macro ch 12

In the short run, there is _____ correlation between the price level and the quantity of aggregate output supplied.

a positive

In Neverlandia, the average price of a house has doubled because of a large increase in demand for houses and a large decrease in the supply because many homebuilders went out of business during a recession. Which is MOST likely to occur?

the aggregate demand curve will shift to the right

Suppose that an economy is in an inflationary gap in the short run. In the long run:

the economy's self-correcting mechanism will restore GDP to its potential level.

In the___, the aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations.

AD-AS model

Which of the following best describes why the aggregate demand curve is downward sloping?

An increase in the aggregate price level causes consumer and investment spending to fall because consumer purchasing power decreases and money demand increases.

If consumers and firms become more pessimistic about the future, then the:

aggregate demand curve shifts to the left.

The ___ shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy.

aggregate supply curve

Which policy would MOST likely eliminate a recessionary gap?

an increase in government spending

An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

an increase; an increase

Suppose the economy is in long-run macroeconomic equilibrium and there is a stock market boom. In the short run, because of the boom in stock prices, it is MOST likely that:

an inflationary gap will occur.

A change in _____ would cause a shift in the short-run aggregate supply curve.

commodity prices

When the price level decreases, firms in imperfectly competitive markets will:

decrease output and decrease the price.

A(n) _____ in physical and human capital can shift the long-run aggregate supply curve _____.

decrease; to the left

An event that shifts the aggregate demand curve is a ___

demand shock.

The aggregate demand curve slopes:

downward in part because as the price level falls, the ability of households and firms to borrow cheaply increases.

Aggregate demand will shift to the RIGHT if:

government purchases increase.

Funland is initially in long-run macroeconomic equilibrium. Then, there is a supply shock because of a severe increase in commodity prices. If Funland's policymakers use active stabilization policy to offset this supply shock, then:

they can either reduce the aggregate price level to its initial equilibrium level, or they can increase aggregate output to its initial level.

An increase in physical and human capital can shift the long-run aggregate supply curve:

to the right

The ___ is the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' assets.

wealth effect of a change in the aggregate price level

John Maynard Keynes famously said: \"In the long run, ______________.\"

were all dead

The short-run aggregate supply curve will shift to the:

left if nominal wages increase.

The ___ shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible.

long-run aggregate supply curve

The economy is in ____ when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve.

long-run macroeconomic equilibrium

When the Federal Reserve changes the money supply or interest rates to change aggregate demand, it is using _____ policy.

monetary

If the costs of health insurance paid by employers rises, then the economy will experience a _____ shock.

negative supply

The ___ is the dollar amount of the wage paid.

nominal wage

The ___ is the percentage difference between actual aggregate output and potential output.

output gap

The aggregate supply curve shows the relationship between the aggregate price level and the aggregate:

output supplied.

Suppose the economy is in short-run equilibrium and the level of aggregate output is less than potential output. Then:

over time, nominal wages will fall.

Output will increase and prices will increase in the short run because of a _____ shock.

positive demand

The increase in government spending during World War II produced a _____ shock, which ended the Great Depression.

positive demand

The aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate:

quantity of output demanded by households, businesses, the government, and the rest of the world.

If potential output is $10 trillion and actual output is $9 trillion, then there is a _____ gap

recessionary

There is a____ when aggregate output is below potential output.

recessionary gap

An increase in the interest rate, holding everything else constant:

reduces consumer spending because households will respond to the higher interest rate by saving more money.

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____.

rise; remain stable

Indicate whether the following scenarios represent an increase, decrease, or no change in the long-run aggregate supply (LRAS) curve. Each label may be used more than once. 1.The mandatory retirement age in Wonkaland is abolished. 2Wonkaland\'s main export is candy. Candy from this country increases in popularity as consumers all over the world want to buy Wonkalandian candy. 3Since candy from Wonkaland has become an international sensation, factories in Wonkaland double the number of candy making machines. 4The top candy companies in Wonkaland chose to relocate their means of production to other countries around the world.

1. increases the LRAS curve 2. no change is the LRAS curve 3. increases the LRAS curve 4. decreases the LRAS curve

Each of the follow scenarios depicts a situation that will result in some sort of demand shock. After reading each scenario, please determine whether the associated demand shock will be positive or negative. 1.After several weeks of economic instability, the Swedish stock market begins to quickly decline as consumers lose confidence in the economy. 2.After several years of rapid growth, the housing market begins to lose value and consumers scale back their spending in response. 3.The United States government passes a tax cut of 4% for all citizens, resulting in an increase in their disposable income. 4.The British government institutes a new public housing program which aims to build 3 million new apartment units across the United Kingdom. The introduction of the program dramatically increases the government\'s demand for raw materials and building supplies. 5.Following a period of sustained economic decline, major companies in both the automobile and textile industries in the United States begin to lay off workers and close factories, citing loss of confidence in the ability of the American government to properly manage the economy.

