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According to the graph, an increase in government spending, all else equal, will shift the AD curve from the initial AD curve to the curve labelled Increased AD. A decrease in taxes, an increase in government spending, or an increase in the money supply will result in an increase in aggregate demand.
Higher taxes, lower government spending, or a decrease in the money supply will all reduce aggregate demand.
Higher taxes, lower government spending, or a decrease in the money supply will all reduce aggregate demand.
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supply shock that caused a leftward shift of the short-run aggregate supply curve. OPEC formed and pushed the price of oil significantly higher. This increased production costs for all products and pushed prices higher. This in turn made consumers worse off so they were forced to reduce consumption.
The shift was not a long-run shift since the economy was operating well below potential output.
It is widely believed that the 2008-2009 recession was caused by a housing bubble collapse (you may recall the sub-prime mortgage crisis in the United States) and financial market failures in the United States that caused a leftward shift of the aggregate demand curve.
The shift was not a long-run shift since the economy was operating well below potential output.
It is widely believed that the 2008-2009 recession was caused by a housing bubble collapse (you may recall the sub-prime mortgage crisis in the United States) and financial market failures in the United States that caused a leftward shift of the aggregate demand curve.
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According to the graph, the situation of this economy after the supply shock can be called stagflation.
Stagflation occurs when the economy has simultaneous high inflation and declining output as shown in this graph. Supply shocks, like a large unexpected increase in the price of oil, can cause stagflation.
Economic growth and excess supply would both lead to an increase in output.
Stagflation occurs when the economy has simultaneous high inflation and declining output as shown in this graph. Supply shocks, like a large unexpected increase in the price of oil, can cause stagflation.
Economic growth and excess supply would both lead to an increase in output.
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If firms reduce investment spending and the economy enters a recession, the eventual agreement by workers to accept lower wages contributes to the adjustment that causes the economy to return to its long-run equilibrium. As prices fall, workers will eventually adjust and be willing to accept lower wages because the purchasing power of the dollar has gone up. In addition, the unemployment caused by the recession will make workers willing to accept a lower wage rate.
Higher prices and higher wages would make the situation worse and keep the economy below the potential real GDP output.
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Higher prices and higher wages would make the situation worse and keep the economy below the potential real GDP output.
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The shift from c to b, and then to a best represents the impact of a decrease in government spending through the multiplier process. The initial shift from c to b is equal to the decrease in government spending. But, after a brief period of time, total aggregate demand will fall even further as the decrease in government spending in turn decreases worker income that was used for consumption.
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The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point on the long-run aggregate supply curve.
The long-run aggregate supply curve represents the potential real GDP. When the short-run aggregate supply and the aggregate demand curve intersect at a point above or below the level of potential real GDP, the economy will eventually adjust back to that level which is the long-run equilibrium.
The long-run aggregate supply curve represents the potential real GDP. When the short-run aggregate supply and the aggregate demand curve intersect at a point above or below the level of potential real GDP, the economy will eventually adjust back to that level which is the long-run equilibrium.
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The 1974-1975 recession was a result of
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Government policies can shift the aggregate demand curve to the right by increasing government purchases. When the government enters the market and buys more goods and services, it shifts the aggregate demand outward and to the right.
Decreasing government purchases would have the opposite effect and shift aggregate demand to the left. Raising personal taxes would also shift the aggregate demand to the left since that lowers the amount of disposable personal income available for consumption.
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Decreasing government purchases would have the opposite effect and shift aggregate demand to the left. Raising personal taxes would also shift the aggregate demand to the left since that lowers the amount of disposable personal income available for consumption.
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If firms reduce investment spending and the economy enters a recession, which of these contributes to the adjustment that causes the economy to return to its long-run equilibrium?
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Consider a country that does not produce and export oil. In the short run, a supply shock as a result of an unexpected decrease in oil prices will decrease the price level but increase real GDP. A decrease in the price of oil will shift the short-run aggregate supply curve to the right and result in a lower price level and an increase in quantity (i.e., real GDP).
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The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point:
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The 2008-2009 recession was a clear example of the impact that a decrease in aggregate demand can have on the economy.
