Aggregate Demand and Aggregate Supply

A decrease in aggregate demand is likely to result from:

an appreciation in the value of the U.S. dollar.

https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/econ/McConnell_Brief_3e/image030ch15.png Refer to the above graph. Which line shows the full-employment output for the economy?

4

Which combination of factors would most likely increase aggregate demand?

An increase in consumer wealth and a decrease in interest rates An increase in government spending and a decrease in interest rates.

Which of the following are sources of productivity?

Improved forms of business enterprises Improved production technology Better educated workforce Better trained workforce

The ratchet effect means that:

When aggregate demand decreases, the price level remains constant

The wealth effect is reflected by:

a rightward shift of the aggregate demand curve

Menu costs will: increase the amount of training of workers. result in price wars between businesses. increase the legal minimum wage. make prices inflexible downward.

Make prices inflexible downward

The aggregate demand curve slopes downward because it reflects:

an inverse relationship between the price level and the amount of real output demanded

https://ezto-cf-media.mheducation.com/Media/Connect_Production/bne/econ/McConnell_Brief_3e/image036ch15.png Refer to the above graph. This economy is at equilibrium:

at price level P2 and output Q2.

In terms of aggregate supply and aggregate demand, the equilibrium price level is:

at the point of intersection of the the aggregate demand and aggregate supply curves

Changes in which of the following variables cause a change in consumption spending?

consumer expectations personal taxes household borrowing consumer wealth

Best investment projects are usually completed first so that subsequent projects produce lower expected rates of return. What is this an example of?

diminishing returns

In the immediate short run, output prices are typically fixed because:

firms enter into supply contracts with their customers

An appreciation of the US real exchange rate will ______ imports and ______ exports while depreciation of the US exchange rate will ______ imports and ______ exports

increase; decrease; decrease; increase

Emphasis is given to ___-run aggregate supply because this is the version of aggregate supply that can explain changes in output and prices.

short

The dollar's exchange rate is the:

the price of foreign currencies in terms of the US dollar

In the short run, labor contracts that cover several months or years cause:

input prices to be sticky or slow to change

The real ___ rate is also called the ___ cost of investment because it reflects the explicit costs of borrowing money from others or the implicit cost of using its own retained earnings to make an investment.

interest; marginal

True or false: Changes in taxes, subsidies and the extent of regulations may alter per-unit production costs and shift the aggregate supply curve.

True

Demand-pull inflation is associated with a(n):

increase in aggregate demand.

A wage increase will ______ per-unit production costs and shift the aggregate supply curve to the ______.

increase; left

Worker morale and productivity might fall when

workers' wages are reduced

Which of the following result from a reduction in personal income tax rates on consumers?

Increased take-home income Increasing consumer purchases at each possible price level

If the real interest rate is 7% and the expected rate of return on investment is 9%, what will the firm do?

Invest because they expect the project to be profitable.

Which of the following best describe the effects of a depreciation of the U.S. dollar on production costs and aggregate supply (AS)?

The dollar price of imported resources is higher. A leftward shift of the AS curve An increase in per-unit production costs from using imported resources U.S. firms obtain less foreign currency with each dollar. A decrease in imported resources

How can the change in real GDP be determined when there has been a change in spending?

The multiplier times the initial change in spending.

Why are employers often reluctant to reduce workers' wages?

Workers' productivity might fall. Workers' morale and effort are impaired.

The effect of an unexpected decline in asset values on aggregate demand can be summarized as:

a decline in wealth prompts consumers to save more and spend less which shifts the aggregate demand curve to the left

Deflation occurs when there is:

a decreasing aggregate price level

Which of the following will shift the aggregate supply (AS) curve for the domestic economy to the left? A depreciation of a foreign currency relative to the U.S. dollar. An appreciation of the U.S. dollar No change in the U.S. dollar exchange rate. A depreciation of the U.S. dollar

A depreciation of the U.S. dollar

The multiplier effect will occur whenever there is a change in

consumption spending government spending investment spending net exports

"Supply-side" economists argue that increased regulations on firms by the government will ________.

decrease aggregate supply and increase prices

When firms are willing to produce and sell less real output at each price level, this is called a(n)

decrease in aggregate supply

An unexpected decline in asset values causes a(n) ___ in consumer wealth and a(n) ___ in aggregate demand.

