ECON 2301 - Chapter 29
An economy has a recessionary gap. With no change in aggregate demand, how does the economy return to full employment?
The money wage rate falls, aggregate supply increases, and the price level falls.
Which of the following are examples of monetary policy that decrease aggregate demand?
A decrease in the quantity of money and an increase in interest rates.
When investment increases, ______.
aggregate demand increases and income increases. The increase in income induces an increase in consumption expenditure, so aggregate demand increases by more than the initial increase in investment.
Aggregate demand decreases if expected future income, inflation, or profits ______. And aggregate demand decreases if fiscal policy ______ government expenditure.
decrease; decreases
A rise in the money wage rate when the economy is at potential GDP ______.
decreases aggregate supply because a rise in the money wage rate increases costs, so firms employ fewer workers
Aggregate demand decreased if the exchange rate ______ or foreign income ______.
increases; decreases
When the price level and the money wage rate rise by the same percentage, unemployment _______.
remains the same
The graph shows an economy at a full-employment equilibrium. Draw a curve that shows the effect of a rise in the price of oil. Label it 1. Draw a point at the new macroeconomic equilibrium. Label it E1. Draw a curve that shows the economy returning to a full-employment equilibrium with no action by the central bank or the government. Label it 2. Draw a point at the full-employment equilibrium. Label it E2. Stagflation _____.
*Stagflation is a combination of recession and inflation.
Consider aggregate supply and then choose the statement that is correct. A. Along the AS curve, a change in the price level brings an equal percentage change in the money wage rate. B. The quantity of real GDP supplied equals potential GDP at the price level at which the real wage rate is at its full-employment equilibrium level. C. Along the AS curve, a rise in the price level brings a decrease in the quantity of real GDP supplied. D. The AS curve shows the relationship between the quantity of real GDP supplied and potential GDP when all other influences on production plans remain the same.
B. The quantity of real GDP supplied equals potential GDP at the price level at which the real wage rate is at its full-employment equilibrium level.
Consider potential GDP and then choose the statement that is correct. A. The potential GDP line shows the relationship between potential GDP and the quantity of real GDP supplied. B. Along the potential GDP line the money wage rate is constant and the real wage rate rises as the price level rise. C. The potential GDP line is vertical because potential GDP is independent of the price level. D. Potential GDP is illustrated by an upward-sloping curve.
C. The potential GDP line is vertical because potential GDP is independent of the price level.
Aggregate demand decreases if monetary policy ______ the quantity of money and ______ interest rates.
decreases; increases
When the price level rises but the money wage rate remains unchanged, unemployment ______ and the quantity of real GDP supplied ______.
decreases; increases
Aggregate demand decreases if fiscal policy _____ taxes or _____ transfer payments.
increases; decreases
