Chapter 12 ECON

The economy's long-run AS curve assumes that wages and other resource prices:

eventually rise and fall to match upward or downward changes in the price level

If the short-run equilibrium level of real GDP (QE) is equal to full employment real GDP (QN), then the economy is experiencing ____________ with unemployment (U) that is ____________ the natural rate of unemployment (UN).

full employment (no gap); equal to

If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium:

output would necessarily rise

A rightward shift in the aggregate supply curve is best explained by an increase in:

productivity

If the actual unemployment rate is greater than the natural rate of unemployment, a(n):

recessionary gap exists and there is a surplus of labor and other resources.

If the short-run equilibrium level of real GDP (QE) is less than full employment real GDP (QN), then the economy is in a(n) ____________ gap with unemployment (U) that is ____________ the natural rate of unemployment (UN).

recessionary; above

In the aggregate demand/aggregate supply model, economic growth is best illustrated by a:

rightward shift of the long-run aggregate supply curve.

The aggregate supply curve (short run):

slopes upward and to the right, showing a direct (positive) relationship between the price level and the quantity-supplied of real GDP

Which of the following is incorrect?

When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending.

The aggregate demand curve is:

(a) downsloping, showing an inverse (negative) relationship between the price level and the quantity-demanded of real GDP. (b) downsloping because of the interest-rate, real-balances, and foreign purchases effects.

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)?

A decline in the incomes of U.S. trading partners

Which one of the following would not shift the aggregate demand curve?

A decrease in the price level.

Which one of the following would increase per-unit production costs and therefore shift the aggregate supply curve to the left?

An increase in energy prices.

Which of the following would most likely increase aggregate demand (shift the AD curve to the right)?

An increase in expected rates of return on investment.

Refer to the diagram. If the initial aggregate demand and supply curves are AD0 and AS0, the equilibrium price level and level of real domestic output will be:

F and C, respectively.

Refer to the diagram. If aggregate supply is AS1 and aggregate demand is AD0, then:

F represents a price level that would result in a shortage of real output of AC.

LRAS U UN Use the graph above to answer question #6: The diagram above shows an economy experiencing:

a recessionary gap.

If the economy is initially in equilibrium at full employment real GDP (QN), and a stock market crash reduces household wealth and lowers investor confidence, ceteris paribus, the ____________ curve will shift to the ____________ resulting in a ____________ price level (P), ____________ output/real GDP level (Q), and ____________ unemployment level (U).

aggregate demand; left; lower; lower; higher

Refer to the diagram. If the aggregate supply curve shifted from AS0 to AS1 and the aggregate demand curve remains at AD0, we could say that:

aggregate supply has decreased, the price level has increased, equilibrium real output has decreased, and unemployment has increased.

Which of the following would not shift the aggregate supply curve?

an increase in the price level

QE = QN U = UN Use the graph above to answer question #8. The diagram above shows an economy:

at full employment equilibrium.

Assuming the short-run aggregate supply curve is upward sloping, an increase in aggregate demand (while short-run aggregate supply remains unchanged) results in a ____________ price level (P), ____________ output/real GDP level (Q), and ____________ unemployment level (U).

higher; higher; lower

UN U Use the following graph to answer question 7. The graph above depicts an economy:

in an inflationary gap.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to:

increase aggregate demand.

If the actual unemployment rate is less than the natural rate of unemployment, a(n):

inflationary gap exists and there is a shortage of labor and other resources.

If the short-run equilibrium level of real GDP (QE) is greater than full employment real GDP (QN), then the economy is in a(n) ____________ gap with unemployment (U) that is ____________ the natural rate of unemployment (UN).

inflationary; below

Assuming the short-run aggregate supply curve is upward sloping, an increase in short-run aggregate supply (while aggregate demand remains unchanged) results in a ____________ price level (P), ____________ output/real GDP level (Q), and ____________ unemployment level (U).

lower; higher; lower

The equilibrium price level and level of real output occur where:

the aggregate demand and aggregate supply curves intersect.

The economy's long-run aggregate supply (LRAS) curve is:

vertical at natural (full employment) real GDP, or potential output (QN).

If aggregate demand increases and aggregate supply decreases, the price level:

will increase, but real output may increase, decrease, or remain unchanged