aggregate demand and supply and how monetary and fiscal policy can influence them

Question 1

what is the wealth effect

Answer 1

An increase in the price level reduces wealth (especially cash), which, in turn, reduces consumption.​

Question 2

whhat is the interest rate effect

Answer 2

An increase in price level increases the need for cash/funds, which increases interest rates and decreases.

Question 3

what is the international trade effect

Answer 3

An increase in the price level (relative to trading partners) means exports become more expensive and imports cheaper. Exports, therefore, fall and imports rise

Question 4

The aggregate demand (AD) curve slopes _________, showing the _______

Answer 4

downwards
inverse relationship between the price level, the quantity of real GDP demanded by households, firms and the government, plus net exports

Question 5

The aggregate supply (SRAS) curve shows the relationship in the short run between

Answer 5

the price level and the quantity of real GDP supplied.

Question 6

The short-run supply curve shows a direct relationship between ________ while the long-run aggregate supply curve shows that, in the long run, _____________

Answer 6

a direct relationship between price levels and the real GDP

increases in the price level do not affect the level of real GDP

Question 7

The long-run aggregate supply curve, however, will shift because potential GDP increases over time.​ Increases in potential GDP (or economic growth) are due to: ​

Answer 7

an increase in resources
an increase in machinery and equipment
new technology.

Question 8

During the __________ phase of the business cycle, production, employment and income are increasing at a rate that is above the trend rate in growth that the economy experiences over time

Answer 8

expansion

Question 9

The period of expansion ends with a

Answer 9

business cycle peak

Question 10

Following the business cycle peak, production, employment and income are growing at a rate that is below trend as the economy enters the __________ phase of the cycle.

Answer 10

contraction

Question 11

The contraction phase may be followed by a _________, which occurs when total production and employment are decreasing and the rate of economic growth is negative

Answer 11

recession

Question 12

The contraction or recession comes to an end with a business cycle ________, after which another period of expansion begins.

Answer 12

trough

Question 13

As the economy nears the end of an expansion, interest rates are usually _____and the wages of workers are usually rising faster than _____. As a result of rising interest rates and rising wages, the profits of firms ________. Typically, towards the end of an expansion, both households and firms will have substantially ______

Answer 13

rising
prices
fall
increased their debts.

Question 14

An economic contraction will often begin with a decline in ______ As spending declines, firms selling capital goods and consumer durables will find their sales ________. As sales _____ firms begin to ____________. ____________ and fallling profits leads to __________ as such a _____ may occur

Answer 14

spending by firms on capital goods or by households on new houses and consumer durables

falling

fall

lay off workers or reduce hours of work

rising unemployment

further declines in spending

recession

Question 15

As the contraction or recession continues, economic conditions gradually begin to______The declines in spending eventually come to an end; households and firms begin to reduce their ______, thereby _________; and interest rates _____, making it more likely that households and firms will borrow to finance new spending. Firms begin to increase their spending on capital goods as they anticipate the need for additional production during the next expansion. Increased spending by households on consumer durables and by businesses on capital goods will finally bring the contraction or recession to an end and begin the next _________.

Answer 15

improve
debt
increasing their ability to spend
decline
expansion

Question 16

in the aggregate demand and supply model, real GDP and price level are determined by

Answer 16

the intersection of the aggregate demand curve and the aggregate supply curve

Question 17

Fluctuations in real GDP and the price level are caused by

Answer 17

shifts in ad or the SRAS

Question 18

The aggregate demand (AD) curve shows the relationship between

Answer 18

the price level and the quantity of real GDP demanded by households, firms and the government, plus net exports.

Question 19

The short-run aggregate supply (SRAS) curve shows the relationship in the short run between

Answer 19

the price level and the quantity of real GDP that would be supplied by firms at each price level.

Question 20

The AD curve is downward-sloping because

Answer 20

a fall in the price level increases the quantity of real GDP demanded.

