ECON 1115 chapter 11 homework

Assume that the U.S. economy is at its full-employment level of output, and there is a fall in net exports. Click on the area that represents the short-run equilibrium for the U.S. economy.

It is the one to the left on the green line Distinguish between the short-run and long-run effects of a change in aggregate demand. While in the short run, both the output and price levels fall, wage rates eventually begin to decrease. The high rate of unemployment puts a downward pressure on wages. Lower wages increase aggregate supply. Thus, output returns to the full employment level but with a significant fall in prices.

Assuming that we are not producing at full capacity, an increase in demand (a shift to the right in AD) will result in which of the following? (multiple answers) a) An increase in real GDP b) An increase in the inflation rate c) A shift in the AS curve d) Movement along the AS curve

a) An increase in real GDP b) An increase in the inflation rate d) Movement along the AS curve

Which of the following will be affected by a change in the average price level or inflation rate? (multiple answers) a) Consumption b) Investment c) Government d) Net Exports e) Saving

a) Consumption b) Investment d) Net Exports e) Saving These are the reasons for why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports. (Government spending is assumed to be determined from outside the model). Saving would likely change too, but it is not one of the spending components of GDP.

Which of the following would cause AD to decrease, that is, shift to the left? a) Increase in income taxes b) Decrease in income taxes c) Optimism about future income d) Lower GDP deflator

a) Increase in income taxes An increase in income taxes leads to less disposable income for consumers. Therefore, consumers are able to purchase less at any given price level, which causes the AD curve to shift to the left. (b and c are shifts to the right, d is a movement along the curve)

A fall in interest rates is likely to change investment spending, real GDP, prices, inflation, and employment in the short run in which of the following ways? a) Increase investment, real GDP, prices, inflation, and employment b) Decrease investment, real GDP, prices, inflation, and employment c) Increase investment and real GDP, but decrease prices, inflation, and employment d) Decrease investment and real GDP, but increase prices, inflation, and employment

a) Increase investment, real GDP, prices, inflation, and employment

A decrease in consumer confidence about job security may affect consumption spending and be most likely to cause which of the following? a) A decrease in employment and perhaps an increase in inflation b) A decrease in employment and perhaps a decrease in inflation c) An increase in employment and perhaps an increase in inflation d) An increase in employment and perhaps a decrease in inflation

b) A decrease in employment and perhaps a decrease in inflation

How would we model the effect of a new costly regulation on businesses? a) A shift left of the AD curve b) A shift left of the AS curve c) A shift right of the AD curve d) A shift right of the AS curve

b) A shift left of the AS curve

A booming stock market may affect consumption spending and be most likely to cause which of the following? a) A decrease in employment and perhaps an increase in inflation b) An increase in employment and perhaps an increase in inflation c) A decrease in employment and perhaps a decrease in inflation d) An increase in employment and perhaps a decrease in inflation

b) An increase in employment and perhaps an increase in inflation

Which of the following represents movement along the aggregate demand curve? Select all that apply. a) Optimistic consumers decide to spend more. b) As the average inflation level falls¸ consumers have more financial wealth and decide to increase spending. c) Falling inflation that decreases interest rates causing investment spending to rise. d) Businesses increase investment spending. e) Government increases spending. f) People from around the world want to buy more Teslas as the inflation rate in the U.S. falls.

b) As the average inflation level falls¸ consumers have more financial wealth and decide to increase spending. c) Falling inflation that decreases interest rates causing investment spending to rise. f) People from around the world want to buy more Teslas as the inflation rate in the U.S. falls. {shifting along a curve means changes in the X or Y variable, shifting the whole curve means changes in things not on the axis}

The aggregate demand curve slopes downward because ______________. (multiple answers) a) Actions of the Federal Reserve Bank b) The inflation rate affects the real value of currency c) The inflation rate affects interest rates d) The inflation rate affects imports and exports

b) The inflation rate affects the real value of currency c) The inflation rate affects interest rates d) The inflation rate affects imports and exports Answer (a) is not correct - diminishing marginal utility explains why the demand for a particular good slopes down, but does not explain why the aggregate demand curve slopes down. . Answers b, c and d are the three effects of why the AD curve is downward-sloping. If the price level changes, the real wealth of consumers out of their money holdings changes, which changes consumption. The change in the price level also changes the demand for money, which causes interest rates to change and in turn leads to changes in investment. Furthermore, a change in the price level leads to changes in the relative price of domestic goods, which affects net exports.

