Chapter 10

Aggregate demand curve

A curve showing planned purchase rates for all final goods and services in the economy at various price levels, all other things held constant.

Secular deflation

A persistent decline in prices resulting from economic growth in the presence of stable aggregate demand.

Long-run aggregate supply (LRAS) curve

A vertical line representing the real output of goods and services after full adjustment has occurred. It can also be viewed as representing the real GDP of the economy under conditions of full employment—the full-employment level of real GDP.

Which of the following would cause aggregate demand to​ decrease? A. The government increases taxes on both business and personal income. B. A drop in the foreign exchange value of the dollar C. The Fed increases the amount of money in circulation. D. Businesses and households believe that the economy is headed for good​ times, so they begin to feel increased security about their jobs.

A. The government increases taxes on both business and personal income.

Economic growth causes the A. production possibilities curve to shift rightward and the​ long-run aggregate supply curve to shift rightward. B. production possibilities curve to shift rightward and the​ long-run aggregate supply curve to shift leftward. C. production possibilities curve to shift leftward and the​ long-run aggregate supply curve to shift leftward. D. production possibilities curve to shift leftward and the​ long-run aggregate supply curve to shift rightward.

A. production possibilities curve to shift rightward and the​ long-run aggregate supply curve to shift rightward.

___ ___ consists of the demand for domestically produced consumption goods, investment goods, government purchases, and net exports. Consequently, any change in total planned spending on any one of these components of real GDP will cause a change in ___ ___.

Aggregate demand

What determines the position of the aggregate demand curve?

Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right. Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.

A higher domestic price level should A. increase real wealth and consumption. B. decrease net exports. C. increase desired investment. D. none of these.

B. decrease net exports.

Many economists view the natural rate of unemployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. There can be positive unemployment in this situation because A. in a free society some people will always prefer idleness over work. B. information is costly and rigidities always exist causing some types of unemployment​ (frictional and​ structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes. C. corporations need the presence of some unemployment to keep workers​ "in line." D. business cycles are an inherent feature of the economy causing cyclical unemployment to naturally occur.

B. information is costly and rigidities always exist causing some types of unemployment​ (frictional and​ structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes. The natural rate of unemployment consists of frictional and structural​ unemployment, which is positive because information is costly and rigidities always exist causing some unemployment to occur even in the long run after everyone in the economy has fully adjusted to any changes.

The​ real-balance effect implies that when A. the price level​ decreases, the value of money balances held by​ individuals, firms,​ government, and foreigners increases and spending decreases. B. the price level​ increases, the value of money balances held by​ individuals, firms,​ government, and foreigners decreases and spending decreases. C. the price level​ decreases, the value of money balances held by​ individuals, firms,​ government, and foreigners decreases and spending decreases. D. the price level​ increases, the value of money balances held by​ individuals, firms,​ government, and foreigners increases and spending increases.

B. the price level​ increases, the value of money balances held by​ individuals, firms,​ government, and foreigners decreases and spending decreases.

Refer to the figure at right. If the price level is​ 80, A. the aggregate demand curve will automatically shift leading to a stable equilibrium. B. the total planned real expenditures by​ individuals, businesses, and the government exceed total planned production by firms. C. the total planned real expenditures by​ individuals, businesses, and the government are less than total planned production by firms. D. the economy will have economic growth and the new equilibrium price level will be 80.

B. the total planned real expenditures by​ individuals, businesses, and the government exceed total planned production by firms.

Which of the following is a correct explanation for why the aggregate demand curve slopes​ downward? A. As the price level decreases​, exports become more expensive overseas and imports become relatively less expensive​ domestically, and thus net exports rise. B. As the price level decreases​, consumers substitute more expensive goods for less expensive choices. C. As the price level decreases​, the real value of cash balances increases​, and total expenditures rise. D. As the price level decreases​, the labor force increases.

C. As the price level decreases​, the real value of cash balances increases​, and total expenditures rise.

When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply​ curve, A. there will be no price level change. B. actual real GDP would exceed total planned real​ expenditures, and the price level will fall. C. actual real GDP would be less than total planned real​ expenditures, and the price level will rise. D. there will be pressures that will lead to a shift of either the aggregate demand or the long run aggregate supply curves.

