question
Real GDP
answer
The value of final goods and services evaluated at base-year prices.
question
Business cycle
answer
Alternating periods of economic expansion and economic recession.
question
Recession
answer
The period of a business cycle during which total production and total employment are decreasing.
question
Expansion
answer
The period of a business cycle during which total production and total employment are increasing.
question
Aggregate demand and aggregate supply model
answer
A model that explains short-run fluctuations in real GDP and the price level.
question
What relationship is shown by the aggregate demand curve?
The aggregate demand curve shows the relationship between
The aggregate demand curve shows the relationship between
answer
the price level and the quantity of real GDP demanded by households, firms, and the government.
question
What relationship is shown by the aggregate supply curve?
The short run aggregate supply curve shows the relationship in the short run between
The short run aggregate supply curve shows the relationship in the short run between
answer
the price level and the quantity of real GDP supplied by firms.
question
Aggregate demand (AD) curve
answer
A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.
question
Short-run aggregate supply (SRAS) curve
answer
A curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms.
question
GDP has four components:
answer
- Consumption (C)
- Investment (I)
- Government purchases (G)
- Net exports (NX)
- Investment (I)
- Government purchases (G)
- Net exports (NX)
question
The aggregate demand curve is downward sloping
answer
because a fall in the price level increases the quantity of real GDP demanded.
question
The Wealth Effect: How a Change in the Price Level Affects Consumption
answer
- Current income is the most important variable determining consumption by households.
- As income rises, consumption will rise, and as income falls, consumption will fall.
- But consumption also depends on household wealth, which is the difference between the value of a household's assets and the value of its debts.
- When the price level rises, the real value of household wealth declines, and so will consumption, thereby reducing the demand for goods and services.
- When the price level falls, the real value of household wealth rises, and so will consumption and the demand for goods and services.
- The effect of the price level on consumption is called the wealth effect, and it is one reason the aggregate demand curve is downward sloping.
- As income rises, consumption will rise, and as income falls, consumption will fall.
- But consumption also depends on household wealth, which is the difference between the value of a household's assets and the value of its debts.
- When the price level rises, the real value of household wealth declines, and so will consumption, thereby reducing the demand for goods and services.
- When the price level falls, the real value of household wealth rises, and so will consumption and the demand for goods and services.
- The effect of the price level on consumption is called the wealth effect, and it is one reason the aggregate demand curve is downward sloping.
question
The Interest-Rate Effect: How a Change in the Price Level Affects Investment
answer
- When prices rise, households and firms need more money to finance buying and selling.
- Therefore, when the price level rises, households and firms will try to increase the amount of money they hold by withdrawing funds from banks, borrowing from banks, or selling financial assets, such as bonds. These actions tend to drive up the interest rate banks charge on loans and the interest rate on bonds.
- A higher interest rate raises the cost of borrowing for households and firms.
- A higher price level will increase the interest rate and reduce investment spending, thereby reducing the quantity of goods and services demanded.
- A lower price level will decrease the interest rate and increase investment spending, thereby increasing the quantity of goods and services demanded.
- Therefore, when the price level rises, households and firms will try to increase the amount of money they hold by withdrawing funds from banks, borrowing from banks, or selling financial assets, such as bonds. These actions tend to drive up the interest rate banks charge on loans and the interest rate on bonds.
- A higher interest rate raises the cost of borrowing for households and firms.
- A higher price level will increase the interest rate and reduce investment spending, thereby reducing the quantity of goods and services demanded.
- A lower price level will decrease the interest rate and increase investment spending, thereby increasing the quantity of goods and services demanded.
question
The International-Trade Effect: How a Change in the Price Level Affects Net Exports
answer
- Net exports equal spending by foreign households and firms on goods and services produced in the United States minus spending by U.S. households and firms on goods and services produced in other countries.
- If the price level in the United States rises relative to the price levels in other counties, U.S. exports will become relatively more expensive, and foreign imports will become relatively less expensive.
- Some consumers in foreign countries will shift from buying U.S. products to buying domestic products, and some U.S. consumers will also shift from buying U.S. products to buying imported products.
- U.S. exports will fall and U.S. imports will rise, causing net exports to fall, thereby reducing the quantity of goods and services demanded.
- If the price level in the United States rises relative to the price levels in other counties, U.S. exports will become relatively more expensive, and foreign imports will become relatively less expensive.
- Some consumers in foreign countries will shift from buying U.S. products to buying domestic products, and some U.S. consumers will also shift from buying U.S. products to buying imported products.
