Chapter 22

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When financial frictions increase​, the real cost of borrowing​ __________, and the AD curve​ __________.

increases, shifts left

The​ self-correcting mechanism describes how the economy eventually returns to the​ _______ regardless of where output is initially.

natural rate level of output

The​ ______ is where the economy gravitates to in the long run.

natural rate of unemployment

Compared to positive supply​ shocks, negative supply shocks have the _________ effect on aggregate supply.

opposite #60 Screenshot CH22

Demand shocks are exogenous events that cause _______ the aggregate demand curve.

shifts in

Supply shocks are exogenous events that cause ______ the aggregate supply curve.

shifts in #60 Screenshot CH22

If autonomous consumption declines​, then the AD curve

shifts to the left.

If autonomous consumption increases​, then the AD curve

shifts to the right

When the unemployment rate is above the natural rate of​ unemployment, there is ______ in the labor market and output is _______ potential. This causes the​ short-run aggregate supply curve to ______ . Hence inflation __________ and output ___________ over​ time, until the economy reaches a __________ equilibrium.

slack; below; shift downward; decreases; increases; long-run

Whether positive or​ negative, supply shocks that ultimately leave output and inflation unchanged are

temporary #60 Screenshot CH22

In the short​ run, a leftward shift in the aggregate demand curve will cause

the inflation rate to fall and output to fall.

In the short​ run, a rightward shift in the aggregate demand curve will cause

the inflation rate to rise and output to rise.

If a pill were invented that made workers twice as productive but their wages did not​ change, what would happen to the position of the​ short-run aggregate supply​ curve?

​Short-run aggregate supply will shift rightward.

Observe a positive demand shock in the graph to the right. In the short​ run, __________ In the long​ run, _______________ In the​ figure, the​ long-run equilibrium is given by_______

"both inflation and output rise." "inflation rises, but output does not change." point 3 #50 Screenshot CH20

An​ economy's aggregate demand is shown graphically as a​ downward-sloping curve. The position of this curve relative to the vertical axis is impacted by six basic factors. The top portion of the following table lists these six factors along with several that do not affect the position of the aggregate demand curve. A response box is attached to each factor. The​ table's bottom portion contains a labeling key. Label any factor that does not impact AD with an X. For a factor that shifts aggregate demand to the​ right, use the label​ R; similarly, for a factor that shifts aggregate demand to the​ left, use the label L. Keep in mind that each factor is to be assessed on the assumption that all else is constant. ​(Note​: Each letter is used three​ times.)

# 1 Screenshot CH22

The top portion of the following table lists a variety of factors that shift some component of the aggregate demand and supply model. A response box is attached to each factor. The​ table's bottom portion contains a labeling key. Label any factor that shifts the​ short-run aggregate supply curve with an S. Use an X to label any factor that does not shift the​ short-run aggregate supply curve. ​(Note​: Each label is used multiple​ times.)

#21 Screenshot CH22

During the first half of​ 2010, Fed officials discussed the possibility of increasing interest rates as a way of fighting potential increases in expected inflation. If the public came to expect higher inflation rates in the​ future, what would be the effect on the​ short-run aggregate supply curve. Using the line drawing​ tool, show the effect of higher expected inflation on the​ short-run aggregate supply curve. Properly label your curve.

#23 Screenshot CH22

Using the line drawing tool​, show how the economy will​ self-correct. Label your new line.

#31 Screenshot CH22

The top portion of the following table lists several demand shocks along with several exogenous events that do not affect the position of the aggregate demand curve. A response box is attached to each event. The​ table's bottom portion contains a labeling key. For a positive demand​ shock, use the label​ P; similarly, for a negative demand​ shock, use the label N. Label any exogenous event that does not impact AD with an X. ​(Note​: Each letter is used three​ times.)

#44 Screenshot CH22

Let the economy initially be in​ long-run equilibrium at point 1 in the figure to the right. Now suppose that in an effort to reduce the current federal government budget​ deficit, the White House decides to sharply decrease government spending. On Graph A ​1) Using the line drawing tool​, shift a single curve in the accompanying figure to illustrate the​ short-run effect of the sharp spending cut. Properly label your curve. ​2) Using the point drawing tool​, identify the​ short-run equilibrium. Label this point​ '2'. Carefully follow the instructions​ above, and only draw the required objects. According to your​ graph, the​ short-run effect of the White House policy​ is: At the​ short-run equilibrium shown in your​ graph, the economy has an output gap that is ________ ​, suggesting that the​economy's self-correcting mechanism will​"kick-in" to propel it toward _________ Compared to the original​ long-run equilibrium, the economy​ has, in the new​ long-run equilibrium at point​ 3, output that is __________ and inflation that is _________

#46 Screenshot CH22 lower​ output, lower​ inflation, and unemployment above the natural rate. negative; full employment unchanged; lower

Which of the following factors would not cause an increase in aggregate​ demand?

