Macro Chapter 12- SmartBook

Suppose households spend 75 cents of each additional dollar of after-tax income. If the government spends an additional $60 million on goods and services, GDP will increase by $ _______ million.

240

Which of the following will NOT increase LRAS?

A increase in the price level

Macroeconomic equilibrium occurs where

AD = AS.

Suppose the prices of goods and services paid by consumers doubles. At the same time, the prices of all inputs in the production process also doubles. What is the effect on aggregate output?

Aggregate supply does not change

Indicate which of the following events will decrease the LRAS curve, ceteris paribus.

Aging capital stock Increasing retirement rates Reducing federal college grants

Which of the following economic events will shift the long-run aggregate supply curve?

Changes in technology

The aggregate demand curve is downward-sloping due to the relationship between the price level and spending in which of the following categories?

Consumption Investment Net exports

Which of the following makes wages sticky?

Contracts Union agreements

Which of the following is considered a demand-side shock?

Decrease in consumer confidence

Which measure of a country's size and strength transforms all production into a common unit: dollar value?

GDP

When taxes increase by a given amount, what is the effect on GDP?

GDP decreases by a greater amount

Which of the following occurred as a result of the great Recession?

GDP fell and unemployment rose

What is the effect on GDP of a $125 million increase in government spending when the MPC = 0.65?

GDP increases by $357.14 million.

Determine the trade-off faced by policy-makers when increasing government spending.

High prices and rapid output adjustment

Suppose the market price of goods and services increases in the short run. In the presence of sticky wages, what is the economic result, ceteris paribus?

Higher profits earned by the firm An upward-sloping aggregate supply curve

Indicate which of the following are long-run supply shocks.

Immigration amnesty programs New, productivity-increasing technology

Indicate which of the following events will increase the LRAS curve, ceteris paribus.

Increase in foreign investment Technology improvements

When price increases and wage are sticky, firms can earn higher profits. Why is this the case?

Increased revenue and fixed labor costs

Suppose households becomes more optimistic about the health and strength of the economy. What is the effect on aggregate demand?

It increases

Which of the following is a problem associated with measuring a country's output?

It is impossible to add quantities of very different items.

Suppose there is an amazing new invention that allows people to access the Internet and email, text and call, AND listen to music. Suppose further that this new invention decreases worker productivity by 50% as workers now spend their time "networking" instead of working. What happens to LRAS?

It shifts to the left.

How does an increase in the actual price level affect the LRAS curve?

LRAS does not change

What is the effect of a change in expected future prices on the LRAS curve?

LRAS does not change

Suppose the economy experiences a substantial increase in the labor stock (through an immigration amnesty for example). Indicate the economic effect.

LRAS increases

When the economy experiences an improvement in technology, which of the following events occur?

LRAS increases SRAS increases

Suppose you enter your favorite coffee shop to find that the price of your favorite coffee drink increased by 15 cents overnight. Is it likely that the employees of the coffee shop received an equivalent increase in wage?

No. Input prices are sticky and rise slower than the price of goods and services.

How long a period is the long run?

Not a set amount of time

The macroeconomic model of aggregate demand (AD) and aggregate supply (AS) reveals information about which of the following? Multiple select question. Price controls Output Employment Labor unions Prices

Output Employment Prices

Why is the short-run aggregate supply shaped the way it is?

Prices of goods and services change more quickly than input prices.

When potential output expands, the LRAS curve shifts to the _________.

Right

In order for the economy to return to long-run equilibrium following an increase in the AD curve, what must occur?

SRAS must decrease.

When a supply-side shock is assumed to be temporary,

SRAS shifts.

At the point where LRAS, SRAS, and AD intersect, what is true?

Short-run output equals potential output Prices are at expected levels The economy is at short-run equilibrium The economy is in long-run equilibrium

Why would a decrease in consumer spending (such as the reduction that occurred during the Great Recession) increase unemployment?

Since businesses are selling fewer goods, they cannot employ as many workers.

What happens to the economy in the long run when a supply shock disrupts equilibrium?

The economy returns to LR equilibrium as prices adjust.

What is the effect of an increase in consumer confidence on the LRAS?

There is no effect.

When actual output in the economy exceeds potential output, the economy experiences

a boom.

A change in the price level causes _____________ the aggregate demand curve; changes in non-price factors cause ______________ the aggregate demand curve.

a movement along; a shift in

When actual output in the economy is less than potential output, the economy experiences

a recession.

In the long run,

a shift in AD changes only the price level.

The relationship between the overall price level and total production by all firms is given by the __________ curve.

aggregate supply

Events that shift the LRAS curve

also shift the SRAS curve.