- U.S. exports will fall and U.S. imports will rise, causing net exports to fall, thereby reducing the quantity of goods and services demanded.
question
The wealth effect refers to the fact that
answer
when the price level falls, the real value of household wealth rises, and so will consumption.
question
The interest rate effect refers to the fact that a higher price level results in
answer
higher interest rates and lower investment.
question
The international-trade effect refers to the fact that an increase in the price level will result in
answer
a decrease in exports and an increase in imports.
question
If the price level changes but other variables that affect the willingness of households, firms, and the government to spend are unchanged,
answer
the result is a movement up or down a stationary aggregate demand curve.
question
If any variable other than the price level changes,
answer
the aggregate demand curve will shift.
question
If the price level increases, then
answer
there will be a movement up along a stationary aggregate demand curve.
question
The variables that cause the aggregate demand curve to shift fall into three categories:
answer
1) Changes in government policies
2) Changes in the expectations of households and firms
3) Changes in foreign variables
2) Changes in the expectations of households and firms
3) Changes in foreign variables
question
Monetary policy
answer
The actions the Federal Reserve takes to manage the money supply and interest rates to achieve macroeconomic policy objectives.
question
Fiscal policy
answer
Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
question
Changes in Government Policies (Variables That Shift the Aggregate Demand Curve)
answer
- The Federal Reserve can lower the cost to firms and households of borrowing by taking actions that reduce interest rates. Lower borrowing costs increase consumption and investment spending, which shifts the aggregate demand curve to the right. Higher interest rates shift the aggregate demand curve to the left.
- An increase in government purchases shifts the aggregate demand curve to the right, and a decrease in government purchases shifts the aggregate demand curve to the left.
- An increase in personal taxes reduces the amount of spendable income available to households, which reduces consumption spending and shifts the aggregate demand curve to the left. A decrease in personal income taxes shifts the aggregate demand curve to the right.
- An increase in business taxes reduces the profitability of investment spending and shifts the aggregate demand curve to the left. A decrease in business taxes shifts the aggregate demand curve to the right.
- An increase in government purchases shifts the aggregate demand curve to the right, and a decrease in government purchases shifts the aggregate demand curve to the left.
- An increase in personal taxes reduces the amount of spendable income available to households, which reduces consumption spending and shifts the aggregate demand curve to the left. A decrease in personal income taxes shifts the aggregate demand curve to the right.
- An increase in business taxes reduces the profitability of investment spending and shifts the aggregate demand curve to the left. A decrease in business taxes shifts the aggregate demand curve to the right.
question
Changes in the Expectations of Households and Firms (Variables That Shift the Aggregate Demand Curve)
answer
- If households become more optimistic about their future incomes, they are likely to increase their current consumption. This increased consumption will shift the aggregate demand curve to the right.
- If households become more pessimistic about their future incomes, the aggregate demand curve will shift to the left.
- Similarly, if firms become more optimistic about the future profitability of investment spending, the aggregate demand curve will shift to the right.
- If firms become more pessimistic, the aggregate demand curve will shift to the left.
- If households become more pessimistic about their future incomes, the aggregate demand curve will shift to the left.
- Similarly, if firms become more optimistic about the future profitability of investment spending, the aggregate demand curve will shift to the right.
- If firms become more pessimistic, the aggregate demand curve will shift to the left.
question
An economics student makes the following statement:
"It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, thereby decreasing total spending in the economy."
This statement is false because the aggregate demand curve is
"It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, thereby decreasing total spending in the economy."
This statement is false because the aggregate demand curve is
answer
downward sloping because as prices rise, consumer real wealth declines, interest rates rise, and exports become more expensive.
question
Changes in Foreign Variables (Variables That Shift the Aggregate Demand Curve)
answer
- If households and firms in other countries buy fewer U.S. goods or if firms and households in the United States buy more foreign goods, net exports will fall, and the aggregate demand curve will shift to the left.
- Net exports will also fall if the exchange rate between the dollar and foreign currencies rises because the price in foreign currency of U.S. products sold in other countries will rise, and the dollar price of foreign products sold in the United States will fall.
- An increase in net exports at every price level will shift the aggregate demand curve to the right.
- Net exports will also fall if the exchange rate between the dollar and foreign currencies rises because the price in foreign currency of U.S. products sold in other countries will rise, and the dollar price of foreign products sold in the United States will fall.