A decrease in the price level.

Which of the following would cause the​ short-run aggregate supply curve to shift upward and to the​ left?

A negative price shock.

Classify the following situation as a supply or demand​ shock: Households and firms become more optimistic about the economy.

A positive demand shock. #59Part2 Screenshot CH22

What factors led to a decrease in both the unemployment rate and the inflation rate in the​ 1990s? ​(Check all that​ apply.)

A. Changes in the health care industry comma which greatly reduced medical care costs relative to other goods and services.Changes in the health care industry, which greatly reduced medical care costs relative to other goods and services. C. The computer revolution comma which caused rapid increases in productivity.

In the long​ run, a leftward shift in aggregate demand will cause

A. the inflation rate to fall and output to remain unchanged.

Changes in the following variables will cause a shift of the long-run aggregate supply​ curve:

A. total capital, total labor, and available technology. shocks.

Which of the following shifts the aggregate demand​ curve?

An increase in the autonomous real interest rate

Supply shocks that are positive are events that​ induce, at any given inflation​ rate, _________ in​ supply, thus shifting the AS curve _________

An increase; rightward #60 Screenshot CH22

What determines the unemployment rate when output is at​ potential?

B. A mismatch between the skills of unemployed workers and the skills needed for available jobs. C. The length of time between jobs when a worker is transitioning from one job to another.

If the Federal Reserve increases the money supply at the same time that Congress implements an income tax​ cut, then which of the following is​ true? The graph to the right depicts aggregate supply and demand in​ long-run equilibrium. ​1) Using the line drawing tool​, show the​ short-run effect of an increase in the money supply combined with a tax cut. Properly label your line. ​2) Using the point drawing tool​, indicate the​ short-run equilibrium. Label the point ​'E2​'. Carefully follow the instructions​ above, and only draw the required objects. In the long​ run, the equilibrium price level will _______ and the equilibrium level of aggregate output will __________

Both of these actions will increase aggregate demand. #49 Screenshot CH20 increase; remain unchanged

Which of the following will not cause the aggregate demand curve to​ shift?

C. tightness in the labor market

Which of the following will cause the aggregate demand curve to​ shift?

D. Each of these factors can cause the aggregate demand curve to shift.

Suppose that the public believes that a newly announced​ anti-inflation program will work and so lowers its expectations of future inflation. What will happen to aggregate output and the inflation rate in the short​ run?

The inflation rate will fall and aggregate output will rise.

When aggregate output is below the natural​ rate, what will happen to the inflation rate over time if the aggregate demand curve remains​ unchanged?

The inflation rate will fall because the slackness of the labor market will eventually cause wages to fall.

Why are central banks so concerned about inflation​ expectations?

When inflation expectations​ rise, the​ short-run aggregate supply curve shifts​ up, leading to higher actual inflation in the short run.

What happens to inflation and output in the short run and the long run when government spending​ increases? If government spending​ increases, the ________ curve shifts _______ . In the short​run, inflation __________ and output ____________ . This leads to tightness in the labor​market, which _____________ inflation expectations and shifts the _____________ curve ___________ . When this​occurs, the economy moves to a new ________ ​equilibrium, output ________ ​, and inflation _______

aggregate demand; rightward; increases; increases; raises; short-run aggregate supply; up; long-run; falls back to potential; increases

Suppose the inflation rate remains relatively​ constant, and output decreases and the unemployment rate increases. This is possible​ if:

both the aggregate supply and demand curves shift horizontally to the left by the same amount.

The​ short-run aggregate supply curve slopes upward because an increase in output relative to potential​ output:

creates tight labor and product markets that cause inflation to rise.

A negative demand shock will _________ inflation and will __________ aggregate output in the short run.

decrease; decrease

A negative demand shock will ______ inflation and will ________ aggregate output in the long run.

decrease; not change

Internet sites that allow people to post their resumes reduce the cost of a job search. How do you think the Internet has affected the natural rate of​ unemployment? The Internet has_______ the natural rate of unemployment.

decreased

Both​ short-run and​ long-run equilibria require that the quantity of aggregate output demanded and the quantity supplied are ______ Beyond this​ equality, the attainment of a​ long-run equilibrium also requires that actual output _____ In the figure to the​ right, a​ long-run equilibrium exists at ________ ​, while a​short-run equilibrium occurs at

equal equal Point 1 (#35 Screenshot CH22) Points 1 and 2

Suppose the economy is starting from a situation of​ long-run equilibrium. In this​ case, we know that its equilibrium output ​(Upper Y starY*​) is _________ its potential output ​(Upper Y Superscript Upper PYP​).

