ch 33 macro

When aggregate demand falls, output and the price level fall in the short run. Over time, a change in expectations causes

wages, prices, and perceptions to adjust, and the short-run aggregate supply curve shifts rightward. In the long run, the economy returns to the natural rates of output and unemployment, but with a lower price level.

Recessions are

periods of falling real GDP and rising unemployment.

Fill in the table by indicating the changes in the determinants necessary to decrease short-run aggregate supply. 1. Input prices 2. Tax rates 3. Burdensome regulations

1. increase 2. increase 3. increase

A fall in aggregate supply results in stagflation. What is stagflation?

falling output and rising prices.

Complete the table by indicating the change in each determinant necessary to increase aggregate demand. 1. Consumer expectations about future profitability 2.Government spending 3. Interest rates 4.The value of the domestic currency relative to the foreign currency

1. improve 2.increase 3. decrease 4. depreciate

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. 1. Many workers leave to pursue more lucrative careers in foreign economies. 2.A scientific breakthrough significantly increases food production per acre of farmland. 3.A government-sponsored training program increases the skill level of the workforce.

1.left 2. right 3. right

Notice that real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as______ Short-run economic fluctuation

Business Cycle

True or False: Small ups and downs in real GDP follow a consistent, predictable pattern. True False

False

what is the interest-rate effect?

Suppose P rises. ▪ Buying g&s requires more dollars. ▪ To get these dollars, people sell bonds or other assets. ▪ This drives up interest rates. Result: I falls. (Recall, I depends negatively on interest rates.

what is the wealth effect?

Suppose P rises. ▪ The dollars people hold buy fewer g&s, so real wealth is lower. ▪ People feel poorer. Result: C falls.

what is the exchange effect?

Suppose P rises. ▪ U.S. interest rates rise (the interest-rate effect). ▪ Foreign investors desire more U.S. bonds. ▪ Higher demand for $ in foreign exchange market. ▪ U.S. exchange rate appreciates. ▪ U.S. exports more expensive to people abroad, imports cheaper to U.S. residents. Result: NX falls.

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The inflation rate The level of technological knowledge The quantity of physical capital The size of the labor force

The inflation rate

(look at the chart for #1) Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1958? Check all that apply. Home sales declined. The unemployment rate declined. Retail sales increased. Industrial production declined.

The unemployment rate declined. Retail sales increased.

The aggregate demand curve slopes downward because

a change in the price level has a wealth effect on consumption, an interest-rate effect on investment, and an exchange-rate effect on net exports.

Again, the following graph shows the economy in long-run equilibrium at the expected price level of 120 and the natural level of output of $600 billion, before the increase in consumption spending associated with the stock market expansion. During the transition from the short run to the long run, price-level expectations will________and the________ ________ curve will shift to the_______

adjust upward, short-run aggregate supply and left

Economic fluctuations are caused by shifts in aggregate demand and aggregate supply.

aggregate demand and aggregate supply.

Anything that changes C, I, G, or NX—except a change in the price level—will shift the

aggregate demand curve

Short-run fluctuations in GDP and other macroeconomic quantities

are irregular and unpredictable.

The long-run aggregate supply curve is vertical because

changes in the price level do not affect output in the long run.

In the short run, output deviates from its natural rate when the price level is

different than expected, leading to an upward-sloping shortrun aggregate supply curve.

As the price level falls, the cost of borrowing money will______, causing the quantity of output demanded to_____ . This phenomenon is known as the__________effect Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to______ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore_____ , and the number of foreign products purchased by domestic consumers and firms (imports) will_____ . Net exports will therefore_____ , causing the quantity of domestic output demanded to____ . This phenomenon is known as the______ effect.

fall, rise and Interest rate fall, rise, fall, rise, rise, and exchange rate

In the long run, as a result of the stock market boom, the price level_____, the quantity of output______ to the natural level of output, and the unemployment rate_____ to the natural rate of unemployment.

increases, returns, returns

• In the long run, output is determined by

labor, capital, natural resources, and technology; changes in any of these will shift the long-run aggregate supply curve

Economists analyze fluctuations using the

model of aggregate demand and aggregate supply.

Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run. For example, an increase in the money supply, a_________ variable, will cause the price level, a________ variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a_______variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as_________

nominal, nominal , real and Monetary neutrality

The three theories proposed to explain this upward slope for the AS curve are

the sticky wage theory, the sticky price theory, and the misperceptions theory.

In the short run, however, most economists believe that real and nominal variables are intertwined. Economists use the model of aggregate demand and aggregate supply to examine the economy's short-run fluctuations around the long-run output level. The following graph shows an incomplete short-run aggregate demand (AD) and aggregate supply (AS) diagram—it needs appropriate labels for the axes and curves. You will identify some of the missing labels in the questions that follow. 1. The vertical axis of the aggregate demand and aggregate supply model measures the overall_________ 2.The aggregate ________ curve shows the quantity of goods and services that firms produce and sell at each price level.

price level and supply

Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to____ , which will: a. Shift the long-run aggregate supply curve to the right b. Not affect the long-run aggregate supply curve c. Shift the long-run aggregate supply curve to the left

rise c. Shift the long-run aggregate supply curve to the left

#7 on HW In the short run, the increase in consumption spending associated with the stock market expansion causes the price level to_____the price level people expected and the quantity of output to_______the natural level of output. The stock market boom will cause the unemployment rate to_______the natural rate of unemployment in the short run.

rise above, rise above, and fall below

The short-run aggregate-supply curve shifts in response to changes in

the expected price level and to anything that shifts the long-run aggregate supply curve.

The AD curve shows

the quantity of all g&s demanded in the economy at any given price level.