question
The aggregate demand and aggregate supply model explains
answer
short-run fluctuations in real GDP and the price level.
question
The aggregate demand curve shows the relationship between
answer
the price level and the quantity of real GDP 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 increases, then
answer
the economy will move up and to the left along a stationary aggregate demand curve.
question
Which of the following factors does not cause the aggregate demand curve to shift?
answer
a change in the price level
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Which of the following shifts the aggregate demand curve to the right?
answer
lower interest rates
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Which of the following policies affects the economy through intended changes in the money supply and interest rates?
answer
monetary policy
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How can government policies shift the aggregate demand curve to the right?
answer
by increasing government purchases
question
If households become more optimistic about their future incomes, then
answer
the aggregate demand curve will shift to the right.
question
Fill in the blanks. If real GDP in the United States increases faster than real GDP in other countries, U.S. imports will __________ faster than U.S. exports, and net exports will ___________.
answer
increase; fall
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If the exchange rate between the dollar and foreign currencies rises (the dollar rises in value versus foreign currencies), the price in foreign currency of U.S. products will _________ and the U.S. aggregate demand curve will shift to the _________.
answer
rise; left
question
If net exports decrease as a result of a change in the price level in the United States, then
answer
neither the aggregate demand curve nor the short-run aggregate supply curve will shift.
question
Which of the following statements is true?
answer
In the long run, changes in the price level do not affect the level of real GDP.
question
The long-run aggregate supply curve
answer
shifts to the right as technological change occurs.
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Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
answer
all of the above
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Which of the following factors will shift the short-run aggregate supply to the left?
answer
a decrease in the size of the labor force
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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.
they pay for inputs.
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If firms and workers could predict the future price level exactly, the short-run aggregate supply curve would be
answer
the same as the long-run aggregate supply curve.
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Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
answer
all of the above
question
Assume that cotton is the only good produced in the economy. Which of the following would explain why the short-run aggregate supply curve for cotton would be upward sloping?
answer
Cotton demand and cotton prices begin to rise rapidly, but the price of fertilizer—an input into the production of cotton—remains fixed by contract.
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What are menu costs?
answer
the costs to firms of changing prices
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What is the impact of an increase in the price level on the short-run aggregate supply curve?
answer
a movement up and to the right along a stationary curve
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Which of the following causes the short-run aggregate supply curve to shift to the right?
answer
a technological change
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If all workers and firms adjust to the fact that the price level is higher than they had expected it to be,
answer
the short-run aggregate supply curve will shift to the left.
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If oil prices rise unexpectedly,
answer
the short-run aggregate supply curve will shift to the left.
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An unexpected change in the price of oil would be called _________ by economists.
answer
a supply shock
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In the short run, a supply shock as a result of an unexpected decrease in oil prices will
answer
decrease the price level but increase real GDP.
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The economy is in long-run equilibrium when
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the short-run aggregate supply curve and the aggregate demand curve intersect at a point on the long-run aggregate supply curve.
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If firms reduce investment spending and the economy enters a recession, which of the following contributes to the adjustment that causes the economy to return to its long-run equilibrium?
answer
the eventual agreement by workers to accept lower wages
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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.
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Fill in the blanks. 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
Stagflation is
answer
a combination of inflation and recession.
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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
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After a supply shock that shifts the short-run aggregate supply (SRAS) curve to the left, what causes the SRAS to shift to the right until the long-run level of equilibrium output is reached once again?
answer
workers' willingness to accept lower wages and firms' willingness to accept lower prices
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Which of the following is true about the basic or static aggregate demand and aggregate supply model?
answer
The economy does not experience long-run growth.
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To turn the basic model of aggregate demand and aggregate supply into a dynamic model, which of the following assumptions must be made?
answer
All of the above assumption must be made.
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If no other factors that affect the SRAS curve have changed, what impact will increases in the labor force, increases in the capital stock, and technological change have on both the short-run and the long-run aggregate supply?
answer
Over time, both the long-run aggregate supply and the short-run aggregate supply will shift to the
right by the same amount.
right by the same amount.
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
In the dynamic aggregate demand and supply model, which of the following is correct?
answer
If aggregate demand increases more than aggregate supply increases, the price level will rise.
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The recession of 2007-2009 was caused by a decline in aggregate demand. Which factors contributed to this decline?
answer
a "credit crunch" as a result of the collapse of major banks and other financial institutions
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The increases of oil prices in 2008 are best described as shifts of the
answer
short-run aggregate supply curve to the left.
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The 2007-2009 recession was a clear example of
answer
the impact that a decrease in aggregate demand can have on the economy.
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The 1974-1975 recession was a result of
answer
a supply shock that caused a leftward shift of the short-run aggregate supply curve.
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The wealth effect suggests that a fall in the price level will increase consumption spending
by households.
by households.
answer
True
question
As the price level in the United States increases, exports from the United States will also
increase.
increase.
answer
False
question
An increase in taxes will reduce consumption and shift the AD curve to the right.
answer
False
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Because prices do not influence the level of the capital stock, the number of workers, or the level of technology in the long run, changes in the price level will not change the level of
real GDP in the long run.
real GDP in the long run.
answer
True
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Better technology that raises labor productivity will shift the LRAS curve to the right.
answer
True
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When real GDP is equal to potential real GDP, there is no unemployment.
answer
False
question
The LRAS curve is upward sloping because wages of workers rise as prices of final goods
and service rise.
and service rise.
answer
False
question
If workers expect prices to rise, the SRAS curve will shift to the left.
answer
True
question
An unexpected increase in the price of an important natural resource causes a movement up
a stationary SRAS curve.
a stationary SRAS curve.
answer
False
question
Long-run macroeconomic equilibrium occurs where the AD and SRAS curves intersect at a
point on the LRAS curve.
point on the LRAS curve.
answer
True
question
A decrease in AD will reduce real GDP in the short run and in the long run.
answer
False
question
If real GDP is to the left of the LRAS curve, there will be no cyclical unemployment.
answer
False
question
The adjustment from short-run to long-run equilibrium is due to government policy actions.
answer
False
question
When real GDP is at the potential GDP level, then a supply shock will affect the level of
real GDP in both the short run and the long run.
real GDP in both the short run and the long run.
answer
False
question
If AD grows faster than LRAS, prices will decrease.
answer
False
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