equal to #55 Screenshot CH22

Suppose the economy is starting from a situation of​ long-run equilibrium. In this​ case, we know that its equilibrium output ​(Upper Y starY*​) __________ its potential output Starting from its​ long-run equilibrium at point 1 in the figure to the​ right, suppose the economy experiences a positive demand shock. ​1) Using the line drawing tool​, shift a single curve to show the initial​ short-run effect. Properly label your curve. ​2) Using the point drawing tool​, identify the new​ short-run equilibrium. Label this point​ '2'.

equal to #45 Screenshot CH22

Changes in the following variables will cause a shift of the short-run aggregate supply​ curve: Refer to the figure on your right. ​1.) Use the line drawing tool to show how an increase in the available technology will affect the​ long-run aggregate supply curve. Draw and label the new graph properly.

expected inflation, output gap, and price (supply) shocks. #28 Screenshot CH22

The three components of​ short-run aggregate supply are

expected​ inflation, output​ gap, and price​ (supply) shock.

Demand shocks that are negative are events that induce planned spending at any given inflation rate to _____________ thus pushing the AD curve ____________

fall; leftward

Inflation _______ when the unemployment rate is greater than the natural rate of unemployment.

falls

Inflation _______ when the unemployment rate is less than the natural rate of unemployment.

rises

A loosening of the labor market will cause

the aggregate demand curve to shift left.

A tightening of the labor market will cause

the aggregate supply curve to shift up.

The aggregate demand curve describes the relationship between

the inflation rate and the quantity of aggregate output demanded.

The aggregate supply curve describes the relationship between

the inflation rate and the quantity of aggregate output supplied.

In the long​ run, a rightward shift in aggregate demand will cause

the inflation rate to rise and output to remain unchanged.

The aggregate demand curve slopes downward because a rise in inflation​ leads:

the monetary policy authorities to raise real interest rates.

When inflation and inflation expectations adjust to move output to​ potential, this is an example of

the​ self-correcting mechanism.

Inflation expectations affect

the​ short-run aggregate supply​ curve, but not the​ long-run supply curve. #16 Screenshot CH22

The​ long-run aggregate supply curve​ is:

vertical because changes in​ labor, capital, and technology​ (not the inflation​ rate) change the output an economy can produce over the long run.

A successful​ cost-push shock by workers means ​1.) Use the line drawing tool to show the effect of​ a(n) favorable price shock. Label the new line properly. 2) ​1.) Use the line drawing tool to show the effect of​ a(n) unfavorable price shock. Label the new line properly.

wage increases are higher than productivity​ growth, and the aggregate supply curve will shift up. #30 Screenshot CH22

When the labor market is​ tight,

wages​ rise, and the aggregate supply curve shifts up.

What would happen to the position of the​ long-run aggregate supply​ curve?

​Long-run aggregate supply will shift rightward.

If huge budget deficits cause the public to think that there will be higher inflation in the​ future, what will happen to the position of the​ short-run aggregate supply​ curve?

​Short-run aggregate supply will shift leftward.

Observe a temporary negative supply shock in the graph to the right. In the short​ run, _________ . In the long​ run, ______________. In the​ figure, the​ long-run equilibrium is given by _________

"inflation rises, but output decreases." "neither inflation nor output change." point 1. #63 Screenshot CH22

Which of the following is an example of a​ "good" supply​ shock?

B. The computer revolution in the late 1990 s.

Using the line drawing tool​, show the effect of increased consumer pessimism on the aggregate demand curve. Label your new line ​'AD2​'. John Maynard Keynes described waves of consumer and investor optimism and pessimism​ as:

#5 Screenshot CH20 animal spirits.

The top portion of the following table lists several supply shocks along with several exogenous events that do not affect the position of the aggregate supply curve. A response box is attached to each event. The​ table's bottom portion contains a labeling key. For a positive supply​ shock, use the label P​; ​similarly, for a negative​ shock, use the label N. Label any exogenous event that does not impact AS with an X. ​(Note​: Each letter is used three​ times.)

#60 Screenshot CH22

The graph to the right shows the effect of an increase in oil prices. ​1) Using the line drawing tool​, show how the economy will​ self-correct. Properly label your line. ​2) Using the point drawing tool​, indicate the new equilibrium point. Label the point ​'E2​'. ​Note: Carefully follow the instructions​ above, and only draw the required objects.

