ECON chapter 7

The position of the long-run aggregate supply (LRAS) curve is determined by a. the number of workers, the amount of capital, and the available technology. b. the price level, the available technology, and "sticky" prices. c. the price level and aggregate demand. d. consumption, investment, government purchases, and net exports.

a

Which of the following is not true when the economy is in macroeconomic equilibrium? a. when the economy is at long-run equilibrium, firms will have excess capacity. b. when the economy is at long-run equilibrium, SRAS=AD=LRAS. c. when the economy is at long-run equilibrium, total unemployment=frictional unemployment+structural unemployment. d. when the economy is at long-run equilibrium, actual GDP= potential GDP.

a

Which of the following would cause an increase in the price level (i.e., a short-run inflation)? a. a reduction in taxes that increases aggregate demand. b. an increase in government purchases that decreases short-run aggregate supply. c. a reduction in personal income taxes that reduces aggregate demand. d. an increase in the exchange rate of the dollar in relation to foreign currencies that decreases short-run aggregate supply.

a

Menu costs are a. the same as sunk costs. b. the costs to firms of changing prices. c. the cost of printing a restaurant menu. d. the costs incurred in the short run.

b

The long-run aggregate supply curve is vertical because in the long run, a.changes in the price level affect potential GDP via other variables, such as the size of the labor force, capital stock, and technology. b. changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology. c. the price level does not change, but potential GDP changes its value. d. changes in the size of the labor force, capital stock, and technology affect the price level but not the potential GDP.

b

The short-run aggregate supply curve slopes upward because of all of the following reasons except a. in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase. b. in the short run, an unexpected change in the price of an important resource can change the cost to firms. c. in the short run, as prices of final goods and services increase, input prices react more slowly. d. in the short run, prices of final goods and services adjust slowly due to existence of menu costs.

b

Which of the following scenarios would lead to a reduction in real GDP and may even causes a recession? a. an increase in oil prices that causes short-run aggregate supply to increase. b. a reduction in the growth rate in foreign countries compared to the United States that causes aggregate demand to fall. c. a recession in a foreign trading partner's causing aggregate supply to fall. d. a reduction in taxes causing aggregate demand to fall.

b

Consider the following event and then figure out how the event will affect the aggregated demand curve an increase in the price level will cause a ________________ the aggregated demand curve.

Movement up along

The aggregate demand curve is downward sloping because a. a decrease in government spending reduces prices and makes consumption demand increase b. as income increases it causes an increase in the amount of planned expenditures. c. an increase in the price level reduces real money holdings, which reduces the amount of expenditures d. an increase in the price of a good causes a decrease in market demand for that good.

c

What relationship is shown by the aggregate demand curve? The aggregate demand curve shows the relationship between a. the price level and the quantity of real GDP demanded by the private sector: households and firms b. the price level and the quantity of real GDP demanded by consumers c. the price level and the quantity of real GDP demanded by households, firms, and the government d. the price level and the quantity of real GDP produced by the firms

c

What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between a. the price level and the quantity of real GDP demanded by firms b. the price level and the quantity of capital goods: machines, factories and buildings, demanded by firms and households c. the price level and the quantity of real GDP cup plies by firms d. the price level and the quantity of real GDP demanded by households, firms and the government

c

Which of the following scenarios would lead to an increase in the price level (i.e., a short-run inflation)? a. an increase in payroll taxes leading to an increase in aggregate demand. b. an increase in business pessimism regarding future profitability that decreases short-run aggregate supply. c. an increase in oil prices that decreases short-run aggregate supply. d. an increase in oil prices that leads to a reduction in aggregate demand.

c

Explain whether the following will cause a shift of the AD curve or a movement along the AD curve The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in __________, it will cause a ___________ the aggregate demand curve.

