Midterm 2 with explanations
If the MPC is 0.75, then a $100 increase in government expenditures will increase equilibrium GDP by
$400. The multiplier is 1/(1 − MPC), so with an MPC of 0.8 (and a multiplier of 5), a $100 million increase in government purchases will increase real GDP by $500 million (= $100 million × 4).
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $80 billion of disposable income?
$72 billion We can use the MPC to tell us how much consumption will change as income changes. Change in consumption = change in disposable income × MPC. In this case: $100 billion × 0.9 = $80 billion.
Q: What is the value of autonomous expenditure in the following macroeconomic model? C = 1,000 + 0.75Y Consumption function, I = 500 Planned investment, G = 600 Government spending, NX = -300 Net exports, and Y = C + I + G + NX Equilibrium condition
1,800 Autonomous expenditure equals 1000 + 500 + 600 - 300 = 1,800.
Q: Find equilibrium GDP using the following macroeconomic model: C = 1,000 + 0.75Y Consumption function, I = 500 Planned Investment, G = 600 Government spending, NX = -300 Net exports, and Y = C + I + G + NX Equilibrium condition
7,200 Equilibrium GDP = Autonomous spending × multiplier, or 1800 × [1/(1 - 0.75)] = 1800 × 4 = 7,200.
Which of the following statements is correct? Actual investment and planned investment are always the same thing. Actual investment will equal planned investment only when inventories rise. Actual investment will equal planned investment only when there is no unplanned change in inventories. Actual investment equals planned investment only when inventories decline.
Actual investment will equal planned investment only when there is no unplanned change in inventories. For the economy as a whole, we can say that actual investment spending will be greater than planned investment spending when there is an unplanned increase in inventories. Actual investment spending will be less than planned investment spending when there is an unplanned decrease in inventories. Therefore, actual investment will only equal planned investment when there is no unplanned change in inventories.
Which of the following is correct concerning shifts in the aggregate demand (AD) curve? An increase in the price level will decrease real household wealth, which will decrease consumption and shift the AD curve to the left. A larger MPS will cause the AD curve to shift further to the right when there is an increase in autonomous expenditures. An increase in corporate taxes will shift the AD curve to the left because there is an inverse relationship between corporate taxes and investment expenditure. An increase in the price level will increase interest rates, which will reduce investment expenditures and shift the AD curve to the left.
An increase in corporate taxes will shift the AD curve to the left because there is an inverse relationship between corporate taxes and investment expenditure. An inverse relationship between corporate taxes and investment spending implies that an increase in corporate taxes will reduce equilibrium GDP at any given level of prices. It follows that an increase in corporate taxes will shift the AD curve to the left.
Which of the following statements is correct? An increase in the corporate income tax decreases the after-tax profitability of investment spending. Changes in tax laws have no effect on investment spending. During periods of recession, the ability of firms to finance spending on new factories or machinery and equipment increases. all of the above
An increase in the corporate income tax decreases the after-tax profitability of investment spending. A reduction in the corporate income tax increases the after-tax profitability of investment spending. An increase in the corporate income tax decreases the after-tax profitability of investment spending.
Which of the following statements is correct? Autonomous expenditure depends on the level of GDP. Autonomous expenditure does not depend on the level of GDP. No part of consumption spending is autonomous. No part of government purchases is autonomous.
Autonomous expenditure does not depend on the level of GDP. Autonomous expenditure does not depend on the level of GDP. In the aggregate expenditure model that we have been using, planned investment spending, government spending, and net exports are all autonomous expenditures.
Which of the following equalities is correct? Disposable income is equal to national income plus government transfer payments plus taxes. Government transfer payments minus taxes equals net taxes. Disposable income is equal to national income minus net taxes. Disposable income equals national income.
Disposable income is equal to national income minus net taxes. Disposable income is equal to national income plus government transfer payments minus taxes. Government transfer payments minus taxes are referred to as net taxes. So, we can write: Disposable income = National income - Net taxes.
Which of the following statements is correct? If households become more optimistic about their future incomes, the aggregate demand curve will shift to the right. If firms become more optimistic about the future profitability of investment spending, the aggregate demand curve will shift to the left. If the dollar depreciate in the international currency market, the aggregate demand will shift to the left. Neither answer is correct.