#61 Screenshot CH22

Assume​ Okun's law is given by the​ following: Upper U minus Upper U Subscript n Baseline equals negative 0.75 times left parenthesis Upper Y minus Upper Y Superscript p Baseline right parenthesisU − Un = −0.75 × Y − Yp and that the Phillips curve is given by the​ following: pi equals pi Superscript e minus 0.6 times left parenthesis Upper U minus Upper U Subscript n Baseline right parenthesis plus rhoπ = πe − 0.6 ×U − Un + ρ If expectations are​ adaptive, inflation was 33​% last​ year, there is a price shock such that rhoρequals=00​, and potential output is ​$1111 ​trillion, then the​ short-run aggregate supply curve would be written as​ follows:

#90 Screenshot CH22

When Paul Volcker became the chairman of the Federal Reserve in August​ 1979, inflation had spun out of control and the inflation rate exceeded​ 10%. Volcker was determined to get inflation down. By early​ 1981, the Federal Reserve had raised the federal funds rate to over​ 20%, which led to a sharp increase in real interest rates. Volcker was indeed successful in bringing inflation​ down, as panel (b) of Figure 10LOADING... ​indicates, with the inflation rate falling from​ 13.5% in 1980 to​ 1.9% in 1986. The decline in inflation came at a high​ cost: the economy experienced the worst recession since World War​ II, with the unemployment rate soaring to​ 9.7% in 1982. This outcome is exactly what our aggregate demand and supply analysis predicts. The autonomous tightening of monetary policy decreased aggregate demand and shifted the aggregate demand curve to the left from AD1 to AD​2, as we show in panel (a) of Figure 10LOADING.... The economy moved to point​ 2, indicating that unemployment would rise and inflation would fall. With unemployment above the natural rate and output below​ potential, the​ short-run aggregate supply curve shifted downward and to the right to AS2. The economy moved toward​ long-run equilibrium at point​ 3, with inflation continuing to​ fall, output rising back to potential​ output, and the unemployment rate moving toward its natural rate level. By​ 1986, panel (b) of Figure 10LOADING... shows that the unemployment rate had fallen to​ 7% and the inflation rate was​ 1.9%, just as our aggregate demand and supply analysis predicts.

#91 Screenshot CH22

​Application: Negative Demand​ Shocks, 2001minus−2004 In​ 2000, the U.S. economy was expanding when it was hit by a series of negative shocks to aggregate demand. 1. The​ "tech bubble" burst in March 2000 and the stock market fell sharply. 2. The September​ 11, 2001, terrorist attacks weakened both consumer and business confidence. 3. The Enron bankruptcy in late 2001 and other corporate accounting scandals in 2002 revealed that corporate financial data were not to be trusted. Interest rates on corporate bonds rose as a​ result, making it more expensive for corporations to finance their investments. All these negative demand shocks led to a decline in household and business​ spending, decreasing aggregate demand and shifting the aggregate demand curve to the left from AD1 to AD2 in panel (a) of Figure 11LOADING.... At point​ 2, as our aggregate demand and supply analysis​ predicts, unemployment rose and inflation fell. Panel (b) of Figure 11LOADING... shows that the unemployment​ rate, which had been at​ 4% in​ 2000, rose to​ 6% in​ 2003, while the annual rate of inflation fell from​ 3.4% in 2000 to​ 1.6% in 2002. With unemployment above the natural rate​ (estimated to be around​ 5%) and output below​ potential, the​ short-run aggregate supply curve shifted downward to AS2​, as we show in panel (a) of Figure 11LOADING.... The economy moved to point​ 3, with inflation​ falling, output rising back to potential​ output, and the unemployment rate returning to its natural rate level. By​ 2004, the​ self-correcting mechanism feature of aggregate demand and supply analysis began to come into​ play,

#92 Screenshot CH22

In​ 1973, the U.S. economy was hit by a series of negative supply​ shocks: 1. As a result of the oil embargo stemming from the​ Arab-Israeli war of​ 1973, the Organization of Petroleum Exporting Countries​ (OPEC) engineered a quadrupling of oil prices by restricting oil production. 2. A series of crop failures throughout the world led to a sharp increase in food prices. 3. The termination of U.S. wage and price controls in 1973 and 1974 led to a push by workers to obtain wage increases that had been prevented by the controls. The triple thrust of these events shifted the​ short-run aggregate supply curve sharply upward and to the left from AS1 to AS2 in panel (a) of Figure 13LOADING...​, and the economy moved to point 2. As the aggregate demand and supply diagram in Figure 13​ predicts, both inflation and unemployment rose​ (inflation by 3 percentage points and unemployment by 3.5 percentage​ points, as per panel (b) of Figure 13LOADING...​). The​ 1978-1980 period was almost an exact replay of the​ 1973-1975 period. By​ 1978, the economy had just about fully recovered from the​ 1973-1975 supply​ shocks, when poor harvests and a doubling of oil prices​ (as a result of the overthrow of the Shah of​ Iran) again led to another sharp upward and leftward shift of the​ short-run aggregate supply curve in 1979. The pattern predicted by Figure 13LOADING... played itself out againlong dash—inflation and unemployment both shot upward.

