Chapter 13 Eco

Consider the graph below, and assume that the U.S. economy initially has a short-run aggregate supply curve corresponding to SRAS1. Click on the SRAS curve that would most plausibly result if the government passed a carbon tax on suppliers.

(SHIFTS LEFT(Higher supplier costs reduce firms' profitability and make them less willing to produce at any price level.Note that tax costs affect both the short-run aggregate supply curve and the long-run aggregate supply as long as it is in place.)

Place the three components of aggregate demand in order of relative size, starting with the one representing the largest component of GDP.

Consumption, Investment, net exports

A supply shock is by definition an unexpected change in supply that always raises a firm's production costs.

FALSE

Whenever the long-run aggregate supply curve shifts to the right as shown, the long-run unemployment rate will decrease.

FALSE

Fill in the blanks to complete the following statement about the change in oil prices.

From July 2007 to July 2008, oil prices in the United States doubled from $70 a barrel to over $140 a barrel. This was a negative supply shock. The drop from more than $100 a barrel to less than $50 a barrel in late 2014 was a positive supply shock for the macroeconomy.

Complete the following passage concerning macroeconomics.

One branch of macroeconomics focuses on long-run growth and development, while the other branch focuses on business cycles, which are fluctuations in an economy's growth rate, typically over time periods of five years or less. One model that macroeconomists use to study these fluctuations, which are called recessions and expansions, is the aggregate demand-aggregate supply model.

Fill in the blanks to complete the sentence below. 2020 Covid

The initial temporary lockdown that occurred in March 2020 would be described as a(n) exogenous supply shock, which led to an increase in firms' production costs, causing a(n) decrease in aggregate supply.

Where will the new equilibrium be in the short run if income tax hikes cause workers to lower their expectations of future income?

Lower expectations of future income shift the aggregate demand curve to the left, so that the new short-run equilibrium is at price level 95.

Which of the following phenomena help explain why the short-run aggregate supply curve is upward sloping instead of vertical?

Correct Answer(s) menu costs money illusion sticky prices Incorrect Answer(s) the wealth effect supply shocks technological advancements

Which of these are conditions for long-run equilibrium in the aggregate demand-aggregate supply model?

Correct: Long-run aggregate supply equals aggregate demand. Short-run aggregate supply equals aggregate demand. Incorrect Answer(s) u > u* u < u* (Note that short-run equilibrium only requires short-run aggregate supply to equal aggregate demand.)

Recessions in the United States occur with regular, predictable frequency; hence the term "business cycle."

FALSE (Recessions do not occur on a fixed schedule. For one thing, in the United States, recessions have been less common in the past few decades than at any other period in the nation's history.)

Click on the long-run aggregate supply curve that would most likely result if a new shipping method, using drone technology, made it less expensive to transport goods between any two locations.

In fact, any new technology that increases productivity will increase LRAS.

Please attach the most appropriate label to the curve in the graph below. Note that the curve is perfectly vertical.

In the aggregate demand-aggregate supply model, only the long-run aggregate supply curve is perfectly vertical.

This graph illustrates an economy, initially in long-run equilibrium, which then experiences a decrease in short-run aggregate supply (from SRAS1 to SRAS2). Label the two short-run equilibria (before and after the shift) with the appropriate relation between u, the short-run equilibrium unemployment rate, and u*, the natural long-run rate.

Point B(Y1): U>U* Point A(Y*): U=U*

How do aggregate demand and aggregate supply differ from product-specific demand and supply?

Product-specific demand and supply describe the market for a single good whereas aggregate demand and aggregate supply describe the combined for all final goods and services

Choose the term that best completes the following statement.

When the U.S. price level increases, Americans increase their demand for German cars, while Germans demand fewer American cars. This is an example of the international trade effect.(The international trade effect explains how the net exports component of aggregate demand depends on the price level.)

Drag each item listed to the correct aspect of a company's financial flow.

revenuePress Space to open Correct label:customer willingness to pay Correct label:product price Correct label:market price of product costPress Space to open Correct label:production staff Correct label:interest on loan Correct label:accounting department

You read a news article reporting that a nation's real output fell while its inflation rate temporarily jumped up. From this you can conclude that the recession was likely caused by which of these scenarios?

A decrease in aggregate supply

Fill in the blanks to complete the following passage regarding firms' short-run supply.

A simple model of a firm describes it as an entity that buys inputs (for example, labor) and sells outputs (goods and services). A firm's input prices, which affect costs, are generally sticky in the short run, while a firm's output prices, which affect revenue, are flexible. Therefore, an increase in the short-run price level raises revenue more than costs, so firms produce more in the short run. Consequently, the SRAS curve slopes upward.(How long is the short run? In macroeconomics, the short run is simply the period of time during which some prices have not yet adjusted.)

Consider the graph below, and assume that Ireland's economy initially has a short-run aggregate supply curve corresponding to SRAS1. Click on the SRAS curve that would most plausibly result if technological improvements lowered costs of production in Ireland.

Any technology that lowers production costs within an economy will shift the SRAS curve to the right.Note that both the long-run and short-run aggregate supply curves would increase in this case.

