macroeconomics chapters 11 and 12
When the Great Depression reached its trough in 1933, real GDP had fallen by ________ since the depression began in 1929.
30%
In a graph that shows the aggregate supply and aggregate demand curves, what are the variables on the axes of the graph?
The price level measured by the implicit price deflator is on the vertical axis and real GDP is on the horizontal axis.
How will a recession in the economies of our foreign trading partners affect U.S. aggregate demand?
U.S. aggregate demand will decrease.
Suppose the U.S. is in a recession while foreign countries that trade with the U.S. are not. How will this affect the U.S.?
U.S. imports will FALL, U.S. exports will RISE and U.S. aggregate demand will RISE
To eliminate an inflationary gap, policy-makers may pursue
a contractionary policy that decreases aggregate demand.
the 'great' recession of 2007-09, like the great depression was, in the simplest terms, caused by
a decline in aggregate demand
aggregate demand/aggregate supply model
a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level
A change in the price level, all other things unchanged, causes
a movement along the aggregate demand curve.
Suppose the economy is initially in long-run equilibrium. Which of the following events leads to a decrease in the price level and real GDP in the short run?
a sharp fall in stock market prices
Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and a decrease in real GDP in the short run?
a sharp fall in stock market prices
sticky wages and prices
a situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand
Aggregate demand is the total value of real GDP that
all sectors of the economy are willing to purchase at various average price levels, all other things unchanged.
stagflation
an economy experiences stagnant growth and high inflation at the same time
To eliminate a recessionary gap, policy-makers may pursue
an expansionary policy that increases aggregate demand.
Which of the following will not cause a change in aggregate demand?
an increase in an economy's price level
full-employment GDP
another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment
A change in the aggregate quantities of goods and services demanded at each price level is called a
change in aggregate demand.
A change in the aggregate quantity of goods and services supplied at every price level is called a
change in short-run aggregate supply.
What are the four sources of aggregate demand?
consumption, private investment, government purchases, and net exports
menu costs
costs firms face in changing prices
coordination argument
downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants
inflationary gap
equilibrium at a level of output above potential GDP
recessionary gap
equilibrium at a level of output below potential GDP
An increase in household saving is likely to increase consumption and aggregate demand.
false
In the short run Keynesian model, all prices are assumed to be flexible.
false
Public policy to eliminate a recessionary gap could involve an increase in taxes.
false
The use of government purchases, transfer payments, and taxes to influence the level of economic activity is called
fiscal policy.
An economic analysis of the short run is useful to explain
how deviations of real GDP from potential output can and do occur.
The short run in macroeconomic analysis is a period
in which wages and some other prices do not respond to changes in economic conditions.
disposable income
income after taxes
macroeconomic externality
occurs when what happens at the macro level is different from and inferior to what happens at the micro level; an example would be where upward sloping supply curves for firms become a flat aggregate supply curve, illustrating that the price level cannot fall to stimulate aggregate demand
All of the following are held constant along a short-run aggregate supply curve except
output prices.
neoclassical zone
portion of the SRAS curve where GDP is at or near potential output where the SRAS curve is steep
intermediate zone
portion of the SRAS curve where GDP is below potential but not so far below as in the Keynesian zone; the SRAS curve is upward-sloping, but not vertical in the intermediate zone
Keynesian zone
portion of the SRAS curve where GDP is far below potential and the SRAS curve is flat
short run aggregate supply (SRAS) curve
positive short run relationship between the price level for output and real GDP, holding the prices of inputs fixed
All other things unchanged, an appreciation of the dollar against the yen say, from the perspective of the U.S.
reduces U.S. exports to Japan, increases U.S. imports from Japan and weakens aggregate demand and output in the U.S.
All other things unchanged, an increase in personal income tax rates will
shift the aggregate demand curve to the left.
All other things unchanged, an increase in exports relative to imports will
shift the aggregate demand curve to the right.
All other things unchanged, an increase in government spending will
shift the aggregate demand curve to the right.
in the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of
the aggregate demand and the short-run aggregate supply curves.
real GDP
the amount of goods and services actually being sold in a nation
aggregate demand (AD)
the amount of total spending on domestic goods and services in an economy
The government expenditure multiplier is given by
the change in real gdp divided by the change in government expenditure
The rise and fall of real GDP over the course of the business cycle suggests that
the economy may not always be in long-run equilibrium.
potential GDP
the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions
Aggregate demand is defined as
the relationship between the total quantity of goods and services demanded and the price level, all other determinants of spending unchanged.
aggregate supply (AS)
the total quantity of output (i.e. real GDP) firms will produce and sell
aggregate supply (AS) curve
the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level
aggregate demand (AD) curve
the total spending on domestic goods and services at each price level
An increase in the prices of natural resources will lead to a decrease in short-run aggregate supply.
true
Public policy used to offset severe economic downturns is called stabilization policy.
true
The aggregate demand curve shifts due to changes in consumption expenditures, investment expenditures, government purchases, or net exports.
true
long run aggregate supply (LRAS) curve
vertical line at potential GDP showing no relationship between the price level for output and real GDP in the long run
What do economists mean by the term "sticky wage"?
It refers to a wage that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus in the labor market.
Suppose that government spending on defense rises by $50 billion. What happens to the aggregate demand curve?
It shifts right by $50 billion or more at each price level.
expenditure multiplier
Keynesian concept that asserts that a change in autonomous spending causes a more than proportionate change in real GDP
Using the aggregate demand-aggregate supply model, predict what happens in the short run when the consumer confidence index falls as consumers become pessimistic about their economic prospects.
The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government enacts a cut in the personal income tax rates.
The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.
The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
Using the aggregate demand-aggregate supply model, predict what happens in the short run if an increase in health insurance premiums paid by firms raises the cost of employing each worker.
The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.
Using the aggregate demand-aggregate supply model, predict what happens in the short run when there is a general decrease in raw materials cost.
The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.
Suppose the price of an important natural resource such as oil falls. What will be the effect on the short-run aggregate supply curve?
The aggregate supply curve will shift to the right.
Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?
The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption which will increase demand further and income further etc
All of the following statements is true about the short-run aggregate supply curve except
it is drawn holding price level constant.
The short-run aggregate supply shows the amount of real GDP that will be
made available at various price levels.
Federal Reserve policies meant to influence the level of economic activity is called
monetary policy.