Ch. 12- Problems

True or False. If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.

False

True or false: "Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply."

True, but the magnitude of the effect on unemployment depends on the economic situation.

The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because

a downsloping, single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed.

A reduction in short-run aggregate demand in the actual economy reduces real output, rather than the price level, because

prices are inflexible downward.

The downsloping aggregate demand curve can be explained by

the interest-rate effect, the real-balances effect, and the foreign purchases effect.

According to the "real-balances effect," if prices

decline, the purchasing power of assets will rise, so spending at each income level should rise.

The multiplier

causes an initial change in spending to generate an even larger change in the aggregate demand curve.

In the two months following the September 11, 2001, attacks on the United States, consumption also declined. This caused a

leftward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply.

Which of the following statements is true concerning the real-balances effect and the wealth effect?

The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve.

According to the "wealth effect," a change in consumer wealth causes

a shift in consumer spending and a shift of the aggregate demand curve.

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 and by how much will the aggregate demand curve initially shift at each price level? b. In what direction and by how much will it eventually shift?

a. Aggregate demand will initially shift rightward by $ 15 billion. b.Aggregate demand will eventually shift rightward by $ 60 billion.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? a. An increase in aggregate demand. b. A decrease in aggregate supply, with no change in aggregate demand. c. Equal increases in aggregate demand and aggregate supply. d. A decrease in aggregate demand. e. An increase in aggregate demand that exceeds an increase in aggregate supply.

a. The price level rises rapidly and there is little change in real output. b. The price level rises and real output decreases. c. The price level does not change, but real output increases. d. The price level does not change, but real output declines. e. The price level increases somewhat, with a relatively large change in output.

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.

An upsloping aggregate supply curve weakens the realized multiplier effect because

any increase in demand will have both a price and an output effect.

In early 2001 investment spending sharply declined in the United States. This caused a

leftward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply.

True or False. Decreases in AD normally lead to decreases in both output and the price level.

False

A full-strength multiplier applies to a decrease in aggregate demand when

aggregate supply is horizontal.