Macro Exam 3

raises; an increase

A fall in the real wage rate ________ firms' profits and leads to ________ in the quantity supplied.

The demand for sushi would decrease.

A popular dinner among college students today is sushi, green tea, and wasabi dip so these foods are complements. If the price of green tea increases and the price of wasabi dip increases, what would be the effect on demand for sushi at lunch?

The buying power of money

A rise in the price level lowers the buying power of money and decreases the quantity of real GDP demanded.

increases; increases; rightward

A technological advance ________ potential GDP, ________ aggregate supply, and shifts the aggregate supply curve ________.

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.

shifts the aggregate demand curve rightward.

An increase in government expenditure on goods and services

an increase in the money prices of raw materials.

Cost-push inflation can be started by

The World Economy

Created by Europeans during the late 16th century; based on control of the seas; established an international exchange of foods, diseases, and manufactured products.

continuing increases in the quantity of money.

Demand-pull inflation persists because of

an increase in aggregate demand.

Demand-pull inflation starts with

The Business Cycle

Fluctuations in economic activity, such as employment and production

U.S. aggregate demand decreases and the U.S. AD curve shifts leftward.

If European economies enter a recession,

aggregate demand increases and the AD curve shifts rightward.

If the Fed increases the quantity of money, then

an increase in aggregate supply and the AS curve shifts rightward.

If the costs of production decrease, there is

Expected Future Prices

If the price of a good is expected to rise in the future, current demand for the good increases and the demand curve shifts rightward.

Prices of Related Goods

Increase in price of related good increases demand if products are substitutes, decreases demand if products are complements

prices of related goods

Increase in price of related good increases demand if products are substitutes, decreases demand if products are complements

today's demand for gasoline increases.

People come to expect that the price of a gallon of gasoline will rise next week. As a result,

Prices of Resources and Other Inputs

Resource and input prices influence the cost of production. And the more it costs to produce a good, the smaller is the quantity supplied of that good.

the demand for milk increases.

The American Dairy Association starts a highly successful advertising campaign that makes most people want to drink more milk. As a result,

Expectations

The anticipations of consumers, firms, and others about future economic conditions.

an improvement in the technology of producing corn

The below figure illustrates the market for corn. If point "a" represents the original equilibrium and point "b" the new equilibrium, which of the following could have caused the change?

the money wage rate and the price of raw materials.

The main sources of cost-push inflation are increases in

Changes in the Demand for Money

The price level, Real GDP, and Financial technology

shifts the demand curve for Natural Water leftward.

Two brands of water, Natural Water and Mountain Water, are close substitutes. If the price of Mountain Water decreases, the fall in price

The demand for bottled water increases.

Water bottlers announce that next month the price of bottled water will rise by 25 percent. Which of the following occurs immediately?

Expected Future Income and Credit

When income is expected to increase in the future or when credit is easy to obtain, the demand might increase now.

Cost-Push Inflation

When prices rise due to an increase in the cost of production.

increases, so aggregate demand shifts right.

When taxes decrease, consumption

Price Level

a measure of the average prices of goods and services in the economy

Real Economy

an economic system based on barter rather than money

Preferences

demand for one item increases and the demand for another item (or items) decreases. For example, preferences have changed as people have become better informed about the health hazards of tobacco

Inflation Cycles

demand pull inflation and cost push inflation

Law of Demand

if the price of a good rises, the quantity demanded of that good decreases; and if the price of a good falls, the quantity demanded of that good increases

Demand-Pull inflation

increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand

Tax Costs

inflation is a tax, inflation, saving, and investment.

Competitive Market

market with so many buyers and sellers that nobody can influence price.

Aggregate Demand Basics => how do price changes affect quantity demanded?

the buying power of money, the real interest rate, the real prices of exports and imports.

changing the interest rate

to change the interest rate, the Fed changes the quantity of money

Change in Supply vs. Change in Quantity Supplied

A change in the price of the product being examined causes a movement along the supply curve. This is a change in quantity supplied. Any other change affecting supply causes the entire supply curve to shift. This is a change in supply.

decreases; decreases; leftward

A decrease in foreign income ________ exports of U.S.-made goods, so aggregate demand ________ and the aggregate demand curve shifts ________.

will shift rightward because people will increase spending now.

