Ch 20: Aggregate Demand and Aggregate Supply

Question 1

A period of falling income and rising unemployment is called a ________ if it is relatively mild and _______ if it is more severe.

Answer 1

recession; depression

Question 2

Fluctuations in the economy are often called the ________

Answer 2

business cycle

Question 3

Do economic fluctuations follow a regular, predictable pattern?

Answer 3

No

Question 4

What is the variable most commonly used to monitor short-run changes in the economy because it is the most comprehensive measure of economic activity?

Answer 4

Real GDP

Question 5

What law states the inverse relationship between output/GDP and unemployment?

Answer 5

Okun’s Law

Question 6

What are the 3 Key Facts about Economic Fluctuations?

Answer 6

1. Economic Fluctuations are irregular and unpredictable
2. Most macroeconomic quantities fluctuate together
3. As output falls, unemployment rises

Question 7

This term refers to the separation between real variables and nominal variables

Answer 7

classical dichotomy

Question 8

What does classical macroeconomic theory say?

Answer 8

Changes in the money supply affect nominal variables but not real variables (only holds in the long run)

Question 9

The model of short term fluctuations focuses on the behavior of two variables:

Answer 9

quantity of output and price level

Question 10

Why does the Aggregate-Demand Curve slope downward?

Answer 10

Recall GDP
Y = C + I + G + NX
(these constitute demand)

1. The Wealth Effect (if price level drops, value of currency increases, allowing you to purchase more)
2. The Interest-Rate Effect (if price level drops, you have more money to save, reducing interest rates and increasing investment)
3. Exchange-Rate Effect (if price level drops and if interest rates drop, you put more dollars abroad, lowering exchange rate, lowing imports, and increasing exports)

Question 11

In the long run, the aggregate supply curve is _______

Answer 11

vertical

Question 12

In the short run, the aggregate supply curve is ________

Answer 12

upward sloping

Question 13

the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate

Answer 13

natural level of output

Question 14

Why does the aggregate supply curve slope upward in the short run?

Answer 14

1. Sticky-Wage Theory
2. Sticky-Price Theory
3. Misperceptions Theory

Question 15

What are the two basic causes of short term fluctuations?

Answer 15

shifts in aggregate demand and shifts in aggregate supply

Question 16

A period of falling output and rising prices

Answer 16

stagflation