Macroeconomics Chapter 33: Aggregate Demand and Aggregate Supply

Notice that real GDP trends upward over time but experiences ups and downs in the short run. A period of declining real GDP, such as the blue-shaded period in 1953, is known as...

a recession

The vertical axis of the aggregate demand and aggregate supply model measures the overall...

price level

The horizontal axis of the aggregate demand and aggregate supply model measures the overall...

quantity of output

(Real/Nominal) variables, such as the quantity of money or the price level, are measured in terms of dollars.

Nominal

"a period of falling real GDP that lasts 6 months or more."

recession

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? A. The Inflation rate B. The price level C. The level of technological knowledge D. The size of the labor force

A. The Inflation rate B. The price level

Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1950? A. Total real income increased B. Corporate profits increased C. Car sales declined D. Consumer spending declined

A. Total real income increased B. Corporate profits increased

Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1958? A. Total real income increased B. Consumer spending declined C. The unemployment rate declined D. Car sales declined

A. Total real income increased C. The unemployment rate declined

Complete the table by indicating the change in each determinant necessary to decrease aggregate demand. Change needed to decrease AD: The value of the domestic currency relative to the foreign currency (appreciate/depreciate)

Appreciate

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? A. The level of technological knowledge B. The quantity of physical capital C. The size of the labor force D. The price level

D. The price level

Complete the table by indicating the change in each determinant necessary to decrease aggregate demand. Change needed to decrease AD: Wealth (increase/decrease)

Decrease

As the price level rises, the purchasing power of households' real wealth will (rise/fall), causing the quantity of output demanded to (rise/fall). This phenomenon is known as the (exchange rate/interest rate/wealth) effect.

fall; fall; wealth

True or False: Small ups and downs in real GDP follow a consistent, predictable pattern.

False

Complete the table by indicating the change in each determinant necessary to increase aggregate demand. Change needed to increase AD: Consumer expectations about future profitability (improve/worsen)

Improve

Complete the table by indicating the change in each determinant necessary to decrease aggregate demand. Change needed to decrease AD: Interest rates (increase/decrease)

Increase

Complete the table by indicating the change in each determinant necessary to decrease aggregate demand. Change needed to decrease AD: Taxes (increase/decrease)

Increase

Complete the table by indicating the change in each determinant necessary to increase aggregate demand. Change needed to increase AD: Expected rate of return on investment (increase/decrease)

Increase

Complete the table by indicating the change in each determinant necessary to increase aggregate demand. Change needed to increase AD: Government spending (increase/decrease)

Increase

Complete the table by indicating the change in each determinant necessary to increase aggregate demand. Change needed to increase AD: Incomes in other countries (increase/decrease)

Increase

(Real/Nominal) variables measure quantities of goods and services, such as the quantity of a particular good or service produced in an economy or the number of units of one good a unit of another good can buy.

Real

______________________________________ is the separation of economic variables into real variables (those that measure quantities or relative prices) and nominal variables (those measured in terms of money).

The classical dichotomy

True or False: Short-term fluctuations in real GDP are irregular and unpredictable.

True

Lower interest rate increases not only investment spending, but also ________________________________________, as people will want to save less.

consumer spending

The aggregate (supply/demand) curve shows the quantity of output that households, firms, the government, and foreign customers want to buy at each price level

demand

The tendency for a fall in the price level to decrease the real exchange rate and increase net exports is known as the...

exchange rate effect

Suppose the government passes a law that reduces unemployment benefits in a way that causes unemployed workers to seek out new jobs more quickly. The policy will cause the natural rate of unemployment to (rise/fall), which will: A. Not affect the long-run aggregate supply curve B. Shift the long-run aggregate supply curve to the left C. Shift the long-run aggregate supply curve to the right

fall; C. Shift the long-run aggregate supply curve to the right

As the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to (rise/fall) in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (rise/fall), and the number of foreign products purchased by domestic consumers and firms (imports) will (rise/fall). Net exports will therefore (rise/fall), causing the quantity of domestic output demanded to(rise/fall). This phenomenon is known as the (exchange rate/interest rate/wealth) effect.

fall; rise; fall; rise; rise; exchange rate

As the price level falls, the cost of borrowing money will (rise/fall), causing the quantity of output demanded to (rise/fall). This phenomenon is known as the (exchange rate/interest rate/wealth) effect.

fall; rise; interest rate

At a lower interest rate, business investment (increases/decreases) and household saving (increases/decreases), leading to an (increased/decreased) demand for domestic output.

increases; decreases; increased

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: A natural disaster destroys a significant amount of the economy's production facilities (left/no shift/right)

left

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: For environmental and safety reasons, the government requires that the country's nuclear power plants be permanently shut down (left/no shift/right)

left

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: Many workers leave to pursue more lucrative careers in foreign economies (left/no shift/right)

left

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: This economy's primary source of foreign oil decides to cease exports for political reasons (left/no shift/right)

left

Most economists believe that real economic variables and nominal economic variables behave independently of each other in the (short-run/long-run).

long-run

________________________________________ is the proposition of classical macroeconomic theory that changes in the money supply affect nominal variables but not real variables.

monetary neutrality

An increase in the money supply, a _____________________ variable, will cause the price level, a _____________________variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a _____________________ variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as ______________________________________________.

nominal; nominal; real; monetary neutrality

An increase in the money supply, a _____________________ variable, will cause the price level, a _____________________variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a _____________________ variable. The distinction between real variables and nominal variables is known as ______________________________________________.

nominal; nominal; real; the classical dichotomy

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: A government-sponsored training program increases the skill level of the workforce (left/no shift/right)

right

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: A scientific breakthrough significantly increases food production per acre of farmland (left/no shift/right)

right

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: An investment tax credit increases the rate at which firms acquire machinery and equipment (left/no shift/right)

right

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: The government allows more immigration of working-age adults who find work (left/no shift/right)

right

Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to (rise/fall), which will: A. Shift the long-run aggregate supply curve to the left B. Shift the long-run aggregate supply curve to the right C. Shift the long-run aggregate supply curve to the right

rise; A. Shift the long-run aggregate supply curve to the left

As the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to (rise/fall) in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (rise/fall), and the number of foreign products purchased by domestic consumers and firms (imports) will (rise/fall). Net exports will therefore (rise/fall), causing the quantity of domestic output demanded to (rise/fall). This phenomenon is known as the (exchange rate/interest rate/wealth)

rise; fall; rise; fall; fall; exchange rate

In the (short-run/long-run) most economists believe that real and nominal variables are intertwined.

short-run

Notice that real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as...

the business cycle