Econ HW 10

When taxes decrease, consumption

increases as shown by a shift of the aggregate demand curve to the right.

A change in the expected price level is likely to cause...

a shift in the short run aggregate supply curve

The classical dichotomy and monetary neutrality are represented graphically by

a vertical long-run aggregate-supply curve

This shifts short run aggregate supply left

an increase in price expectations

The equation: quantity of output supplied = natural rate of output + z (actual price level - expected price level), where z is a positive number, represents

an upward- sloping short-run aggregate supply curve

Other things the same, if the price level is lower than expected, then some firms believe that the relative price of what they produce has

decrease, so they decrease production

Most economists believe that money neutrality

does not hold in the short run

Suppose the economy is in long run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in taxes, then in the short run, real GDP will

fall and the price level might rise, fall, or stay the same. In the long run, the price level might rise, fall, or stay the same but real GDP will be lower.

During a recession the economy experiences

falling employment and income

Aggregate demand shifts left if

government purchases decrease and shifts left if stock prices fall

The misconceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has

increase, so they increase priduction

Other things the same, an increase in the price level makes consumers feel

less wealthy, so the quantity of goods and services demanded falls.

As the price level rises

people will want to hold more money, so the interest rate rises.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected

production is more profitable and employment rises.

Most economists believe that in the short run

real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend.

An unexpected increase in the price level that temporarily lowers real wages and induces more employment and output in an economy, occurs in

sticky-wage theory

Aggregate demand includes...

the quantity of goods and services the government, households, firms, and customers abroad want to buy.

When the Fed buys bonds

the supply of money increases and so aggregate demand shifts right.

According to classical macroeconomic theory, changes in the money supply affect

variables measured in terms of money but not variables measured in terms of quantities or relative prices

if output is above its natural rate, then according to sticky-wage theory...

will strike bargains for higher wages. In response to the higher wages firms will produce less at an given price level