Economics 201: Chapter 12 Assignment

Use AD-AS analysis to explain the impacts of the following events on real GDP: In early 2001 investment spending sharply declined in the United States. This caused a

leftward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply

In the two months following the September 11, 2001, attacks on the United States, consumption also declined. This caused a

leftward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply

A strong negative wealth effect from, say, a precipitous drop in house prices could cause a recession even though productivity is surging if

aggregate demand shifts left while aggregate supply shifts right

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: Consumers become more pessimistic about the economy

demand decreases

A full-strength multiplier applies to a decrease in aggregate demand when

aggregate supply is horizontal

An upsloping aggregate supply curve weakens the realized multiplier effect because

any increase in demand will have both a price and an output effect

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: A widespread fear by consumers of an impending economic depression.

Aggregate demand will decrease

determine whether the situation described can be attributed to the real-balances effect, the interest-rate effect, or the foreign purchases effect: A higher price level increases the cost of borrowing, which causes people to buy fewer cars

Interest-rate effect

determine whether the situation described can be attributed to the real-balances effect, the interest-rate effect, or the foreign purchases effect: When the U.S. price level rises, Canadian consumers are more likely to buy cars made in Mexico than cars made in the United States

Foreign purchases effect

determine whether the situation described can be attributed to the real-balances effect, the interest-rate effect, or the foreign purchases effect: A lower price level causes restaurants to become busier as more people purchase restaurant meals

Real-balances effect

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?: A decrease in aggregate demand

The price level does not change, but real output declines

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?: Equal increases in aggregate demand and aggregate supply

The price level does not change, but real output increases

The long-run aggregate supply curve is vertical because the economy's potential output is determined by

the availability and productivity of real resources, not by the price level

According to the "real-balances effect," if prices

decline, the purchasing power of assets will rise, so spending at each income level should rise

The U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s can be explained by

a rightward shift of aggregate demand and a rightward shift of aggregate supply.

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because

there are large amounts of unused capacity and idle human resources

The shape of the short-run aggregate supply curve is

upsloping, because wages adjust more slowly than the price level.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: An increase in exports that exceeds an increase in imports (not due to tariffs)

aggregate demand will increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: The general expectation of coming rapid inflation

aggregate demand will increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: A 12 percent increase in nominal wages (with no change in productivity)

aggregate supply will decrease

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

aggregate supply will decrease

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: A sizable increase in labor productivity (with no change in nominal wages)

aggregate supply will increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: The complete disintegration of OPEC, causing oil prices to fall by one-half

aggregate supply will increase

The multiplier

causes an initial change in spending to generate an even larger change in the aggregate demand curve

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?: An increase in aggregate demand that exceeds an increase in aggregate supply

The price level increases somewhat, with a relatively large change in output

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?: A decrease in aggregate supply, with no change in aggregate demand

The price level rises and real output decreases

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run?: An increase in aggregate demand.

The price level rises rapidly and there is little change in real output

Which of the following statements is true concerning the real-balances effect and the wealth effect?

The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve

True or false: "Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply."

True, but the magnitude of the effect on unemployment depends on the economic situation

The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because

a downsloping, single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed

According to the "wealth effect," a change in consumer wealth causes

a shift in consumer spending and a shift of the aggregate demand curve

At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is:

above equilibrium

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: A 10 percent across-the-board reduction in personal income tax rates

aggregate demand will increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: A major increase in spending for health care by the federal government

aggregate demand will increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal?: A reduction in interest rates

aggregate demand will increase

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: A stock market crash reduces people's wealth

demand decreases

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: Government spending increases

demand increases

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: The United States enters into an arms race with China, resulting in a significant increase in military spending

demand increases

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: The spread of democracy around the world increases consumer confidence in the United States

demand increases

A reduction in short-run aggregate demand in the actual economy reduces real output, rather than the price level, because

prices are inflexible downward

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: A hurricane destroys manufacturing plants

supply decreases

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: A revolution in Iran results in a significant reduction in the world's supply of oil

supply decreases

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: Employers are required to provide paid sick leave to part-time as well as full-time employees

supply decreases

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: A new computer chip is developed that is faster and cheaper than previous chips

supply increases

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: Manufacturing firms expect steel prices to decrease significantly

supply increases

indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy: Technological changes enable workers to be more productive

supply increases

The downsloping aggregate demand curve can be explained by

the interest-rate effect, the real-balances effect, and the foreign purchases effect