Macro: Ch 30- Aggregate Demand and Aggregate Supply

interst-rate effect

A decline in price level means lower interest rates that can increase levels of certain types of spending.

The short-run aggregate supply curve is relatively flat to the left of the full employment output because there are shortages of capital. there are large amounts of unused capacity and idle human resources. resources are difficult to bring into production. there are shortages of labor.

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

The shape of the short-run aggregate supply curve is vertical because wages adjust at the same rate as the price level. upsloping because wages adjust more slowly than the price level, increasing profits and output. upsloping because wages adjust more rapidly than the price level. horizontal because wages adjust at the same rate as the price level.

upsloping because wages adjust more slowly than the price level, increasing profits and output.

_______ _______ can be represented as a schedule or curve showing the relationship between the price level and the amount of real domestic output that firms within the economy produce.

Aggregate; supply

immediate-short-run aggregate supply curve

In the immediate short run, the aggregate supply curve AS(ISR) is horizontal at the economy's current price level, P1. With output prices fixed, firms collectively supply the level of output that is demanded at those prices.

New and improved technology, seen as investment spending by firms will lead to a(n) _______ in aggregate demand.

increase

determinants of aggregate demand

- Change in one of the determinants - directly changes the amount of real GDP demanded - Multiplier effect - produces a greater ultimate change in aggregate demand than the initiating change in spending 1. Change in consumer spending (consumer wealth, consumer expectations, household borrowing, taxes) 2. Change in investment spending (interest rates, expected returns: expected future business conditions, technology, degree of excess capacity, business taxes) 3. Change in government spending 4. Change in net export spending (national income abroad, exchange rates)

productivity

A measure of the relationship between a nation's level of real output and the amount of resources used to produce that output. It is a measure of real output, or of real output per unit of input. Productivity = total output / total inputs Per-unit production cost = total input cost / total output

Which of the following will shift the aggregate supply curve to the right? A new networking technology increases productivity all over the economy. Business taxes fall. The government passes a law doubling all manufacturing wages. The price of oil rises substantially.

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

aggregate supply

A schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce. - In the immediate short run, both input prices as well as output prices are fixed. - In the short run, input prices are fixed, but output prices can vary. - In the long run, input prices aw well as output prices can vary

aggregate demand

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.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? a. A widespread fear by consumers of an impending economic depression.

Aggregate demand will decrease

c. A reduction in interest rates at each price level.

Aggregate demand will increase

d. A major increase in spending for health care by the Federal government.

Aggregate demand will increase

e. The general expectation of coming rapid inflation.

Aggregate demand will increase

g. A 10 percent across-the-board reduction in personal income tax rates.

Aggregate demand will increase

j. An increase in exports that exceeds an increase in imports (not due to tariffs).

Aggregate demand will increase

f. The complete disintegration of OPEC, causing oil prices to fall by one-half.

Aggregate supply wil increase

b. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

Aggregate supply will decrease

i. A 12 percent increase in nominal wages (with no change in productivity).

Aggregate supply will decrease

h. A sizable increase in labor productivity (with no change in nominal wages).

Aggregate supply will increase

equilibrium price level

In the AD-AS model, the price level at which aggregate demand equals aggregate supply; the price level at which the aggregate demand curve intersects the aggregate supply curve.

Which of the following explain the reason for the up-sloping aggregate supply curve?

Higher prices mean higher profits when input costs are fixed. Input costs are fixed, but output costs are variable

Which of the following will shift the aggregate demand curve to the left? There is an economic boom overseas that raises the incomes of foreign households. The government raises corporate profit taxes. The government reduces personal income taxes. Interest rates rise.

Interest rates rise. The government raises corporate profit taxes.

determinants of aggregate supply

The "other things" besides price level that cause changes or shifts in aggregate supply at each price level. 1. Change in input prices (domestic resource prices, prices of imported resources) 2. Change in productivity 3. Change in legal-institutional environment (business taxes and subsidies, government regulations)

equilibrium real output

The GDP at which the total quantity of final goods and the final services purchased (aggregate expenditures) is equal to the total quantity of final goods services produced (the real domestic output); the real domestic output at which the aggregated demand curve intersects the aggregate supply curve.

