Ch. 32 Aggregate Demand and Aggregate Supply

Which of the following will shift the aggregate supply curve to the right?

1. Business Taxes fall2. A new networking technology increases productivity all over the economy.

How can the effect of an unexpected decline in asset values on aggregate demand best be described?

A decline in wealth prompts consumers to save more and spend less which shifts the aggregate demand curve to the left.

Which of the following explain the reasons for the downward slope of the aggregate demand curve?

A higher price level decreases the purchasing power of the publics' accumulated savings balances.

How is the real-balances effect defined?

A higher price level reduces the purchasing power of the public's accumulated savings balances.

A schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level is called

Aggregate Demand

A schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level is called

Aggregate Demand Curve

What is shown by a schedule or curve showing the total quantity of goods and services that would be supplied at various price levels?

Aggregate supply

Investment spending refers to purchases of which of the following?

Capital goods

The determinants of aggregate supply are variables that ______.

Cause the aggregate supply curve to shift

An increase in the price level results in which of the following effects?

Decrease in investments

An increase in the price level results in which of the following effects?

Decrease in investments Decrease in the level of consumption

True or false: The aggregate demand curve slopes downward because it reflects a direct relationship between the price level and the amount of real output demanded

False. The curve shows an inverse relationship between price level and real output demand.

Select all the following that were characteristic of economic conditions in the United States during the 1990s.

Full employment Very low inflation Strong growth

Which of the following are the four components or determinants of aggregate demand?

Investment spending Net export spending Consumer spending Government spending

What is the result of an increase in the money supply?

Lower interest rate, increased investment and increased aggregate demand

What is one result of a decrease in aggregate demand?

Recession

What will a rise in net exports do?

Shift the aggregate demand curve to the right

Which of the following statements best explains the effect of a decline in the price level on consumption, investment and net exports?

The level of consumption increases, investment increases, and net exports increase.

c. Which of the following statements is true concerning the real-balances effect and the wealth effect?

The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve.

Which aggregate supply curve is used in order to understand business cycles and macroeconomic policy?

The short-run curve

True or false: Changes in taxes, subsidies, and the extent of regulations may alter per-unit production costs and shift the aggregate supply curve.

True

True or false: "Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply."

True, but the magnitude of the effect on unemployment depends on the economic situation.

What happened to the U.S. economy in the 1990s?

Unemployment fell to 4%. GDP grew by 4% annually.

b. The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because

a downsloping, single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed.

The U.S. experience of strong economic growth, full employment, and price stability in the late 1990s and early 2000s can be explained by

a rightward shift of aggregate demand and a rightward shift of aggregate supply.

The wealth effect is reflected by ______.

a rightward shift of the aggregate demand curve

b. According to the "wealth effect," a change in consumer wealth causes

a shift in consumer spending and a shift of the aggregate demand curve.

A change in one of the determinants of aggregate supply causes ______ the aggregate supply curve.

a shift of

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? a. An increase in aggregate demand. b. A decrease in aggregate supply, with no change in aggregate demand. c. Equal increases in aggregate demand and aggregate supply. d. A decrease in aggregate demand. e. An increase in aggregate demand that exceeds an increase in aggregate supply.

a. The price level rises rapidly and there is little change in real output. b. The price level rises and real output decreases. c. The price level does not change, but real output increases. d. The price level does not change, but real output declines. e. The price level increases somewhat, with a relatively large change in output.

(A)Price Level Real GDP110 275100 25095 22590 200(B)Price Level Real GDP100 200100 225100 250100 275(C)Price Level Real GDP110 225100 22595 22590 225 a. Which set of data illustrates aggregate supply in the immediate short-run in North Vaudeville? __?__ Which set of data illustrates aggregate supply in the short run in North Vaudeville? __?__ Which set of data illustrates aggregate supply in the long run in North Vaudeville? __?__ b. Assuming no change in hours of work, if real output per hour of work increases by 10 percent, what will be the new levels of real GDP in the right column of A? __?__Instructions: Round your answer to 1 decimal place.With a price level of 110, new output = __?__ Instructions: Enter your answer as a whole number.With a price level of 100, new output = __?__Instructions: Round your answer to 1 decimal place.With a price level of 95, new output = __?__Instructions: Enter your answer as a whole number.With a price level of 90, new output = __?__Does the new data reflect an increase in aggregate supply or does it indicate a decrease in aggregate supply? __?__

a.) B.; A.; C. b.) 302.5; 275; 247.5; 220; increase

At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is:

above equilibrium.