#93 Screenshot CH22

In February​ 1994, the Federal Reserve began to raise interest rates. It believed the economy would be reaching potential output and the natural rate of unemployment in​ 1995, and it might become overheated​ thereafter, with output climbing above potential and inflation rising. As we can see in panel (b) of Figure 15LOADING...​, ​however, the economy continued to grow​ rapidly, with the unemployment rate falling to below​ 5% in 1997. Yet inflation continued to​ fall, even declining to around​ 1.6% in 1998. Can aggregate demand and supply analysis explain what​ happened? Two permanent positive supply shocks hit the economy in the late 1990s. 1. Changes in the health care​ industry, such as the emergence of health maintenance organizations​ (HMOs), reduced medical care costs substantially relative to other goods and services. 2. The computer revolution finally began to impact productivity​ favorably, raising the potential growth rate of the economy​ (which journalists dubbed the​ "new economy"). In​ addition, demographic​ factors, such as an increase in the relative number of older workers who are less likely to be​ unemployed, led to a fall in the natural rate of unemployment. These factors led to a rightward shift in the​ long-run aggregate supply curve to LRAS2 and a downward and rightward shift in the​ short-run aggregate supply curve from AS1 to AS2​, as shown in panel (a) of Figure 15LOADING.... Aggregate output​ rose, and unemployment​ fell, while inflation also declined.

#94 Screenshot CH22

At the beginning of​ 2007, higher demand for oil from rapidly growing developing countries like China and India and slowing of production in places like​ Mexico, Russia, and Nigeria drove up oil prices sharply from around the​ $60 per barrel level. By the end of​ 2007, oil prices had risen to​ $100 per barrel and reached a peak of over​ $140 in July 2008. The​ run-up of oil​ prices, along with other commodity​ prices, led to a negative supply shock that shifted the​ short-run aggregate supply curve in panel (a) of Figure 16LOADING... sharply upward from AS1 to AS2. To make matters​ worse, a financial crisis hit the economy starting in August ​ 2007, causing a sharp increase in financial​ frictions, which led to contraction in both household and business spending. This negative demand shock shifted the aggregate demand curve to the left from AD1 to AD2 in panel (a) of Figure 16LOADING... and moved the economy to point 2. These shocks led to a rise in the unemployment​ rate, a rise in the inflation​ rate, and a decline in​ output, as point 2 indicates. As our aggregate demand and supply analysis​ predicts, this perfect storm of negative shocks led to a recession starting in December​ 2007, with the unemployment rate rising from the​ 4.6% level in 2006 and 2007 to​ 5.5% by June​ 2008, and with the inflation rate rising from 2.5​% in 2006 to​ 5% in June 2008​ (see panel (b) of Figure 16LOADING...​). After July​ 2008, oil prices fell​ sharply, shifting​ short-run aggregate supply back downward to AS1. ​However, in the fall of​ 2008, the financial crisis entered a particularly virulent phase following the bankruptcy of Lehman BrothersLOADING...​, decreasing aggregate demand sharply to AD3. As a​ result, the economy moved to point​ 3, with the unemployment rate rising to​ 10.0% by the end of​ 2009, while the inflation rate fell to​ 2.8% (see panel (b) of Figure 16LOADING...​).

#95 Screenshot CH22

As in the United​ States, the rise in the price of oil in 2007 led to a negative supply shock. In Figure 17 panel (a)LOADING...​, the​ short-run aggregate supply curve shifted up from AS1 to AS2 in the United Kingdom. The financial crisis did not at first have a large impact on​ spending, so the aggregate demand curve did not shift and equilibrium instead moved from point 1 to point 2 on AD1. The aggregate demand and supply framework indicates that inflation would​ rise, which is what occurred​ (see the increase in the inflation rate from​ 2.3% in 2007 to​ 3.9% in December 2008 in Figure 17 panel (b)LOADING...​). With output below potential and oil prices falling after July of​ 2008, the​ short-run aggregate supply curve shifted down to AS1. At the same​ time, the financial crisis after the Lehman Brothers bankruptcyLOADING... impacted spending​ worldwide, causing a negative demand shock that shifted the aggregate demand curve to the left to AD2. The economy now moved to point​ 3, with a further fall in​ output, a rise in​ unemployment, and a fall in inflation. As the aggregate demand and supply analysis​ predicts, the U.K. unemployment rate rose to​ 7.8% by the end of​ 2009, with the inflation rate falling to​ 2.1%.