(aggregate demand curve)

The aggregate demand curve shows an inverse relationship between price level and real domestic output. Figure 30.1 (pg 660): The downsloping aggregate demand curve AD indicates an inverse (or negative) relationship between the price level and the amount of real output purchased. (The explanation of the inverse relationship is not the same as for demand for a single product, which centered on substitution and income effects.)

long-run aggregate supply curve

The long-run aggregate supply curve, AS(LR), is vertical at the full-employment level of real GDP (Qf) because in the long run wages and other input prices rise and fall to match changes in the price level. So price-level changes do not affect firms' profits and thus they create no incentive for firms to alter their output.

aggregate demand-aggregate supply (AD-AS model)

The macroeconomic model that uses aggregate demand and and aggregate supply to determine and explain the price level and the real domestic output (real gross domestic product).

d. A decrease in aggregate demand. The price level rises and real output decreases. The price level rises rapidly and there is little change in real output. The price level does not change, but real output declines. The price level does not change, but real output increases. The price level increases somewhat, with a relatively large change in output.

The price level does not change, but real output declines.

c. Equal increases in aggregate demand and aggregate supply. The price level rises and real output decreases. The price level rises rapidly and there is little change in real output. The price level does not change, but real output declines. The price level does not change, but real output increases. The price level increases somewhat, with a relatively large change in output.

The price level does not change, but real output increases.

e. An increase in aggregate demand that exceeds an increase in aggregate supply. The price level rises and real output decreases. The price level rises rapidly and there is little change in real output. The price level does not change, but real output declines. The price level does not change, but real output increases. The price level increases somewhat, with a relatively large change in output.

The price level increases somewhat, with a relatively large change in output.

b. A decrease in aggregate supply, with no change in aggregate demand. The price level rises and real output decreases. The price level rises rapidly and there is little change in real output. The price level does not change, but real output declines. The price level does not change, but real output increases. The price level increases somewhat, with a relatively large change in output.

The price level rises and real output decreases.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? a. An increase in aggregate demand. The price level rises and real output decreases. The price level rises rapidly and there is little change in real output. The price level does not change, but real output declines. The price level does not change, but real output increases. The price level increases somewhat, with a relatively large change in output.

The price level rises rapidly and there is little change in real output.

menu costs

The reluctance of firms to cut prices during recessions (that they think will be short-lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants.

short-run aggregate supply curve

The upsloping aggregate supply curve AS indicates a direct (or positive) relationship between the price level and the amount of real output that firms will offer for sale. The AS curve is relatively flat below the full-employment output because unemployed resources and unused capacity allow firms to respond to price-level rises with large increases in real output. It is relatively steep beyond the full-employment output because resource shortages and capacity limitations make it difficult to expand real output as the price level rises.

Consider the following statement: "Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply." True or false? True, but the magnitude of the decrease in aggregate demand or aggregate supply depends on the economic situation. True, but the magnitude of unemployment depends on the economic situation. False, because changes in aggregate demand and supply affect the price level more than unemployment. True, but only under conditions of economic recession.

True, but the magnitude of unemployment depends on the economic situation.

Which of the following best describe the effects of a depreciation of the U.S. dollar on production costs and aggregate supply (AS)?

U.S. firms obtain less foreign currency with each dollar; a shift of the AS curve leftward; an increase in per-unit production costs from using imported resources; the dollar price of imported resources is higher; a decrease in imported resources

Which of the following describe why wages are inflexible downward?

Wages and salaries of non-union workers are usually adjusted only once a year Large parts of the labor force work under contracts prohibiting wage cuts for the duration of the contract

efficiency wages

Wages that elicit maximum work effort and thus minimize labor costs per unit of output.

foreign purchases effect

When price level falls, other things being equal, U.S. prices will fall relative to foreign prices, which will tend to increase spending on U.S. exports and also decrease import spending in favor of U.S. products that compete with imports (similar to the substitution effect).

real-balances effect

When price level falls, the purchasing power of existing financial balances rises, which can increase spending.