Investment spending refers to ______.

adding to physical capital

A strong negative wealth effect from, say, a precipitous drop in house prices could cause a recession even though productivity is surging if

aggregate demand shifts left while aggregate supply shifts right.

A full-strength multiplier applies to a decrease in aggregate demand when

aggregate supply is horizontal.

An upsloping aggregate supply curve weakens the realized multiplier effect because

any increase in demand will have both a price and an output effect.

c. The multiplier

causes an initial change in spending to generate an even larger change in the aggregate demand curve.

A decrease in aggregate supply, assuming constant aggregate demand, will result in _______ inflation

cost-push

a. According to the "real-balances effect," if prices

decline, the purchasing power of assets will rise, so spending at each income level should rise.

Cyclical unemployment and recession often arise from____ in aggregate demand.

decrease

A decline in expected returns will ______ investment and shift the aggregate demand curve to the ______.

decrease, left

An increase in real interest rates will ______ investment spending and ______ borrowing costs.

decrease; increase

Aggregate ____ is a schedule or curve that shows the amount of real GDP that buyers collectively desire to purchase at each possible price level.

demand

An increase in aggregate demand, assuming constant aggregate supply, will result in ______ inflation.

demand-pull

In the short run, output prices are ______ and ______ prices are ______.

flexible; input; sticky

The long run aggregate supply curve is vertical at ______.

full employment output

Suppose an economy is operating at its full-employment output. An increase in aggregate demand with constant aggregate supply will result in actual GDP being _____ than potential GDP.

greater

A higher than expected return on investment will ____ the demand for capital goods and shift the aggregate demand curve to the right.

increase

A rise in consumer wealth will ______ consumer spending.

increase

A decrease in the money supply is likely to cause a(n) ______ in interest rates, and subsequent ______ in investments and aggregate demand.

increase, decreases

The equilibrium price level and equilibrium output is determined by the ______.

intersection of the aggregate demand curve and the aggregate supply curve

In early 2001 investment spending sharply declined in the United States. This caused a

leftward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply.

In the two months following the September 11, 2001, attacks on the United States, consumption also declined. This caused a

leftward shift in aggregate demand, and lower investment would have caused a leftward shift in aggregate supply.

An increase in real interest rates will ______ investment spending and ______ aggregate demand.

lower; reduce

An increase in real interest rates will ______ investment spending and ______ aggregate demand.

lower;reduce

The short-run is the period in which ______.

output prices are flexible but input prices are fixed or highly inflexible

Aggregate supply is represented as a schedule or curve showing the relationship between a nation's ____ level (index) and the amount of real domestic output that firms in the economy produce.

price

A reduction in short-run aggregate demand in the actual economy reduces real output, rather than the price level, because

prices are inflexible downward.

The ______ is when a higher price level reduces the purchasing power of the public's accumulated savings balances.

real-balances effect

In the immediate short run for aggregate supply, both input and output prices ____.

remain fixed

An input price is a(n) ______ price while an output price makes up the price level.

resource. Inputs and their associated costs can be both fixed and variable.

Changes in consumer spending, investment, government spending and net export spending will:

shift the aggregate demand curve

A decline in investment spending at each price level will ______.

shift the aggregate demand curve to the left

An increase in government spending is likely to _____.

shift the aggregate demand curve to the right

An increase in investment spending at each price level will ______.

shift the aggregate demand curve to the right

A leftward shift in the aggregate ____ curve leads to cost-push inflation.

supply

The two changes of the legal-institutional environment that will shift the aggregate supply curve are ______.

taxes and government regulations

a. The long-run aggregate supply curve is vertical because the economy's potential output is determined by

the availability and productivity of real resources, not by the price level.

The intersection of the aggregate demand and aggregate supply curves determines ______.

the equilibrium price level and equilibrium real GDP

a. The downsloping aggregate demand curve can be explained by

the interest-rate effect, the real-balances effect, and the foreign purchases effect.

c. The short-run aggregate supply curve is relatively flat to the left of the full-employment output because

there are large amounts of unused capacity and idle human resources.

Productivity can be illustrated in the formula ______.

total output divided by total inputs

What is a major factor in per-unit production costs and therefore a key determinant of aggregate supply?

total output divided by total inputs

b. The shape of the short-run aggregate supply curve is

upsloping, because wages adjust more slowly than the price level.

At full-employment output level, the long-run aggregate supply curve is ______.

vertical

In the long run the economy will produce at full-employment output levels no matter what the price is, so the long-run aggregate supply curve is ______.

vertical

The total dollar value of all assets owned by consumers in the economy less the dollar value of their liabilities is called consumer___

wealth