MacroEcon Ch 12 Homework

A fall in the prices of inputs will shift the aggregate

supply curve rightward

In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?

expansion

The aggregate supply curve

shows the various amounts of real output that businesses will produce at each price level

An increase in expected future income will

increase aggregate demand

The upward slope of the short-run aggregate supply curve is based on the assumption that

?

Which of the following effects best explains the downward slope of the aggregate demand curve?

?

The short-run aggregate supply curve shows the

Direct relationship between the price level and real GDP produced

In the expansion phase of a business cycle,

Employment and output increase

The aggregate demand curve shows the

Inverse relationship between the price level and the quantity of real GDP purchased

The natural rate of unemployment

Is equal to the total of frictional and structural unemployment

When the price level decreases,

The demand for money falls and the interest rate falls

The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will

increase U.S. exports and decrease U.S. imports.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will

increase U.S. imports and decrease U.S. exports.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to

increase aggregate demand

Which of the following would not shift the aggregate supply curve? 1. a decline in business taxes 2. an increase in the price level 3. a decline in the price of imported oil 4. an increase in labor productivity

increase in price level

The short-run aggregate supply curve represents circumstances where

input prices are fixed, but output prices are flexible.

Official unemployment statistics

understate unemployment because discouraged workers are not counted as unemployed.

In the aggregate demand-aggregate supply model, the economy's price level is assumed to be

variable, unlike in the aggregate expenditures model.

In the immediate short-run, the aggregate supply curve is a _________ line

Horizontal

A rightward shift in the aggregate supply curve is best explained by an increase in

Productivity

The labels for the axes of the aggregate demand graph should be

Real domestic output on the horizontal axis and the price level on the vertical axis

The Great Recession that started in 2007 was triggered by shocks in which of the following economic sectors?

Real estate and financial markets

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending.

The long-run aggregate supply curve is

vertical Because the aggregate price level has no effect on aggregate output in the long run

The real-balances, interest-rate, and foreign purchases effects all help explain

why the aggregate demand curve is downsloping

The interest rate effect on aggregate demand indicates that a(n)

Decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending

When national income in other nations decreases, aggregate demand in our economy

Decreases because our exports will decrease

(Last Word) In response to the Great Recession, the federal government engaged in significant deficit-funded spending, but it did not fully achieve the desired result. Which of the following best explains why the fiscal policy actions fell short of their objective?

consumers did not respond to the fiscal stimulus as well as hoped, as they put more income into saving and repaying debt

A decrease in aggregate supply means

The real domestic output will decrease and the price level would rise

Collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to

A price level that is inflexible downward

In an economy, it costs $1,500 to produce 2,000 units of output. If the costs increase to $2,500, then the per unit cost of production will have increased from

$0.75 to $1.25.

Suppose that an economy produces 2,400 units of output, employing 60 units of input, and the price of the input is $30 per unit. The per-unit cost of production is

0.75 =cost of input/total output

Which one of the following would not shift the aggregate demand curve?

A change in price level

A sharp rise in the real value of stock prices, which is independent of a change in the price level, would best be an example of

A change in real value of consumer wealth

Which of the following is incorrect? 1. When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending. 2. As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise. 3. Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward-flexible prices, reduces the price level. 4.As the price level falls, the demand for money declines, the interest rate declines, and interest-rate-sensitive spending increases.

1. When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending.

If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is

11%

1. Real-Balances Effect 2. Household Expectations 3. Interest-Rate Effect 4. Personal Income Tax Rates 5. Profit Expectations 6. National Incomes Abroad 7. Government Spending 8. Foreign Purchases Effect 9. Exchange Rates 10. Degree of Excess Capacity Changes in which two of the factors would most likely cause a shift in aggregate demand due to a change in consumer spending?

2 & 4

The total adult population of an economy is 175 million, the number of employed is 122 million, and the number of unemployed is 17 million. The percentage of adults who are not in the labor force is

20.6

If Fred's annual real income rises by 8 percent each year, his annual real income will double in about

8-9 years

The slope of the immediate-short-run aggregate supply curve is based on the assumption that

Both input and output prices are fixed

The long-run aggregate supply analysis assumes that

Both input and product prices are variable

Determinants of aggregate demand

Consumer spending, investment spending, government spending, net export spending

The aggregate demand curve is

downsloping because of the interest-rate, real-balances, and foreign purchases effects.

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes

the foreign purchases effect

The CPI compiled by the Bureau of Labor Statistics is used in the computations for

the inflation rate

The higher the rate of unemployment,

the larger the GDP gap

When the dollar appreciates relative to foreign currencies, it means that

the value of foreign currencies decreased relative to our dollar

The following factors explain the inverse relationship between the price level and the total demand for output, except

a substitution effect

An economic peak is

a temporary maximum point

Other things equal, a decrease in the real interest rate will

expand investment and shift the AD curve to the right.

Other things equal, an improvement in productivity will

shift the aggregate supply curve to the right.

The aggregate demand curve

shows the amount of real output that will be purchased at each possible price level

The foreign purchases, interest rate, and real-balances effects explain why the

Why the aggregate demand curve is downsloping

What is the correct way to calculate the unemployment rate?

[(unemployed)/(labor force)] x 100

The immediate-short-run aggregate supply curve represents circumstances where

both input and output prices are fixed.

If Congress passed new laws significantly increasing the regulation of business, this action would tend to

increase per-unit production costs and shift the aggregate supply curve to the left

An increase in personal income tax rates will cause a(n)

Decrease (or shift left) in aggregate demand

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about

1.6%

Which of the following will shift the aggregate supply curve to the right? 1. The price of oil rises substantially. unchecked 2. The government passes a law doubling all manufacturing wages. unchecked 3. A new networking technology increases productivity all over the economy. checked 4. Business taxes fall.