- An increase in net exports at every price level will shift the aggregate demand curve to the right.
question
Explain whether each of the following will cause a shift of the AD curve or a movement along the AD curve.
a) Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in _________________, it will cause a _____________________ the aggregate demand curve.
b) The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in _________________, it will cause a _______________________ the aggregate demand curve.
c) The U.S. economy experience 4 percent inflation. Because this is a change in ___________________, it will cause a ____________________ the aggregate demand curve.
a) Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in _________________, it will cause a _____________________ the aggregate demand curve.
b) The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in _________________, it will cause a _______________________ the aggregate demand curve.
c) The U.S. economy experience 4 percent inflation. Because this is a change in ___________________, it will cause a ____________________ the aggregate demand curve.
answer
a) investment; shift to the right in
b) consumption; shift to the left in
c) the price level; movement along
b) consumption; shift to the left in
c) the price level; movement along
question
Which of the following statements is correct if real GDP in the United States declined by more during the 2007-2009 recession than did real GDP in Canada, China, and other trading partners of the United States?
answer
Imports to the United States fell more than the U.S. exports, leading to an increase in net exports.
question
Which of the following factors DOES NOT cause the aggregate demand curve to shift?
answer
a change in the price level
question
How can government policies shift the aggregate demand curve to the right?
answer
by increasing government purchases
question
The aggregate demand curve slopes downward for all the following reasons except:
answer
A lower price level makes imports from other countries less expensive, and U.S. citizens buy more imports.
question
Increases in personal income taxes or business taxes will make the aggregate demand curve shift
answer
to the left.
question
From August 2009 to May 2017, the Standard & Poor's Index of 500 stock prices increased by more than 135 percent, while the consumer price index increased by less than 15 percent.
These changes would have caused
These changes would have caused
answer
an increase in the real value of household wealth, which shifted the aggregate demand curve to the right.
question
In the long run, the level of real GDP is determined by
answer
the number of workers, the capital stock - including factories, office buildings, and machinery and equipment - and the available technology.
question
Because changes in the price level do not affect the number of workers, the capital stock, or technology,
answer
in the long run, changes in the price level do not affect the level of real GDP.
question
Long-run aggregate supply (LRAS) curve
answer
A curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied.
question
Explain how each of the following events would affect the long-run aggregate supply curve.
a) The price level increases.
Because this is a change in ____________________, the LRAS curve will __________________.
b) The labor force increases.
Because this is a change in __________________________________, the LRAS wiIl _____________________.
c) There is an increase in the quantity of capital goods.
Because this is a change in _________________________________, the LRAS will _______________________.
d) Technological change occurs.
Because this is a change in _______________________________, the LRAS will _________________________.
a) The price level increases.
Because this is a change in ____________________, the LRAS curve will __________________.
b) The labor force increases.
Because this is a change in __________________________________, the LRAS wiIl _____________________.
c) There is an increase in the quantity of capital goods.
Because this is a change in _________________________________, the LRAS will _______________________.
d) Technological change occurs.
Because this is a change in _______________________________, the LRAS will _________________________.
answer
a) the price level; not change
b) the productive capacity of the economy; shift to the right
c) the productive capacity of the economy; shift to the right
d) the productive capacity of the economy; shift to the right
b) the productive capacity of the economy; shift to the right
c) the productive capacity of the economy; shift to the right
d) the productive capacity of the economy; shift to the right
question
Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
answer
- technological change
- an increase in the number of workers in the economy
- the accumulation of more machinery and equipment
- All of the above
- an increase in the number of workers in the economy
- the accumulation of more machinery and equipment
- All of the above
question
While the LRAS curve is vertical, the SRAS curve is upward sloping because, over the short run,
answer
as the price level increases, the quantity of goods and services firms are willing to supply will increase.
question
Menu costs
answer
The costs to firms of changing prices.
question
Why does the short-run aggregate supply curve slope upward?
answer
Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.
question
Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
answer
- because contracts between workers and firms make some wages and prices "sticky"
- because firms are often slow to adjust wages
- because menu costs make some prices "sticky"
- All of the above
- because firms are often slow to adjust wages
- because menu costs make some prices "sticky"
- All of the above
question
What is the effect of an increase in the price level on the short-run aggregate supply curve?
answer
a movement up along a stationary curve
question
Increases in the Labor Force and in the Capital Stock (Variables That Shift the Short-Run Aggregate Supply Curve)
answer
- A firm will supply more output at every price if it has more workers and more physical capital.
- So, as the labor force and the capital stock grow, firms will supply more output at every price level, and the short-run aggregate supply curve will shift to the right.
- So, as the labor force and the capital stock grow, firms will supply more output at every price level, and the short-run aggregate supply curve will shift to the right.
question
Technological Change (Variables That Shift the Short-Run Aggregate Supply Curve)
answer
- As positive technological change takes place, the productivity of workers and machinery increases, which means firms can produce more goods and services with the same amount of labor and machinery.
- This increase in productivity reduces the firms' costs of production and allows them to produce more output at every price level.
- As a result, the short-run aggregate supply curve shifts to the right.
- This increase in productivity reduces the firms' costs of production and allows them to produce more output at every price level.
- As a result, the short-run aggregate supply curve shifts to the right.
question
Expected Changes in the Future Price Level (Variables That Shift the Short-Run Aggregate Supply Curve)
answer
- If workers and firms believe that the price level is going to increase by 3 percent during the next year, they will try to adjust their wages and prices accordingly.
