Economics Chapter 10

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from the list below match the letter of the outcome each of the following events produces upon the LRAS curve. A shifts to right B shifts to left C movement up along D movement down along Last year, businesses invested in new capital equipment, so this year the nation's capital stock is higher than it was last year.

(A)shifts to the right

Suppose that the full employment level of nominal GDP rises in one year from ​$13.8 to ​$14.2 trillion. The​ long-run equilibrium price​ level, however, remains unchanged at 115. By how much​ (in real​ dollars) has the​ long-run aggregate supply curve shifted to the right from one year to the​ next? ​$----- nothing trillion. ​(Round your answer to two decimal places.​)

.35

Which one of the following is not a component of total​ expenditures? A. Government purchases. B. Merchandise inventories. C. Consumption spending. D. Investment expenditures.

Merchandise inventories.

Consider the figure to the right. What type of variation in the position of the​ long-run aggregate supply​ (LRAS) curve could generate inflationlong dashthat ​is, an increase in the equilibrium price​ level? In a nation that generally experiences economic growth over the long​ run, would we anticipate that such a change in the position of the​ long-run aggregate supply curve could explain persistent inflation​? A rise in the equilibrium price level could be caused by a decline in​ long-run aggregate supply.​ Hence, one possible reason for persistent inflation would be continual reductions in economywide production.

a decline reductions

year to year rightward shifts in long run aggregate supply leads to

a long run trend path for real GDP

The ​long-run aggregate supply​ curve, ​LRAS, is a vertical line determined by amounts of available resources such as labor and capital and by technology and resource productivity. The position of the LRAS gives the​ full-information and​ full-adjustment level of real GDP per year. The natural rate of unemployment occurs at the​ long-run level of real GDP per year given by the position of the LRAS. If labor or capital increases from year to year or if the productivity of either of these resources rises from one year to the​ next, the LRAS shifts rightward . In a growing​ economy, therefore, real GDP per year gradually increases over time.

answer in text

Total expenditures for domestically produced goods and services consist of A. consumer spending only. B. consumer​ spending, business​ spending, government​ spending, and net foreign spending. C. consumer​ spending, business​ spending, and net foreign spending. D. government spending only.

consumer​ spending, business​ spending, government​ spending, and net foreign spending.

From the list​ below, match the letter of the outcome each of the following events produces upon the AD curve LOADING.... A Shifts to right B Shifts to left C Movement up along D Movement down along Type in a single letter​ (A, B, C or​ D). Deflation has occurred during the past year. real GDP levels of all the nations major trading partners have declined there has been a decline in the foreign exchange value of the nations currency the price level has increased this year.

d b a c

According to the interest rate​ effect, an increase in the price level A. reduces borrowing and spending. B. reduces the aggregate quantity of goods and services demanded. C. increases nominal interest rates. D. All of the above.

d all of the above

Consider the figure to the right. If the Federal Reserve seeks to prevent supply minus side inflation from taking place as a consequence of negative economic​ growth, how should it change the quantity of money in​ circulation? How would this policy action prevent supply minus side inflation​? If the Federal Reserve seeks to prevent supply minus side inflation from taking place as a consequence of negative economic​ growth, it should decrease the quantity of money in circulation.

decrease

Suppose that during a given​ year, the quantity of U.S. real GDP that can be produced in the long run rises from ​$11.9 trillion to ​$12.0 ​trillion, measured in base-year dollars LOADING.... During the​ year, no change occurs in the various factors that influence aggregate demand. As a​ result, the U.S.​ long-run equilibrium price level during this particular year will decrease .

decrease

suppose that there is a sudden rise in the price level. As a consequence economywide planned spending on purchase of goods and services will...... Which of the following is not a reason for this change in economywide planned​ spending?

decrease the substitution effect

​Supply-side inflation can be caused by a continual

decrease in aggregate supply while aggregate demand remains unchanged.

Inflation can be caused by

decreases in the​ long-run aggregate supply curve or increases in the aggregate demand curve.

Inflation can be caused by an increase in aggregate demand or by a decrease in aggregate supply .

demand supply

Economic growth causes the​ long-run aggregate supply schedule to shift rightward over time. If the position of the aggregate demand curve does not​ change, the​ long-run equilibrium price level tends to decrease ​, and there is secular deflation.

rightward decrease

The position of the​ long-run aggregate supply curve is determined by

the production possibilities curve.

the long run aggregate supply curve is determined by

the​ full-employment level of real output. The​ long-run aggregate supply curve is a vertical line set at the real output level corresponding to a fully employed economy.

