Econ Chapter 30

The shape of the short-run aggregate supply curve is

upsloping because wages adjust more slowly than the price level, increasing profits and output.

Immediate Short Run

A horizontal line. The price level is fixed.

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

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

Short Run

Output prices are flexible but input prices are fixed. An upsloping curve.

True or False. If the price of oil suddenly increases by a large amount, AS will shift left but the price level will not rise thanks to price inflexibility.

False

True or False. In the real world, decreases in AD normally lead to decreases in both output and the price level.

False

Which of the following will shift the aggregate demand curve to the left?

Interest rates rise. There is an economic boom overseas that raises the incomes of foreign households

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

Supply is horizontal

Which of the following explain why the aggregate demand curve slopes downward?

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

d. A decrease in aggregate demand.

The price level does not change, but real output declines.

c. Equal increases in aggregate demand and aggregate supply.

The price level does not change, but real output increases.

e. An increase in aggregate demand that exceeds an increase in aggregate supply.

The price level increases somewhat, with a relatively large change in output.

b. A decrease in aggregate supply, with no change in aggregate demand.

The price level rises and real output decreases.

a. An increase in aggregate demand.

The price level rises rapidly and there is little change in real output.

True or False? "Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply."

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

Long Run

Vertical line Output is fixed

Which of the following help to explain why the aggregate demand curve slopes downward?

When the domestic price level rises, our goods and services become more expensive to foreigners. The government raises corporate profit taxes.

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

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

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

The multiplier

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

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

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

An upsloping aggregate supply curve weakens the realized multiplier effect because any increase in aggregate

demand will have both a price and an output effect.

A strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though productivity is surging if aggregate demand shifts

left while aggregate supply shifts right.

In the 2 months following the September 11, 2001, attacks on the United States, consumption also declined. This event caused a

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

In 2002, the annual oil price was $24.36. As of late July 2006, the annual oil price was $62.07. The percentage increase in real GDP from 2001 to 2005 (the latest year for which data were available) was about 12.6 percent. This indicates that

oil prices increased faster than real GDP, but real GDP still grew at a healthy pace.

A reduction in aggregate demand likely causes a decline in real output rather than the price level because

prices are inflexible downward.

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.

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

shift in consumer spending and the aggregate expenditures curve.

The explanation of 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 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.

aggregate demand

the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels. This is the demand for the gross domestic product of a country.

aggregate supply

the total supply of goods and services produced within an economy at a given overall price level in a given time period. It is represented by the aggregate-supply curve, which describes the relationship between price levels and the quantity of output that firms are willing to provide.

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.

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.