C. actual real GDP would be less than total planned real​ expenditures, and the price level will rise.

An increase in the amount of physical capital will cause A. an increase in both aggregate supply and real​ GDP, but have no effect on the price level. B. an increase in both aggregate demand and real​ GDP, but have no effect on the price level. C. an increase in both aggregate supply and real GDP and a reduction in the price level. D. aggregate demand and aggregate supply to increase by the same​ amounts, causing real GDP to increase and the price level to remain constant.

C. an increase in both aggregate supply and real GDP and a reduction in the price level.

According to the​ real-balance effect, an increase in the price level A. does not affect the real value of cash balances in the​ short-run. B. does not affect the real value of cash balances in the​ long-run. C. reduces an​ individual's expenditures due to a decrease in the real value of cash balances. D. increases an​ individual's expenditures due to an increase in the real value of cash balances.

C. reduces an​ individual's expenditures due to a decrease in the real value of cash balances.

The primary difference between the aggregate demand curve and an individual demand curve is that A. the aggregate demand curve is vertical in the long​ run, while an individual demand curve is downward sloping. B. a change in the price level will shift the aggregate demand curve but not an individual demand curve. C. the aggregate demand curve represents total planned expenditures on all goods and services while an individual demand curve represents a single good or service. D. a change in real balances will shift an individual demand curve but not the aggregate demand curve.

C. the aggregate demand curve represents total planned expenditures on all goods and services while an individual demand curve represents a single good or service.

Which of these questions will aggregate demand help us​ answer? I. What determines the total amount of our output that​ individuals, firms, governments and foreigners want to​ buy? II. What is the​ economy's long-run real Gross Domestic Product​ (GDP)? III. What determines the​ economy's equilibrium price level and the rate of​ inflation? A. I only B. I and II C. II and III D. I and III

D. I and III

Which one of the following is not a component of total​ expenditures? A. Investment expenditures. B. Consumption spending. C. Government purchases. D. Merchandise inventories.

D. Merchandise inventories.

The sum of all planned expenditures for the entire economy at each possible price level is A. effective demand. B. aggregate supply. C. actual expenditures by consumers. D. aggregate demand.

D. aggregate demand.

Which of the following will cause a leftward shift in the aggregate demand​ curve? A. a reduction in government spending B. a reduction in the money supply C. an increase in taxes D. all of the above

D. all of the above

Open economy effect

One of the reasons that the aggregate demand curve slopes downward: A higher price level induces foreign residents to buy fewer U.S-made goods and U.S. residents to buy more foreign-made goods, thereby reducing net exports and decreasing the amount of real goods and services purchased in the United States.

Interest rate effect

One of the reasons that the aggregate demand curve slopes downward: Higher price levels increase the interest rate, which in turn causes businesses and consumers to reduce desired spending due to the higher cost of borrowing.

The following equation gives the relationship between real​ GDP, nominal​ GDP, and the price level in index​ form, PI.

PI = (NGDP / RDGP) * 100 thus NGDP = (RGDP * PI) / 100

Real-balance effect

The change in expenditures resulting from a change in the real value of money balances when the price level changes, all other things held constant; also called the wealth effect.

Aggregate demand

The total of all planned expenditures in the entire economy.

Aggregate supply

The total of all planned production for the economy.

Base-year dollars

The value of a current sum expressed in terms of prices in a base year.

Endowments

The various resources in an economy, including both physical resources and such human resources as ingenuity and management skills.

The ___ ___ ___ gives the total amount, measured in base-year dollars, of real domestic final goods and services that will be purchased at each price level—everything produced for final use by households, businesses, the government, and foreign (non-U.S.) residents.

aggregate demand curve

The determinants of growth in per capita real GDP are the ___, ___, and ___.

annual growth rate of labor, the rate of year-to-year capital accumulation, and the rate of growth of the productivity of labor and capital.

Recall the components of GDP: ___, ___, ___, and ___.

consumption spending, investment expenditures, government purchases, and net foreign demand for domestic production. They are all components of aggregate demand.

Supply side inflation is caused by a ___ in​ long run aggregate supply.

decline

The ___ ___ ___ occurs at the point where the aggregate demand curve (AD) crosses the long-run aggregate supply curve (LRAS).

equilibrium price level

The ___ ___ ___ ___ is the rate of growth of per capita real GDP, which in turn equals the growth rate of real GDP minus the population growth rate.

rate of economic growth

There are economy wide reasons that cause the aggregate demand curve to slope downward. They involve at least three distinct forces: ___, ___, and ___.

the real-balance effect, the interest rate effect, and the open economy effect