Econ Exam 2 Study Guide

Maria has started looking for work after taking time off to have a baby.

Frictional unemployment.

The SRAS curve shifts right when:

the price of oil suddenly falls.

Which of the following events would cause the short-run aggregate supply curve to shift?

-During an economic boom, Congress passes a guest worker law that enables up to 5 million foreign workers to get work permits in the U.S. -Manufacturing firms expect steel prices to decrease significantly. -The Affordable Care Act is amended to require employers to provide health insurance to part-time as well as full-time employees.

Example of Demand Shock

-Increasing or decreasing government purchase -Decreasing consumption -Decreasing income -Increase in consumption -Increase in the real interest rate -Increase in the Tax -Decrease in currency strength -Government Purchase -Net Export

Example of Supply Shock

--Temporary Supply Shock (Usually only shock SRAS) -Temporary Drought (negative supply shock) -Temporary War (negative supply shock) -Temporary increasing in oil production (positive supply shock) --Permanent Supply Shock (Usually shock LRAS too) -Natural Disaster causing permanent damage to land (negative supply shock) -Climate change (negative supply shock) -Innovation of new energy source (positive supply shock)

For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and describe the appropriate shifts in the AS or AD curves. A stock market crash reduces people's wealth.

-Aggregate demand shifts to the left. -Output falls. -The price level falls.

For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and describe the appropriate shifts in the AS or AD curves. The European economy crashes.

-Aggregate demand shifts to the left. -Output falls. -The price level falls.

For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and describe the appropriate shifts in the AS or AD curves. The United States enters into an arms race with China, resulting in a significant increase in military spending.

-Aggregate demand shifts to the right. -Output rises. -The price level rises

For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and describe the appropriate shifts in the AS or AD curves. The spread of democracy around the world increases consumer confidence in the United States.

-Aggregate demand shifts to the right. -Output rises. -The price level rises

For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and describe the appropriate shifts in the AS or AD curves. Terrorist activities temporarily halt the ability of Americans to engage in certain productive activities such as transportation and finance

-Aggregate supply shifts to the left -Output falls. -The price level rises.

For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and describe the appropriate shifts in the AS or AD curves. A revolution in Iran results in a significant reduction in the world's supply of oil.

-Aggregate supply shifts to the left. -Output falls. -The price level rises.

For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and describe the appropriate shifts in the AS or AD curves. A summer of perfect weather in the Midwest leads to record harvests of corn, wheat, and soybeans.

-Aggregate supply shifts to the right. -Output rises. -The price level falls.

For each of the following situations, use an AD/AS model to describe what happens to price levels and output in the United States in the short run. In each case assume the economy starts in long- and short-run equilibrium, and describe the appropriate shifts in the AS or AD curves. Intel develops a new computer chip that is faster and cheaper than previous chips.

-Aggregate supply shifts to the right. -Output rises. -The price level falls.

Structural Unemployment

-Portion of unemployment that is due to changes in the structure of the economy, causing some skills are no longer needed in some industries. -Example: Gas Station Assistance, Travel Agent, etc

Frictional Unemployment

-The portion of unemployment that is due to normal turnover in the labor market -Caused by short run job/skill matching problems -This kind of unemployment needed in the economy, as so people will keep looking for better job (trickle down effect) -Example: New graduated student, Bartender looking for Manager Job, etc

Classical Unemployment

-The unemployment that is created because of the increasing of minimum wage. -Increasing of minimum wage causing firm's cost to increase and then they have to fire some workers in order to keep the cost constant

Cyclical Unemployment

-Unemployment caused by short term economics fluctuation. -Example of this unemployment: People getting laid off because crisis hit and cost of firm is getting too high to have more employer

In order to be considered unemployed, a person must be:

-over 16 years old and under 65 years old. -not working. -actively seeking work. -willing and able to work.

One consequence of unemployment is that:

-some productive potential of the economy is being wasted. -the time and skills of the unemployed are not being put to use. -it can create uncertainty about the future. -All of these are consequences of unemployment.

Supply and Price

Anything that causes the cost of production to temporarily decrease will cause the short-run correct aggregate supply curve(s) to shift right correct. Ceteris paribus, this will temporarily increase correct output and decrease correct the price level.