When the production possibilities curve shifts​ outward,

the​ long-run aggregate supply curve shifts to the right.

If there is persistent inflation in a growing​ economy,

the​ long-run aggregate supply is shifting to the right at a slower rate than aggregate demand.

If economic growth causes the​ long-run aggregate supply curve to shift rightward over​ time, but the aggregate demand curve does not​ change, we expect

the​ long-run equilibrium price to​ decline, and there will be secular deflation.

In an open​ economy, the total value of GDP is based on the spending decisions of​ individuals, firms,​ governments, and foreign residents.

true

Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the​ long-run aggregate supply curve.

true

The components of GDP as calculated using the expenditure approach are identical to the components of aggregate demand.

true

The lower the price​ level, the greater the total planned spending on goods and services.

true

The​ long-run aggregate supply curve ​(LRAS​) is equivalent to the​ full-employment level of real GDP.

true

The shape of the​ long-run aggregate supply curve ​(LRAS​) is

vertical

The​ long-run equilibrium of an economy occurs

where the​ long-run aggregate supply curve meets the aggregate demand curve.

An increase in the U.S. price level can be caused by all of the following except

worsening economic conditions in Asia.

In the accompanying graph the equilibrium price level is​ ____ and the equilibrium real GDP is​ _____.

​120; $8 trillion

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of a decrease in equilibrium real GDP with no change in the equilibrium price level.

​Long-run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the left by an equal amount.

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP and increase in the equilibrium price level.

​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by a larger amount.

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP with no change in the equilibrium price level.

​Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by an equal amount.

If the LRAS shifts to the right over time and during this time AD does not noticeably​ change, real GDP will​ ________ and the price level will​ ________.

​increase; decrease

The aggregate demand curve slopes downward because of the

​real-balance, interest rate and open economy effects.

inflation has occurred during the past year as a result of rightward shifts of the AD curve.

(C) movement up along

there has been an 8 percent increase in the quantity of money in circulation that has shifted the AD curve

(C) movement up along

a hurricane of unprecedented strength has damaged oil rigs factories and ports all along the nation's coast.

(B) shifts to left

Assume that the position of a​ nation's aggregate demand curve has not​ changed, but the​ long-run equilibrium price level has declined. Now consider the following​ factors: Factors a. An increase in labor productivity b. A decrease in the capital stock c. Upper A decrease in the quantity of money in circulation d. The discovery of new mineral resources used to produce various goods e. A technological improvement Other things being​ equal, which of these factors might account for this​ event?

Factors a comma d comma and e.

Which of the following will generate an increase in aggregate​ demand?

Government spending for the onset of a war.

Consider the figure to the right. What are the three effects of decreases in the price​ level, and do these generate upward or downward movements along the​ economy's aggregate demand​ curve? The three effects of changes in the price level are A. the ​real-balance effect, the interest rate​ effect, and the wealth effect. B. the ​real-balance effect, the interest rate​ effect, and the open economy effect. C. the ​real-balance effect, the income​ effect, and the wealth effect. D. the substitution effect​, the income​ effect, and the wealth effect.

The three effects of decreases in the price level are the ​real-balance effect, the interest rate​ effect, and the open economy effect. the ​real-balance effect, the interest rate​ effect, and the open economy effect.

​Long-run equilibrium in the economy will occur

at the price level where total planned real expenditures equals real GDP at full employment.

we draw the long run aggregate supply curve as a vertical line to reflect the fact that

changes in the price level do not alter the level of potential real output.

Economic growth is represented by the​ long-run aggregate supply curve ​(LRAS​) shifting

outward to the right

In the accompanying graph if the price level is 140

real GDP exceeds total planned expenditures.

b. The equilibrium price levels in nations that are recipients of large inflows of funds from migrants will likely

rise because there is an increase in the aggregate demand in these countries.

The aggregate demand curve

shows planned purchase rates of goods and services at various price levels.

The​ long-run aggregate supply curve shifts outward when

there is economic growth

If the actual price level increases beyond the​ long-run equilibrium price​ level, all of the following will tend to occur except

firms offering fewer services than people wish to purchase.