#96 Screenshot CH22

The financial crisis that began in August 2007 at first had very little impact on China. When the financial crisis escalated in the United States in the fall of 2008 with the collapse of Lehman BrothersLOADING...​, all this changed.​ China's economy had been driven by extremely strong export​ growth, which up until September of 2008 had been growing at over a​ 20% annual rate. Starting in October​ 2008, Chinese exports​ collapsed, falling at around a​ 20% annual rate through August 2009. The negative demand shock from the collapse of exports led to a decline in aggregate​ demand, shifting the aggregate demand curve to AD2 and moving the economy from point 1 to point 2 in Figure 18 panel (a)LOADING.... As aggregate demand and supply analysis​ indicates, China's economic growth slowed from over​ 11% in the first half of 2008 to under​ 5% in the second​ half, while inflation declined from​ 7.9% to​ 4.4%, and then became negative thereafter​ (see Figure 18 panel (b)LOADING...​). Instead of relying solely on the​ economy's self-correcting​ mechanism, the Chinese government proposed a massive fiscal stimulus package of​ $580 billion in​ 2008, which at​ 12.5% of GDP was three times larger than the U.S. fiscal stimulus package relative to GDP. In​ addition, the​ People's Bank of​ China, the central​ bank, began taking measures to autonomously ease monetary policy. These decisive actions shifted the aggregate demand curve back to AD1 and the Chinese economy very quickly moved back to point 1. The Chinese economy thus weathered the financial crisis remarkably well with output growth rising rapidly in 2009 and inflation becoming positive thereafter.

#97 Screenshot CH22

Classify the following situation as a supply or demand​ shock: Financial frictions increase.

A negative demand shock. #59 Screenshot CH22

According to the​ expectations-augmented Phillips​ curve, which of the following factors determines the rate of​ inflation?

A. The degree of tightness in the labor market. B. Expected inflation. C. The difference between the unemployment rate and the natural rate of unemployment.

In the United​ Kingdom, the unemployment rate increased from​ 5.4% in 2006 to​ 7.8% in December​ 2009, while the inflation rate rose from​ 2.3% to​ 3.9% and then fell to​ 2.1% over this same time period. This can be explained by the following changes in aggregate demand and aggregate​ supply:

Aggregate supply initially decreased.​ Subsequently, aggregate supply​ increased, while aggregate demand decreased.

Why did China fare much better than the United States and the United Kingdom during the​ 2007-2009 financial​ crisis? ​(Check all that​ apply.)

D. China pursued an autonomous easing of monetary policy. E. The Chinese economy is less closely tied to the functioning of financial markets than the economies of the United States and the United Kingdom.

Which of the following describes a reason why the​ long-run Phillips curve relationship differs from the​ short-run relationship?

In the long​ run, expected inflation is taken into account when making work and hiring decisions.

Which of the following justifies the assumption of adaptive expectations in Phillips curve​ analysis?

Inflation expectations are sticky.

What basic relationship does the​ short-run Phillips curve​ describe?

It describes the negative relationship between unemployment and inflation.

What basic relationship does the​ long-run Phillips curve​ describe?

It indicates unemployment will move toward its natural rate regardless of the inflation rate.

What​ trade-offs does this relationship seem to offer​ policymakers?

Policymakers can increase inflation to decrease unemployment.

In what ways is the Volcker disinflation considered a​ success? What are the negative aspects of​ it?

The Volcker disinflation was successful in bringing inflation down with contractionary​ policies; however, these policies resulted in two recessions and a significant increase in unemployment.

Which of the following best explains why aggregate supply would decrease in the short run due to the implementation of a national sales​ tax?

The cost of goods sold would​ increase, making production more expensive. #58 Screenshot CH22

Which of the following best explains real business cycle​ theory?

The potential level of output changes due to technology and other​ shocks, creating business cycles even though the economy is still producing at potential output.

In the long​ run, a permanent negative supply shock leads to

a decline in output and a rise in inflation.

A negative supply shock that raises production costs will cause the

aggregate supply curve to shift up.

The financial crisis that began in August 2007 in the United​ States:

caused a collapse of​ China's exports and the Chinese government used a fiscal stimulus package to restore economic activity.

Adaptive expectations are based​ on:

past values.

​Okun's law describes​ the:

negative relationship between the unemployment gap and the output gap.

The inflation rate tends to​ increase, ceteris paribus​, as the actual unemployment rate

decrease

The inflation rate tends to​ increase, ceteris paribus​, as the unemployment gap

decrease

According to modern Phillips curve​ analysis, an increase in the unemployment gap​ would:

decrease the inflation rate by moving downward and to the right along the Phillips curve.