decrease; decrease

A depreciation of the US real exchange rate will ______ imports and ______ exports while depreciation of the US exchange rate will ______ imports and ______ exports

decrease; increase; increase; decrease

A wage decrease will ____ per unit production costs and shift the aggregate supply curve to the ___.

decrease; right

If consumers expect lower future prices, current consumption spending ______ and the aggregate demand curve shifts to the ______.

decreases; left

An increase in aggregate demand, assuming constant aggregate supply, will result in __________.

demand-pull inflation

The "other things" that change and shift the aggregate demand curve are called the of aggregate demand or aggregate demand shifters.

determinants

The price of foreign currencies in terms of the US dollar is called the:

dollar's exchange rate

An increase in productivity:

enables more output with limited resources

The slope of the short-run aggregate supply curve is

flatter below full-employment output and steeper at outputs greater than full-employment.

One of the reasons that the short run aggregate supply curve is upward sloping is because ___ prices are fixed while ___ prices are variable.

input; output

What is it called when changes in investment spending change aggregate demand and GDP by more than the initial change in spending?

multiplier effect

A ___ war refers to successively deeper and deeper rounds of price cuts.

price

The immediate short run, short run and long run are the three time horizons that influence the relationship between the price level and the amount of:

real GDP

The marginal cost of investment is also known as the

real interest rate

In deciding whether or not invest, a firm compares the ______ to the ______.

real interest rate; expected return on investment

An input price is a(n) ______ price while an output price makes up the price level.

resource

An increase in productivity will shift the aggregate supply curve to the ____.

right

If firms are optimistic about future business conditions, investment will ____

rise

Changes in consumer spending, investment, government spending and net export spending will:

shift the aggregate demand curve

The aggregate demand curve would shift to the left if:

taxes were increased

Which of the following are determinants of aggregate demand?

Change in consumer wealth Change in investment spending

Economists view investment spending on which of the following?

Physical capital

The equilibrium price level and equilibrium level of real GDP occur at the intersection of the aggregate demand curve and the aggregate supply curve.

True

Suppose that the table below shows an economy's relationship between real output and the inputs needed to produce that output: (Left to right, top to bottom) Input Quantity: 150, 112.5, 75 Real GDP: $400, 300, 200

a. What is the level of productivity in this economy? 2.66 or 2.67 Productivity = Real GDP / Input Quantity 400 / 150 = 2.66(repeating)7 = 2.67 b. What is the per-unit cost of production if the price of each input unit is $5? $1.88 Per unit cost = (price of input unit x input quantity) / real GDP (5 * 150) / 400 = 1.875 = 1.88 c. Assume that the input price increases from $5 to $6 with no accompanying change in productivity. What is the new per-unit cost of production? $2.25 (6 * 150) / 400 = 2.25 In what direction would the $1 increase in input price push the economy's aggregate supply curve? Left - Price level would increase and real output would decrease. d. Suppose that the increase in input price does not occur but, instead, that productivity increases by 25% percent. What would be the new per-unit cost of production? $1.5 25% = 1.25 (1.25 * 400) = 500 ($5 * 150) / 500 = 1.5 What effect would this change in per-unit production cost have on the economy's aggregate supply curve? Left; Price level would decrease and real output would increase.

When the price level rises, real GDP demanded increases.

False.

Why are firms reluctant to reduce their prices?

Fear of price wars Lower profits

___ spending will fall if firms' outlook on the economy is pessimistic.

Investment

As more investment occurs the subsequent projects produce ___ expected rates of return as a result of diminishing returns.

lower

A legal floor placed on wages is called a:

minimum wage

Which of the following influence expected returns on investment projects?

Business taxes Expectations about future business conditions Technology Degree of excess capacity

If real output is 100 units and 5 units of inputs are needed to produce a quantity of ___ units.

20 units total output / total input

The table shows the aggregate demand and aggregate supply schedule for a hypothetical economy. Refer to the above table. The equilibrium price level and quantity of real domestic output will be:

200 and $6000.

Which factors seem to be undermining the ability of firms and workers to resist price and wage cuts in the U.S. when aggregate demand falls?

Declining power of unions in the U.S. International competition

True or false: The multiplier effect only occurs when there is a change in investment spending.

False

True or false: The shifts from one AD curve to another AD curve only include the initial changes in spending.

