macro practice 1

___ prices, like wages, tend to be sticky and take time to adjust to a change in the economy

**input

What will increase the aggregate demand curve?

An increase in consumption spending An increase in investment

**Suppose there is an economy-wide decrease in business taxes. What can we expect to see in the business cycle model?

The business cycle enters an expansion

interest-rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases). occurs when a change in the price level leads to a change in interest rates and, therefore, in the quantity of aggregate demand

real balances effect

The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level. when a price increases, your buying power is decreased, causing you to buy less

**if the amount of output firms are willing to produce at each possible price level increases, that's

a shift of the aggregate supply

The equilibrium price level and real GDP are determined by the intersection of the:

aggregate demand and short-run aggregate supply curves

The relationship between the price level and the amount of real GDP supplied in the economy is called

aggregate supply

Negative shocks or changes to aggregate supply include:

an abrupt increase in oil prices a natural disaster

Negative shocks or changes to aggregate demand include:

an increase in taxes a decrease in consumer confidence

Positive shocks or changes to aggregate supply include

an unexpected increase in productivity an abrupt decrease in oil prices

Suppose there is a negative supply shock In the short run, the economy moves to a new equilibrium where real GDP lies _____ the full-employment level, and unemployment is _____ than the natural rate. In the long run, wages and production costs fall. Firms produce more at every price level. The short-run aggregate supply curve shifts to the _____, moving the economy to a new higher equilibrium. The price level falls and real GDP rises. Eventually, the economy returns to its full-time employment level of real GDP.

below; higher; right

Interest rates in the economy decrease This causes ___ to ___, so that aggregate demand ___ shifting to the ___

consumption and investment' increase; increases; right

Your state raises taxes on income, while holding fixed all other forms of taxation. This causes ___ to ___, so that aggregate demand ___ shifting to the ___

consumption; decrease; decrease; left

Existing home prices in the economy start to decline. This causes ___ to ___, so that aggregate demand ___ shifting to the ___

consumption; decrease; decreases; left

A stock market boom dramatically increases the amount of wealth in the economy. This causes ___ to ___, so that aggregate demand ___ shifting to the ___.

consumption; increase; increases; right

A ___ in investment will shift the AE line downward and shift the AD curve to the left

decrease

which causes government purchases to fall

decreased spending on defense decreased spending on airports

Holding the price level constant, a decrease in net exports _____ the aggregate demand for real GDP

decreases

Many things affect productivity, including:

education health of workers

Exports from the US will tend to fall when foreign incomes ___

fall ((when foreign consumers have more (less) money, they tend to increase (decrease) spending on goods from ALL sources - including US markets. This affects the AD curve.))

When the price level increases, in the short run, output will expand because profit margins ___

increase

Suppose incomes rise in foreign countries. This will:

increase U.S. exports, net exports, and aggregate demand.

Demand Shock Example

increase in consumer confidence

If consumers _____ the amount of goods and services they purchase, given constant prices, then aggregate _____ for real GDP increases

increase; demand

Higher U.S incomes tend to _____ U.S. imports and _____ net exports

increase; lower

After reading reports of increased consumer confidence in the economy, firms anticipate higher expected returns on investments in the future. This causes ___ to ___, so that aggregate demand ___ shifting to the ___

investment; increase; increases; right

The explosion of robotics and remote applications causes firms in the economy to purchase new devices and software This causes ___ to ___, so that aggregate demand ___ shifting to the ___

investment; increase; increases; right

Input prices tend to be sticky because

labor contracts might commit firms to paying a certain wage over multiple years

**if firms are producing more output because of the higher price level, that's a:

movement along the aggregate supply

Aggregate demand illustrates a(n) _____ relationship between the price level and the quantity of real GDP, or output, demanded

negative

in the short run, an increase in the ___ will increase the quanitty of real GDP supplied

price level

You have a habit of saving $100 per month for emergencies. The price level falls, so you decide that your emergencies can be funded with only $80 per month, leaving you with $20 more to spend each month.

real balances effect

**supply shocks cause a ___ the aggregate supply curve. A change in the price level causes a ___ the aggregate supply curve

shift of; movement along

A decline in investment will

shift the AE line downward and shift the AD curve to the left

In the ___ run, input prices are fixed and do not adjust along with other prices in the economy

short

Generally, changes to social institutions that facilitate production shift aggregate ___ to the right.

supply

As nominal wages and the costs of other resources rise during an expansion

the aggregate supply curve shifts to the left, real output falls and the price level rises further.

When we draw an aggregate demand curve, we're assuming that the only thing that is changing as we move up and down the curve is:

the overall price level

The long run aggregate supply curve is a ___ line originating at the full-employment level of real GDP

vertical

foreign purchases effect

when price level falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports and also decrease import spending in favor of US products that compete with imports. The inverse relationship between the net exports of an economy and its price level relative to foreign price levels. the rise in the price level reduces the quantity of U.S. goods demanded as net exports