ECON 201- CH. 23 Aggregate Supply and Aggregate Demand
An increase in the aggregate demand for goods and services has a larger impact on the ________ output and a larger impact on the price level in the ________.
short-run, long-run
Suppose firms become very optimistic about future business conditions and invest heavily in new capital equipment. What will be the short-run effect of this optimism on the aggregate-demand curve?
Aggregate Demand curve will shift right
The short-run effect on aggregate supply and aggregate demand: Florida orange groves suffer a prolonged period of below-freezing temperatures.
Aggregate supply shifts left
Suppose an economy is in long-run equilibrium. The central bank raises the money supply by 5 percent. What happens to diagram?
Aggregate supply shifts left; Aggregate demand shifts right
Change Needed to Decrease Aggregate Demand: The value of the domestic currency relative to the foreign currency: Deppreciate/Appreciate
Appreciate
Effect on Long-Run Aggregate Supply A severe hurricane damages factories along the East Coast.
Decrease (the capital stock is smaller, so long-run aggregate supply decreases)
Change Needed to Increase AS: Human Capital (improve/ decline)
Improve
Change Needed to Decrease Aggregate Demand: Taxes: Decrease or Increase ?
Increase ( An increase in taxes reduces households' disposable income. Households will spend less, causing aggregate demand to decrease at each price level.)
The idea that economic downturns result from an inadequate aggregate demand for goods and services is derived from the work of which economist?
John Maynard Keynes
Direction of LRAS Curve Shift: For environmental and safety reasons, the government requires that the country's nuclear power plants be permanently shut down.
Left
Direction of LRAS Curve Shift: Many workers leave to pursue more lucrative careers in foreign economies.
Left
Quantity of Output Supplied=
Natural Rate of Output + a( Actual Price Level - Expected Price Level)
What causes the economy to move from its short-run equilibrium to its long-run equilibrium?
Nominal wages, prices, and perceptions will adjust upward to this new price level.
Long-run effects on output and the price level, assuming policymakers take no action: A technological improvement raises productivity.
Output: Increase Price Level: Decrease
Long-run effects on output and the price level, assuming policymakers take no action: The stock market declines sharply, reducing consumers' wealth.
Output: No change Price Level: Decrease
Which of the following reasons could explain why the aggregate quantity of output supplied changes? Check all that apply. Prices are sticky. People have misperceptions about the price level. The price level has risen. Wages are not sticky
Prices are sticky. People have misperceptions about the price level. The price level has risen.
Direction of LRAS Curve Shift: A government-sponsored training program increases the skill level of the workforce.
Right
Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The price level The inflation rate The level of technological knowledge The size of the labor force
The price level The inflation rate
Stagflation is caused by ____________.
a leftward shift in the aggregate-supply curve
Stagflation:
a period of time where output is falling and prices are rising
A sudden crash in the stock market shifts the ______________.
aggregate demand curve (A stock market crash, or any event that causes consumers to cut back in spending and firms to cut back in their investments, reduces aggregate demand at any given price level (that is, causes a shift in the aggregate-demand curve))
According to the misperceptions theory, the economy is in a recession when the price level is________ what was expected.
below
Effect on Long-Run Aggregate Supply Congress raises the minimum wage to $10 per hour.
decrease (the natural rate of unemployment rises, so long-run aggregate-supply decreases )
The aggregate___________ curve shows the quantity of output that households, firms, the government, and foreign customers want to buy at each price level.
demand
As the price level rises the purchasing power of households real wealth will ________ causing the quantity of output demanded to _______. This phenomenon is known as ________________.
fall, fall, wealth effect
Suppose the government passes a law that reduces unemployment benefits in a way that causes unemployed workers to seek out new jobs more quickly. The policy will cause the natural rate of unemployment to______, which will: Shift the long-run aggregate supply curve to the ________.
fall, right
As the price level falls, the cost of borrowing money will_________, causing the quantity of output demanded to________ . This phenomenon is known as ______________.
fall, rise, the interest rate effecr
According to the sticky-wage theory, the economy is in a recession because the price level has declined so that real wages are too______ , thus labor demand is too_____.
high , low
When firms experience an increase in the costs of production, selling goods becomes _______ profitable, and firms supply _______ output at any given price level
less, less
In the short run, the increase in foreign spending on domestic goods associated with expansion abroad causes the price level to __________ the price level people expected and the quantity of output to __________ the natural rate of output. The economic prosperity abroad will cause the unemployment rate to___________ the natural rate of unemployment in the short run.
rise above, rise above, fall below
Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to________ , which will: Shift the long-run aggregate supply curve to the________.
rise, left
The aggregate_____________ curve shows the quantity of goods and services that firms produce and sell at each price level.
supply
Real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as_____________ .
the business cycle
The separation of real variables and nominal variables is known as ________________.
the classical dichotomy
The short-run effect on aggregate supply and aggregate demand: Households decide to save a larger share of their income.
Aggregate demand shifts left (they must spend less on consumer goods)
The short-run effect on aggregate supply and aggregate demand: Increased job opportunities overseas cause many people to leave the country.
