ECON CH 13 & 14 - Assignment Essays

question

Real GDP per capita

answer

is real GDP divided by the population size

question

Real GDP

answer

used to separate changes in the quantity of goods and services from the effects of a rising price level.

question

Real GDP per capita

answer

used to isolate the effect of changes in population

question

GDP grew

answer

when the level of real GDP increases

question

Rule of 70

answer

tells us that the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable's annual growth rate

question

Rule of 70 formula

answer

number of years to double = 70/growth rate

question

Real GDP per capita

answer

Is what economist use to measure economic progress

question

China and India have higher growth rates than the U.S., but the typical Chinese or Indian household is poorer than the typical U.S. household because India and China have high growth rates.

answer

False, since they are not yet caught up, their living standard is still lower than the typical American household

question

Labor productivity, or productivity

answer

output per worker

question

Productivity

answer

simply GDP divided by the number of people working

question

Physical capital

answer

consist of human-made resources such as buildings and machines

question

Human capital

answer

improvement in labor created by the education and knowledge embodied in the workforce.

question

Technological progress

answer

advance in the technical means of the production of goods and services

question

The aggregate production function

answer

a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology

question

diminishing returns to physical capital

answer

in an aggregate production function when the amount of human capital per worker and the state of technology are held fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity.

question

growth accounting

answer

estimates the contribution of each major factor in the aggregate production function to economic growth

question

3% a year

answer

Amount of physical capital per worker growth

question

total factor productivity

answer

the amount of output that can be achieved with a given amount of factor inputs

question

The effect of technological progress, assuming that physical and human capital are unchanged, is to ________ in the rate of productivity.

answer

Increase. Significant technological progress will result in a positive growth rate of productivity even though physical capital per worker and human capital per worker are unchanged.

question

What effect does an increase in physical capital per worker have on the rate of productivity, if human capital per worker and technology are unchanged?

answer

There is a decrease in the growth rate of productivity, but it remains positive due to diminishing returns to physical capital.

question

why growth rates differ

answer

1. savings and investment spending
2. education
3. research and development

question

research and development (R&D)

answer

is spending to create and implement new technologies

question

infraestructure

answer

is the roads, power lines, ports, information networks, and other underpinnings for economic activity

question

Government policies to promote economic growth

answer

1. Government subsidies to infrastructure
2. Government subsidies to education
3. Government subsidies to R&D
4. Mantaining a well-functioning financial system.

question

Role of Government in Promoting economic growth

answer

1. government policies
2. protection of property rights
3. political stability and good governance

question

The New Growth Theory

answer

Founded by Paul Romer in the 1980's and 1990's. A theory of economic growth that examines the factors that determine why technology, research, innovation, and the like are undertaken and how they interact.

question

True or False? Countries with low rates of domestic savings usually have the highest growth rates.

answer

False, a country with high domestic savings is able to achieve a high rate of investment spending as a percent of GDP. This allows the country to achieve a high growth rate.

question

During the 1990s in the former U.S.S.R., a lot of property was seized and controlled by those in power. How might this have affected the country's growth rate?

answer

This would have decreased the country's growth rate.
The growth rate would fall because the lack of property rights would have dissuaded people from making investments in productive capacity.

question

East Asia's spectacular growth was generated by

answer

high savings and investment spending rates, emphasis on education, and adoption of technological advances from other countries.

question

major factors in the slow growth of Latin America.

answer

Poor education, political instability and irresponsible government policies

question

In sub-Saharan Africa, severe instability, war and poor infrastructure resulted in

answer

catastrophic failure of growth. But economic performance in recent years has been much better than in preceding years.

question

The convergence hypothesis (international differences in real GDP per capita tend to narrow over time)

answer

seems to hold only when other things that affect economic growth - such as education, infrastructure, property rights and so on - are held equal.

question

True or False? It is impossible for the Asian economies to sustain their recent high rates of productivity growth.

answer

False, If Asian economies continue investing in human capital, if savings rates continue to be high, and if governments invest in infrastructure, productivity growth can continue at a high rate.

question

standard of living

answer

It is the best predictor of future growth together with high rates of savings and investment.

question

True or False? A policy that provides funding for basic infrastructure in Africa is the only factor needed for Africa to achieve economic growth.