PI=NGDP/ RGDP*100

formula for PI

In the figures to the​ right, if the economy acquires a larger amount of capital goods in the current​ year, does a larger or smaller outward shift in the production possibilities curve​ (PPC) result? Does the​ long-run aggregate supply​ (LRAS) curve shift more or less far to the​ right? Why? Using the​ three-point curved line drawing​ tool, draw a new PPC curve for the future year​ (FY) that reflects a higher capital stock in the current year​ (CY). Label your line ​'FY Subscript New​.' Using the line drawing tool​, draw a new LRAS curve that shows how it responds to the increase in capital goods. Label this line ​'LRAS Subscript New​.' Carefully follow the instructions​ above, and only draw the required object. The PPC shifts out more and the LRAS shifts right more because the​ economy's productive capabilities ____________ with a higher capital stock.

increase

Many economist view the natural rate of unemployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. There can be positive unemployment in this situation because.....

information is costly and rigidness always exist causing some types of unemployment (frictional and structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes. the natural rate of unemployment consists of frictional and structural unemployment which is positive because information is costly and rigidities always exists causing umeployment to occur even in the long run after everyone in the economy has fully adjusted to any changes.

the long run aggregate supply curve

is vertical because changes in the price level have no effect on real output.

The​ long-run aggregate supply curve will shift to the --- left right ​, the equilibrium price level will -------- decrease increase ​, and equilibrium GDP will ----- increase decrease .

left increase decrease

This​ year, a​ nation's long-run equilibrium real GDP and price level both increased. Which of the following combinations of factors might simultaneously account for both ​occurrences? In the response box for each of the following pair of events insert Y to indicate YES and N to indicate NO. a. An isolated earthquake at the beginning of the year destroyed part of the​ nation's capital​ stock, and the​ nation's government significantly reduced its purchases of goods and services. 2 Upper N b. There was a minor technological improvement at the end of the previous​ year, and the quantity of money in circulation rose significantly during the year. n Upper Y c. Labor productivity increased somewhat throughout the​ year, and consumers significantly increased their total planned purchases of goods and services. n Upper Y d. The capital stock increased somewhat during the​ year, and the quantity of money in circulation declined considerably. n n

n y y n

Assume that the economy is in​ long-run equilibrium with complete information and that input prices adjust rapidly to changes in the prices of goods and services. If there is a sudden rise in the price level induced by an increase in aggregate​ demand, real GDP will not change

not change

The idea that higher price levels in the United States result in foreign residents desiring to buy fewer​ U.S.-made goods and U.S. residents desiring to buy more​ foreign-made goods is referred to as the

open economy effect

According to the​ real-balance effect, an increase in the price level

reduces an​ individual's expenditures due to a decrease in the real value of cash balances.

A leftward shift in the aggregate supply schedule could be caused by

reductions in labor force participation.

Suppose that the​ long-run aggregate supply curve is positioned at a real GDP level of ​$14 trillion in base year​ dollars, and the​ long-run equilibrium price level​ (in index number​ form) is 120. The corresponding full employment level of nominal GDP must be ​$ 3 16.8 trillion dollars ​(Enter your response rounded to one decimal place​).

16.8

By how​ much, if​ any, has the aggregate demand curve LOADING... shifted to the​ right? A. AD has shifted by less than ​$0.4 trillion. B. AD has shifted exactly by ​$0.4 trillion. C. AD has shifted exactly by ​$0.35 trillion. D. AD has not shifted

AD has shifted exactly by ​$0.35 trillion.

Which of the following statements is​ true?

Annual U.S. inflation rates rose considerably during the 1970s but declined to lower levels after the 1980s.

suppose that during the past 3​ years, equilibrium real GDP in a country rose​ steadily, from ​$438 billion to ​$498 ​billion, but even though the position of its aggregate demand curve remained​ unchanged, its equilibrium price level steadily​ declined, from 110 to 105. What could have accounted for these​ outcomes, and what is the term for the change in the price level experienced by this​ country?

Economic growth without an increase in aggregate​ demand; secular deflation.

Which of the following factors could cause the economy to experience​ supply-side inflation?

Government laws which say that the average work week must be reduced by one hour every year.

What determines the total value of annual U.S.​ GDP? A. The Federal Reserve Board. B. Wall Street. C. The spending and production decisions of​ consumers, firms,​ governments, and foreigners. D. The Congressional Budget Office.

The spending and production decisions of​ consumers, firms,​ governments, and foreigners.