consumption; shift to the left in

Aggregate demand (AD) is comprised of expenditure components that include: a. consumption, investment, exports, and taxes b. consumption, government spending, exports, and labor c. government spending, taxes, exports, and labor d. government spending, consumption, investment, and net exports

d

Edward Leamer of UCLA has argued that "housing is the business cycle." Spending on housing is likely to fluctuate more than spending by households on consumer durables, such as automobiles or furniture, or spending by firms on plant and equipment because a. spending by firms on plant and equipment is less sensitive to interest rate changes, which are countercyclical. b. housing is very sensitive to spending by households on consumer durables. c. spending by households on consumer durables is not sensitive to interest rate changes, which are cyclical. d. housing is very sensitive to interest rate changes, which are cyclical.

d

Suppose that workers and firms could always predict next year's price level with perfect accuracy. Under these circumstances, the SRAS curve a. would be downward sloping because quantity supplied would increase as the price level falls. b. would be upward sloping because higher price levels would still reduce household wealth and consumption spending c. would be upward sloping because worker and firm price predictions do not affect the SRAS curve d. would be the same as the LRAS

d

Which of the following would cause a decrease in real GDP and, if large enough, a recession? a. an increase in interest rates that causes short-run aggregate supply to fall. b. an increase in government purchases that causes aggregate demand to rise. c. a reduction in consumer confidence that causes short-run aggregate supply to fall. d. a reduction in consumer confidence that causes aggregate demand to fall.

d

The widespread use of computers and the Internet has ________ menu costs.

decreased

Explain whether the following will cause a shift of the AD curve or a movement along the AD curve Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in __________, it will cause a ___________ the aggregate demand curve.

investment; shift to the right in

Consider the following event and then figure out how the event will affect the aggregated demand curve an increase in interest rates will cause a ______________ the aggregate demand curve

leftward shift of

Consider the following event and then figure out how the event will affect the aggregated demand curve an increase in the state income taxes will cause a _________ the aggregate demand curve

leftward shift of

Explain how the following event would affect the long-run aggregate supply curve. The price level increases. Because this is a change in the price level, the LRAS curve will _________.

not change

The SRAS curve will ____________ is there is an increase in the adjustment of workers' and firms' prior underestimation of the price level.

shift to the left

The SRAS curve will ____________ is there is an increase in the expected future prices.

shift to the left

The SRAS curve will ____________ is there is an increase in the expected price of an important natural resource.

shift to the left

Explain how the following event would affect the long-run aggregate supply curve. Technological change occurs. Because this is a change in the productive capacity of the economy, the LRAS curve will _________.

shift to the right

Explain how the following event would affect the long-run aggregate supply curve. The labor force increases. Because this is a change in the productive capacity of the economy, the LRAS curve will _________.

shift to the right

Explain how the following event would affect the long-run aggregate supply curve. There is an increase in the quantity of capital goods. Because this is a change in the productive capacity of the economy, the LRAS curve will _________.

shift to the right

The SRAS curve will ____________ is there is a technological change.

shift to the right

The SRAS curve will ____________ is there is an increase in productivity.

shift to the right

The SRAS curve will ____________ is there is an increase in the labor force or capital accumulation.

shift to the right

Explain whether the following will cause a shift of the AD curve or a movement along the AD curve The US economy experiences 4 percent inflation. Because this is a change in __________, it will cause a ___________ the aggregate demand curve.

the price level; movement along

The aggregate demand curve shows the relationship between _________ and ___________.

the price level; output demanded

Increases in the interest rate will make the aggregate demand curve shift __________

to the left

if menu costs were eliminated, the short-run aggregate supply curve will be ____________ because of wage price stickiness and slow wage adjustment by firms.

upward sloping

Consider the following event and then figure out how the event will affect the aggregated demand curve an increase in government purchases will cause a ___________ the aggregate demand curve.

rightward shift of

Almora, a developing open economy, is experiencing an economic boom since it discovered discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson's view. In one of his recent articles in the country's leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. which of the following statements is Bill and Robin likely to agree with? a. the purchasing power of the people has increased substantially after the discovery of oil reserves. b. the cost of industrial production will decline over the next couple of years. c. the country's production possibilities frontier will not be affected by this discovery. d. the government's expenses on unemployment benefits will increase. e. the discovery of oil reserves has resulted in a rightward shift of the long-run aggregate supply curve.

e