True/Falseandexplain

True/FalseandExplain

AggregateSupply

1.Atfullemployment,thereisnounemployment.

2.Alongthe LAS curve, a riseinthepricelevelandallresourcepricesincreasetheaggregatequantityofgoods and services supplied.

3.Alongthe SAS curve, a riseinthepricelevelin-creasestheaggregatequantityofgoodsandservicessupplied.

4.Boththelong-runandshort-runaggregatesupplycurvesshiftrightwardwhenthequantityofcapitalincreases.

5.Anyfactorthatshiftstheshort-runaggregatesup-plycurvealsoshiftsthelong-runaggregatesupplycurve.

AggregateDemand

6.Aggregatedemandequalsconsumptionexpendi-ture plus investment plus government purchases plus exports minus imports.

7.Accordingtothewealtheffect,thelowerthequan-tityofrealwealth,thelargerwillbethequantityofrealGDPdemanded.

8.Theterm“monetarypolicy”referstothegovern-ment’sspendingmoremoneytopurchasemoregoodsandservices.

MacroeconomicEquilibrium

9.Long-run macroeconomic equilibrium occurs when realGDPequalspotentialGDP.

10.In the short run, an increase in expected future profitsraisesthepricelevelandincreasesrealGDP.

11.If the economy is in equilibrium at below fullem-ployment,thereis a recessionarygap.

12.A riseinthemoneywagerateincreasesshort-runaggregatesupply,thatis,shiftstheshort-runaggre-gatesupplycurverightward.

13.IfaggregatedemandincreasessotheeconomyisproducingmoreoutputthanpotentialrealGDP,then,withthepassageoftime,themoneywageratewillriseinresponsetothehigherpricelevel.

U.S.EconomicGrowth,Inflation,andCycles

14.Iftheaggregatedemandcurveshiftsrightwardbymorethantheshort-runaggregatesupplycurveshiftsrightward,thepricelevelrises.

15.Iftheaggregatedemandcurveandtheshort-runaggregatesupplycurvebothshiftrightwardatthesametime,realGDPincreases.

16.ThemainforcesgeneratingpersistentgrowthinrealGDParethosethatcauseincreasesinlong-runaggregatesupply.

MacroeconomicSchoolsofThought

17.Allmacroeconomicschoolsofthoughtagreethattheeconomyisself-regulatingandwouldoperateatfullemploymentifleftalone.

MultipleChoice

AggregateSupply

1.Long-runaggregatesupplyisthelevelofrealGDPatwhich

a.aggregatedemandalwaysequalsshort-runaggre-gate supply.

b.fullemploymentoccurs.

c.morethanfullemploymentoccurs.

d.pricesaresuretorise

2.Alongwhichcurvedomoneywagesandthepricelevelchangeinthesameproportion?

a.Boththe SAS andtheLAS curves.

b.Only the SAS curve.

c.Only the LAS curve.

d.NeithertheSAS curvenortheLAS curve.

3.Long-runaggregatesupplywillincreaseforallthefollowingreasonsEXCEPT

a.reducedmoneywages.

b.increased human capital.

c.introductionofnewtechnology.

d.increasedcapital.

4.A technologicalimprovementshifts

a.boththeSAS and LAS curvesrightward.

b.both the SAS and LAS curvesleftward.

c.theSAS curverightward,butitleavestheLAS

unchanged.

d.theLAS curverightward,butitleavestheSAS

curve unchanged.

5.Anincreaseinthemoneywagerateshifts

a.boththeSAS and LAS curvesrightward.

b.both the SAS and LAS curvesleftward.

c.theSAS curveleftward,butleavesthe LAS curveunchanged.

Use Table 7.1 for the next four questions.

TABLE 7.1

MultipleChoiceQuestions 11, 12, 13, 14

d.theLAS curverightward,butleavesthe SAS

curve unchanged.

Pricelevel

Aggregate

demand(billions of

Short-run

aggregatesupply(billions

Long-run

aggregatesupply(billions of

AggregateDemand

6.Theaggregatedemandcurve(AD)illustratesthat,asthepricelevelfalls,

a.thequantityofrealGDPdemandedincreases.

b.thequantityofrealGDPdemandeddecreases.

c.theADcurveshiftsrightward.

2000dollars)of2000dollars)

2000dollars)

d.theADcurveshiftsleftward.

