Macroeconomics Chapter 13 AS/AD
Consider the figure to the right. (Figure 13.6) Why does the short run aggregate supply curve slope upward?
Firms and workers fail to predict changes in the price level, Contracts keep wages "sticky", Prices of final goods rise more quickly than the prices of inputs.
Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
because menu costs make some prices "sticky", because contracts between workers and firms make some wages and prices "sticky", because firms are often slow to adjust wages
A change in the price level causes a __________ the short run aggregate curve. A change in other factor causes a ___________ the SRAS curve
movement along ; shift in
In the diagram to the right, moving from point A to point B is called a ___________ the AD curve (Figure 13.13) Moving from point A to point C is referred to as a ______ the AD curve
movement along ; shift in
The graph to the right shows the aggregate demand curve for an economy. (downward sloping straight line labeled AD1) Use the line drawing tool to show the effect of a monetary policy change that causes a decrease in interest rates. Properly label this line.
shift AD1 to the right and label it AD2
If the price level increases, than
there will be a movement up along a stationary aggregate demand curve
Consider the downward-sloping aggregate demand (AD) curve to the right. Which of the following results in a movement from point A to point B (a movement up along the AD curve) or from point A to point C (a movement down along the AD curve)? (Figure 13.2)
wealth effect, interest rate effect
The wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption
According to the dynamic AD-AS model, what is the most common cause of inflation?
AD increases by more than LRAS, Total spending increases faster than total production
Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from ________ The new short-run macroeconomic equilibrium occurs at _________ Long-run adjustment will shift the SRAS curve from ______________ as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at _________ (Figure 13.9)
AD0 to AD1 point B SRAS0 to SRAS1 point C
Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C. (Figure 13.1)
Increased consumer optimism, lower interest rates, decrease in the US exchange rate relative to other currencies, lower taxes
Why does the short-run aggregate supply curve slope upward?
Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.
Neutron Inc., is one of the leading electric car manufacturers in Northbay, a developing economy. Neutron's sales increased by more than 20 percent this year compared to the previous year, which started a debate within the company about whether the firm should increase prices. Among those in favor of a price hike is Eric Johnson, the operations head at Neutron. Eric is of the opinion that given the high demand for Neutron's cars, the firm should increase price to improve profits. Mike Wilson, the CEO of the firm, however, feels that a price increase would adversely affect the demand for Neutron's products because he thinks consumers in this industry are more price conscious than brand loyal. Which of the following, if true, will weaken the case for a price increase
Some of Neutron's competitors have recently announced price cuts.
Paul Schumer and Jim Miller, two analysts at a research institute, discuss the rising costs of higher education in their country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher education market. According to Jim, however, the rising costs are the result of better quality education being provided by the institutions in recent years. Which of the following, if true, will strengthen Jim's claim?
The gap between the earnings of college graduates and nongraduates is increasing.
Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane Wilson, an industry analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her colleague, Harry Gomes, however, disagrees. According to Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Which of the following, if true, will indicate that higher prices will not induce firms to increase output?
The increase in the price of inputs outweighed the increase in the price of the final product.
Almora, a developing open economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson's view. In one of his recent articles in the country's leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the following, if true, will support Bill's argument? Which of the following statements is Bill and Robin likely to agree with?
The number of Almorans who had settled abroad but are coming back to their homeland has been increasing in the last two years. The discovery of oil reserves has resulted in a rightward shift of the long-run aggregate supply curve.
Which of the following causes the short-run aggregate supply curve to shift to the left?
an increase in the expected price of an important natural resource
The aggregate demand curve is downward sloping because
an increase in the price level reduces real money holdings, which reduces the amount of expenditures.
Suppose an economy experiences technological progress and this causes a shift in the LRAS curve. Which of the following should not occur?
There will be an increase in government purchases as the economy has more income.
Which of the following factors does not cause the aggregate demand curve to shift?
a change in the price level
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
Which of the following would cause a decrease in aggregate demand?
a decrease in government spending
__________ would cause a similar shift in the aggregate demand curve
a decrease in taxes
What is the effect of an increase in the price level on the short-run aggregate supply curve?
a movement up along a stationary curve
Which of the following causes the short-run aggregate supply curve to shift to the right?
a positive technological change
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
a recession in the short run and a decline in the price level in the long run.
Which of the following is usually the cause of stagflation?
a supply shock as a result of an unexpected increase in the price of a natural resource
If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run.
an increase ; an increase
How can government policies shift the aggregate demand curve to the right?
by increasing government purchases
How does the dynamic model of aggregate supply and aggregate demand explain inflation?
by showing that if total spending in the economy grows faster than total production, prices will rise
How does an increase in the price level affect the quantity of real GDP supplied in the long run?
changes in the price level do not affect the level of GDP in the long run
Aggregate demand (AD) is comprised of expenditure components that include:
government spending, consumption, investment, and net exports.
The interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investment
Which of the following is a major difference between the AD-AS model and the dynamic AD-AS model? The dynamic AD-AS model assumes
potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.
The position of the long-run aggregate supply (LRAS) curve is determined by
the number of workers, the amount of capital, and the available technology.
The aggregate demand curve shows the relationship between _________ and _________
the price level ; output demanded
