Chapter 32

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.

FALSE.

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

FALSE. a decrease in AD normally leads to a decreases in output but not the price level.

The economy experiences an increase in the price level and a decrease in real domestic output. What is the explanation?

Input prices have increased.

Other things being equal, a reorganization of the OPEC cartel to permit it to increase world oil prices by 70 percent would most likely have which effect?

It would shift the aggregate supply curve left

The down-sloping aggregate demand curve can be explained by:

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

When the U.S. price level rises, Canadian consumers are more likely to buy cars made in Mexico than cars made in the United States

This can be attributed to the FOREIGN PURCHASES EFFECT

A lower price level causes restaurants to become busier as more people purchase restaurant meals

This can be attributed to the REAL BALANCES EFFECT.

A higher price level increases the cost of borrowing, which causes people to buy fewer cars.

This can be attributed to the REAL INTEREST RATE EFFECT

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.

The aggregate demand curve shows the:

inverse relationship between the price level and real GDP purchased.

If the multiplier is 4 and the desired increase in real GDP is $200 billion, the initial change in spending required to achieve that goal:

is $50 billion (200/4)

In the two months following September 11, 2001, attacks on the united states, consumption also declined. This caused a:

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

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

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

An aggregate supply curve shows the:

level of real domestic output that will be produced at each possible price level.

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

price are inflexible downward

If at a particular price level, real domestic output from producers is greater than real domestic output desired by purchasers, there will be a:

surplus and the price level will fall

The long-run aggregate supply curve is vertical because the economy's potential output is determined by:

the availability and productivity of real resources, not by the price level

The magnification of small changes in spending into larger changes in output and income is produced by:

the multiplier effect

Movement along the aggregate demand curve would be caused by a change in:

the price level

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because:

there are large amounts of unused capacity and idle human resources.

The shape of the short-run aggregate supply curve is:

up-sloping, because wages adjust more slowly than the price level

Wage contracts, menu costs, and the minimum wage are explanations for why:

wages tend to be inflexible downward

What would shift the aggregate demand curve to the right?

- a new networking technology increases productivity all over the economy. - Business taxes fall

Which of the following will shift the aggregate demand curve to the left?

-Interest rates rise -The government raises corporate profit taxes

Long run

-Output is fixed - a vertical line

Which of the following help to explain why the aggregate demand curve slopes downward?

-When domestic price level rises, our goods and services become more expensive to foreigners. -When the price level rises, the real value of financial assets (stocks/bonds/savings acct balances) declines.

Short run

-output prices are flexible - an upsloping curve

Immediate short run

-the price level is fixed - a horizontal line

Assume the price level is flexible upward but not downward and the economy is currently operating at its full employment output. Other things equal, how will the following affect the equilibrium? 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 the real output declines E) The price level increases somewhat, with 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. because there is an excess supply of goods and services of $20 billion (375 produced - 355 purchased). Excess of supply only occurs when the prices are above equilibrium

Which combination of factors would most likely increase aggregate demand?

An increase in consumer wealth and a decrease in interest rates

Which set of events would most likely increase aggregate demand?

An increase in foreign nations and a depreciation of the dollar

Which would most likely increase aggregate supply?

An increase in productivity

A decrease in business taxes will tend to:

increase aggregate demand and increase aggregate supply.

The explanation for a down-sloping aggregate demand curve differs from the explanation for the down-sloping demand curve for a SINGLE product because:

a down-sloping, 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. ( as a person becomes richer, they can buy more of this product or all other products)

The U.S. experience of strong economic growth, full employment, and price stability in the late 1990's and early 2000's can be explained by:

a rightward shift of aggregate demand and a rightward shift of aggregate supply.

according to the "wealth effect," a change in consumer wealth causes:

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

A strong negative wealth effect from, say, a precipitous drop in house prices could cause a recession even though productivity is surging if:

aggregate demand shifts left while aggregate supply shifts right.

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

aggregate supply is horizontal

In the short run, a decrease in aggregate demand will decrease:

both real output and the price level

The multiplier

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

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

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

If personal income taxes and business taxes increase, then this will:

decrease aggregate demand and aggregate supply

A decrease in government spending will cause a:

decrease in aggregate demand

An increase in personal income tax rates will cause an:

decrease in aggregate demand

The intersection of the aggregate demand and aggregate supply curves determines the:

equilibrium level of real domestic output and prices.