If households become more optimistic about their future incomes, the aggregate demand curve will shift to the right. If households become more optimistic about their future incomes, they are likely to increase their current consumption. This will shift the aggregate demand curve to the right. If firms become more optimistic about the future profitability of investment spending, the aggregate demand curve will shift to the right (not left). When the dollar depreciates, the AD curve shifts to the right, not left.
Which of the following statements is true? In the long run, increases in the price level result in an increase in real GDP. In the long run, increases in the price level result in a decrease in real GDP. In the long run, changes in the price level do not affect the level of real GDP. In the long run, changes in the price level may either increase or decrease real GDP.
In the long run, changes in the price level do not affect the level of real GDP. In the long run, changes in the price level do not affect the level of real GDP. Textbook Figure 13.2 illustrates the fact that in the long run, changes in the price level do not affect real GDP by showing the long-run aggregate supply curve (LRAS) as a vertical line.
How accurate is the prediction that a recession in the U.S. caused by the aggregate demand curve shifting to the left will cause the price level to fall?
Inaccurate. This has not happened for an entire year since the 1930s. The basic aggregate demand and aggregate supply model gives us important insights into how short-run macroeconomic equilibrium is determined. Unfortunately, the model relies on two assumptions: (1) The economy does not experience continuing inflation, and (2) the economy does not experience long-run growth.
Which of the following equalities is not correct? MPS + MPC=1 0 < MPS < 1 MPS = 1 - (ΔC/ΔYD) MPS = 1 - (C/YD)
MPS = 1 - (C/YD) Assuming that net taxes do not change, for each additional dollar of income, some will go to savings and the rest will go to consumption. Therefore, MPC + MPS = 1 so choice (a) is correct. Since the MPS is the fraction of each new dollar of income that will be saved, MPS cannot be less than 0 or greater than 1, so choice (b) is correct. Starting with the function MPC + MPS = 1 and rearranging we get MPS = 1 - MPC. MPC is the change in consumption that results from a change is income (or ΔC/ΔYD) so MPS = 1 - (ΔC/ΔYD), so choice (c) is correct. Due to the presence of autonomous consumption, MPC does not equal C/YD, so option (d) is incorrect.
If no other factors that affect the SRAS curve have changed, what impact will increases in the labor force, increases in the capital stock, and technological change have on both the short-run and the long-run aggregate supply?
Over time, both the long-run aggregate supply and the short-run aggregate supply will shift to the right by the same amount. Increases in the labor force and the capital stock and technological change cause both the long-run aggregate supply curve and the short-run aggregate supply curve to shift. If no other factors that affect the SRAS curve have changed, the LRAS and SRAS curves will shift to the right by the same amount.
Assume that steel is the only good produced in the economy. Which of the following would explain why the short-run aggregate supply curve for steel would be upward sloping? Steel demand and steel prices begin to rise rapidly, and the wages of steel workers rise as the demand for workers increases. Steel demand and steel prices begin to rise rapidly, but the price of coal—an input into the production of steel—remains fixed by contract. Steel demand and steel prices begin to rise rapidly, but foreign producers increase production faster than domestic producers increase production. All of the above.
Steel demand and steel prices begin to rise rapidly, but the price of coal—an input into the production of steel—remains fixed by contract. If steel demand and steel prices begin to rise rapidly, producing additional steel will be profitable, because coal prices will remain fixed by contract. In both of these cases, rising prices lead to higher output. If these examples are representative of enough firms in the economy, then a rising price level should lead to a greater quantity of goods and services supplied. In other words, the short-run aggregate supply curve will be upward sloping. If the workers of the coal companies had accurately predicted what would happen to prices, this would have been reflected in the contracts, and the steel mill would not have earned greater profits when prices rose. In that case, rising prices would not have led to higher output.
What is the multiplier?
The multiplier is the ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure. The ratio of the increase in equilibrium real GDP to the increase in autonomous expenditure is called the multiplier. The series of induced increases in consumption spending that results from an initial increase in autonomous expenditure is called the multiplier effect.
When incomes rise faster in the United States than in other countries,
U.S. net exports will fall. When incomes rise faster in the United States than in other countries, American consumers' purchases of foreign goods and services will increase faster than foreign consumers' purchases of U.S. goods and services. As a result, net exports will fall.