7.Asthepricelevelrises,thequantityofrealwealth

and the aggregatequantitydemanded.

a.increases;increases

b.increases; decreases

c.decreases;increases

d.decreases;decreases

8.Whichofthefollowingisclassifiedasmonetarypolicy?

a.Thegovernmentchangingtheamountofitspurchases.

b.Thegovernmentchangingitsleveloftaxation.

c.Thegovernmentchanginginterestrates.

d.Thegovernmentfinancing a changeinmoneywages.

9.Whichofthefollowingshiftstheaggregatedemandcurverightward?

a.An increase in expected inflation.

b.An increase in taxes.

c.A fallinthepricelevel.

d.A riseinthepricelevel.

MacroeconomicEquilibrium

10.Short-runmacroeconomicequilibriumoccursatthelevelofGDPwherethe

a.economyisatfullemployment.

b.ADcurveintersectsthe SAS curve.

c.SAS curveintersectsthe LAS curve.

d.ADcurveintersectsthe LAS curve.

11.In the short-runmacroeconomicequilibrium, the

price level isand the level of real GDP is billion.

a. 100; $600

b. 110; $700

c. 120; $600

d. 130; $600

12.In the short run, the economy is in

a.a full-employmentequilibriumandresourcepriceswillnotchange.

b.anabovefull-employmentequilibriumandre-source prices will rise.

c.anabovefull-employmentequilibriumandre-sourcepriceswillfall.

d.a belowfull-employmentequilibriumandre-sourcepriceswillfall.

13.In the short-run equilibrium, there is

a.aninflationarygap of$100 billion.

b.aninflationarygap of$50 billion.

c.a recessionarygap of$50 billion.

d.a recessionarygap of$100 billion.

14.Assuming no changes in aggregatedemandorlong-runaggregatesupply,in thelong-runmacroeco-nomicequilibrium, the price level is and thelevel of real GDP is billion.

a. 100; $600

b. 110; $700

c. 120; $600

d. 130; $600

15.IfrealGDPisgreaterthanpotentialrealGDP,thentheeconomyis

a.notinmacroeconomicequilibrium.

b.in a full-employmentequilibrium.

c.inanabovefull-employmentequilibrium.

d.in a belowfull-employmentequilibrium.

16.A below full-employmentequilibrium can be theresultofthe

a.ADcurveshiftingrightward.

b.SAS curveshiftingrightward.

c.LAS curveshiftingleftward.

d.ADcurveshiftingleftward.

Use Figure 7.4 for the next four questions.

17.Whichofthefollowingfactorsmighthaveshiftedtheaggregatedemandcurverightward?

a.Reducedtaxes

b.Less investment

c.A decreaseingovernmentpurchases

d.Highermoneywages

18.Aftertheaggregatedemandcurvehasshiftedper-

manentlyto AD1,thenewshort-runmacroeco-nomic equilibrium is at point

a.pointa.

b.point b.

c.point c.

d.Nopointidentifiedwith a letterinthefigure.

19.When the economy in Figure 7.4 is moving to itslong-runequilibrium, which curveshifts?

a.TheLAS curveshiftsrightward.

b.The LAS curveshiftsleftward.

c.The SAS curveshiftsrightward.

d.TheSAS curveshiftsleftward.

20.Aftertheaggregatedemandcurvehasshiftedper-

manentlyto AD1,thenewlong-runmacroeconomicequilibrium will be at

a.pointa.

b.point b.

c.point c.

d.Nopointidentifiedwith a letterinthefigure.

U.S.EconomicGrowth,Inflation,andCycles

22.Thefactthattheshort-runaggregatesupplyandaggregatedemandcurvesdonotshiftat a fixed,steadypaceexplains

a.persistentinflation.

b.business cycles.

c.trendgrowthinrealGDP.

d.largegovernmentbudgetdeficits.

23.Persistent inflation is caused by

a.persistentrightwardshiftsintheADcurve.

b.persistentrightwardshiftsinthe SAS curve.

c.thetendencyforlong-runaggregatesupplytoincreasefasterthanaggregatedemand.

d.persistentleftwardshiftsintheSAS and AD

curves.

MacroeconomicSchoolsofThought

23.Whichschoolofthoughtsaysthatexpectationsarethemostimportantinfluenceonaggregatedemand?

a.Keynesian school

b.classicalschool

c.monetaristschool

d.BothKeynesianandmonetaristschools

24.Whichschoolofthoughtbelievestheeconomyisself-regulating?

a.Keynesian school

b.classicalschool

c.monetaristschool

d.Bothclassicalandmonetaristschools

ShortAnswerProblems

1.Why is the LAS curvevertical?

2.WhydoestheSAS curvehave a positiveslope?