answer

False, it also needs political and financial stability. Policies should address all areas.

question

Is world growth sustainable?

answer

Long-run economic growth is sustainable if it can continue in the face of the limited supply of natural resources and the impact of growth on the environment

question

Why the limits to growth arising from environmental degradation are more difficult to overcome ?

answer

because overcoming them requires effective government intervention.

question

The emission of greenhouse gases is clearly ...

answer

linked to growth, and limiting them will require some reduction in growth.

question

True or False? Economists are more concerned about the limits to growth imposed by resource scarcity than those imposed by environmental degradation.

answer

False. Economists are typically more concerned about environmental degradation than resource scarcity because the price response tends to alleviate the limits imposed by resource scarcity through conservation and the development of alternatives. Environmental degradation involves a negative externality, which must be addressed by effective government intervention.

question

True or False? Economic growth results in increased greenhouse gas emissions, and reducing those emissions would severely limit economic growth.

answer

False. Growth does increase a country's greenhouse gas emissions, but most estimates indicate that a large reduction in emissions will result in only a modest decrease in growth.

question

True or False? Both rich countries and emerging countries are willing to share the costs of reducing greenhouse emissions.

answer

False. The international burden of sharing emissions reduction is contentious because rich countries are reluctant to pay the costs of reducing their emissions only to see newly emerging countries like China rapidly increase their emissions. Yet most of the current accumulation of gases is due to the past actions of rich countries. Poorer countries are equally reluctant to sacrifice their growth to pay for the past actions of rich countries.

question

Growth

answer

is measured as changes in real GDP per capita to eliminate the effects of changes in the price level and changes in population size. Levels of real GDP per capita vary greatly around the world.

question

The key to long-run economic growth is

answer

rising labor productivity, or just productivity, which is output per worker.

question

Increases in productivity arise from increases in

answer

physical capital per worker and human capital per worker as well as advances in technology.

question

The aggregate production function shows

answer

how real GDP per worker depends on physical capital, human capital and technology.

question

Growth is measured as

answer

changes in real GDP per capita to eliminate the effects of changes in the price level and changes in population size. Levels of real GDP per capita vary greatly around the world.

question

According to the Rule of 70, the number of years it takes for real GDP per capita to double is

answer

equal to 70 divided by the annual growth rate of real GDP per capita.

question

Other things equal, there are diminishing returns to physical capital:

answer

holding human capital per worker and technology fixed, each successive addition to physical capital per worker yields a smaller increase in productivity than the one before.

question

Growth accounting

answer

estimates the contribution of each factor to a country's economic growth, has shown that rising total factor productivity is key to long-run growth. It is usually interpreted as the effect of technological progress.

question

The large differences in countries' growth rates

answer

are largely due to differences in their rates of accumulation of physical and human capital as well as differences in technological progress.

question

the convergence hypothesis fits the data only

answer

when factors that affect growth, such as education, infrastructure, and favorable policies and institutions, are held equal across countries.

question

Economists generally believe that environmental degradation poses a greater challenge to

answer

sustainable long-run economic growth than does natural resource scarcity.

question

The emission of greenhouse gases

answer

is clearly linked to growth, and limiting them will require some reduction in growth. However, the best available estimates suggest that a large reduction in emissions would require only a modest reduction in the growth rate.

question

The aggregate demand curve

answer

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households (C), businesses (I), the government (G), and the rest of the world (X - IM).

question

Agregate demand curve formula

answer

GDP=C+I+G+X-IM

question

The aggregate demand curve

answer

The curve is downward-sloping due to the wealth effect of a change in the aggregate price level and the interest rate effect of a change in the aggregate price level.

question

Two Reasons for the Downward Sloping Aggregate Demand Curve

answer

1. Wealth effect of a change in the aggregate price level
2. Interest rate effect of a change in the aggregate price level

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Wealth effect of a change in the aggregate price level

answer

is the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumer's assets.

question

Interest rate effect of a change in the aggregate price level

answer

is when a rise in the interest rate reduces investment spending because the cost of borrowing is higher. It also reduces consumer spending because households save more of their disposable income.

question

The aggregate demand curve shifts because of:

answer

changes in expectations
changes in wealth
the existing stock of physical capital
government policies like fiscal policy & monetary policy

question

A rise in the interest rate caused by a change in monetary policy causes:

answer

a leftward shift of the aggregate demand curve. A higher interest rate decreases investment and consumption at every price level, so the aggregate demand curve shifts to the left.

