, and members of the Federal Reservedashdo not take any policy actions in response to the recession, what is the likely result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long run? i. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run.
Statement ii is correct.
As output increases along the short-run aggregate supply curve, briefly explain what happens to the cyclical rate of unemployment.
The cyclical rate decreases because fewer workers will be laid off.
Consider the data in the following table for the years 1969 and 1970 (the values for real GDP are in 2009 dollars): . Even though real GDP in 1970 was slightly greater than real GDP in 1969, the unemployment rate increased substantially from 1969 to 1970. Which of the following explains how unemployment could have increased even though output did not change? If the inflation rate for 1970 is greater than the inflation rate for 1969, it is likely that the recession was caused by
The economy can produce a level of GDP above potential GDP in the short run. Potential GDP increased significantly, but actual GDP did not, and thus there is unemployment. a negative supply shock rather than an increase in aggregate demand .
As output increases along the short-run aggregate supply curve, briefly explain what happens to the natural rate of unemployment.
The natural rate remains the same because it is not affected by the business cycle.
Which one of the following is not true when the economy is in macroeconomic equilibrium?
When the economy is at long-run equilibrium, firms will have excess capacity.
Which of the following factors does not cause the aggregate demand curve to shift?
a change in the price level
What is the effect of an increase in the price level on the short-run aggregate supply curve?
a movement up along a stationary curve
Which of the following causes the short-run aggregate supply curve to shift to the right?
a positive technological change
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
a recession in the short run and a decline in the price level in the long run.
Stagflation occurs when
a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP .
Which of the following causes the short-run aggregate supply curve to shift to the left?
an increase in the expected price of an important natural resource
From August 2009 to May 2017, the Standard & Poor's Index of 500 stock prices increased by more than 135 percent, while the consumer price index increased by less than 15 percent.
an increase in the real value of household wealth, which shifted the aggregate demand curve to the right.
If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run.
an increase; an increase
The new short-run macroeconomic equilibrium occurs at point B
b
The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in
consumption , it will cause a shift to the left in the aggregate demand curve.
An increase in what the price level is expected to be in the future will
decrease (shift leftward) the SRAS curve because this is a change in expectations about future prices .
The short-run aggregate supply curve slopes upward because of all of the following reasons except
in the short run, an unexpected change in the price of an important resource can change the cost to firms.
"the economy's potential to supply goods and services [is] determined by such things as labour force and capital stock, as well as inflation expectations."
incorrect since changes in the expected price level affect short run aggregate supply but not the long run aggregate supply.
An increase in the labor force will
increase (shift rightward) the SRAS curve because this is a change in the productive capacity of the economy .
The SRAS curve will
shift to the left if there is an increase in the adjustment of workers' and firms' prior underestimation of the price level .
The SRAS curve will
shift to the left if there is an increase in the expected price of an important natural resource .
An increase in the working population will cause the long-run aggregate supply curve to
shift to the right
The SRAS curve will
shift to the right if there is a technological change
The SRAS curve will
shift to the right if there is an increase in productivity .
The SRAS curve will
shift to the right if there is an increase in the labor force or capital accumulation .
Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
technological change B. the accumulation of more machinery and equipment C. an increase in the number of workers in the economy D. All of the above.
Because this is a change in the price level (The price level increases)
the LRAS curve will not change .
Because this is a change in the productive capacity of the economy (The labor force increases.)
the LRAS will shift to the right .
Because this is a change in (Technological change occurs.)
the LRAS will shift to the right .
There is an increase in the quantity of capital goods. Because this is a change in the productive capacity of the economy
the LRAS will shift to the right .
Menu costs LOADING... are If menu costs were eliminated, the short-run aggregate supply curve will be
the costs to firms of changing prices. upward sloping because of wage price stickiness and slow wage adjustment by firms .
The U.S. economy experiences 4 percent inflation. Because this is a change in
the price level , it will cause a movement along the aggregate demand curve.
The aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded by households, firms, and the government.
The short run aggregate supply curve shows the relationship in the short run between
the price level and the quantity of real GDP supplied by firms.
Increases in personal income taxes or business taxes will make the aggregate demand curve shift
to the left .
An article in the Economist discussing the 2007-2009 recession states that "employers found it difficult to reduce the cash value of the wages paid to their staff. (Foisting a pay cut on your entire workforce hardly boosts morale.)"
would likely react by becoming less productive if their wages are cut.
An article in the Los Angeles Times about driver-less trucks states that "Trucking will likely be the first type of driving to be fully automatedlong dashmeaning there's no one at the wheel." The article adds that there is a financial incentive for automating trucks because "Trucking is a $700-billion industry, in which a third of costs go to compensating drivers." How are driver-less trucks likely to affect the short-run aggregate supply curve (SRAS)? How are driver-less trucks likely to affect the long-run aggregate supply curve (LRAS)?
Driver-less trucks would decrease transportation costs by requiring less labor. Driver-less trucks would shift the SRAS curve to the right due to a technological advance. Driver-less trucks would shift the LRAS curve to the right due to a technological advance.
Briefly explain whether the combination of other currencies rising against the dollar and stronger economic growth in Asia and Europe had led to an increase or a decrease in U.S. net exports.
Increase, because U.S. exports are cheaper
Could these firms have reduced their labor costs by the same, or possibly more, if they laid off fewer workers while cutting wages?
No, because workers would become disgruntled with wage cuts and reduce their productivity, resulting in higher production costs.
Which of the following best explains how the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level.
Which of the following best explains how and why the economy will adjust back to long-run equilibrium? After the adjustment of aggregate supply is complete, the economy returns to equilibrium at When the economy returns to long-run equilibrium again
Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices. This is the correct answer. After the adjustment of aggregate A real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.
Compared to the U.S. aggregate demand curve, the reason that the demand curve for an individual product, such as bananas, slopes downward is
different, because consumers can substitute between individual products.
The U.S. aggregate demand curve slopes downward due to all of the following reasons except the
government-spending effect, where a change in the price level affects government purchases.
