CH 11 Aggregate Output, Price level and the Interest Rate

The​ long-run aggregate supply curve..... A. is vertical because all prices​ (both input and output​ prices) change at the same rate in the long run. B. shows the various amounts of aggregate output businesses are willing to consume at each price level. C. is vertical because input prices lag behind price level changes. D. is​ upward-sloping because a higher price level causes businesses to increase production.

A. is vertical because all prices​ (both input and output​ prices) change at the same rate in the long run.

The level of aggregate output ​(Yo​) where the curve at right is drawn is called .... A. potential output or potential GDP. B. full capacity output. C. zero unemployment output. D. real GDP.

A. potential output or potential GDP.

All of the following are exogenous variables to the aggregate​ supply-aggregate demand model except.... A.the price level. B.net taxes. C.government spending. D.the Z factors.

A. the price level.

The curve displayed( Vertical straight line) in the figure to the right is known as the​ economy's .... A. ​long-run aggregate supply. B. ​long-run price level. C. ​long-run aggregate demand. D. ​short-run aggregate supply.

A. ​long-run aggregate supply.

According to your​ graph, the short run result is that ....both the price level and aggregate output​ (income) increase.

ADo is negative and decreasing than the new AD1 shifts to the right

The relationship between the price level and aggregate output​ (income) depicted in the figure to the right is known as the .....

Aggregate Supply curve

Suppose that the price level in the economy increases. .... results .....

An increase in the price level yields a higher demand for​ money, a higher interest​ rate, and consequently less planned investment and decreased consumption. Less investment and decreased consumption with no change in government purchases produces a downward shift in the AE curve.

Which of the following will generate an increase in aggregate​ demand? A. A decrease in the money supply. B. Increased government expenditures for war. C. A tax increase. D. A decrease in the price level.

B. Increased government expenditures for war.

Which of the following is the best explanation of the shape of the AD​ curve? The aggregate demand curve slopes downward because.... A. a decrease in the price level drives up interest​ rates, which discourages consumption and aggregate demand falls. B. an increase in the price level causes the demand for money to​ rise, driving up the interest rate and discouraging​ investment, which causes aggregate demand to fall. C. when the price level is​ lower, people can afford to buy more and aggregate demand rises. D. All of the above are good explanations.

B. an increase in the price level causes the demand for money to​ rise, driving up the interest rate and discouraging​ investment, which causes aggregate demand to fall.

According to the real wealth effect ​(or real balance​ effect), an increase in the price level..... A.increases ​consumers' expenditures due to an increase in the purchasing power of household wealth. B. decreases ​consumers' expenditures due to a decrease in the purchasing power of household wealth. C. does not affect the purchasing power of wealth in the long run. D. does not affect the purchasing power of any type of wealth in the short run.

B. decreases ​consumers' expenditures due to a decrease in the purchasing power of household wealth.

The somewhat unique shape of the short run aggregate supply curve is based in part on how firms respond to an increase in aggregate demand. As firms and the economy move closer to full​ capacity, the response of firms is likely to change from A. mainly increasing prices to mainly increasing output. B. mainly increasing output to mainly increasing prices. C. having fixed prices and rising output to having fixed output and rising prices. D. being ingratiating to being exploitative.

B. mainly increasing output to mainly increasing prices.

The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very steep portion of AS​ curve, when..... A. there is hardly any inflationary pressure. B. the economy is operating at or near full employment and output level is above full capacity. C. the Fed is following a contractionary monetary policy. D. there exists considerable excess capacity and high unemployment in the economy.

B. the economy is operating at or near full employment and output level is above full capacity.

This example describes the simple Keynesian aggregate supply curve as one in which there is a maximum level of output given the constraints of a fixed capital stock and a fixed supply of labor. The presumption is that increases in demand when firms are operating below capacity will result in output increases and no input price or output price changes but that at levels of output above full​ capacity, firms have no choice but to raise prices if demand increases. The aggregate demand​ (AD) and aggregate supply​ (AS) equilibrium may occur at a very flat portion of AS​ curve, when.... A. there is considerable inflationary pressure. B. there exists considerable excess capacity and high unemployment in the economy. C. the Fed is following an expansionary monetary policy. D. the economy is at full employment.

B. there exists considerable excess capacity and high unemployment in the economy.

The negative slope of the aggregate demand curve A. occurs because less is supplied at higher prices. B. is explained by the substitution effect and the income effect. C. is due to a higher price level raising interest rates comma reducing investment and aggregate output. D. occurs because prices change when incomes are lower.

C. is due to a higher price level raising interest rates comma reducing investment and aggregate output.

On November​ 9, 2011, the European Central Bank acted to decrease the​ short-term interest rate in Europe by​ one-fourth of a percentage​ point, to 1.25​ percent, and additional cuts were made over the next three​ years, to a low rate of 0.05 percent by September 2014. The rate cuts were made because European countries were growing very slowly or were in recession. What effect did the bank hope the action would have on the​ economy? A. Increase investment spending and raise GDP. B.Increase​ GDP, which would set off a multiplier effect with consumption rising. C. Increase​ GDP, which would encourage additional government spending and continue to increase GDP. D. A and B only.

D. A and B only.

In​ reality, however, the​ short-run aggregate supply curve​ isn't flat and then vertical.​ Rather, it becomes steeper as we move from left to right. This somewhat unique shape of the​ short-run aggregate supply curve is based in part on the fact that.... A. as the economy moves closer to full​ capacity, the firms increase output and not the​ prices, and at excess capacity input prices increase faster. B. when the economy has excess​ capacity, input prices are quicker to adjust to an increase in aggregate demand than is output and at full capacity output increases more than prices. C. as the economy moves closer to full​ capacity, the firms decrease output and decrease​ prices; whereas at excess capacity prices increase more than output. D. when the economy has excess​ capacity, input prices are slow to adjust whereas output adjusts quickly to increases in aggregate​ demand; as the economy approaches full capacity prices increase at a faster rate than does output.

D. when the economy has excess​ capacity, input prices are slow to adjust whereas output adjusts quickly to increases in aggregate​ demand; as the economy approaches full capacity prices increase at a faster rate than does output.

A decrease in government spending shifts the​ ________, and a decrease in the price level shifts the​ ________.

IS curve to the​ left; Fed rule to the right

T/F : The Fed rule is an equation that shows how the interest rate behavior of the Fed depends on the state of the economy.

True

the​ short-run aggregate supply curve​ (AS) is​ upward-sloping. This positive slope is explained in part by the fact that ...

in the​ short-run, input prices--particularly wage rates----are slower to adjust to increasing aggregate demand than are output prices.

show an increase in aggregate demand

line shift to the right and above original line \ \ \ \ \ \ \ \ o new

According to your​ graph (new line below original ), the relationship between the price level and the level of aggregate output​ (income) is ....

negative.

In a June​ 17, 2015 press​ conference, Fed Chair Janet Yellen indicated the possibility of the Fed raising interest rates by the end of the year. On this​ date, the federal funds rate target set by the Fed was 0.00-0.25 ​percent, where it had been since January 2009. According to the Fed​ rule, the Fed will raise the interest rate when​ ______. ​ (Check all that apply.​)

output is high, inflation is high

real wealth effect (real balance effect)

the change in consumption brought about by a change in real wealth that results from a change in the price level

A sudden increase in oil prices results in a supply​ shock, shifting the​ short-run aggregate supply curve to the​ ________, resulting in society getting a​ ________ aggregate output at any price level.

​left; smaller