question

A fall in the real value of money in the economy due to a higher aggregate price level causes:

answer

a movement up along the aggregate demand curve. As the price level rises, the real value of money holdings falls. This is the interest rate effect of a change in the aggregate price level: as the value of money falls people want to hold more money, so they borrow more and lend less. This increases interest rates and reduces consumer and investment spending. So this is a movement along the aggregate demand curve.

question

Expectations of a poor job market next year causes:

answer

a leftward shift of the aggregate demand curve. The aggregate demand curve shifts to the left because expectations of a poor job market and lower incomes will reduce spending today.

question

A fall in tax rates causes:

answer

a rightward shift of the aggregate demand curve.

question

A rise in the real value of assets in the economy due to a lower aggregate price level causes:

answer

a movement down along the aggregate demand curve. As the price level falls, the real value of assets rises. This is the wealth effect of a change in the price level: as the value of assets rises, people will increase their consumption plans. This leads to higher consumption spending and a movement down the aggregate demand curve.

question

A rise in the real value of assets in the economy due to a surge in real estate values causes:

answer

a rightward shift of the aggregate demand curve. The aggregate demand curve shifts because an increase in the value of assets due to an increase in real estate values raises consumer spending at any price level.

question

The aggregate supply curve shows

answer

the relationship between the aggregate price level and the quantity of aggregate output in the economy.

question

The short-run aggregate supply curve shows

answer

the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed.

question

The nominal wage

answer

is the dollar amount of the wage paid.

question

Sticky wages

answer

are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.

question

Why are Some nominal wages are flexible in the short run ?

answer

because some workers are not covered by a contractor or agreement with employers.

question

How the average nominal wage behave when there is a steep rise in unemployment?

answer

Falls

question

How is the short-run aggregate supply curve despite complications?

answer

Upward sloping

question

Why does the short-run aggregate supply curve shifts?

answer

Because of: changes in commodity prices, changes in nominal wages and changes in productivity.

question

Factors that lead to changes in producers profits:

answer

changes in commodity prices, nominal wages and in productivity

question

The long-run aggregate supply curve:

answer

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

question

Potential output

answer

the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.

question

Long-run economic growth

answer

growth that takes place over decades.

question

A rise in CPI leads producers to increase output. This represents a:

answer

movement along the SRAS curve because the CPI, like the GDP deflator, is a measure of the aggregate price level of final goods and services in the economy.

question

A fall in the price of oil leads producers to increase output. This represents a:

answer

Shift in the SRAS curve, because oil is a commodity. The SRAS curve will shift to the right because production costs are lower now, leading to a higher quantity of output supplied at any given price level.

question

A rise in legally mandated retirement benefits paid to workers leads producers to reduce output. This represents a:

answer

Shift in the SRAS curve, because it involves a change in nominal wages. An increase in benefits to workers is equivalent to an increase in nominal wages. As a result the SRAS curve will shift leftward because production cost are now higher, leading to a lower quantity of aggregate output supplied at any given aggregate price level.

question

Assume that an economy is initially at potential output. The aggregate output supplied increases due to an increase in aggregate price level. This represents a:

answer

Movement along the SRAS curve. If the prices level and the quantity of output supplied both increase, this is caused by a movement along the SRAS.

question

The AS-AD Model

answer

uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations

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Short-run macroeconomic equilibirium.

answer

The economy is in __________________ when the quantity of aggregate output supplied is equal to the quantity demanded.

question

short-run equilibrium aggregate price level

answer

the aggregate price level in the short-run macroeconomic equilibrium

question

short-run equilibrium aggregate output

answer

is the quantity of aggregate output produced in the short-run macroeconomic equilibrium

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Demand shock

answer

is an event that shifts the aggregate demand curve.

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Supply shock

answer

is an event that shifts the short-run aggregate supply curve.