Following the end of the housing bubble, spending on residential construction sharply declined. The collapse of the housing market in the U.S. then led to a financial crisis which caused a credit crunch that led to declines in consumption and business investment. The overall impact was a large decline in aggregate demand that found its way to Canada and the global economy. A positive supply shock would have stimulated growth and shifted the short-run aggregate supply to the right.
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Following the end of the housing bubble, spending on residential construction sharply declined. The collapse of the housing market in the U.S. then led to a financial crisis which caused a credit crunch that led to declines in consumption and business investment. The overall impact was a large decline in aggregate demand that found its way to Canada and the global economy. A positive supply shock would have stimulated growth and shifted the short-run aggregate supply to the right.
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How can government policies shift the aggregate demand curve to the right?
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For a country that uses oil as an input, an unexpected change in the price of oil would be called a supply shock by economists (assume the country does not produce and export oil). When an unexpected increase or decrease in the price of an important raw material occurs, it is known as a supply shock. The change in the price of an input affects the supply.
For countries such as Canada that also produce and export oil, a decrease in the price of oil causes a reduction in income to domestic oil producers and is thus a negative aggregate demand shock.
Stagflation occurs when the economy has simultaneous high inflation and declining economic growth.
For countries such as Canada that also produce and export oil, a decrease in the price of oil causes a reduction in income to domestic oil producers and is thus a negative aggregate demand shock.
Stagflation occurs when the economy has simultaneous high inflation and declining economic growth.
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Consider a country that does not produce and export oil. In the short run, a supply shock as a result of an unexpected decrease in oil prices will:
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A higher domestic price level will result in higher imports.
A higher price level makes domestic goods more expensive relative to foreign goods. As domestic goods become more expensive, exports will fall and imports will rise, thereby making the trade balance worse.
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A higher price level makes domestic goods more expensive relative to foreign goods. As domestic goods become more expensive, exports will fall and imports will rise, thereby making the trade balance worse.
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The 2008-2009 recession was a clear example of the impact:
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Classical economic theory often states that supply creates its own demand. This is known as Say's law. Say's law is named after one of the fathers of modern economic thought, Jean-Baptiste Say. Simply put it merely states that the act of production creates an equivalent amount of income for workers to spend. Therefore, producing or supplying product provides the financial means to consume or demand the product.
The paradox of thrift refers to the conundrum that occurs when households save more which leads to reduced consumption and ultimately to lower income. The higher savings rate ultimately caused their income to fall.
Stagflation occurs when the economy has simultaneous high inflation and declining economic growth.
The paradox of thrift refers to the conundrum that occurs when households save more which leads to reduced consumption and ultimately to lower income. The higher savings rate ultimately caused their income to fall.
Stagflation occurs when the economy has simultaneous high inflation and declining economic growth.
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For a country that uses oil as an input, an unexpected change in the price of oil would be called __________ by economists (assume the country does not produce and export oil).
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short-run fluctuations in real GDP and the price level
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A higher domestic price level will result in:
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lower income
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Classical economic theory often states that supply creates its own demand. This is known as:
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supply shock that caused a leftward shift of the short-run aggregate supply curve
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The aggregate demand and aggregate supply model explains:
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In the long run, the level of output is the full-employment level of output.
In the long run, the level of output is independent of the price level. It does however depend solely on the supply factors or the availability of labour and capital, and on the state of technology. In the long run, the economy will operate at the full-employment level of output with any deviation lasting only in the short run.
In the long run, the level of output is independent of the price level. It does however depend solely on the supply factors or the availability of labour and capital, and on the state of technology. In the long run, the economy will operate at the full-employment level of output with any deviation lasting only in the short run.
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The paradox of thrift states that increased household savings will ultimately lead to:
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a plan for the central bank to increase the money supply at a fixed rate and not respond to economic fluctuations. Both monetarists and new classical theorists believe that the central bank should increase the money supply by a fixed rate approximately equal to the long-run rate of real growth in the economy.
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The 1974-1975 recession was a result of a:
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In the long run, the level of output is:
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A monetary growth rule
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