- For instance, if a labor union believes there will be 3 percent inflation next year, it knows that wages must rise 3 percent to preserve the purchasing power of those wages.
- For instance, if a labor union believes there will be 3 percent inflation next year, it knows that wages must rise 3 percent to preserve the purchasing power of those wages.
question
Adjustments of Workers and Firms to Errors in Past Expectations about the Price Level (Variables That Shift the Short-Run Aggregate Supply Curve)
answer
- Workers and firms sometimes make incorrect predictions about the price level. As time passes, they will attempt to compensate for these errors.
- If workers and firms across the economy are adjusting to the price level being higher than expected, the SRAS curve will shift to the left.
- If they are adjusting to the price level being lower than expected, the SRAS curve will shift to the right.
- If workers and firms across the economy are adjusting to the price level being higher than expected, the SRAS curve will shift to the left.
- If they are adjusting to the price level being lower than expected, the SRAS curve will shift to the right.
question
Supply shock
answer
An unexpected event that causes the short-run aggregate supply curve to shift.
question
Unexpected Changes in the Price of an Important Natural Resource (Variables That Shift the Short-Run Aggregate Supply Curve)
answer
- Supply shocks are often caused by unexpected increases or decreases in the prices of important natural resources that cause firms' costs to be different from what they had expected.
- Because firms face rising costs, they will supply the same level of output only if they receive higher prices, and the short-run aggregate supply curve will shift to the left.
- Because firms face rising costs, they will supply the same level of output only if they receive higher prices, and the short-run aggregate supply curve will shift to the left.
question
Which of the following causes the short-run aggregate supply curve to shift to the right?
answer
a positive technological change
question
Which of the following causes the short-run aggregate supply curve to shift to the left?
answer
an increase in the expected price of an important natural resource
question
The long-run aggregate supply curve is vertical because in the long run,
answer
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
question
The short-run aggregate supply curve slopes upward because of all the following reasons except
answer
in the short run, an unexpected change in the price of an important resource can change the cost to firms.
question
Consider the following information about menu costs.
Menu costs are
Menu costs are
answer
the costs to firms of changing prices.
question
If menu costs were eliminated, the short-run aggregate supply curve will be _____________________ because of __________________________________.
answer
upward sloping; wage price stickiness and slow wage adjustment by firms
question
Which one of the following is NOT true when the economy is in macroeconomic equilibrium?
answer
When the economy is at long-run equilibrium, firms will have excess capacity.
question
Stagflation
answer
A combination of inflation and recession, usually resulting from a supply shock.
question
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
answer
a recession in the short run and a decline in the price level in the long run.
question
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.
answer
an increase; an increase
question
Which of the following is usually the cause of stagflation?
answer
a supply shock as a result of an unexpected increase in the price of a natural resource
question
A supply shock is
answer
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.
question
Stagflation is a
answer
combination of inflation and recession.
question
Stagflation occurs when
answer
a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP.
question
Potential GDP
answer
The level of real GDP attained when all firms are producing at capacity.
question
Find out which one of the following is NOT one of the key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model.
answer
In the dynamic AD-AS model, the economy does not experience long-run growth, whereas in the basic AD-AS model, the economy experiences both continuing inflation and growth.
question
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be ___________________.
answer
inflation
question
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be ____________________.
answer
recession
question
How does the dynamic model of aggregate supply and aggregate demand explain inflation?
answer
by showing that if total spending in the economy grows faster than total production, prices will rise
question
Several factors combined to cause the recession of 2007-2009:
answer
1) The end of the housing bubble
2) The financial crisis
3) The rapid increase in oil prices during 2008
2) The financial crisis
3) The rapid increase in oil prices during 2008
question
Which of the following factors brought on the recession of 2007-2009?
answer
- A rapid increase in the price of oil.
- The end of the housing bubble.
- The financial crisis.
- All of the above.
- The end of the housing bubble.
- The financial crisis.
- All of the above.
question
The 2007-2009 recession was a clear example of
answer
the effect that a decrease in aggregate demand can have on the economy.
question
In a speech in late 2011, President Barack Obama argued that:
"Probably the single greatest cause of the financial crisis and this brutal recession has been the housing bubble that burst four years ago."
By "housing bubble" President Obama referred to an increase in the price of housing caused by
"Probably the single greatest cause of the financial crisis and this brutal recession has been the housing bubble that burst four years ago."
By "housing bubble" President Obama referred to an increase in the price of housing caused by
answer
an increase in the demand for housing based on the expectation that prices will continue to increase.
question
The end of the housing bubble can bring on a recession because
answer
reduced demand for housing lowers investment, which in turn lowers aggregate demand and income.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
