Ch 10

If Europe and Japan experience rapid growth in their incomes, other things constant, this will cause

an increase in the exports of the United States.

factors that increase LRAS

(1) increases in the supply of labor and capital resources (2) improvements in technology and productivity, and (3) institutional changes improving the efficiency of resource use.

Changes in real wealth

-increase: shifts AD curve right -decrease:shifts AD curve left

Changes in the real interest rate

-interest rate falls: shift AD curve right -interest rate rises: shift Ad curve left

The short-run effect of a sudden increase in stock prices will be

. an increase in both output and prices.

two causes of a recession

1. An unanticipated fall in aggregate demand 2. An unanticipated fall in short-run aggregate supply

two causes of an expansion

1. An unanticipated rise in aggregate demand 2. An unanticipated rise in short-run aggregate supply

shifters of aggregate demand

1. Changes in real wealth 2. Changes in the real interest rate 3. Changes in the expectations of businesses and households about the future 4. Changes in the expected rate of inflation 5. Changes in income abroad 6. changes in exchange rates

self-correcting economy

1. consumption demand is relatively stable 2. changes in real interest rates stabilize aggregate demand and redirect economic fluctuations 3. changes in real resource prices will help redirect economic fluctuations

Over the last 60 years, the average annual growth of real GDP in the United States has been approximately

3%

Which of the following is most likely to shift the short-run aggregate supply curve of an economy to the left?

An increase in resource prices in the economy

How would aggregate demand change if foreign incomes increase and the exchange rate value of the dollar decreases?

Both changes would increase aggregate demand.

changes in exchange rates

Dollar depreciates: AD curve shifts right Dollar appreciates: AD curve shifts left

Permanent Income Hypothesis

Peoples consumption depends on their long-run expected permanent income rather than their current income

Which of the following is likely to cause a rightward shift in the long-run aggregate supply curve?

The discovery of coal mines in an economy

Which of the following is likely to cause a leftward shift in the long-run aggregate supply curve of an economy?

The imposition of taxes on firms to reduce pollution in the economy

Within the framework of the AD/AS model, if consumers and investors become more pessimistic about the future direction of the economy, this will lead to

a decrease in aggregate demand.

A new law restricts the immigration of highly trained or qualified foreigners. This is likely to cause:

a decrease in long-run aggregate supply in the country.

Suppose a country has experienced drought for the past three months. This will cause:

a leftward shift in the short-run aggregate supply curve of the country.

Economic growth coupled with constant money supply in an economy will lead to:

a lower price level in the economy in the long run.

If favorable weather causes an increase in the orange crop here in Florida, this is an example of

a supply shock that will increase short-run aggregate supply.

Which of the following will most likely increase long-run aggregate supply?

a. an increase in the rate of investment b. an increase in resource prices c. an increase in the minimum wage d. an increase in the expected inflation rate d

Which of the following would be most likely to shift the long-run aggregate supply curve (LRAS) to the right?

a. favorable weather conditions that increased the size of this year's grain harvest b. an increase in resource prices relative to product prices c. an increase in labor productivity as the result of improved computer technology and expansion of the Internet d. an increase in the cost of security as the result of terrorist activities c

Which of the following would be most likely to cause an increase in current aggregate demand in the United States?

a. increased fear that the U.S. economy was going into a recession b. an increase in the real interest rate c. a reduction in the expected rate of inflation d. rapid growth of real income in Canada and Western Europe d

Which of the following will most likely increase short-run aggregate supply?

a. unfavorable weather conditions in the nation's agricultural areas b. an increase in income tax rates c. an increase in the expected inflation rate d. a reduction in resource prices d

An increase in the consumer sentiment index indicates that consumers are

becoming more optimistic about their future income and employment prospects.

Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long run prices

c. are higher and output is the same as the original long-run equilibrium.

unanticipated (temporary) changes in aggregate demand

cause both AD and SRAs curve to shift in opposite directions ex- real interest rate declines

anticipated (permanent) changes in long-run aggregate supply

cause both LRAS and SRAS curve to shift in the same direction ex-invention of a more efficient engine, capitalism to socialism

If a market economy has a self-correcting mechanism, when output is lower than potential or full-employment output, Correct!

changes will occur that redirect economic fluctuations back to long-run equilibrium.

In the aggregate demand/aggregate supply model, when the output of an economy is less than its long-run potential, the economy will experience

declining real wages and interest rates that will stimulate employment and real output.

An increase in the exchange rate value of the U.S. dollar, relative to the Japanese yen, will cause U.S. imports from Japan to

increase and exports to Japan to decrease.

Suppose housing prices in the fictional country of Corinthia increased by 85 percent in 2014. This will:

increase the wealth of the citizens of Corinthia. because people will demand more goods and services

Changes in income abroad

increase- shift right decrease- shift left

Changes in the expected rate of inflation

increase- shift right decrease- shift left

If a country experiences economic growth without any decline in the price level in the long run, it is likely that policy-makers have:

increased the supply of money in the economy.

temporary (unanticipated) changes in AS

only shift SRAS curve 1. changes in resource prices 2. changes in the expected rate of inflation 3. supply shocks

unanticipated (temporary) changes in SRAS

only shifts SRAS curve and back to original position ex- favorable weather

A large grain crop resulting from favorable weather conditions would shift which of the following curves?

only short-run aggregate supply

changes in the expectations of businesses and households about the future

optimism- shift right pessimism- shift left

A recession abroad would

reduce U.S. net exports and reduce aggregate demand.

factors that shift SRAS to the left

rise in resource prices, a rise in the expected rate of inflation, and unfavorable supply shocks

permanent (anticipated) changes in AS

shift both LRAS and SRAS curves 1. change in the resource base 2. change in the level of technology 3. change in institutional arrangements that affect productivity

An improvement in technology would shift which of the following curve(s)?

short-run and long-run aggregate supply

Productivity

the average output produced per worker during a specific period of time

If a country experiences economic growth caused by capital formation, then:

the long-run aggregate supply curve will shift to the right.

If an unanticipated reduction in aggregate demand throws a market economy into a recession,

then automatic stabilizers will affect real resource prices and interest rates directing the economy back to where actual GDP will equal potential GDP.

When the economy is operating at an output rate less than full-employment capacity,

weak demand for investment will place downward pressure on real interest rates.