The recession of 2007-2009 was caused by a decline in aggregate demand. Which factors contributed to this decline?
a "credit crunch" as a result of the collapse of major banks and other financial institutions A "credit crunch" among major banks and other financial institutions made it difficult for consumers to finance their spending, leading to declines in consumption and investment spending. Other factors that led to a decline in aggregate demand include the ending of the housing bubble of 2002-2005, leading to a decline in spending on residential construction, which is part of investment spending.
Which of the following factors does not cause the aggregate demand curve to shift? a change in the price level a change in government policies a change in the expectations of households and firms a change in foreign variables
a change in the price level The factors that cause the aggregate demand curve to shift fall into three categories: changes in government policies, changes in the expectations of households and firms, and changes in foreign factors. Changes in the price level causes a movement along the aggregate demand curve, not a shift.
Stagflation is
a combination of inflation and recession. Stagflation is defined as a combination of inflation and recession.
The international-trade effect refers to the fact that an increase in the price level will result in
a decrease in exports and an increase in imports If the price level in the United States rises relative to the price levels in other countries, U.S. exports will become relatively more expensive and foreign imports will become relatively less expensive. Some consumers in foreign countries will shift from buying U.S. products to buying domestic products, and some U.S. consumers will also shift from buying U.S. products to buying imported products. U.S. exports will fall and U.S. imports will rise, causing net exports to fall. A lower price level in the United States has the reverse effect, causing net exports to rise.
Which of the following will not shift the aggregate demand curve to the right? a fall in the price level a decrease in taxes households expecting higher future income exports rising
a fall in the price level Lower interest rates reduce the cost of borrowing so that consumption and investment spending increase, resulting in a shift of the AD curve to the right. A price level change causes a movement along the AD curve rather than a shift in the curve.
What is the impact of an increase in the price level on the short-run aggregate supply curve?
a movement up and to the right along a stationary curve If the price level changes, but other factors are unchanged, then the economy will move up or down a stationary aggregate supply curve. If any factor other than the price level changes, the aggregate supply curve will shift.
Which of the following will cause the short-run aggregate supply curve to shift to the right? a higher expected future price level an increase in the actual (or current) price level a technological change all of the above
a technological change As technology improves, the productivity of workers and machinery increases, which means that firms can produce more goods and services with the same quantities of labor and capital. This reduces their costs of production and allows them to produce more output at every price level. As a result, the short-run aggregate supply curve shifts to the right.
A curve showing the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure, is called
aggregate demand. Hide Feedback The relationship between the price level and the level of aggregate expenditure is known as the aggregate demand curve (AD): a curve showing the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure.
At points above the 45 degree line,
aggregate expenditure is greater than GDP. At points above the line, aggregate expenditure is greater than GDP. At points below the line, aggregate expenditure is less than GDP.
Why does the failure of workers and firms to accurately predict the price level result in an upwardsloping aggregate supply curve?
all of the above Most economists agree that the short-run aggregate supply curve slopes upward because workers and firms fail to accurately predict the future price level. Economists are not in complete agreement on why this is true, but the three most common explanations are: contracts make some wages and prices "sticky," businesses are often slow to adjust wages, and menu costs make some prices sticky.
Which of the following statements about investment spending is correct? The optimism or pessimism of business firms is an important determinant of investment spending. A higher real interest rate results in less investment spending. When the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong. all of the above
all of the above The higher the interest rate, the more expensive it becomes for firms and households to borrow. Because households and firms are interested in the cost of borrowing after taking into account the effects of inflation, investment spending will depend on the real interest rate. Therefore, holding the other factors that affect investment spending constant, there is an inverse relationship between the real interest rate and investment spending. Also, it is true that when the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong. If businesses are optimistic about the future of the economy and thus they feel that investment will pay as consumers have the ability to buy their expanded output, then they will be more likely to invest in the capacity to produce higher output.
Which of the following factors will cause the long-run aggregate supply curve to shift to the right? an increase in the number of workers in the economy the accumulation of more machinery and equipment technological change all of the above
all of the above The long-run aggregate supply curve and potential real GDP increase each year as the number of workers in the economy increases, the economy accumulates more machinery and equipment, and technological improvement occurs.
An unexpected increase in the price of oil would be called _________ by economists.
an adverse supply shock Economists refer to an unexpected increase or decrease in the price of an important raw material as a supply shock.
