c.24 problem sets

Which of the following graphs most likely illustrates full employment GDP

B (straight vertical line) The full-employment GDP line shows the maximum output that the economy can produce with full employment of workers and physical capital. Since that maximum output is, theoretically, a certain level of output or GDP, potential GDP is illustrated as a vertical line at a certain level of output.

Which of the following graphs most likely illustrates the aggregate supply curve in it's intermediate range

D (positive slope) In the AS curve's intermediate area, a higher price level for outputs continues to encourage a greater quantity of output -- therefore we will see an upwardly sloping AS curve.

Which of the following graphs most likely illustrates aggregate supply:

D (positive slope) The aggregate supply curve is an upward sloping curve. As the price level increases, Real GDP increases to form the the upward sloping aggregate supply curve.

True or False: Sudden reduction in the availability of resources (inputs and labor) for production will cause the aggregate supply curve to shift to the right.

False Sudden shocks to input goods or labor are termed supply shocks. They decrease aggregate supply and thus the AS curve would shift to the left.

True or False? Stagflation refers to a stagnant or contracting real GDP in the presence of deflation.

False This is actually a recession. A stagnant - or stagnating (i.e. contracting) economy with high unemployment and high inflation is nicknamed stagflation.

True or False: An increase in import expenditures is bad for the U.S. economy.

False When an American buys a foreign product it gets counted along with all the other consumption. Thus, the income generated does not go to American producers, but rather to producers in another country. It would be wrong to count this as part of domestic demand. Therefore, imports added in consumption are subtracted back out in the M term of the equation. Because of the way in which we write the demand equation, it is easy to make the mistake of thinking that imports are bad for the economy. Just keep in mind that every negative number in the M term has a corresponding positive number in the C or I or G term, and they always cancel out.

Which of the following is true about the aggregate supply curve?

It illustrates real GDP for each price level. • The aggregate supply (AS) curve shows the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level.

The term used to describe an economy that is experiencing a decrease in real GDP alongside a rising price level is:

Stagflation A stagnant - or stagnating (i.e. contracting) - economy with inflation is termed stagflation.

True or False: If consumers become more confident about the economy, we can expect consumption to increase.

True Economists associate a rise in consumer confidence with higher consumption.

True or False: If businesses become more confident about the economy, we can expect investment spending to increase.

True If business confidence is high, then firms tend to spend more on investment, believing that the future payoff from that investment will be substantial.

True or False: Potential GDP is synonymous with full employment GDP.

True When an economy is operating at its potential GDP, machines and factories are running at capacity, and the unemployment rate is relatively low—at the natural rate of unemployment. For this reason, potential GDP is sometimes also called full-employment GDP.

If aggregate demand in the economy has soared so high that firms in the economy are not capable of producing additional goods, because labor and physical capital are fully employed, then __________.

additional increases in aggregate demand can only result in a rise in the price level

Which of the following will result in a shift in the short-run aggregate supply curve to the left

an increase in the cost of electricity • An increase in the price of a major input, such as electricity which is used to power production activities, will cause the SRAS curve to shift to the left, which means that at each given price level for outputs, a higher price for electricity will discourage production because it will decrease the possibilities for earning profits.

Which of the following is an example of an adverse supply shock? a. a sudden increase in the price level b. an outbreak of war in major oil producing nations c. an increase in the quantity of labor d. none of the above

b. an outbreak of war in major oil producing nations Sudden shocks to input goods or labor are termed supply shocks.

Which of the following is true about aggregate demand Select the correct answer below: a. It is derived from exports and imports b. It is the sum of all goods and services demanded by a nation's consumers c. It is a measure of total spending on domestic goods and services. d. It does not take into account the expenditure that is planned for in the government budget

c. It is a measure of total spending on domestic goods and services.

Suppose, in the nation of Xurbia, input prices within its industrial sector increase; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

supply decrease • An increase in the price of inputs, in this case within the industrial sector, will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will discourage production because it will dampen the possibilities for earning profits.

Suppose, in the nation of Xurbia, input prices within its agricultural sector increase; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

supply decreases • An increase in the price of inputs for agriculture will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will encourage production because it will increase the possibilities for earning profits.

Suppose, in the nation of Xurbia, input prices within its agricultural sector decrease; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

supply increases • A decrease in the price of inputs will cause the AS curve to shift to the right, which means that at each given price level for outputs, a lower price for inputs will encourage production because it will increase the possibilities for earning profits.