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Stagflation

answer

is the combination of inflation and falling aggregate output.

question

long-run macroeconomic equilibrium

answer

when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve

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recessionary gap

answer

when aggregate output is below potential output

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Inflationary gap

answer

when aggregate output is above potential output

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output gap

answer

is the percentage difference between actual aggregate output and potential output

question

output gap formula

answer

((actual aggregate output - potential output)/potential output) X 100

question

The economy is self-correcting when

answer

shocks to aggregate demand affect aggregate output in the short run but not in the long run

question

The AD-AS model says that:

answer

either a negative demand shock or a positive supply shock should lead to a fall int he aggregate price level, that is, deflation.

question

Recessions are mainly caused by:

answer

Demand shocks

question

What happens when a negative supply shock does happen?

answer

Recession tends to be particularly severe. This is because macroeconomic policy has a much harder time dealing with supply shocks than with demand shocks.

question

The government sharply increases the minimum wage, raising the wages of many workers. This causes a(n) ______ in output as measured by real GDP and a(n) ______ in the price level.

answer

decrease; increase. An increase in the minimum wage raises the nominal wage and shifts the short-run aggregate supply curve to the left. As a result of this negative supply shock, output decreases and the price level increases.

question

Solar energy firms launch a major program of investment spending. This causes a(n) ______ in output as measured by real GDP and a(n) ______ in the price level.

answer

Increase; increase. Increased investment increases aggregate demand, which causes an increase in output and the price level.

question

Congress raises taxes and cuts spending. This causes a(n) ______ in output as measured by real GDP and a(n) ______ in the price level.

answer

Decrease; decrease. Higher taxes and less government spending decrease aggregate demand, which causes a decrease in both output and the price level.

question

Severe weather destroys crops around the world. This causes a(n) ______ in output as measured by real GDP and a(n) ______ in the price level.

answer

Decrease; increase. This is a negative supply shock which decreases short-run aggregate supply. The decrease in SRAS decreases output and increases the price level.

question

True or False? A rise in productivity increases potential output, but demand for the additional output will be insufficient in the long run.

answer

False. As long-run growth increases potential output, the long-run aggregate supply curve shifts to the right. If, in the short run, there is now a recessionary gap, nominal wages will fall, shifting the SRAS to the right. As prices fall, we move down the aggregate demand curve until actual output is equal to potential output

question

Stabilization policy

answer

is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions

question

policy in the face of supply shocks

answer

there are no easy policies to shift the short-run aggregate supply curve.

question

Policy dilemma

answer

a policy that counteracts the fall in aggregate output by increasing aggregate demand will lead to higher inflation, but a policy that counteracts inflation by reducing aggregate demand will deepen the output slump.

question

Sir John Maynar Keynes

answer

Father of macroeconomics

question

Has the economy actually become more stable since the government began trying to stabilize it?

answer

Yes

question

"Expansionary monetary or fiscal policy does nothing but temporarily over stimulate the economy—you have a brief high, but then you have the pain of inflation." Which statement below best describes how the AS-AD model represents this statement?
a) The policy causes the AD curve to shift to the right, causing aggregate price and output to rise. After a period of time nominal wages rise, shifting the AS curve to the left until output falls back to potential output.
b) The policy causes a movement along the AD curve which increases prices. After time the prices fall back to their initial levels.
c) The policy causes the AS curve to shift to the right causing prices and output to rise. After a period of time nominal wages rise and output falls back to potential output but prices remain elevated.

answer

The policy causes the AD curve to shift to the right, causing aggregate price and output to rise. After a period of time nominal wages rise, shifting the AS curve to the left until output falls back to potential output.
If expansionary monetary or fiscal policy is implemented when the economy is in long-run macroeconomic equilibrium, then aggregate demand increases to create an inflationary gap, with higher output and prices. Eventually nominal wages will increase and shift the SRAS to the left, returning output to potential output.

question

True or False? In 2008, after the collapse of the housing bubble and the sharp rise in the price of commodities, especially oil, the appropriate policy for the Fed was to lower interest rates.

answer

Uncertain. Those within the Fed who advocated lowering interest rates were focused on boosting aggregate demand in order to counteract the negative demand shock caused by the collapse of the housing bubble. Lowering interest rates will result in a rightward shift of the aggregate demand curve, increasing aggregate output, but raising the aggregate price level. Those within the Fed who advocated holding interest rates steady were focused on the fact that fighting the slump in aggregate demand in the face of a negative supply shock could result in a rise in inflation. Holding interest rates steady relies on the ability of the economy to self-correct in the long run, with the aggregate price level and aggregate output only gradually returning to their levels before the negative supply shock.