Which of the following would result in a decrease in U.S. aggregate demand?

Correct Answer(s) Buyers become less optimistic about their future income. A stock market crash erodes U.S. citizens' retirement savings. South American nations experience a recession. Incorrect Answer(s) Buyers become more optimistic about their future income. An increase in the price level leads foreign consumers to substitute away from U.S. goods.

Imagine that the U.S. economy has an initial unemployment rate equal to the natural rate of unemployment. Identify each event as a factor that will either increase or decrease unemployment in the short run.

Increase The oil cartel OPEC raises oil prices. The U.S. dollar appreciates in price against foreign currencies. Decrease U.S. real estate values rise. American consumers expect higher incomes in the future. Brazil experiences economic growth and increases its demand for U.S. exports.

Assuming the U.S. economy's initial aggregate supply curve is LRAS1, label the other two curves with the event most likely to cause a shift to each curve.

Left:A new law prohibitsemployers from hiringanyone under the age of 21 Right: Oil prospectors discovera previously unknownlarge reservoir of oil in California. (An increase in natural resources will increase the LRAS curve.Remember, anything that shifts long-run aggregate supply also shifts short-run aggregate supply, but not the other way around.)

Which of the following are reasons the aggregate demand curve slopes downward, as shown in the figure? \

Reason(s) When the price level increases, people save less, thus interest rates rise and investment falls. Therefore, real GDP falls. When the price level increases, the real value of wealth falls and consumers want to purchase less. Therefore, real GDP falls. When the price level increases, U.S. exports become relatively more expensive for foreign buyers and they want to purchase less. Therefore, the quantity of net exports falls and real GDP falls. Not a Reason When the price of one domestic good rises, people may substitute away from that good in favor of a cheaper domestic good.

Consider the following graph. Assuming that the U.S. economy begins with an aggregate demand curve equal to AD1, click on the aggregate demand curve you would expect to see following a decrease in the value of the U.S. dollar.

Shift Right AD2 (When the value of the U.S. dollar falls, foreign goods become relatively more expensive, so U.S. demand for imports fall. Also, U.S. exports become relatively cheaper, so demand for U.S. exports increases. Both effects increase the net exports component of aggregate demand.)

Fill in the blanks to complete the following statement about the relationship between price level and slope.

The positive slope of the short-run aggregate supply curve indicates that increases in the economy's price level lead to a(n) increase in the quantity of aggregate supply in the short run.

Match each of the following terms with the phrase that best describes it.

a measure of consumers' expectationsconsumer sentiment index Correct label:consumer sentiment index the spending side of the economyaggregate demand Correct label:aggregate demand the producing side of the economyaggregate supply Correct label:aggregate supply a measure of the price levelGDP deflator Correct label:GDP deflator

There are three reasons for the downward slope of the demand curve: the wealth effect, the interest rate effect, and the international trade effect. Match each effect with the component of aggregate demand it most closely impacts

consumption the wealth effect Correct label:the wealth effect net exportsthe international trade effect Correct label:the international trade effect investmentthe interest rate effect Correct label:the interest rate effect(When real wealth falls, people choose to spend less, which decreases the consumption component of aggregate demand.)

Which of these scenarios would cause the U.S. short-run aggregate supply curve to shift to the left?

Correct Answer(s) A mysterious chronic disease kills off half of the nation's corn crop. Many workers signed contracts last year assuming 1% future inflation. This year, it was revealed that current inflation is nearly 5%. Incorrect Answer(s) Foreign buyers experience a decrease in income. After the FDA announces a new set of regulations for next year, consumers expect all grocery prices to fall. Most workers signed contracts last year assuming 3% future inflation. This year, it was revealed that current inflation is only 1%.

Which of these are consequences of an increase in long-run aggregate supply?

Correct Answer(s) an increase in full-employment output an increase in short-run aggregate supply Incorrect Answer(s) a decrease in the long-run rate of unemployment u* an increase in the price level

Place the following items in order of the magnitude of the effect on the aggregate demand curve, starting with the greatest effect and descending to the least. Keep in mind that there will be an item which has zero effect on the AD curve (because it causes movement along the curve).

Development of computer based technologies, from the 1940's to now State governments in the 2010's cut their budgets for teachers, infrastructure, police, and other government expenditures. Prices of tech stocks increase in the late 1990's as a result of a speculative bubble people notice prices rising and an associated decrease in purchasing power. A trade war with china in the late 2010's leads to a decrease in trade

Where will the new equilibrium be in the short run if political events cause workers to lower their expectations of future income?

Lower expectations of future income shift the aggregate demand curve to the left, so that the new equilibrium is at price level 95. Eventually if the political situation stabilizes and workers' expectations of income go back to normal, the SRAS curve will shift, as well, to return the economy to the LRAS curve at a lower price level, namely 90.

Consider the following graph. Assuming that the U.S. economy begins with an aggregate demand curve equal to AD1, click on the aggregate demand curve you would expect to see following a rise in the U.S. price level.