If people's expectations about future income improve so they think their future income will be higher than previously believed, then the AD curve

Effects of Changes in Supply

If the supply of a good or service increases, the supply curve shifts rightward. As a result, the equilibrium price falls and the equilibrium quantity increases. If the supply of a good or service decreases, the supply curve shifts leftward. As a result, the equilibrium price rises and the equilibrium quantity decreases. The figure illustrates an increase in supply. In this figure, the original equilibrium point is where demand curve D intersects the supply curve S0. The equilibrium price is $3 and the equilibrium quantity is 30 units per month. Now, an increase in supply causes the supply curve to shift rightward from S0 to S1. If the price stays at $3, a surplus will occur. As a result, the equilibrium price falls from $3 toward the new equilibrium where the demand curve D intersects the new supply curve S1. At this new equilibrium, the equilibrium price is $2 and the equilibrium quantity is 40. The demand curve does not shift; there is a movement along the demand curve. The figure shows that an increase in supply lowers the equilibrium price but raises the equilibrium quantity.

an increase in government expenditures on goods and services.

In the figure below, the shift in the aggregate demand curve from AD1 to AD2 could be result of

fiscal policy and monetary policy

In the former, the government uses taxing and spending programs (including deficit spending). In the latter, the federal reserve and other central banks manipulate the nation's money supply

Confusion costs

Inflation makes it more difficult to use prices to compare marginal benefits to marginal costs.

number of buyers

The greater the number of buyers in a market, the larger is the demand for any good.

Predicting Price Changes: Three Questions

To explain and predict changes in prices and quantities, we need to consider only changes in the equilibrium price and the equilibrium quantity. We can work out the effects of an event on a market by answering three questions: 1. Does the event influence demand or supply? 2. Does the event increase or decrease demand or supply—shift the demand curve or the supply curve rightward or leftward? 3. What are the new equilibrium price and equilibrium quantity and how have they changed?

Effects of Changes in Demand

When supply changes: -The demand curve does not shift. -There is a change in quantity demanded.

Real and Money Interactions and Policy

When the Fed changes the short-term nominal interest rate, other changes ripple through the economy. Expenditure plans change and real GDP, employment, unemployment, and the price level (and inflation rate) all change. In the long run, the real effects fade, leaving changes in only the price level and inflation rate.

Supply Curve

a graph of the relationship between the price of a good and the quantity supplied

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

demand schedule/curve

a table/curve that shows the relationship between the price of a product and the quantity of the product demanded

Quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

money economy

an economic system based on money rather than barter

The Demand for Money

benefit of holding money, opportunity cost of holding money, opportunity cost: nominal interest is a real cost, the demand for money schedule and curve.

change in quantity demanded versus change in demand

change in demand is a shift of the demand curve, which changes the quantity demanded and makes movement along the demand curve.

Changes in Aggregate Supply

change in potential GDP, change in money wage rate, change in money prices of other resources.

expected future prices

consumers choose not only which products to buy but also when to buy them

Changes in Aggregate Demand

could be caused by changes in the spending decisions of the households, businesses, the government, and foreigners

A tax increase

decreases aggregate demand and the AD curve shifts leftward.

income

money received, especially on a regular basis, for work or through investments.

changes in demand

prices of related goods, expected future prices, income, expected future income and credit, number of buyers, preferences.

Changes in Supply

prices of related goods, prices of resources and other inputs, expected future prices, number of sellers, productivity.

Law of Supply

producers offer more of a good as its price increases and less as its price falls

market demand

the demand by all the consumers of a given good or service

individual demand

the demand of an individual consumer

Real interest Rate

the interest rate corrected for the effects of inflation

Macroeconomic Equilibrium

the point where the quantity of aggregate demand equals the quantity of aggregate supply

Real GDP

the production of goods and services valued at constant prices

Productivity

the ratio of the quantity and quality of units produced to the labor per unit of time

Individual Supply

the relation between the price of a good and the quantity an individual producer is willing and able to sell per period, other things constant

The supply of money

the relationship between the quantity of money supplied and the nominal interest rate

shoe leather costs

the resources wasted when inflation encourages people to reduce their money holdings

nominal interest rate

the stated interest rate on a loan

Market Supply

the sum of all that is supplied each period by all producers of a single product

Number of Sellers

usually the number of sellers in a market changes as profits change; firms will enter when profit is high and exit when it is low

opportunity cost of holding money

varies directly with the interest rate