The total of all planned real expenditures in the economy is

aggredate in demand

Consider the accompanying diagram when answering the questions that follow. Suppose that the current price level is Upper P 2. In this​ case, the price will fall toward Upper P 1because A. actual real GDP would be greater than total planned real expenditures. B. firms would stand ready to offer more services than people wish to purchase. C. inventories of unsold goods would begin to accumulate. D. All of the above. E. A and​ B, but not C.

all of the above

The​ long-run aggregate supply curve can shift to the right due to A. improvements in technology. B. improvements in labor productivity. C. economic growth resulting from an increase in resources. D. All of the above.

all of the above

Consider the figure to the right. What change in the position of the aggregate demand curve could generate inflationlong dashthat ​is, an increase in the equilibrium price​ level? What type of variation in the quantity of money placed into circulation by the Federal Reserve could generate such a change in the position of the aggregate demand​ (AD) curve? A rise in the equilibrium price level could be caused by an increase in aggregate demand. The Federal Reserve could generate such a change in the position of the aggregate demand​ (AD) curve by increasing the quantity of money placed into circulation.

an increase increasing

In Ciudad​ Barrios, El​ Salvador, the latest payments from relatives working in the United States have finally arrived. When the credit unions open for​ business, up to 150 people are already waiting in line. After receiving the funds their relatives have transmitted to these​ institutions, customers go off to outdoor markets to stock up on food or clothing or to appliance stores to purchase new stereos or televisions. Similar scenes occur throughout the developing​ world, as each year migrants working in​ higher-income, developed nations send around​ $200 billion of their earnings back to their relatives in less developed nations. Evidence indicates that the​ relatives, such as those in Ciudad​ Barrios, typically spend nearly all of the funds on current consumption. a. Based on the above​ information, developing​ countries' income inflows transmitted by migrant workers are primarily affecting their​ economies' long-run aggregate demand curves.

demand curve

Consider this​ statement: "Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the​ long-run aggregate supply​ curve." This statement is describing

demand side inflation

When the price level falls​, these three effects work together to generate ---------- movements along the​ economy's aggregate demand curve.

downward

the shape of the aggregate demand curve (AD) is

downward sloping

For each event​ below, suppose that the economy begins at the​ long-run equilibrium point A in the figure to the right. Identify which of the other points on the diagramminuspoints B​, ​C, D, or E long dash could represent a new ​long-run equilibrium after the described events take place and move the economy away from point A. Events a. Significant productivity improvements​ occur, and the quantity of money in circulation decreases​: 8 Upper E. b. No new capital investment takes​ place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same​ time, the government enacts a large tax decrease for the​ nation's households: c Upper D. c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government increases its spending on goods and services. e Upper B.

e d b

When the economy is in​ long-run equilibrium, the price level adjusts to equate total planned real expenditures by​ individuals, businesses, the​ government, and foreign​ (non-U.S.) residents with total planned production by firms.

expenditures production

Aggregate demand is the total of all planned expenditures in the​ economy, and aggregate supply is the total of all planned production in the economy. The aggregate demand curve shows the various quantities of total planned spending on final goods and services at various price​ levels; it is downward sloping. There are three reasons why the aggregate demand curve is downward sloping. They are the real-balance ​effect, the interest rate ​effect, and the open-economy effect. The real-balance effect occurs because price level changes alter the real value of cash​ balances, thereby causing people to desire to spend more or​ less, depending on whether the price level decreases or increases. The interest rate effect is caused by interest rate changes that mimic price level changes. At higher interest​ rates, people seek to buy fewer houses and​ cars, and at lower interest​ rates, they seek to buy more . The open economy effect occurs because of a shift away from expenditures on domestic goods and a shift toward expenditures on foreign goods when the domestic price level increases.

expenditures production spending real balance interest rate aopen economy real balance interset rate fewer more domestic foregin

Suppose that the position of a​ nation's long-run aggregate supply​ (LRAS) curve has not​ changed, but its​ long-run equilibrium price level has decreased. FACTOR a. A fall in the value of the domestic currency relative to other world currencies b. Upper A decrease in the quantity of money in circulation c. An increase in the labor force participation rate d. An increase in taxes e. A fall in real incomes of countries that are key trading partners of this nation f. Increased​ long-run economic growth Of the factors given​ above, which could account for the price level decrease with constant​ LRAS?

factors b,d,e

A change in the price level has no effect on the real value of cash balances.

false

An increase in the price level shifts the aggregate demand curve ​(AD​) to the left.

false

An increase in​ long-run aggregate supply cuases the price level to​ increase, and is therefore inflationary.

false

The aggregate demand curve is essentially the same as the demand curve for an individual product.

false


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