3.Theinternationalsubstitutioneffectimpliesthatanincreaseinthepricelevelwillleadto a decreaseintheaggregatequantityofgoodsandservicesde-manded. Explain why.

4.InFigure 7.5 illustrateaneconomy in long-runequilibrium,producing at the full-employmentlevelofproduction.IndicatetheequilibriumpricelevelandlevelofrealGDP.Alsoindicatethepo-tentiallevelofrealGDP.

5.InFigure 7.6illustrateaneconomyinshort-runequilibrium producing at abelow full-employmentlevelofproduction.IndicatetheequilibriumpricelevelandlevelofrealGDPandshowtheamountoftherecessionarygap.

6.InFigure 7.7illustrateaneconomyinshort-runequilibrium producing atanabovefull-employ-mentlevelofproduction.IndicatetheequilibriumpricelevelandlevelofrealGDPandshowtheamountoftheinflationarygap.

TABLE 7.2

Short Answer Problem 7

anabovefull-employment, a full-employment,or a belowfull-employmentequilibrium.Ifei-theraninflationaryorrecessionarygapexists,calculatewhatitequals.

d. Astimepasses,whathappenstomovetheecon-omyback to its long-runequilibrium?Illustratethis process in Figure 7.8 by drawing any othercurves you need. Label the long-run equilib-rium pointc.WhatistheequilibriumlevelofGDP and price level in the long run?

8.Suppose that the ADcurveshiftsrightward.Inthelongrun,howdoesthisshiftaffectthe SAS curve?Whydoesthe SAS change only in the long run?

Aggregate

Short-run

Long-run

demand

aggregatesupplyaggregatesupply

Pricelevel

(billions of2000dollars)

(billions of2000dollars)

(billions of2000dollars)

7.Table 7.2 shows the initialaggregatedemand,short-run,andlong-run aggregatesupplyschedulesforthenationofMacro.

a.Drawthe AD,SAS, and LAS curvesforMacroin Figure 7.8. Label the equilibrium point a.WhatistheequilibriumlevelofrealGDPandpricelevel?

b.Suppose that government purchases increase so thataggregatedemandincreases by $2 billion ateverypricelevel.InFigure7.8drawthenewaggregatedemandcurve.Labelthenewshortrunequilibrium point b. What is the equilib-riumlevelofrealGDPandpricelevelintheshortrun?

c.Why is point b not a long-runequilibrium?Inyouranswer,mentionthelevelofpotentialrealGDP,anddescribewhetherpointb represents

9.Suppose that new, productivity enhancing tech- nologiesarediscovered.InFigure7.9showhowthesetechnologicaladvancesaffecttheequilibriumlevelofrealGDPandthepricelevel.

10.WhyareincreasesinthequantityofmoneythefactorthatcreatedthepersistentinflationthattheUnitedStateshasexperiencedforthelastseveraldecades?

11.Keynesianeconomistsgenerallybelievethatgov-ernmentfiscalandmonetarypolicyisdesirable.Classicaleconomistsgenerallydisagree.Whatac-countsforthisdifferenceinviews?

You’retheTeacher

1.“I’vereallytried,but I justdon’tseewhy a changeinthepriceleveldoesn’tshifttheshort-runaggregatesupplycurve.Afterall,itseemslikewhenthepricelevelfalls,firmsshoulddecreasetheamounttheyproduceandthatthisshouldshiftthe SAScurve.Plus,I’m a littleshakyonhowtousetheAS/ADmodel. I surehopethe AS/ADmodelisn’ttooimportantsothat I don’tgethurtbadlybynotknowingthis.”Intruth,yourfriendmaybemor-tallywoundedbynotunderstandingthedifferencebetween a shiftof a curveand a movementalong acurve.UseanexampleinwhichtheADcurveshiftsleftwardtohelpexplaintoyourfriendhowtousetheAS/ADmodelfortheshortrunandalsowhy adropinthepriceleveldoesnotshifttheSAS curve.

2.Afteryouhavehelpedovercomethepreviousproblems,yourfriendoffersanobservation:“IthinkI’mcatchingontothisstuffnow.Andthediagramyoujustdrewwasreallyhelpful.But,isthatdia-gramtheendofthestory?Ordoessomethingelsehappenasmoretimepasses?”Basically,yourfriendisaskingyoutocompletetheexplanationyoustartedbyshowingwhathappensinthelongrun.Doingsowouldhelpreinforceyourfriend’sgraspofthe AS/ADmodel.So,usinganotherdiagram,showwhathappensinthelongrunafteraninitialdecreaseinaggregatedemandhasoccurred.