Which of the following events would cause the aggregate demand curve to shift to the right?

Consumers become more optimistic about the future state of the economy.

Jada has just lost her job in a Web startup that was affected by a downturn in the economy.

Cyclical unemployment.

Rohit had a job working on Wall Street but lost his job during the financial crisis.

Cyclical unemployment.

Adam has just arrived in a new city and is looking for work.

Frictional unemployment.

In June of 2013, 11.8 million people were unemployed. If the labor force consisted of 155.3 million people at that same time, the unemployment rate equals:

Labor Force: number of people employed + number of people unemployed Unemployment Rate: Unemployed/(Labor Force) * 100 Unemployment Rate = (11.8/155.3) * 100 Unemployment Rate = 7.6%

Long Run Aggregate Supply (LRAS)

In the long run, changes in price don't affect correct aggregate supply. As a result, the long-run aggregate supply curve is vertical

labor-force participation rate =

Labor Force/Working Age Population * 100

Labor Force =

Number of people employed + Number of people unemployed

Suppose that a statement by the chair of Federal Reserve Board about the state of the economy causes a loss in consumer confidence. What will be the long-run impact on the economy if the government allows the economy to adjust without a policy response?

Output will return to its initial level in the long run but the price level will be lower.

Juan left high school without graduating and can't find any jobs he is qualified for.

Structural unemployment.

Max wants to work as an air steward, but because the airline industry is heavily unionized there are very few jobs available

Structural unemployment.

Suppose the price of a major commodity like oil decreases dramatically and unexpectedly.

The SRAS curve will shift right correct and the LRAS will not change correct.

Unemployment Rate =

Unemployed/(Employed + Unemployed) * 100

Rick Alexander is a master builder who spent three decades running a successful home-restoration business in Connecticut. When his elderly parents fell ill in 2008, he gave up his business and moved to Florida to look after them. He thought it would be easy to find work—after all, he had a certified trade and more than 30 years' experience. He looked first for jobs as a supervisor at construction sites, but didn't find anything. Lowering his sights, he next looked for work at wholesalers and lumberyards, and then he applied for any job at hardware stores. Still he experienced a constant stream of rejections. He tried to start his own business, but couldn't generate enough sales to make it profitable. Tired and frustrated, Rick Alexander gave up looking for work. For each of the following situations, is Rick Alexander counted as employed, unemployed, or not in the labor force by the Bureau of Labor Statistics?

a. Alexander is self-employed in his old job as a carpenter. -According to the Bureau of Labor Statistics, he is counted as employed correct. b. Alexander moves to Florida and begins looking for work. - According to the Bureau of Labor Statistics, he is counted as unemployed correct. c. Alexander feels discouraged looking for work and stops applying for jobs. -According to the Bureau of Labor Statistics, he is counted as not in the labor force correct. d. Alexander starts looking for work again. -According to the Bureau of Labor Statistics, he is counted as unemployed correct. e. Alexander starts work at a new job. -According to the Bureau of Labor Statistics, he is counted as employed correct.

For each of the following shocks, say whether it is a demand-side shock or a supply-side shock.

a. Consumer confidence falls: Demand-side shock correct. b. Government spending increases: Demand-side shock correct. c. The price of foreign goods increases: Demand-side shock correct. d. The price of oil increases: Supply-side shock correct. e. A cyclone destroys manufacturing plants: Supply-side shock correct.

Say whether the following statements are true or false.

a. In the long run, prices don't affect output: True correct. b. In the short run, prices may affect output: True correct

What is the relationship between the price level and the following components of aggregate demand.

a. There is a negative correct relationship between the price level and consumption. b. There is a negative correct relationship between the price level and investment. c. There is no correct relationship between the price level and government spending. d. There is a negative correct relationship between the price level and net exports.

When the government increases taxes on businesses and individuals:

consumption decreases correct and the AD curve shifts to the left

Non-price changes in consumption, investment, government spending, or net exports:

shift the aggregate demand curve.

All other things equal, when wage increases:

the quantity demanded for labor decreases.

During periods of recession:

unemployment is more common.