Econ Chapter 7

When the Great Depression reached its trough in 1933, real GDP had fallen by ________ since the depression began in 1929.

30%

Aggregate demand is defined as

the relationship between the total quantity of goods and services demanded and the price level, all other determinants of spending unchanged.

(Exhibit: Short-run Aggregate Supply) Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. In the short-run,

unemployment is above its natural level.

The potential output in this economy is

$7,000 billion at a price level of 1.12.

(Exhibit: Aggregate Demand) What could have caused a movement from point D to point A?

A decrease in investment demand due to lower expected sales

(Exhibit: Aggregate Demand) What could have caused a movement from point A to point D?`

An increase in household wealth

(Exhibit: Short-run Aggregate Supply) Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. What happens in the long-run, all other things unchanged?

Equilibrium will be re-established at point E at a higher price level

Which of the following is false about potential output?

It is the long run output level that guarantees price stability.

What do economists mean by the term "sticky wage"?

It refers to a wage that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus in the labor market.

(Exhibit: Short-run Aggregate Supply) Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. What happens in the short-run?

Real GDP decreases to Y3 and the price level falls to P3.

(Exhibit: Short-run Aggregate Supply) Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. What happens in the short run?

Real GDP increases to Y2 and the price level rises to P2.

(Exhibit: Short-run Aggregate Supply) Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. What happens in the long-run, all other things unchanged?

The economy returns to full-employment equilibrium at point D.

A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is the

aggregate demand curve.

(Exhibit: Aggregate Demand) A movement from point B to point E on could be due to

an increase in consumer confidence.

A change in the aggregate quantity of goods and services supplied at every price level is called a

change in short-run aggregate supply.

A movement along the short-run aggregate supply curve in response to a change in the price level is called a

change in the aggregate quantity of goods and services supplied.

(Exhibit: Long-run Equilibrium) Based on the figure, we can conclude that

in the long run, given flexible wages and prices, the economy will achieve equilibrium at its potential output level.

(Exhibit: Aggregate Demand) A movement from point A to point B

is a change in aggregate quantity demanded resulting from a lower price level.

The short-run aggregate supply shows the amount of read GDP that will be

made available at various price levels.

(Exhibit: Short-run Aggregate Supply) Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. As a result of this,

real GDP is temporarily above potential output.