Both aggregate supply and aggregate demand shift left (the short-run aggregate-supply curve will shift to the left because there are fewer people producing output. The aggregate-demand curve will also shift to the left because there are fewer people consuming goods and services. )
Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1950? Check all that apply. Consumer spending increased. The unemployment rate declined. Home sales declined. Retail sales increased.
Consumer spending increased. The unemployment rate declined. Retail sales increased.
Change Needed to Increase AS: Burdensome regulation (increase/decrease)
Decrease
Change Needed to Increase AS: Input prices (increase/decrease)
Decrease
Change Needed to Decrease Aggregate Demand: Wealth: Decrease/ Increase ?
Decrease (As household wealth declines, consumer spending decreases at each price level. A decrease in consumer spending leads to a decrease in aggregate demand.)
True or False: Small ups and downs in real GDP follow a consistent, predictable pattern.
FALSE
True/False? If firms adjusted their prices every day, then the short-run aggregate-supply curve would be horizontal.
FALSE (If firms adjusted prices quickly and if sticky prices were the only possible cause for the upward slope of the short-run aggregate-supply curve, then the short-run aggregate-supply curve would be vertical, not horizontal. The short-run aggregate-supply curve would be horizontal only if prices were completely fixed.)
True/False? The aggregate-demand curve slopes downward because it is the horizontal sum of the demand curves for individual goods.
FALSE (The aggregate-demand curve slopes downward because a fall in the price level raises the overall quantity of goods and services demanded through the wealth effect, the interest-rate effect, and the exchange-rate effect.)
Change Needed to Decrease Aggregate Demand: Interest rates: Decrease/ Increase
Increase (Higher interest rates raise the cost of borrowing and discourage business investment. The decrease in investment causes aggregate demand to decrease at each price level.)
Effect on Long-Run Aggregate Supply Intel invents a new and more powerful computer chip.
Increase (productivity increases, so long-run aggregate supply increases because more output can be produced with the same inputs)
Effects on Long-run aggregate supply The United States experiences a wave of immigration.
Increase (the labor force increases, so long-run aggregate supply increases)
Long-run effects on output and the price level, assuming policymakers take no action: The federal government increases spending on national defense.
Output: No change Price Level: Increase
Long-run effects on output and the price level, assuming policymakers take no action: A recession overseas causes foreigners to buy fewer U.S. goods.
Output:No change Price Level: Decrease
Direction of LRAS Curve Shift: An investment tax credit increases the rate at which firms acquire machinery and equipment.
Right
True/False? Whenever the economy enters a recession, its long-run aggregate-supply curve shifts to the left.
TRUE (An economy could enter a recession if either the aggregate-demand curve or the short-run aggregate-supply curve were to shift to the left.)
True/False? The long-run aggregate-supply curve is vertical because the price level does not affect long-run aggregate supply.
TRUE (Economic forces of various kinds (such as population and productivity) do affect long-run aggregate supply, but the price level does not)
Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to________ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore ________, and the number of foreign products purchased by domestic consumers and firms (imports) will_______ . Net exports will therefore_______ , causing the quantity of domestic output demanded to _______. This phenomenon is known as ________________.
fall, rise, fall, rise, rise, the exchange rate effect
When the economy goes into a recession, real GDP ________, and unemployment ________.
falls, rises
The investment boom might __________ the long-run aggregate-supply curve because higher investment today means a larger capital stock in the future, thus higher productivity and output.
increase
The notion that an increase in the quantity of money will impact the price level but not the output level is known as_______________.
monetary neutrality
For example, an increase in the money supply, a_________ variable, will cause the price level, a__________ variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a_________ variable. The separation of real variables and nominal variables is known as ________________
nominal, nominal , real
According to the sticky-price theory, the economy is in a recession because______________.
not all prices adjust quickly
The vertical axis of the aggregate demand and aggregate supply model measures the overall__________.
price level
The horizontal axis of the aggregate demand and aggregate supply model measures the overall______________ .
quantity of output
If the central bank increases the money supply, aggregate demand shifts to the ______. In the short run, there is an increase in output and the price level. Over time, nominal wages, prices, and perceptions will adjust to this new price level. As a result, the short-run aggregate-supply curve will shift to the _____. The economy will return to its natural rate of output.
right, left
Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to________ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore ______, and the number of foreign products purchased by domestic consumers and firms (imports) will _______ . Net exports will therefore _______ , causing the quantity of domestic output demanded to ______. This phenomenon is known as _____________.
rise, fall, rise, fall, fall, exchange rate effect
The economy begins in long-run equilibrium. Then one day, the president appoints a new chairman of the Federal Reserve. This new chairman is well known for her view that inflation is not a major problem for an economy. As a result of this news, people will expect the price level to______ , which, in turn, will cause the nominal wage that workers and firms agree to in their new labor contracts to be________ than it would be otherwise. This_________ the profitability of producing goods and services at any given price level, which would cause the short-run aggregate-supply curve to shift to the_______ . If aggregate demand is held constant, this shift in the aggregate-supply curve will cause the price level to_______ and the quantity of output produced to ________ .
rise, higher, decreases, left, rise, fall
A change in the expected price level shifts the _______________.
short-run aggregate-supply curve (If people expect lower prices in the future, they will accept lower wages (that is, supply more labor for any given price level) and set lower prices (or produce more output at any given price level))