Which of the following help to explain why the aggregate demand curve slopes downward? When the domestic price level rises, our goods and services become more expensive to foreigners. When government spending rises, the price level falls. There is an inverse relationship between consumer expectations and personal taxes. When the price level rises, the real value of financial assets (like stocks, bonds, and savings account balances) declines.

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

A decline in aggregate supply, assuming constant aggregate demand, will result in _______ in the quantity demanded for real GDP.

a decrease

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.

Suppose that consumer spending initially rises by $5 billion for every 1 percent rise in household wealth and that investment spending initially rises by $20 billion for every 1 percentage point fall in the real interest rate. Also assume that the economy's multiplier is 4. a. If household wealth falls by 5 percent because of declining house values, and the real interest rate falls by 3 percentage points, in what direction and by how much will the aggregate demand curve initially shift at each price level? b. In what direction and by how much will it eventually shift?

a. Rightward by $35 billion. b. Rightward by $140 billion.

A wage decrease shifts the:

aggregate supply curve to the right

Demand-pull inflation, assuming constant aggregate supply, results in _______ in the price level.

an increase

The multiplier causes an initial change in spending to generate an equal change in saving. reduces how spending changes influence the aggregate demand curve. causes an initial change in spending to generate an even larger change in the aggregate demand curve. equalizes the change in spending and the change in aggregate demand.

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

Which of the following are determinants of aggregate demand?

change in investment spending; change in consumer wealth

If firms are optimistic about the business outlook, investment will _______.

increase

According the the foreign purchases effect, an increase in domestic price levels will _______ net exports.

decrease

"Supply-side" economists argue that increased regulations on firms by the government will _______.

decrease aggregate supply and increase prices

A decline in the price level is called _______.

deflation

An upsloping aggregate supply curve weakens the realized multiplier effect because any increase in aggregate demand will have both a price and an output effect. demand will have only a price effect. supply will have both a price and an output effect. demand will have only an output effect.

demand will have both a price and an output effect.

Which of the following influence expected returns on the investment projects?

expectations about future business conditions; business taxes; degree of excess capacity; technology

In the immediate short run for aggregate supply, both input and output prices are _______.

fixed

Which of the following are main sources of productivity?

improved production technology; better trained workforce; improved forms of business enterprises; better educated workforce

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

increase; left

Which of the following result from a reduction in personal income tax rates on consumers?

increased take-home income; increasing consumer purchases at each possible price level

In the short run, output prices are flexible and _______ prices are sticky.

input

If firms are pessimistic about future business conditions, they are more likely to reduce current _______ spending.

investment

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

investment spending; government spending; consumer spending; net export spending

A tax increase will reduce consumption and shift the aggregate demand curve to the _______.

left

The aggregate demand curve will shift to the _______ when US new exports decline.

left

The aggregate demand curve will shift to the _______ when there is a reduction in government purchases.

left

An increase in the interest rate and subsequent decreases in investment and aggregate demand could be the result of a decrease in the _______ supply.

money

Identify factors other than the price level, that would cause net exports to change.

national income abroad; changes in exchange rates

Menu costs refer to the additional costs:

of changing listed prices

A reduction in aggregate demand likely causes a decline in real output rather than the price level because output is inflexible downward. prices are inflexible downward. prices are flexible downward. output is flexible downward.

prices are inflexible downward.

The determinant of aggregate supply raise or lower per-unit _______ costs at each price level.

production

A full-strength multiplier applies to a decrease in aggregate demand when the aggregate _______.

supply is horizontal

The long-run aggregate supply curve is vertical because the economy's potential output is determined by changes in price and output that occur in the long run. the availability and productivity of real resources, not by the output level. the availability and productivity of real resources, not by the price level. changes in wages, and these are unchanged in the long run.

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