False

Refer to the data in the table given below. Suppose that the present equilibrium price level and level of real GDP are 100 and $275, and that data set A represents the relevant aggregate supply schedule for the economy.

a. What must be the current amount of real output demanded at the 100 price level? $275 - Given that the economy is equilibrium aggregate supply equals aggregate demand. Thus, the real output demanded must also equal $275 (quantity supplied given above). b. If the amount of output demanded decline by $25 at the 100 price level shown in A, what will be the new equilibrium real GDP? $250 - If the output demanded fell by $25, the new level of demand is $200. Since the price level does not change the quantity supplied would also fall by $25. In business cycle terminology, what would economists call this change in real GDP? Recession - The new equilibrium level of real GDP is $200. This decline in output is likely a recession.

Wage increases shift the:

aggregate supply curve to the left

Suppose an economy is operating at its full-employment output. An increase in aggregate demand with constant aggregate supply will result in actual GDP being ___ than potential GDP.

greater

Aggregate demand will rise if consumers expect prices to ___ (increase/decrease) in the future.

increase

Investment spending and aggregate demand will ___ when excess capacity dwindles.

increase

An expected rise in the rate of inflation for consumer goods will:

increase current aggregate demand.

When firms are willing to produce and sell more real output at each price level, this is called a(n)

increase in aggregate supply

Over time if aggregate demand and aggregate supply increase proportionately real GDP will rise and

there is no cyclical unemployment there is no demand-pull inflation

The multiplier effect creates a multiple increase in GDP when spending increases, but when spending falls ______.

there is no multiplier effect

Businesses will invest less if:

they are pessimistic about future business conditions

Productivity can be illustrated in the formula:

total output divided by total inputs

Consumer wealth is defined as the:

total value of assets minus total value liabilities

The short-run aggregate supply curve is ______ to reflect that real output rises when the price level rises and real output falls when the price level falls.

upward-sloping

At full employment, the long run aggregate supply curve is

vertical

The slope of the long run aggregate supply curve is

vertical

Which of the following describe why wages are inflexible downward?

Large parts of the labor force work under contracts prohibiting wage cuts for the duration of the contract Wages and salaries of non-union workers are usually adjusted only once a year

What is the ratio of a change in GDP to the initial change in spending?

Multiplier

If the real interest rate is 9% and the expected rate of return on investment is 7%, what will the firm do?

Not invest because they expect the project will not be profitable.

What is the multiplier? What is the multiplier in the multiplier effect?

Ratio of a change in GDP to a change in spending.

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 3. If household wealth falls by 6 percent because of declining house values, and the real interest rate falls by 3 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? In what direction and by how much will it eventually shift?

The aggregate demand curve will shift (rightward) by $30 billion. (20 * 3) - (5 * 6) = 30 The aggregate demand curve will shift (rightward) by $90 billion. (30 * 3) = 90

True or false: A determinant of aggregate demand will raise or lower demand, illustrated as changes or shifts of the aggregate demand curve.

True

True or false: Other things equal, a change in the price level will change the amount of aggregate spending and the amount of real GDP demanded.

True

Investment spending refers to:

adding to physical capital

If there is no demand-pull inflation nor cyclical unemployment, but real GDP is expanding, changes in

aggregate supply and aggregate demand are proportional.

A wage decrease shifts the ______.

aggregate supply curve to the right

When there is a change in consumer wealth, household borrowing, consumer expectations or personal taxes, then there will be a change in ______ spending.

consumption

The firm will choose to invest up to the point where the expected rate of return ___ the real interest rate.

equals

Answer the following questions on the basis of the three sets of data for the country of North Vaudeville: Original Values: (Left to right, top to bottom) Price Level: 110, 100, 95, 90 Real GDP: 290, 265, 240, 215

a. Which set of data illustrates aggregate supply in the immediate short run in North Vaudeville? A, C, B b. Assuming no change in hours of work, if real output per hour of work decreases by 30 percent, what will be the new levels of real GDP in the right column of C? 100 - 30 = 70 70/100 Price level 110: New output = 203 - (70/100) * 290 Price level 100: New output = 185.5 - (70/100) * 265 Price level 95: New output = 168 - (70/100) * 240 Price level 90: New output = 150.5 - (70/100) * 215 Do the new values reflect an increase in aggregate supply or do they indicate a decrease in aggregate supply? Decrease This is a decrease in aggregate supply because output has decreased at every price level.