1.Negative demand shock 2.negative demand shock 3.positive demand shock 4.positive demand shock 5.negative demand shock

For each of the following scenarios, please decide whether there will be an increase, decrease, or no change in aggregate demand. 1.The United States government decides to increase the federal tax rate by 4% for all earners. 2.The Federal Reserve, the agency charged with regulating banking and monetary policy in the United States, decides to increase the amount of money available in the economy. 3.The newest release of the Consumer Confidence Index shows a steady increase in consumer confidence about the economy. 4.A manufacturing boom during the late 1990s has created an oversupply of tractors, a necessary implement in agricultural production.

1.aggregate demand decreases 2.aggegate demand increases 3.aggregate demand increases 4.aggregate demand decreases

For each of the following scenarios, please decide whether there will be an increase or decrease in short-run aggregate supply, or if there will be no change. 1.Although the economy is healthy, there is an increase in the natural rate of unemployment. 2.The price of lumber, a commodity, rises drastically due to the effect of heavy winter weather in the American Northwest, where much of the world\'s lumber is grown. 3.The production of a new type of blade for their combine harvesters, a tractor used to harvest crops, has allowed wheat farmers, like Herbert, to increase productivity by 40%.

1.short run aggregate supple decreases 2.short run aggregate supply decreases 3.short run aggregate supply increases

If potential output is $10 trillion and actual output is $12 trillion, then there is an output gap of _____ percent.

20

_____ pose a policy dilemma because fighting the slump in aggregate output worsens inflation and fighting inflation worsens the slump.

Negative supply shocks

Choose the answer that accurately explains how nominal wage changes affect the economy\'s output in long run equilibrium.

Nominal wages have no impact on output in the long run.

___ is the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.

Potential output

____ is the quantity of aggregate output produced in the short-run macroeconomic equilibrium.

Short-run equilibrium aggregate output

___ is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions.

Stabilization policy

___is the combination of inflation and falling aggregate output.

Stagflation

___ are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.

Sticky wages

____ shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world.

The aggregate demand curve

Which of the following is TRUE with respect to short-run and long-run aggregate supply?

The economy can be on both curves simultaneously.

Which MOST likely will cause a negative demand shock?

The stock of existing capital is very large.

Keynes was an economist during the Great Depression. During the Great Depression there was:

high unemployment and high deflation

A positive demand shock leads to:

higher prices and higher unemployment.

The aggregate demand curve will shift to the right when:

household wealth increases.

In the short-run, a positive supply shock causes a(n) _____ in output, and a(n) _____ in prices.

increase, decrease

If the Federal Reserve increases the money supply, then interest rates decrease, and investment _____; this shifts the aggregate demand curve to the _____.

increases; right

There is an ___when aggregate output is above potential output.

inflationary gap

The ____ is the effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' and firms' money holdings.

interest rate effect of a change in the aggregate price level

The interest rate effect

is the change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price level.

Potential output:

is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible.

The economy is____ when shocks to aggregate demand affect aggregate output in the short run, but not the long run.

self-correcting

During the oil crisis in the 1970s, the U.S. economy experienced a:

shift of the short-run aggregate supply curve to the left.

A decrease in employers' contribution to workers' health insurance will MOST likely cause a:

shift of the short-run aggregate supply curve to the right.

Assuming that prices remain constant, suppose that consumer assets and wealth lose value. The aggregate demand curve will undergo a:

shift to the left.

The ____ shows the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed.

short-run aggregate supply curve

If the price of oil rises, then the:

short-run aggregate supply curve shifts to the left.

If the price of oil decreases, then, MOST likely, the:

short-run aggregate supply curve shifts to the right.

If workers become more productive, then the:

short-run aggregate supply curve shifts to the right.

The ____ is the aggregate price level in the short-run macroeconomic equilibrium.

short-run equilibrium aggregate price level

The economy is in ___ when the quantity of aggregate output supplied is equal to the quantity demanded.

short-run macroeconomic equilibrium

The economy moved down the _____ aggregate supply curve between 1929 and 1933 because aggregate demand _____.

short-run; decreased

An event that shifts the short-run aggregate supply curve is a ___

supply shock.

Which most likely will NOT cause a shift in the aggregate demand curve?

the increase in the price of a commodity

The short-run aggregate supply curve illustrates:

the positive relationship between the aggregate price level and aggregate output supplied.