NO CHANGE (In the aggregate demand-aggregate supply model, the price level plays a similar role to that of the price in the market for a specific good or service. An increase in the price level in the economy impacts the quantity of aggregate demand, but does not shift the aggregate demand curve.)

The island nation of Maskonia initiated a very strict lockdown in response to the COVID-19 pandemic, along with extensive testing and contact-tracing protocols. During this lockdown, many workers could not travel to their jobs, and businesses could not produce as much as they had prior to the lockdown. Maskonia's economy was at LRAS1 before the pandemic. The economy reopened weeks later and returned to full-employment output.Select the LRAS curve that would most likely represent the post-lockdown economy.

NO CHANGE (The lockdown was temporary, which would impact the short-run aggregate supply curve rather than the LRAS curve.)

Consider the graph below, and assume that the U.S. economy initially has a short-run aggregate supply curve corresponding to SRAS1. Click on the SRAS curve that would most plausibly result if the Federal Reserve announced a plan to increase the U.S. money supply one year from now, and citizens responded by expecting higher prices in the future.

Shift left (UP) (When new information causes expected prices to increase, workers demand higher wages now. Therefore, firms are less profitable and will choose to produce less.Note that expected future prices affect only the short-run aggregate supply curve; LRAS would not shift in this case.)

Classify each event either as shifting the aggregate demand curve or as causing movement along the curve.

Shifts the Aggregate Demand Curve State governments cut their budgets for infrastructure maintenance. Technological advances generate wealth in a broad range of industries. Causes Movement Along the Aggregate Demand Curve As inflation drops to nearly zero, people save more and therefore more loanable funds are available. People notice prices going up and their purchasing power going down as a result.(More loanable funds supplied means lower interest rates and therefore a greater quantity of funds demanded. Investment increases. This is movement along the aggregate demand curve; With less money in real terms to spend, people will buy less. This is movement along the curve due to the wealth effect.)

Fill in the blanks to complete the passage about the U.S. unemployment rate.

Since 1970, the highest monthly unemployment rate in the United States was 10.8%; this happened in 1982. Following the recession of 1991-1992, GDP growth was generally strong, at one point exceeding 4% for four consecutive quarters. (Since 1970, the peak unemployment rate of 10% in 2009 is exceeded only by the peak rate in 1982, which was 10.8%.)

Fill in the blanks to complete the following passage concerning the history of U.S. recessions.

Since the year 1900, the United States has experienced 22 recessions. Since 1970, 7 recessions have occurred. (In the United States, recessions have become somewhat less common since 1990.)

What is the meaning of a leftward shift in the long-run aggregate supply (LRAS) curve?

The Unemployment rate has not changed but the workers are less productive. (A leftward shift indicates a drop in real GDP.)

Fill in the blanks to complete the passage below.

The fallout from the spread of COVID-19 forced many businesses to close permanently. This shuffling of resources, which began as a short-run shock, eventually led to a permanent decline of resources in the economy. We use two models to explain that decline. In the production possibilities frontier (PPF) model, a decline is indicated by shifting the curve inward. In the AD-AS model, a permanent decline in production would be represented by shifting the LRAS curve to the left. The two models can be used to measure economic growth.

A small manufacturer, operating out of a rented space in a light-industrial area, produces inexpensive office supplies. Classify each aspect of the operation as an example of sticky input prices, menu costs, or money illusion.

The flagship product has been packaged and advertised as "The two-buck stapler." Changing the price would require new packaging and re-branding of the item.menu costs Correct label:menu costs Due to lower-than-usual inflation, workers get a smaller-than-usual annual raise, which hurts morale.money illusion Correct label:money illusion The warehouse space is on a 3-year lease, with two years still to go.sticky input prices Correct label:sticky input prices

With the figure for reference, follow the indicated shifts of the curves to match each shift to the expected consequence on aggregate output (Y), the price level (P), and the unemployment rate (u).

Y (real GDP) increases, P (price level) increases Correct label:Consumers expect higher future income. Y (real GDP) falls, P (price level) falls Correct label:The income of people in foreign nations falls. Y (real GDP) decreases, P (price level) increases Correct label:The economy experiences a permanent decline in resources. u (unemployment rate) falls, P (price level) falls Correct label:Input prices fall

Match each interest rate change with the effect(s) it most likely produces.

less saving Correct label:interest rate fall more investment interest rate fall Correct label:interest rate fall more savinginterest rate increase Correct label:interest rate increase less investmentinterest rate increase Correct label:interest rate increase

With the figure for reference, follow the indicated shifts of the curves to match each shift to the expected consequence on aggregate output (Y), the price level (P), and the unemployment rate (u).

u (unemployment rate) falls, P (price level) fallsSRAS shifts to the right. Correct label:SRAS shifts to the right. Y (real GDP) falls, P (price level) fallsAggregate demand shifts to the left. Correct label:Aggregate demand shifts to the left. Y (real GDP) decreases, P (price level) increasesLRAS shifts to the left. Correct label:LRAS shifts to the left. Y (real GDP) increases, P (price level) increasesAggregate demand shifts to the right. Correct label:Aggregate demand shifts to the right