Determine the effects on inflation and output in the short run and the long run using ​AD/AS graph analysis. In the short​ run, output ___________ and inflation ____________. In the long​ run, output ________ to potential and inflation ___________ Which of the following graphs illustrates your previous​ answer?

decreases; decreases; rises; falls #59 Screenshot CH22

When financial frictions decreases​, the real cost of borrowing​ __________, and the AD curve​ __________.

decreases; shifts right

When inflation​ increases, the AD curve

does not shift

The inflation rate tends to​ increase, ceteris paribus​, as expected inflation

increase

The inflation rate tends to​ increase, ceteris paribus​, as the natural rate of unemployment

increase

According to modern Phillips curve​ analysis, a price shock — like a significant increase in oil prices —​ would:

increase the inflation rate by shifting the Phillips curve upward.

According to modern Phillips curve​ analysis, an increase in expected inflation​ would:

increase the inflation rate by shifting the Phillips curve upward.

Suppose​ Okun's law can be expressed according to the following​ formula: U − Un = −0.5 × Y − Yp Assuming potential output grows at a steady rate of 2.5​% and that the natural rate of unemployment remains​ unchanged: Unemployment will _____ by _____ ​% when real GDP decreases by one percentage point.​ Real GDP will ____ by ____% when unemployment decreases by two percentage points

increase; 0.5% increase; 4%

A temporary negative supply shock will ______ inflation and will _________ aggregate output in the short run. A temporary positive supply shock will _________ inflation and will __________ aggregate output in the long run.

increase; decrease not change ;not change

When the natural rate of unemployment increases

inflation is higher comma and output is lower in the long run.

When the natural rate of unemployment decrease

inflation is lower comma and output is higher in the long run.

If autonomous consumption declines​, and there is a sharp increase in energy​ prices, you would expect

inflation to have an ambiguous effect, but output to decrease.

If autonomous consumption increases​, and there is a sharp increase in energy​ prices, you would expect

inflation to increase, and output to have an ambiguous effect.

The aggregate demand curve would shift to the _____ if household wealth decreases or businesses become less optimistic.

left #7 Screenshot CH22

The Federal Reserve pursued inherently recessionary policies in the early 1980s​ to:

lower the inflation​ rate, which had spun out of control.

Of the factors identified above that shift the​ short-run aggregate supply​ curve, the only factor that possibly also shifts the​ long-run aggregate supply curve is __________ but only if this factor is

price shocks; permanent

The primary factor that shifts the​ short-run aggregate supply curve is changes​ in:

production costs.

In the preceding​ table, the permanent supply shocks are associated with

regulations and technology #60 Screenshot CH22

The aggregate demand curve would shift to the _______ if household wealth increases or businesses become more optimistic.

right #7P2 Screenshot CH22

Combining​ Okun's law with the Phillips curve helps derive the​ short-run aggregate supply curve in​ that:

the Phillips curve describes the​ short-run negative relationship between the unemployment rate and the inflation​ rate, while the​ short-run aggregate supply curve describes the positive relationship between output and inflation.

An upward shift in aggregate supply ultimately causes

the inflation rate to remain unchanged and output to remain unchanged.

An upward shift in aggregate supply initially causes

the inflation rate to rise and output to fall.

The stimulus package used by China after the financial crisis that began in August 2007 in the United States​ was:

three times larger than the U.S. fiscal stimulus package relative to GDP.

The economy is currently in​ long-run equilibrium. Suppose there is a sudden and significant increase in oil prices. Which of the following describes the​ short-run effect on the​ economy?

​Short-run aggregate supply​ decreases, the price level​ rises, and output falls below the natural rate.

​"The depreciation of the dollar from December 2008 to December 2009 had a positive effect on aggregate demand in the​ U.S." Is this statement​ true, false, or​ uncertain? Explain your answer.

​True, since a cheaper dollar increases net​ exports, a component of aggregate demand.

The four components of aggregate demand are

​consumption, planned​ investment, government​ spending, and net exports.

Using the line drawing tool​, show the effect of increased oil prices on the​ short-run aggregate supply curve. Label your new line ​'AS2​'.

#26 Screenshot CH22

Refer to the figure on your right. ​1.) Use the line drawing tool to show how the economy will​ self-correct. Label your new line. ​2.) Use the point drawing tool to locate the new equillibrium. Which of the following could NOT have caused the shock shown in the​ figure?

#39 Screenshot CH22 an increase in the price of oil

Refer to the figure on your right. ​1.) Using the line drawing tool draw the aggregated demand curve​ (AD), the aggregate supply curve​ (AS). Label these lines properly. ​2.) Using the point drawing tool locate the​ short-run equilibrium​ (E). Label this point​ 'E'. The​ short-run equilibrium will move as long as

#40 Screenshot CH20 output differs from its potential level.