Question 21

If the price level changes while other variables that affect the willingness of households, firms and the government to spend are unchanged, the economy will

Answer 21

move up oor down the AD curve

Question 22

If any variable other than the price level changes, the AD curve will

Answer 22

shift

Question 23

The variables that cause the AD curve to shift fall into three categories:

Answer 23

Changes in government and central bank policies

Changes in the expectations of households and firms

Changes in foreign variables.

Question 24

a lower price level causes 3 things to happen what are they

Answer 24

raises the level of household wealth which increases consumption

lowers interest rates which increases investment and consumption

increases earnings from exports and decreases foreign imports as they become more expensive

Question 25

Lower interest rates lower the cost to firms and households of borrowing. Lower borrowing costs should usually increase________

Answer 25

consumption and investment spending,

Question 26

Higher interest rates shift the AD curve to the

Answer 26

left

Question 27

An increase in government purchases shifts the AD curve to the

Answer 27

right

Question 28

decrease in government purchases shifts the AD curve to the left

Answer 28

left

Question 29

An increase in individual income taxes reduces the amount of after-tax income available to households. Higher individual income taxes reduce ______spending and shift the AD curve to the _______

Answer 29

consumption
left

Question 30

An increase in company income taxes reduces the profitability of _______ and shifts the AD curve to the left

Answer 30

investment spending

Question 31

A decrease in company income taxes shifts the AD curve to the

Answer 31

right

Question 32

If households become more optimistic about their future incomes, they are likely to increase their

Answer 32

consumption

Question 33

increased consumption will shift the AD curve to the

Answer 33

right

Question 34

f households become more pessimistic about their future incomes, the AD curve will shift to the

Answer 34

left

Question 35

if firms become more optimistic about the future profitability of investment spending then the AD curve will shift to the

Answer 35

right

Question 36

f firms, households and governments in other countries buy fewer Australian goods and services or if firms, households and governments in Australia buy more foreign goods and services,

Answer 36

net exports will fall and the AD curve will shift to the left

Question 37

If real GDP in Australia increases faster than real GDP in other countries, Australian imports will

Answer 37

increase faster than Australian exports and net exports will fall.

Question 38

The long-run aggregate supply (LRAS) curve is a curve showing the relationship in the long run between

Answer 38

the price level and the quantity of real GDP that can be supplied when all firms are producing at normal capacity

Question 39

Each year the LRAS curve shifts to the right as the number and/or ______ in the economy increases, more ____ are accumulated, and ________ occurs.

Answer 39

quality of workers

machinery and equipment

technological change

Question 40

The SRAS curve is upward-sloping because, over the short run,

Answer 40

as the price level increases then the quantity of goods and services that firms are willing to supply will increase

Question 41

The main reason why firms are willing to supply more goods and services as the price level rises is that

Answer 41

prices of final goods and services rise, prices of inputs—such as the wages of workers or the price of natural resources—rise more slowly

Question 42

. A secondary reason why the SRAS curve slopes upward is that as the

Answer 42

price level rises or falls, some firms are slow to adjust their prices.

Question 43

If the price level changes but other variables are unchanged, the economy will

Answer 43

move up or down a stationary aggregate supply curve.

Question 44

If any variable other than the price level changes

Answer 44

the aggregate supply curve will shift.

Question 45

an increase in the labour force or the capital stock or resources shifts the aggregate supply curve to the _____ because….

Answer 45

right
more output can be produced at every price level

Question 46

an increase in productivity shifts the aggregate supply curve to the _____ because….

Answer 46

right
costs od production fall

Question 47

an increase the expected future price level shifts the aggregate supply curve to the _____ because….

Answer 47

left
workers and firms increase wages and prices

Question 48

an increase in workers and firms adjusting to having previously under-estimated the price level shifts the aggregate supply curve to the _____ because….

Answer 48

left
workers and firms increase wages and prices

Question 49

an increase in the expected price of an important natural resource shifts the aggregate supply curve to the _____ because….

Answer 49

left
costs of production rise