Chapter 12- preview

A decrease in the money supply is likely to cause a(n) ______ in interest rates, and subsequent ______ in investments and aggregate demand.

increase, decreases

The interest-rate effect creates a downward sloping aggregate demand curve because a higher price level ______.

increases money demand which increases interest rates and decreases the amount of real GDP

If consumers expect their future real incomes to rise, current consumption spending ______ and the aggregate demand curve shifts to the ______.

increases; right

In the immediate short run ______.

input prices and output prices are fixed

Which of the following explain the reasons for the downward slope of the aggregate demand curve?

A higher price level decreases the purchasing power of the publics' accumulated savings balances.

How is the real-balances effect defined?

A higher price level reduces the purchasing power of the public's accumulated savings balances.

What is shown by a schedule or curve showing the total quantity of goods and services that would be supplied at various price levels?

Aggregate supply

True or false: The aggregate demand curve slopes downward because it reflects a direct relationship between the price level and the amount of real output demanded

False

Which of the following will increase per-unit costs and reduce short-run aggregate supply?

Higher business taxes

Which of the following enhance the expected returns on investment and thus increase aggregate demand?

New and improved technology

Which of the following statements best explains the effect of a decline in the price level on consumption, investment and net exports?

The level of consumption increases, investment increases, and net exports increase.

A decrease in investment and subsequent shift of the aggregate demand curve to the left is due to ______.

a decline in firms' expected returns

Consumer wealth is defined as the total value of ______.

assets minus the total value of liabilities

Investment spending refers to...

capital goods

A decline in the price level is called

deflation

An increase in productivity ______.

enables more output with limited resources

Technological advancements will ______ expected returns on investment and ______ aggregate demand.

enhance; increase

In the long-run, output prices and input prices are ______.

flexible

In the short run, output prices are ______ and ______ prices are ______.

flexible; input; sticky

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 (blank) than potential GDP.

greater

Higher expected returns on investment will ______.

increase the demand for capital and shift the aggregate demand curve to the right

A higher business tax will ______ per-unit costs and ______ short-run aggregate supply.

increase; decrease

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

increase; left

What is a major factor in per-unit production costs and therefore a key determinant of aggregate supply?

input prices

The equilibrium price level and equilibrium output is determined by the ______.

intersection of the aggregate demand curve and the aggregate supply curve

(blank) spending will fall if firms' outlook on the economy is pessimistic.

investment

Expectations about future business conditions, technology, degree of excess capacity and business taxes are all factors that influence ______.

investment spending

If consumers expect their future income to be lower, they may reduce their current consumption which would shift that aggregate demand curve to the (blank)

left

An increase in the money supply will ______ the interest rate, increase investment and ______ aggregate demand.

lower; increase

An increase in real interest rates will ______ investment spending and ______ aggregate demand.

lower; reduce

The short-run is the period in which ______.

output prices are flexible but input prices are fixed or highly inflexible

Aggregate supply is represented as a schedule or curve showing the relationship between a nation's (blank) level (index) and the amount of real domestic output that firms in the economy produce.

price

Total output divided by total inputs is the formula for

productivity

Productivity is the measure of the relationship between a nation's level of ______.

real output and the amount of resources used to produce that output

The ______ is when a higher price level reduces the purchasing power of the public's accumulated savings balances.

real-balances effect

A decrease in aggregate demand with constant aggregate supply can result in ______.

recession

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

resource

The increase in consumer spending that results from an increase in consumer wealth will shift the aggregate demand curve to the

right

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

shift the aggregate demand curve

A decrease in borrowing by consumers for consumption spending will ______.

shift the aggregate demand curve to the left

An increase in government spending is likely to _____.

shift the aggregate demand curve to the right

When consumers increase their consumption spending by borrowing, the aggregate demand curve ______.

shifts to the right

A leftward shift in the aggregate (blank) curve leads to cost-push inflation.

supply

The two changes of the legal-institutional environment that will shift the aggregate supply curve are ______.

taxes and government regulations

The intersection of the aggregate demand and aggregate supply curves determines ______.

the equilibrium price level and equilibrium real GDP

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

True or false: Emphasis is given to short-run aggregate supply because this is the version of aggregate supply that can explain changes in output and prices.

true

The short-run aggregate supply curve is more useful than the curves for other time horizons because real-world economies ______.

typically change price levels and output levels simultaneously

An unexpected increase in asset values that results in an increase in consumer spending is called the (blank) effect.

wealth

An unexpected increase or decrease in asset values that results in a change in consumer spending is called the ______ effect.

wealth

An increase in the price level results in which of the following effects?

-Decrease in the level of consumption -Decrease in investments

Which of the following influence expected returns on investment projects?

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

What happened to the U.S. economy in the 1990s?

-GDP grew by 4% annually. -Unemployment fell to 4%.

Which of the following are the four components or determinants of aggregate demand?

-Net export spending -Consumer spending -Investment spending -Government spending

Select all the choices that explain what happens with dropping price levels.

-People demand more output. -Real balances rise.

Select all the following that were characteristic of economic conditions in the United States during the 1990s.

-Strong growth -Very low inflation -Full employment

What is the result of an increase in the money supply?

Lower interest rate, increased investment and increased aggregate demand

What is one result of a decrease in aggregate demand?

Recession

What will a decrease in US net exports do?

Shift the aggregate demand curve leftward

What will a rise in net exports do?

Shift the aggregate demand curve to the right

Which aggregate supply curve is used in order to understand business cycles and macroeconomic policy?

The short-run curve

Businesses and consumers will decrease investment spending and interest-sensitive consumption spending, respectively, when interest rates are higher.

True

Deflation occurs when there is ______.

a decreasing aggregate price level

An increase in productivity is related to ______.

a reduction in per-unit costs

The wealth effect is reflected by ______.

a rightward shift of the aggregate demand curve.

A change in one of the determinants of aggregate supply causes ______ the aggregate supply curve.

a shift of

Investment spending refers to ______.

adding to physical capital

A schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level is called

aggregate demand

A wage decrease shifts the ______.

aggregate supply curve to the right

The determinants of aggregate supply are variables that ______.

cause the aggregate supply curve to shift

A decrease in aggregate supply, assuming constant aggregate demand, will result in _______ inflation

cost-push

A decrease in aggregate demand with constant aggregate supply results in _____.

cyclical unemployment

An increase in the interest rate and subsequent decreases in investment and aggregate demand could be the result of a (blank) in the money supply.

decrease

Cyclical unemployment and recession often arise from (blank) in aggregate demand.

decrease

When interest rates are higher, businesses and consumers will:

decrease investment spending and interest-sensitive consumption spending.

A decline in expected returns will ______ investment and shift the aggregate demand curve to the ______.

decrease, left

An increase in real interest rates will ______ investment spending and ______ borrowing costs.

decrease; increase

A wage decrease will (blank) per-unit production costs and shift the aggregate supply (AS) curve to the (blank)

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 ______ inflation.

demand-pull

The interest rate effect causes the aggregate demand to be ______.

downward sloping

The interest-rate effect occurs when a higher price level decreases the demand for money, thereby increasing the interest rate, assuming a fixed money supply.

false

When a higher price level increases the demand for money, which will drive up the price paid for its use, assuming a fixed money supply, it is called the ______ effect.

interest-rate

Given a fixed supply of money and a downward sloping aggregate demand curve, an increase in money demand will ________ the price paid for its use, otherwise known as the ______.

raise; interest rate

The total dollar value of all assets owned by consumers in the economy less the dollar value of their liabilities is called consumer (blank).

wealth