Suppose the federal government reduces taxes on the profits earned from investment in physical capital. According to our model, this policy will eventually result in a) an increase in real GDP and an increase in inflation. b) an increase in real GDP and a decrease in inflation. c) an increase in real GDP and an ambiguous effect on inflation. d) a decrease in consumption and no change in inflation.

b) an increase in real GDP and a decrease in inflation.

An increase in aggregate demand results in ____________ a) higher inflation and lower real GDP. b) higher inflation and higher real GDP. c) lower inflation and higher real GDP. d) lower inflation and lower real GDP.

b) higher inflation and higher real GDP.

The figure below shows the effect of an increase in total national spending. What is the level of output after the increase in spending? a) $14 trillion b) $16 trillion c) $17 trillion d) Cannot be determined

c) $17 trillion The aggregate demand curve will shift to the right. Before the increase in aggregate demand, the graph shows an equilibrium below full employment. When the aggregate demand curve shifts to the right, the equilibrium shifts out to the full employment level. Due to the rise in spending, businesses will find themselves in positions where prices have to be raised in order for them to be willing to increase production. The new equilibrium will yield a higher real GDP (at $17 trillion) and a higher price level.

In 2008, the price of houses fell dramatically across the country. As a result, the wealth of most households fell substantially. How would we model the effect of this using the AS/AD model? a) Movement along the AD curve to the right b) A shift in the AS curve to the right c) A shift in the AD curve to the left d) A shift in the AD curve to the right

c) A shift in the AD curve to the left While there is a decrease in wealth here, it is caused by a decrease in assets other than money. The wealth effect that moves us along the Aggregate Demand curve talks about money holdings, that is wealth derived from cash and deposits. If the wealth is reduced by changes in the values of other assets, such as real estate or stock holdings, then the AD curve shifts.

How would we model an increase in the amount of capital available in an economy? a) A shift left of the AD curve b) A shift left of the AS curve c) A shift right of the AS curve d) A shift right of the AS curve

c) A shift right of the AS curve

People tend to like higher incomes and lower inflation. What kind of change in our model results in higher incomes and lower inflation? a) An increase in AD b) An decrease in AD c) An increase in AS d) An decrease in AS

c) An increase in AS

Why does the aggregate supply curve become very steep at high levels of real GDP? a) Most producers are monopolists and will charge as high a price as possible. b) Producers produce a fixed amount of goods no matter what the price is. c) At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices. d) Real GDP is unrelated to spending decisions in the short run.

c) At very high levels of production, capacity constraints become severe and more spending can only lead to higher prices.

Which of the following changes would cause a shift in the aggregate demand curve? I. Increase in investment II. Decrease in productivity III. Increase in consumption a) I only b) II and III only c) I and III only d) I and II only e) I, II, and III

c) I and III only A shift in the aggregate demand curve is caused by changes in factors influencing the amount of spending in the economy. Thus, both investment spending and consumption spending will shift the aggregate demand curve. A change in productivity will affect the amount that businesses can produce at each price level. Thus, a decrease in productivity will reduce aggregate supply and shift the aggregate supply curve to the left.

As spending increases, there will be upward pressure on the price of inputs including wages. As the marginal cost of production rises, businesses start to increase prices as they attempt to produce more. This scenario best describes _____________. a) Movement along the aggregate demand curve b) A shift in aggregate supply c) Movement along the aggregate supply curve d) A shift in the aggregate demand curve

c) Movement along the aggregate supply curve d) A shift in the aggregate demand curve

People really dislike falling income and rising inflation. What kind of change in our model will make people really unhappy? a) An increase in AD b) An decrease in AD c) An increase in AS d) An decrease in AS

d) An decrease in AS