If wage rates increase, while the costs of other inputs remain the same,

the short-run aggregate supply curve shifts to the left • An increase in wage rates implies an increase in labor costs which will cause the SRAS curve to shift to the left; because at each given price level for outputs, a higher price for labor input will discourage production because it will reduce the possibilities for earning profits.

A rise in business confidence

will lead to a rightward shift of the AD curve. • If business confidence is rising, then firms tend to spend more on investment, believing that the future payoff from that investment will be substantial. Higher investment spending will lead to rightward shift of the AD curve.

Inflationary pressures happen when __________.

• aggregate demand is close to full employment and shifts even closer to full employment • aggregate supply decreases as a result of increases in input prices which are widely used throughout the economy

Suppose, the Congress decides to increase spending on domestic infrastructure in order to upgrade the nation's infrastructure. Use the graph below to show the impact of the aforementioned on the economy by shifting the appropriate curve(s).

• demand increases (to the right) Government spending is one component of AD.Thus, higher government spending will cause AD to shift to the right

Suppose foreigners become less confident about products made in America; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

demand decreases (shifts to the left) • An decrease in consumer confidence shifts AD to the left. When AD shifts to the left, the new equilibrium will have a lower quantity of output and also a lower price level compared with the original equilibrium.

Suppose, the British government decides to increase government spending on public healthcare services. Use the graph below to illustrate the impact of the aforementioned on the British economy by shifting the appropriate curve(s).

demand increases (shifts to the right) • Government spending is one component of AD.Thus, higher government spending will cause AD to shift to the right

Use the aggregate supply (AS) curve and aggregate demand (AD) curve below to determine the equilibrium price level and equilibrium real GDP for this economy.

The intersection of the aggregate supply and aggregate demand curves shows the equilibrium level of real GDP and the equilibrium price level in the economy. In this case those points are: Price Level = $50 & Real GDP = $10,000.

Graphically, the long-run aggregate supply curve is

Vertical The vertical line that represents an economy's potential GDP is its long run aggregate supply (LRAS).

Which of the following will result in a shift in the short-run aggregate supply curve to the right

a decrease in the cost of production machinery • An decrease in the price of an input will cause the SRAS curve to shift to the right which means that at each given price level for outputs, a lower price for electricity will encourage production because it will increase the possibilities for earning profits.

Which of the following is not a reason why the aggregate demand curve is downward sloping a. The foreign price effect b. The wealth effect c. The stock price effect d. The interest rate effect

c. The stock price effect The AD curve slopes down, which means that increases in the price level of outputs lead to a lower quantity of total spending. Therefore, a movement along the AD curve up to the left must correspond to an increase in the price level

The shape of the short-run aggregate supply curve is determined by a. The wealth effect b. The interest rate effect c. The foreign price effect d. None of the above

d. None of the above The wealth effect, interest rate effect, and foreign price effect influence the shape of the aggregate demand curve.

American households become more confident about American made electronic products; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

demand increases (to the right) • An increase in consumer confidence shifts AD to the right. When AD shifts to the right, the new equilibrium will have a higher quantity of output and also a higher price level compared with the original equilibrium.

A rise in input prices that affects many or most firms across the economy can cause the aggregate supply curve to shift back to the left creating __________.

inflationary pressure • An alternative source of inflationary pressures can occur due to a rise in input prices that affects many or most firms across the economy—perhaps an important input to production like oil or labor—and causes the aggregate supply curve to shift back to the left.

In the AD/AS framework, if aggregate demand continues to shift to the right while the economy is near potential GDP, then __________.

inflationary pressures will increase • One possible cause of inflationary pressure is if aggregate demand continues to shift to the right when the economy is already at or near potential GDP and full employment, thus pushing the macroeconomic equilibrium into the AS curve's steep portion. In this situation, the aggregate demand in the economy has soared so high that firms in the economy are not capable of producing additional goods, because labor and physical capital are fully employed, and so additional increases in aggregate demand can only result in a rise in the price level.

Suppose, in the nation of Xurbia, the minimum wage law is repealed; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

supply increases • A decrease in the price of inputs, in this case labor, will cause the AS curve to shift to the right, which means that at each given price level for outputs, a lower price for labor will encourage production because it will increase the possibilities for earning profits.

Suppose, in the nation of Xurbia, a new technological advancement increases the productive capacity of its manufacturing sector; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

supply increases, demand doesn't change • In this case, a technological advancement allowed for higher productivity. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.