3 & 4

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)? 1. increased consumer optimism regarding future economic conditions 2. increased government spending on military equipment 3. an appreciation of the U.S. dollar 4. a reduced amount of excess capacity

3. an appreciation of the U.S. dollar

Suppose that an economy produces 300 units of output, employing 50 units of input, and the price of the input is $9 per unit. The level of productivity and the per-unit cost of production are

6 & $1.50

1. Government Spending 2. Consumer Expectations 3. Degree of Excess Capacity 4. Personal Income Tax Rates 5. Productivity 6. National Income Abroad 7. Business Taxes 8. Domestic Resource Availability 9. Prices of Imported Products 10. Profit Expectations on Investments Answer the question based on the accompanying list of items related to aggregate demand or aggregate supply. Changes in which combination of factors best explain why the aggregate supply curve would shift?

7 & 8

A change in which one of the following factors would shift the aggregate supply curve in the short run?

?

Refer to the graph. Which of the following changes will shift AD1 to AD2? 1. An increase in the value of the dollar relative to other currencies 2. A cut in personal and business taxes 3. An increase in real interest rates 4. A shrinkage in the value of stocks and other financial assets

?

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The level of productivity is

?

Innovations such as the microchip and the Internet lead to business cycle variations because

significant innovations occur irregularly and unexpectedly.

Immediate-short-run aggregate supply curve

An aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curve shifts; a horizontal aggregate supply curve that implies an inflexible price level.

Government Spending Consumer Expectations Degree of Excess Capacity Personal Income Tax Rates Productivity National Income Abroad Business Taxes Domestic Resource Availability Prices of Imported Products Profit Expectations on Investments A change in which factor is most likely to change both aggregate demand and aggregate supply?

Business taxes

A decrease in government spending will cause a(n)

Decrease in aggregate demand

The immediate-short-run aggregate supply curve is

horizontal

If aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that

the price level is inflexible downward and a recession has occurred.

Per-unit production cost is

total input cost divided by units of output

Per-unit production cost is

total input cost divided by units of output.

When the excess capacity of business expands unintentionally

aggregate demand decreases

The foreign purchases effect on aggregate demand suggests that a

Rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand

Which combination of factors would most likely increase aggregate demand?

an increase in consumer wealth and a decrease in interest rates

Which would most likely increase aggregate supply?

an increase in productivity

Compared to other industrial nations, unemployment rates in the United States

tend to fall somewhere in the middle over time.

The determinants of aggregate demand

explain shifts in the aggregate demand curve

The shape of the immediate-short-run aggregate supply curve implies that

total output depends on the volume of spending.

If the price of crude oil decreased, then this would most likely

Increase aggregate supply in the U.S.

An increase in personal income taxes would shift AD to the

Left because C will decrease

Which of the following will not tend to happen if the U.S. dollar depreciates against the euro? 1. Europeans will find U.S. goods become less expensive in euro terms. 2. Many Europeans will switch and buy their own products instead of imports from the U.S. 3. Many Americans will switch and buy domestic goods instead of imports from Europe. 4. Americans will find European goods become more expensive in dollar terms.

Many Europeans will switch and buy their own products instead of imports from the U.S.

An aggregate supply curve represents the relationship between the

Price level and the production of real domestic output

Deflation refers to a situation where

Price level falls, and could be caused by a shift of AD to the left

The real-balance effect pertains to the effect of

Price-changes on aggregate demand, while the wealth effect refers to the impact of changes in wealth on aggregate demand

Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 4. a. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 2 percentage points, in what direction b. By how much will the aggregate demand curve initially shift at each price level?

a. The aggregate demand curve will initially shift rightward by $15 billion. (2% x 20 billion) 40 billion - (5% x 5 billion) 25 Billion b. The aggregate demand curve will eventually shift rightward by $60 billion, because the economy's multiplier is 4, and 4 x 15 is 60 which is positive.

At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is:

above equilibrium

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.

aggregate demand curve would shift to the right

The U.S. economy was able to achieve full employment with relative price level stability between 1996 and 2000 because

aggregate demand increased and aggregate supply increased

Which of the following events would most likely reduce aggregate demand?

an increase in real interest rates

The interest-rate effect suggests that

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

Most economists agree that the immediate cause of most business cycle variation is

an unexpected change in the level of total spending.

Suppose that an economy produces 2,400 units of output, employing 60 units of input, and the price of the input is $30 per unit. If productivity increased such that 3,000 units are now produced with the quantity of inputs still equal to 60, then per-unit production costs would

decrease and aggregate supply would increase.

Other things equal, appreciation of the dollar

decreases aggregate demand in the US and may increase aggregate supply by reducing the prices of imported resources

The production of durable goods varies more than the production of nondurable goods because

durables purchases are postponable.

The economy's long-run AS curve assumes that wages and other resource prices

eventually rise and fall to match upward or downward changes in the price level.

When aggregate demand declines, the price level may remain constant, at least for a time, because

firms individually may fear that their price cut may set off a price war.

If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift

leftward by $40 billion at each price level.

The foreign purchases effect shifts the aggregate supply curve rightward. shifts the aggregate demand curve leftward. shifts the aggregate demand curve rightward. moves the economy along a fixed aggregate demand curve.

moves the economy along a fixed aggregate demand curve.

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the

multiplier effect

Susie has lost her job in a Vermont textile plant because of import competition. She intends to take a short course in electronics and move to Oregon, where she anticipates that a new job will be available. We can say that Susie is faced with

structural unemployment.