Problem Set #5: Chapter 12 Aggregate Demand & Aggregate Supply

Based on the data in the following table, what is the equilibrium price level and equilibrium real output? real output demanded in billions $: 1020, 1030, 1040, 1050, 1060 price level (index number): 215, 220, 225, 230, 240 real output supplied in billions: 1045, 1030, 11020, 1015, 1005 215 and 1020 220 and 1,030 225, and 1,040 230 and 1,050

220 and 1,030 The equilibrium price level is the price level are where the real output demand equals the real output supplied. That output level is the equilibrium real output.

One reason wages are inflexible downward is the minimum wage. sellers choose the wage rate. productivity remains constant. aggregate demand is inflexible downward.

the minimum wage Wages are inflexible downward due to minimum wage laws.

Demand-pull inflation occurs because of a decrease in aggregate supply. an increase in aggregate supply. a decrease in aggregate demand. an increase in aggregate demand.

an increase in aggregate demand. An increase in aggregate demand increase the price level, thus creating demand-pull inflation.

Cost-push inflation is characterized by: a decrease in real output and the price level, assuming prices are flexible downward. a decrease in real output and increase the price level. an increase in real output and decrease the price level, assuming prices are flexible downward. an increase in both real output and the price level.

a decrease in real output and increase the price level. Cost-push inflation affect the cost of production and aggregate supply. The AS curve shifts to the left, the price level increases and output falls.

Which of the following would most likely decrease aggregate demand? an improvement in consumer expectations about the future an increase in government spending on national defense an appreciation in the value of the U.S. dollar a decline in real interest rates

an appreciation in the value of the U.S. dollar An appreciation of the U.S. dollar means that U.S. exports are more expensive for foreigner to buy and that U.S. imports are now cheaper. Net export therefore will fall and reduce aggregate demand. All of the other choices lead to an increase in aggregate demand.

Which of the following would most likely increase aggregate demand? an increase in consumer wealth an increase in real interest rates a decrease in national income abroad a decrease in consumer borrowing

an increase in consumer wealth Consumer wealth sometimes changes suddenly and unexpectedly due to surprising changes in asset values. The resulting increase in consumer spending is known as the wealth effect and shifts the AD curve to the right.

A decrease in aggregate demand in the short-run when the price level is flexible will: increase real output and decrease the price level. increase real output and increase the price level. decrease real output and decease the price level. decrease real output and increase the price level.

decrease real output and decease the price level. With flexible prices, a decrease in aggregate demand will reduce the price level and real output.

Other things equal, a decrease in the real interest rate will: expand investment and shift the AD curve to the right. expand investment and shift the AD curve to the left. reduce investment and shift the AD curve to the right. reduce investment and shift the AD curve to the left.

expand investment and shift the AD curve to the right. Real interest rates affect the amount of investment that businesses are willing to make. As investment spending increases, so will AD.

A decline in the amount of government regulation is most likely to: increase aggregate demand. decrease aggregate demand. increase aggregate supply. decrease aggregate supply.

increase aggregate supply A decline in government regulation reduces the cost of production and thus increases AS.

Assume that the price level is flexible upward and downward. An increase in aggregate supply would: increase real output and increase the price level. increase real output and decrease the price level. decrease real output and increase the price level. decrease real output and decrease the price level.

increase real output and decrease the price level. Assuming that the price level is flexible, an increase in aggregate demand will produce an increase in real output and a decrease in the price level.

The aggregate demand curve slopes downward due to the inverse relationship between the price level and real GDP. direct relationship between the price level and real GDP. inverse relationship between interest rates and nominal GDP. direct relationship between interest rates and nominal GDP.

inverse relationship between the price level and real GDP. The aggregate demand curve is downward sloping due to the inverse relationship between price level and real GDP.

The aggregate supply curve (immediate short-run) is horizontal sloping because: output prices are fixed. the price level is flexible upward but inflexible downward. the real domestic output, GDP, is fixed. consumers demand output for a set price.

output prices are fixed. The immediate short run aggregate supply curve is a horizontal line. The overall price level, which is calculated from all of the individual prices set by the various firms in the economy, is constant.

Assume that it takes 100 units of input to produce 300 units of output in an economy. Then because of an improvement in technology, it requires only 75 units of input to produce the same level of output. Which statement is correct? productivity in the economy is .33. productivity in the economy is 2. productivity in the economy increased from 3 to 4. productivity in the economy decreased from .33 to .25.

productivity in the economy increased from 3 to 4. Productivity is measured by dividing total output by total input. So productivity changes from 300/100 =3 to 300/75 = 4.

Other things equal, an increase in government spending on health care will shift aggregate demand to the left. shift aggregate supply to the left. shift aggregate demand to the right. shift aggregate supply to the right.

shift aggregate demand to the right. An increase in government spending will increase aggregate demand, shifting the curve to the right.

Assume the prices are fully flexible in an economy. If aggregate demand increased and aggregate supply increased, what will happen to the price level and real output? the price level will increase and real output will increase the price level will decrease and real output will decrease the effect on the price level will be uncertain, but real output will decrease the effect on the price will be uncertain, but real output will increase

the effect on the price will be uncertain, but real output will increase An increase in aggregate demand and an increase in aggregate supply are certain to increase real output, but the effect on the price level will be uncertain based on the size of the shifts in AD and AS.