Which of the following is usually the cause of stagflation? reductions in government spending increases in investment a decline in net exports an adverse supply shock
an adverse supply shock Stagflation, a combination of inflation (higher prices) and recession, occurs when the short-run aggregate supply curve shifts left. This type of shift usually results from an adverse supply shock.
Which of the following causes saving to increase? an increase in consumption an increase in the interest rate an increase in unemployment an increase in the price level
an increase in the interest rate When the interest rate is high, the reward for saving is increased and households are likely to save more and spend less.
If the economy is initially at full employment equilibrium, in the short run, an increase in aggregate demand causes _____________ in real GDP, and in the long run, it causes___________ in the price level.
an increase; an increase In the short run, an increase in aggregate demand causes an increase in real GDP as a result of a rightward shift of the AD curve. In the long run, it causes only an increase in the price level as the SRAS curve shifts to the left.
Why does the short-run aggregate supply curve slope upward?
because profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs The short-run aggregate supply curve (SRAS) slopes upward because, as prices of final goods and services rise, prices of inputs—such as the wages of workers—rise more slowly. Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs. Therefore, a higher price level leads firms to supply more goods and services. A secondary reason the SRAS curve slopes upward is that as the price level rises or falls, some firms are slow to adjust their prices. A firm that is slow to raise its prices when the price level is increasing may find its sales increasing and will increase production.
Fluctuations in total spending in the economy may affect
both employment and production in the short run. During some years, total spending in the economy, or aggregate expenditure, increases about as much as does the production of goods and services. If this happens, most firms will sell about what they expected to sell and they will probably not increase or decrease production, or the number of workers hired. During other years, total spending in the economy increases more than the production of goods and services. In these years, firms will increase production and hire more workers.
How can government policies shift the aggregate demand curve to the right?
by increasing government purchases Because government purchases are one component of aggregate demand, an increase in government purchases shifts the aggregate demand curve to the right. An increase in personal income taxes reduces disposable income available to households. This reduces consumption spending and shifts the aggregate demand curve to the left. Lower personal income taxes shift the aggregate demand curve to the right. Increases in business taxes reduce the profitability of investment spending and shift the aggregate demand curve to the left. Decreases in business taxes shift the aggregate demand curve to the right.
Which of the following makes up the largest fraction of GDP? consumption investment government expenditures net exports
consumption See page 377 in the textbook.
The behavior of consumption and investment over time can be described as follows:
consumption follows a smooth, upward trend, but investment is subject to significant fluctuations. Investment is subject to more changes than is consumption. Investment declined significantly during the recessions of 1980, 1981-1982, 1990-1991, 2001, and 2007-2010.
Aggregate expenditure, or the total amount of spending in the economy, equals
consumption spending plus planned investment spending plus government purchases plus net exports. Aggregate expenditure (AE) is the total amount of spending in the economy: the sum of consumption, planned investment, government purchases, and net exports.
Economists and business analysts usually explain fluctuations in GDP in terms of fluctuations in these four categories:
consumption, planned investment, government purchases, and net exports. In 1936, the English economist John Maynard Keynes published The General Theory of Employment, Interest, and Money. In this book, he systematically analyzed the relationship between fluctuations in aggregate expenditure and fluctuations in GDP. Keynes identified four categories of aggregate expenditure that together equal GDP.
When national income increases, there must be some combination of an increase in household
consumption, saving, and taxes. Households either spend their income, save it, or use it to pay taxes. For the economy as a whole, we can write: National income = Consumption + Saving + Taxes. When national income increases, there must be some combination of an increase in consumption, an increase in saving, or an increase in taxes. Therefore: Change in national income = Change in consumption + Change in saving + Change in taxes.
The most important determinant of consumption is
current disposable income. Since most spending is financed through income rather than savings, the most important determinant of consumption is the current disposable income of households. For most households, the higher their disposable income, the more they spend, and the lower their disposable income, the less they spend.
An increase in the value of the dollar (the dollar appreciates against other currencies) will _________ exports and _________ imports, so net exports will _________.
decrease; increase As the value of the U.S. dollar rises, the foreign currency price of U.S. products sold in other countries rises, and the dollar price of foreign products sold in the United States falls. Therefore, an increase in the value of the dollar will reduce exports and increase imports, so net exports will fall.
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.
fall; increase When aggregate expenditure is greater than GDP, the total amount of spending in the economy is greater than the total amount of production. The only way firms can sell more goods than they produce is to fill the excess orders from their inventories. That causes an unplanned decrease in inventories. GDP and total employment will increase in order to replenish the inventories.
The interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investment. When prices rise, businesses and households need more money to finance buying and selling. A higher interest rate raises the cost of borrowing to business firms and households. As a result, firms will borrow less to build new factories or to install new machinery and equipment, and households will borrow less to buy new houses. A lower price level will have the reverse effect, leading to an increase in investment.
An increase in stock prices will
increase the consumption component of aggregate expenditure. When household wealth increases, consumption increases, and when household wealth decreases, consumption decreases.
If inflation in the United States is lower than inflation in other countries, then U.S. exports ________ and U.S. imports ________, which _________ net exports.
increase; decrease; increases If inflation in the United States is lower than inflation in other countries, then prices of U.S. products increase more slowly than the prices of products of other countries. This difference in inflation rates increases the demand for U.S. products relative to the demand for foreign products. So, U.S. exports increase and U.S. imports decrease, which increases net exports.
If real GDP in the United States increases faster than real GDP in other countries, U.S. imports will__________ faster than U.S. exports, and net exports will ___________.
increase; fall When real GDP increases, so does the income available for consumers and businesses to spend. If real GDP in the United States increases faster than real GDP in other countries, U.S. imports will increase faster than U.S. exports, and net exports will fall. This happened in the late 1990s and early 2000s.
As long as the AE line is above the 45o line,
inventories will decline and firms will expand production. As long as the AE line is above the 45o line, total spending is greater than total production and firms' inventories will fall. Unplanned declines in inventories lead firms to increase their production.
When aggregate expenditure is greater than GDP
inventories will fall. When aggregate expenditure is less than GDP, the total amount of spending in the economy is less than the total amount of production. That causes an unplanned increase in inventories.
Which of the following happens if the price level rises? investment will rise, while consumption and net exports will fall investment and consumption will fall, but net exports will rise investment, consumption and net exports will all rise investment, consumption and net exports will all fall
investment, consumption and net exports will all fall If the price level rises, investment, consumption and net exports will all fall, causing the AE line to shift down on the 45o line diagram. The AE line shifts down because with higher prices there will be less spending in the economy at every level of GDP or national income. Textbook Figure 12.13 (a) shows that the downward shift of the AE line results in a lower level of equilibrium real GDP.
According to the paradox of thrift, a simultaneous increase in saving and decrease in consumption lead to
lower real GDP in the short run but higher real GDP in the long run As John Maynard Keynes argued, the paradox of thrift occurs because a simultaneous increase in saving and decrease in spending result in lower aggregate expenditure and GDP in the short run, even though more saving increases the rate of economic growth in the long run by providing funds for investment.
Which of the following government policies affects the economy through intended changes in the money supply and interest rates? fiscal policy monetary policy both fiscal and monetary policies neither fiscal nor monetary policies
monetary policy The federal government uses monetary policy and fiscal policy to shift the aggregate demand curve. Monetary policy involves changes in interest rates, and fiscal policy involves changes in government purchases and taxes.
Net exports have recently been ________ in most years between 1979. They tend to __________ when the U.S. economy is in recession and __________ when the U.S. economy is expanding.
negative; increase; decrease Net exports have been negative in most years between 1979 and 2010. Net exports rise when the U.S. economy is in recession because domestic spending falls and imports fall. Net exports decrease when the U.S. economy is expanding because domestic spending rises and imports rise.
An adverse supply shock will
not change real GDP in the long-run. An unexpected decrease in oil prices shifts the short-run aggregate supply curve to the right, resulting in a lower price level and higher real GDP.
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals
one. Assuming that net taxes do not change, the relationship between the marginal propensity to consume and the marginal propensity to save is: 1 = MPC + MPS. In other words, for each additional dollar of income, some will go to savings, the rest will go to consumption.
If we account for the impact of increasing GDP on imports, inflation, and interest rates, the simple multiplier formula would
overstate the true value of the multiplier. Increasing GDP has an impact on imports, inflation, and interest rates, which in turn decrease consumption. Thus, the MPC would be lower. Excluding these effect therefore, cause our simple formula to overstate the true value of the multiplier.
The aggregate expenditure model focuses on the relationship between total spending and
real GDP in the short run. The aggregate expenditure model states that the economy is in short-run equilibrium when total spending equals real GDP.