1 of 110

question

Real GDP per capita

answer

is real GDP divided by the population size

question

Real GDP

answer

used to separate changes in the quantity of goods and services from the effects of a rising price level.

question

Real GDP per capita

answer

used to isolate the effect of changes in population

question

GDP grew

answer

when the level of real GDP increases

question

Rule of 70

answer

tells us that the time it takes a variable that grows gradually over time to double is approximately 70 divided by that variable's annual growth rate

question

Rule of 70 formula

answer

number of years to double = 70/growth rate

question

Real GDP per capita

answer

Is what economist use to measure economic progress

question

China and India have higher growth rates than the U.S., but the typical Chinese or Indian household is poorer than the typical U.S. household because India and China have high growth rates.

answer

False, since they are not yet caught up, their living standard is still lower than the typical American household

question

Labor productivity, or productivity

answer

output per worker

question

Productivity

answer

simply GDP divided by the number of people working

question

Physical capital

answer

consist of human-made resources such as buildings and machines

question

Human capital

answer

improvement in labor created by the education and knowledge embodied in the workforce.

question

Technological progress

answer

advance in the technical means of the production of goods and services

question

The aggregate production function

answer

a hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology

question

diminishing returns to physical capital

answer

question

growth accounting

answer

estimates the contribution of each major factor in the aggregate production function to economic growth

question

3% a year

answer

Amount of physical capital per worker growth

question

total factor productivity

answer

the amount of output that can be achieved with a given amount of factor inputs

question

The effect of technological progress, assuming that physical and human capital are unchanged, is to ________ in the rate of productivity.

answer

Increase. Significant technological progress will result in a positive growth rate of productivity even though physical capital per worker and human capital per worker are unchanged.

question

What effect does an increase in physical capital per worker have on the rate of productivity, if human capital per worker and technology are unchanged?

answer

There is a decrease in the growth rate of productivity, but it remains positive due to diminishing returns to physical capital.

question

why growth rates differ

answer

1. savings and investment spending
2. education
3. research and development

question

research and development (R&D)

answer

is spending to create and implement new technologies

question

infraestructure

answer

is the roads, power lines, ports, information networks, and other underpinnings for economic activity

question

Government policies to promote economic growth

answer

1. Government subsidies to infrastructure
2. Government subsidies to education
3. Government subsidies to R&D
4. Mantaining a well-functioning financial system.

question

Role of Government in Promoting economic growth

answer

1. government policies
2. protection of property rights
3. political stability and good governance

question

The New Growth Theory

answer

question

True or False? Countries with low rates of domestic savings usually have the highest growth rates.

answer

False, a country with high domestic savings is able to achieve a high rate of investment spending as a percent of GDP. This allows the country to achieve a high growth rate.

question

During the 1990s in the former U.S.S.R., a lot of property was seized and controlled by those in power. How might this have affected the country's growth rate?

answer

This would have decreased the country's growth rate.
The growth rate would fall because the lack of property rights would have dissuaded people from making investments in productive capacity.

question

East Asia's spectacular growth was generated by

answer

high savings and investment spending rates, emphasis on education, and adoption of technological advances from other countries.

question

major factors in the slow growth of Latin America.

answer

Poor education, political instability and irresponsible government policies

question

In sub-Saharan Africa, severe instability, war and poor infrastructure resulted in

answer

catastrophic failure of growth. But economic performance in recent years has been much better than in preceding years.

question

The convergence hypothesis (international differences in real GDP per capita tend to narrow over time)

answer

seems to hold only when other things that affect economic growth - such as education, infrastructure, property rights and so on - are held equal.

question

True or False? It is impossible for the Asian economies to sustain their recent high rates of productivity growth.

answer

False, If Asian economies continue investing in human capital, if savings rates continue to be high, and if governments invest in infrastructure, productivity growth can continue at a high rate.

question

standard of living

answer

It is the best predictor of future growth together with high rates of savings and investment.

question

True or False? A policy that provides funding for basic infrastructure in Africa is the only factor needed for Africa to achieve economic growth.

answer

False, it also needs political and financial stability. Policies should address all areas.

question

Is world growth sustainable?

