Intro to Macro Exam 2 Study Guide CH 11
The aggregate demand curve slopes downward because
an increase in the price level causes the demand for money to rise, driving up the interest rate and discouraging investment, which causes aggregate demand to fall
The level of aggregate output (Y0)
potential output or potential GDP.
The derivation of an economy's aggregate demand (AD) curve
requires knowledge regarding the interaction between the goods market and the money market.
When the interest rate falls, the planned aggregate expenditure curve shifts ________ because planned investment is ________.
up; higher
A decrease in government spending shifts the ________, and a decrease in the price level shifts the ________.
IS curve to the left; Fed rule to the right
Which of the following will generate an increase in aggregate demand?
Increased government expenditures for war.
exogenous
relating to or developing from external factors.
Which of the following events would NOT produce a rightward shift in the short-run AS curve?
A significant decrease in the country's labor force participation rate.
real wealth effect
The change in consumption brought about by a change in real wealth that results from a change in the price level.
True/False The Fed rule is an equation that shows how the interest rate behavior of the Fed depends on the state of the economy.
True
True/False The IS curve shows the relationship between output and the interest rate.
True
The relationship between the price level and aggregate output (income)
aggregate supply curve
A sudden increase in oil prices results in a supply shock, shifting the short-run aggregate supply curve to the ________, resulting in society getting a ________ aggregate output at any price level.
left; smaller
According to the real wealth effect (or real balance effect), an increase in the price level
decreases consumers' expenditures due to a decrease in the purchasing power of household wealth
The negative slope of a simple demand curve
depends on the price of a single product relative to other product prices
the short-run aggregate supply curve (AS) is upward-sloping. This positive slope is explained in part by the fact that
in the short-run, input prices—particularly wage rates—are slower to adjust to increasing aggregate demand than are output prices.
The Fed's tendency to "lean against the wind" occurs when it _______ the money supply to _______ interest rates to counteract contraction of the economy, and _______ the money supply to _______ interest rates to counteract rapid expansion. These policies are designed to _______ the economy.
increases; lower; decreases; raise; stabilize
The long-run aggregate supply curve
is vertical because all prices (both input and output prices) change at the same rate in the long run.
The somewhat unique shape of the short run aggregate supply curve is based in part on how firms respond to an increase in aggregate demand. As firms and the economy move closer to full capacity, the response of firms is likely to change from
mainly increasing output to mainly increasing prices.
The aggregate demand (AD) and aggregate supply (AS) equilibrium may occur at a very steep portion of AS curve, when
the economy is operating at or near full employment and output level is above full capacity.
All of the following are exogenous variables to the aggregate supply-aggregate demand model except
the price level.
The aggregate demand (AD) and aggregate supply (AS) equilibrium may occur at a very flat portion of AS curve, when
there exists considerable excess capacity and high unemployment in the economy.
In reality, however, the short-run aggregate supply curve isn't flat and then vertical. Rather, it becomes steeper as we move from left to right. This somewhat unique shape of the short-run aggregate supply curve is based in part on the fact that
when the economy has excess capacity, input prices are slow to adjust whereas output adjusts quickly to increases in aggregate demand; as the economy approaches full capacity prices increase at a faster rate than does output.