When the aggregate demand (AD) curve shifts to the right, it is considered

an increase in AD.

Using the aggregate demand and aggregate supply model, it is possible to _____.

analyze the effect of government policies on the economy

Equilibrium price level and output are given

at the intersection of LRAS, SRAS, and AD.

When a supply-side shock is assumed to be permanent,

both LRAS and SRAS shift.

An increase in the price level _____.

causes a movement up along the SRAS curve

When the price of U.S. goods and services increases, U.S. exports tend to __________.

decrease

If another country increases its tariffs on U.S goods and services, the AD curve for the U.S. will likely

decrease. shift left.

A decrease in foreign investment in a country will _________ the country's capital stock and shift the LRAS to the __________.

decrease; left

Suppose there is a decrease in government spending. In the short run, output ___________ and in the long run, output _________.

decreases; does not change

When the government increases taxes on businesses and individuals, consumption ___________ and the AD curve _____________.

decreases; shifts to the left

Much government spending is legislated. As a result, an increase in the overall price level

does not affect government spending as it related to GDP.

In the long run, changes in price ___________ aggregate supply. As a result, the long-run aggregate supply curve is _________.

don't affect; vertical

The relationship between the price level and investment spending leads to a ___________ aggregate demand curve.

downward-sloping

Supply shocks are

economic events that affect production and the SRAS curve.

At the point where the AD curve and the SRAS curve intersect, the economy has reached

equilibrium.

When price level rises, real purchasing power

falls.

When price level rises, wealth

falls.

When the price level rises in the short run,

firms are able to produce more.

If price increases and wages are sticky, then

firms produce more at higher prices.

The aggregate supply curve represents production

in the economy as a whole.

In order for the economy to return to long-run equilibrium following a decrease in the AD curve, the SRAS must __________.

increase

When the price of U.S. goods and services increases, U.S. imports tend to

increase as foreign products are now relatively less expensive.

The purpose of the American Recovery and Reinvestment Act was to __________ aggregate demand (AD), and. as a result, shift the AD curve to the __________.

increase; right

An increase in foreign investment in a country,

increases the capital stock.

Suppose there is an increase in government spending. In the short run, output ___________ and in the long run, output _________.

increases; does not change

Suppose there is an increase in consumer confidence. In the short run, price ___________ and in the long run, price _________.

increases; increases

When the government reduces taxes on businesses and individuals, consumption ___________ and the AD curve _____________

increases; shifts to the right.

The effect of an $200 million tax cut will be ___________ an equivalent __________ in government spending.

less than; increase

A period of time where the price of all inputs (labor, land, capital) is variable is called the _________.

long run

Increases in the price level make it

more expensive to borrow money as interest rates rise.

When consumer confidence increases,

more goods and services are demanded at all price levels.

An indirect ___________ relationship exists between price level and investment spending by businesses.

negative

Government spending is a less effective policy with respect to

negative supply shocks.

In general, there is a(n) ___________ relationship between total expenditure and price level in ____________ components of GDP.

negative; 3-out-of-4

Government spending decisions are

not based on changes in the price level.

When workers and firms expect changes in future price levels,

only the SRAS shifts.

Shifts in AD change only the _________ level in the long-run.

price

All else equal, increases in government spending shift the AD curve to the ____________.

right

Suppose the price of a major commodity like oil decreases dramatically and unexpectedly. The SRAS curve will _________ and the LRAS will ________.

shift right; not change

Suppose an economy experiences substantial increases in the capital stock and technology. As a result, worker productivity increases. From this we would expect to see the long-run aggregate supply curve

shift to the right.

A decrease in the cost of production _____.

shifts the SRAS curve to the right

An increase in consumer confidence

shifts the aggregate demand curve to the right.

If the U.S. dollar strengthens relative to other currencies, then the U.S. AD curve

shifts to the left as U.S. goods are more expensive abroad.

Government spending is a policy that is best suited to ________-run demand shocks.

short

Suppose the economy experiences a temporary increase in the price of a major commodity. This event is considered a

short-run supply shock.

The short-run aggregate supply curve has a positive slope in large part due to the effect of __________ wages.

sticky

When policy-makers attempt to stimulate the economy with increased government spending,

the economy often experiences inflation.

Aggregate demand measures

the market value of all goods and services.

As a result of the relationship between price level and government spending, the slope of aggregate demand curve is

unaffected.

In the short run, the aggregate supply curve is

upward-sloping.

The aggregate supply curve slopes __________ in the short run because input prices change __________ than the price of goods and services.

upward; slower