answer

Long-run economic growth is sustainable if it can continue in the face of the limited supply of natural resources and the impact of growth on the environment

question

Why the limits to growth arising from environmental degradation are more difficult to overcome ?

answer

because overcoming them requires effective government intervention.

question

The emission of greenhouse gases is clearly ...

answer

linked to growth, and limiting them will require some reduction in growth.

question

True or False? Economists are more concerned about the limits to growth imposed by resource scarcity than those imposed by environmental degradation.

answer

question

True or False? Economic growth results in increased greenhouse gas emissions, and reducing those emissions would severely limit economic growth.

answer

False. Growth does increase a country's greenhouse gas emissions, but most estimates indicate that a large reduction in emissions will result in only a modest decrease in growth.

question

True or False? Both rich countries and emerging countries are willing to share the costs of reducing greenhouse emissions.

answer

question

Growth

answer

is measured as changes in real GDP per capita to eliminate the effects of changes in the price level and changes in population size. Levels of real GDP per capita vary greatly around the world.

question

The key to long-run economic growth is

answer

rising labor productivity, or just productivity, which is output per worker.

question

Increases in productivity arise from increases in

answer

physical capital per worker and human capital per worker as well as advances in technology.

question

The aggregate production function shows

answer

how real GDP per worker depends on physical capital, human capital and technology.

question

Growth is measured as

answer

changes in real GDP per capita to eliminate the effects of changes in the price level and changes in population size. Levels of real GDP per capita vary greatly around the world.

question

According to the Rule of 70, the number of years it takes for real GDP per capita to double is

answer

equal to 70 divided by the annual growth rate of real GDP per capita.

question

Other things equal, there are diminishing returns to physical capital:

answer

holding human capital per worker and technology fixed, each successive addition to physical capital per worker yields a smaller increase in productivity than the one before.

question

Growth accounting

answer

question

The large differences in countries' growth rates

answer

are largely due to differences in their rates of accumulation of physical and human capital as well as differences in technological progress.

question

the convergence hypothesis fits the data only

answer

when factors that affect growth, such as education, infrastructure, and favorable policies and institutions, are held equal across countries.

question

Economists generally believe that environmental degradation poses a greater challenge to

answer

sustainable long-run economic growth than does natural resource scarcity.

question

The emission of greenhouse gases

answer

question

The aggregate demand curve

answer

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households (C), businesses (I), the government (G), and the rest of the world (X - IM).

question

Agregate demand curve formula

answer

GDP=C+I+G+X-IM

question

The aggregate demand curve

answer

The curve is downward-sloping due to the wealth effect of a change in the aggregate price level and the interest rate effect of a change in the aggregate price level.

question

Two Reasons for the Downward Sloping Aggregate Demand Curve

answer

1. Wealth effect of a change in the aggregate price level
2. Interest rate effect of a change in the aggregate price level

question

Wealth effect of a change in the aggregate price level

answer

is the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumer's assets.

question

Interest rate effect of a change in the aggregate price level

answer

is when a rise in the interest rate reduces investment spending because the cost of borrowing is higher. It also reduces consumer spending because households save more of their disposable income.

question

The aggregate demand curve shifts because of:

answer

changes in expectations
changes in wealth
the existing stock of physical capital
government policies like fiscal policy & monetary policy

question

A rise in the interest rate caused by a change in monetary policy causes:

answer

a leftward shift of the aggregate demand curve. A higher interest rate decreases investment and consumption at every price level, so the aggregate demand curve shifts to the left.

question

A fall in the real value of money in the economy due to a higher aggregate price level causes:

answer

question

Expectations of a poor job market next year causes:

answer

a leftward shift of the aggregate demand curve. The aggregate demand curve shifts to the left because expectations of a poor job market and lower incomes will reduce spending today.

question

A fall in tax rates causes:

answer

a rightward shift of the aggregate demand curve.

question

A rise in the real value of assets in the economy due to a lower aggregate price level causes:

answer

question

A rise in the real value of assets in the economy due to a surge in real estate values causes:

answer

question

The aggregate supply curve shows

answer

the relationship between the aggregate price level and the quantity of aggregate output in the economy.

question

The short-run aggregate supply curve shows

answer

the relationship between the aggregate price level and the quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed.