If the exchange rate between the dollar and foreign currencies rises (the dollar rises in value versus foreign currencies), the price in foreign currency of U.S. products will _________ and the U.S. aggregate demand curve will shift to the _________.
rise; left Net exports will fall if the exchange rate between the dollar and foreign currencies rises, because the price in foreign currency of U.S. products sold in other countries will rise, thereby lowing exports, and the dollar price of foreign products sold in the United States will fall, which increases U.S. imports. Consequently, net exports will fall. A decrease in net exports at every price level will shift the AD curve to the left.
For most of the 1979-2008 period, real government purchases
rose steadily. Government purchases grew steadily for most of the 1979-2010 period, with the exception of the mid-1990s, when concern about the federal budget deficit caused real government purchases to fall for three years, beginning in 1992.
The increases of oil prices in 2008 are best described as
shifts of the short-run aggregate supply curve to the left. Increases in oil prices, such as those in 2008, are considered as adverse supply shocks. An adverse supply shock causes a shift of the short-run aggregate supply curve to the left. This contributed to the severity of the 2007-2009 recession.
The long-run aggregate supply curve
shifts to the right as technological change occurs. The long-run aggregate supply curve is vertical and shifts to the right with increases in capital, labor, and technology.
The aggregate demand and aggregate supply model may explain
short-run fluctuations in real GDP and the price level. The aggregate demand and aggregate supply model explains short-run fluctuations in real GDP and the price level. As a textbook figure in chapter 14 shows, in this model real GDP and the price level are determined in the short run by the intersection of the aggregate demand curve and the aggregate supply curve. Fluctuations in real GDP and the price level are caused by shifts in the aggregate demand curve or in the aggregate supply curve.
What are menu costs?
the costs to firms of changing prices If demand for their products is higher or lower than they had expected, firms may want to charge prices different from the ones printed in their menus or catalogs. Changing prices would be costly, however, because it would involve printing new menus or catalogs. The costs to firms of changing prices are called menu costs.
If aggregate expenditure is equal to GDP, then
the economy is in macroeconomic equilibrium. If aggregate expenditure is equal to real GDP, there is no reason for output to rise or fall. Therefore, the economy is in macroeconomic equilibrium.
If the price level increases, then
the economy will move up and to the left along a stationary aggregate demand curve. If the price level rises but other factors that affect the willingness of households, firms, and the government to spend are unchanged, then the economy will move up a stationary aggregate demand curve.
If firms reduce investment spending and the economy slumps into a recession, which of the following contributes to the adjustment that causes the economy to return to its long-run equilibrium? the eventual agreement by workers to accept lower wages the decision by firms to charge higher prices both of the above none of the above
the eventual agreement by workers to accept lower wages The decrease in aggregate demand initially leads to a short-run equilibrium with a lower price level and GDP below potential. Workers and firms will begin to adjust to the price level being lower than they had expected it to be. Workers will be willing to accept lower wages—because each dollar of wages is able to buy more goods and services—and firms will be willing to accept lower prices. In addition, the unemployment resulting from the recession will make workers more willing to accept lower wages, and the decline in demand will make firms more willing to accept lower prices. This causes the short-run aggregate supply curve to shift to the right.
The 2007-2009 recession was a clear example of
the impact that a decrease in aggregate demand can have on the economy. The 2007-2009 recession provides a clear example of the impact of a decline in aggregate demand on the economy. Following the end of the housing bubble, spending on residential construction declined sharply. The collapse of the housing market also caused a crisis in the financial sector, which in turn led to a "credit crunch" that led to declines in consumption and investment spending.
Which of the following factors will shift the short-run aggregate supply to the right? an increase in the price level an increase in the wage rate an increase in the cost of producing output the labor force increases
the labor force increases A price level change will cause a movement along the short-run aggregate supply curve, while decreasing costs of production and lower wages will cause the curve to shift to the right. A decrease in the size of the labor force will cause the curve to shift to the left.
The key idea of the aggregate expenditure model is that in any particular year, the level of gross domestic product (GDP) is determined mainly by
the level of aggregate expenditure. The key idea of the aggregate expenditure model is that in any particular year, the level of gross domestic product (GDP) is determined mainly by the level of aggregate expenditure.
The amount by which consumption spending increases when disposable income increases is called
the marginal propensity to consume. The marginal propensity to consume is also the slope of the consumption function.
The aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded. The aggregate demand curve shows the relationship between the price level and the quantity of GDP demanded by households, firms and the government. This is shown in textbook Figure 13.1.
Which of the following is among the most important determinants of the level of net exports? the price level in the United States relative to the price levels in other countries the unemployment rate in the United States relative to the unemployment rate in other countries the level of investment spending in the United States relative to the level of investment spending in other countries all of the above
the price level in the United States relative to the price levels in other countries The three most important variables that determine the level of net exports are: the price level in the United States relative to the price levels in other countries, the growth rate of GDP in the United States relative to the growth rates of GDP in other countries, and the exchange rate between the dollar and other currencies.
The economy is in long-run equilibrium when
the short-run aggregate supply curve and the aggregate demand curve intersect at a point on the long-run aggregate supply curve. When the short-run aggregate supply curve and the aggregate demand curve intersect at a level of real GDP that is above or below the level of potential GDP represented by the long-run aggregate supply curve (LRAS), the economy will adjust back toward the LRAS. Only when the short-run aggregate supply curve intersects the aggregate demand curve at a point on the LRAS is the economy in long-run equilibrium. Long-run equilibrium is shown in textbook Figure 13.4.
If oil prices rise unexpectedly,
the short-run aggregate supply curve will shift to the left. If oil prices rise unexpectedly, the costs of production will rise for many firms. Some utilities also burn oil to generate electricity, so electricity prices will rise. Rising oil prices lead to rising gasoline prices, which raises transportation costs for many firms. Oil is a key input to manufacturing plastics and artificial fibers, so costs will rise for many other products. Because many firms face rising marginal production costs, they will supply the same level of output only at higher prices, and the short-run aggregate supply curve will shift to the left.
When the economy is in a recession, the shortfall in aggregate expenditure is exactly equal to
the unplanned increase in inventories that would occur if the economy were initially at potential GDP. When the economy is in a recession, the shortfall in aggregate expenditure can be measured as the vertical distance between the AE line and the 45o line at the level of potential real GDP. The shortfall in aggregate expenditure is exactly equal to the unplanned increase in inventories that would occur if the economy were initially at potential GDP. This is true because the unplanned increase in inventories measures the amount by which current aggregate expenditure is too low for the current level of production to be the equilibrium level.
The value of the multiplier is larger when
the value of the MPC is larger. The larger the MPC, the larger the value of the multiplier. With an MPC of 0.75, the multiplier is 4, but with an MPC of 0.50, the multiplier is only 2. This is because the larger the MPC, the greater the amount of additional consumption spending that takes place after each rise in income during the multiplier process
Macroeconomic equilibrium occurs where
total spending, or aggregate expenditure, equals total production, or GDP. For the economy as a whole, macroeconomic equilibrium occurs where total spending, or aggregate expenditure, equals total production, or GDP.
When is the economy in a recession?
when the aggregate expenditure line intersects the 45o line at a level of GDP below potential real GDP Macroeconomic equilibrium occurs where the aggregate expenditure line intersects the 45o line. If this occurs at a level of GDP below potential real GDP, then the economy is in recession.
The wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption. When the price level falls, the real value of household wealth rises, and so will consumption. Economists refer to this impact of the price level on consumption as the wealth effect.
An increase in net exports that results from a change in the price level in the United States
will not cause the aggregate demand curve to shift. A change in the U.S. domestic price level causes a movement along the U.S. aggregate demand curve, not a shift. Therefore, a change in net exports caused by a change in the price level in the United States will not cause the aggregate demand curve to shift.
Macroeconomic equilibrium in the short run
will occur at a point on the 45o line. A key point to understand is that macroeconomic equilibrium can occur at any point on the 45o line. Ideally, we would like equilibrium to occur at potential real GDP. But in order for equilibrium to occur at the level of potential real GDP, aggregate expenditure must be high enough.
After an adverse supply shock, what causes the short-run aggregate supply curve to shift to the right until the long-run level of equilibrium output is reached once again?
workers' willingness to accept lower wages and firms' willingness to accept lower prices The recession caused by the supply shock increases unemployment and reduces output. This eventually results in workers being forced to accept lower wages and firms being forced to accept lower prices. Lower wages cause the short-run aggregate supply curve to shift back to the long-run equilibrium output at full employment.