The graph to the right shows the effect of an increase in investment spending. ​1) Using the line drawing tool​, show how the economy will​ self-correct. Properly label your line. ​2) Using the point drawing tool​, indicate the new equilibrium. Label the point ​'E2​'. Carefully follow the instructions​ above, and only draw the required objects. The economy is currently in​ long-run equilibrium. Suppose that investor optimism leads to an investment boom. Which of the following best explains the​ short-run effect on the​ economy?

#47 Screenshot CH22 Aggregate demand​ increases, the price level​ rises, and output rises above the natural rate.

During the Great​ Depression, investment spending collapsed. ​1) Using the line drawing tool​, show the effect of the collapse in investment spending on the graph to the right. Properly label your line. ​2) Using the point drawing tool​, indicate the new equilibrium point. Label the point ​'E2​'. Which of the following describes the effect of the fall in investment on output and the price​ level?

#48 Screenshot CH20 The price level fell and output fell below the natural rate.

Suppose the economy is starting from a situation of​ long-run equilibrium. In this​ case, we know that its equilibrium output ​(Upper Y starY*​) is ▼ equal to greater than less than its potential output ​(Upper Y Superscript Upper PYP​).

#56 Screenshot CH22

Many of the resources devoted to the January 2009 U.S. stimulus package encouraged investment in research and development of new technologies​ (e.g., more​ fuel-efficient cars and wind and solar​ power). Assume this policy results in positive technological change for the U.S. economy and​ "takes hold" at a time when the economy has been restored to a position of​ long-run equilibrium as depicted by point 1 in the figure to the right. ​1) Using the line drawing tool​, shift the LRAS curve in the appropriate direction. Label your curve ​'LRAS2​'. ​2) Using the line drawing tool​, shift one of the remaining curves such that a new​ short-run equilibrium is achieved that is not also a​ long-run equilibrium. Properly label your curve. ​3) Using the point drawing tool​, identify the new​ short-run equilibrium. Label this point​ '2'. Carefully follow the instructions​ above, and only draw the required objects.

#57 Screenshot CH22

If huge budget deficits cause the public to think that there will be higher inflation in the future but have no effect on business or consumer​ optimism, what will happen to the position of the aggregate demand​ curve?

Aggregate demand will not change.

Which of the following would cause the​ long-run aggregate supply curve to shift​ rightward?

An increase in available technology.

A positive demand shock will _________ inflation and will __________ aggregate output in the short run.

increase; increase

Suppose that the White House decides to sharply decreases military spending without increasing government spending in other areas. This measure​ would, all else​ constant, cause aggregate demand to

Decrease #3 Screenshot CH22

​"If prices and wages are perfectly​ flexible, then γ= 0 and changes in aggregate demand have a smaller effect on​ output." Is this statement​ true, false, or​ uncertain? Explain your answer.

False. As prices and wages become more​ flexible, γ becomes​ larger, and thus for a given aggregate demand​ shock, the effects on output are smaller.

Suppose that the White House decides to sharply increase military spending without decreasing government spending in other areas. This measure​ would, all else​ constant, cause aggregate demand to

Increase #3P2 Screenshot CH22

What relationship does the aggregate supply curve​ describe?

It describes the relationship between the total quantity of output supplied and the inflation rate.

Proposals have come before Congress that advocate the implementation of a national sales tax. Which of the following is true if such a tax is​ implemented?

It would cause a decrease in aggregate supply in the short run and no change in the long run. #58 Screenshot CH22

Which of the following best describes the adjustment to​ long-run equilibrium if an​ economy's short-run equilibrium output is below potential​ output?

Since unemployment is greater than its natural​ rate, there will be excess slack in the labor market​ and, consequently, pressure on firms to raise their prices at a less rapid rate. This deceleration of inflation shifts the​ short-run aggregate supply curve down​, pushing the​ economy's output up toward potential output.

Which of the following best describes the adjustment to​ long-run equilibrium if an​ economy's short-run equilibrium output is above potential​ output?

Since unemployment is less than its natural​ rate, there will be excessive tightness in the labor market​ and, consequently, pressure on firms to raise their prices at a more rapid rate. This acceleration of inflation shifts the​ short-run aggregate supply curve up​, pushing the​ economy's output down toward potential output.

As the labor force becomes more productive over​ time, how does that affect the​ long-run aggregate supply​ curve?

The LRAS curve shifts to the right because the existing labor​ force, along with a given amount of capital and other​ resources, can produce more output.

Compared to negative demand​ shocks, positive demand shocks have _______ effect on aggregate demand.

The opposite

The​ short-run aggregate supply curve​ has:

a positive slope because as the inflation rate​ increases, so does the quantity of output supplied.

We can see from the graph that in the short run if a national sales tax is​ implemented, the equilibrium inflation rate will _______ and the equilibrium level of aggregate output will ______

increase; decrease #58 Screenshot CH22


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