question

The nominal wage

answer

is the dollar amount of the wage paid.

question

Sticky wages

answer

are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.

question

Why are Some nominal wages are flexible in the short run ?

answer

because some workers are not covered by a contractor or agreement with employers.

question

How the average nominal wage behave when there is a steep rise in unemployment?

answer

Falls

question

How is the short-run aggregate supply curve despite complications?

answer

Upward sloping

question

Why does the short-run aggregate supply curve shifts?

answer

Because of: changes in commodity prices, changes in nominal wages and changes in productivity.

question

Factors that lead to changes in producers profits:

answer

changes in commodity prices, nominal wages and in productivity

question

The long-run aggregate supply curve:

answer

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

question

Potential output

answer

the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.

question

Long-run economic growth

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growth that takes place over decades.

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A rise in CPI leads producers to increase output. This represents a:

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movement along the SRAS curve because the CPI, like the GDP deflator, is a measure of the aggregate price level of final goods and services in the economy.

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A fall in the price of oil leads producers to increase output. This represents a:

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A rise in legally mandated retirement benefits paid to workers leads producers to reduce output. This represents a:

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Assume that an economy is initially at potential output. The aggregate output supplied increases due to an increase in aggregate price level. This represents a:

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Movement along the SRAS curve. If the prices level and the quantity of output supplied both increase, this is caused by a movement along the SRAS.

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The AS-AD Model

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uses the aggregate supply curve and the aggregate demand curve together to analyze economic fluctuations

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Short-run macroeconomic equilibirium.

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The economy is in __________________ when the quantity of aggregate output supplied is equal to the quantity demanded.

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short-run equilibrium aggregate price level

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the aggregate price level in the short-run macroeconomic equilibrium

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short-run equilibrium aggregate output

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is the quantity of aggregate output produced in the short-run macroeconomic equilibrium

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Demand shock

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is an event that shifts the aggregate demand curve.

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Supply shock

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is an event that shifts the short-run aggregate supply curve.

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Stagflation

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is the combination of inflation and falling aggregate output.

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long-run macroeconomic equilibrium

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when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve

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recessionary gap

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when aggregate output is below potential output

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Inflationary gap

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when aggregate output is above potential output

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output gap

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is the percentage difference between actual aggregate output and potential output

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output gap formula

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((actual aggregate output - potential output)/potential output) X 100

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The economy is self-correcting when

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shocks to aggregate demand affect aggregate output in the short run but not in the long run

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The AD-AS model says that:

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either a negative demand shock or a positive supply shock should lead to a fall int he aggregate price level, that is, deflation.

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Recessions are mainly caused by:

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Demand shocks

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What happens when a negative supply shock does happen?

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Recession tends to be particularly severe. This is because macroeconomic policy has a much harder time dealing with supply shocks than with demand shocks.

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The government sharply increases the minimum wage, raising the wages of many workers. This causes a(n) ______ in output as measured by real GDP and a(n) ______ in the price level.

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Solar energy firms launch a major program of investment spending. This causes a(n) ______ in output as measured by real GDP and a(n) ______ in the price level.

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Increase; increase. Increased investment increases aggregate demand, which causes an increase in output and the price level.

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Congress raises taxes and cuts spending. This causes a(n) ______ in output as measured by real GDP and a(n) ______ in the price level.

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Decrease; decrease. Higher taxes and less government spending decrease aggregate demand, which causes a decrease in both output and the price level.

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Severe weather destroys crops around the world. This causes a(n) ______ in output as measured by real GDP and a(n) ______ in the price level.

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Decrease; increase. This is a negative supply shock which decreases short-run aggregate supply. The decrease in SRAS decreases output and increases the price level.

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True or False? A rise in productivity increases potential output, but demand for the additional output will be insufficient in the long run.

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Stabilization policy

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is the use of government policy to reduce the severity of recessions and rein in excessively strong expansions

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policy in the face of supply shocks

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there are no easy policies to shift the short-run aggregate supply curve.

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Policy dilemma

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Sir John Maynar Keynes

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Father of macroeconomics

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Has the economy actually become more stable since the government began trying to stabilize it?

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Yes

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True or False? In 2008, after the collapse of the housing bubble and the sharp rise in the price of commodities, especially oil, the appropriate policy for the Fed was to lower interest rates.

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