Chapter 10 & 11 pt B

Question 1

Long Run Aggregate Supply

Answer 1

relationship between Q Real GDP supplied & price level when money wage rate CHANGES
(when SRAS shifts or MWR changes)
Vertical at Yp

Question 2

3 Causes of LRAS to shift RIGHT (change in Potential GDP)

Answer 2

-increase in full employment/ Q labor
-increase in Q capital
-advance in tech

Question 3

2 Causes of LRAS to shift LEFT

Answer 3

-natural disaster
-war

Question 4

Short Run Aggregate Supply

Answer 4

-relationship between Q Real GDP & price level when MWR remains CONSTANT
-move along SRAS curve = no change in MWR

Question 5

Shift of the SRAS Curve

Answer 5

Money wage rate INCREASES = shift LEFT
MWR DECREASES = shift RIGHT

Question 6

Aggregate Demand

Answer 6

Aggregate Expenditure function

Question 7

3 reasons for AD Curve to slope downwards

Answer 7

P & Y are INVERSE
1- wealth effect: Price rises = real wealth falls = total autonomous consumption falls = AE shift down via multiplier effect = Y falls
2- Substitution effects: price rise = demand for money rises = interest rate rise = Investment falls AE shift down via multiplier effect = Y falls
3- International Substitution effect: Price rise = X falls = M rises = NX falls - AE shift down via multiplier effect = Y falls

Question 8

Movement along AD curve

Answer 8

P rise = Y fall (inverse)

Question 9

5 reasons for shift in AD curve

Answer 9

1- Expectations
2- Fiscal policy (expansion = right)
3- monetary policy (expansion = right)
4- foreign income (rise = right)
5- foreign exchange rate (depreciation = right)

Question 10

expectations for shift in AD

Answer 10

expected future income- increase = shift right
expected future inflation- rise = shift right
expected future profits- rise = shift right

Question 11

Foreign Exchange Rate for AD shift

Answer 11

CAD depreciates = CAN X rise = CAN M fall = CAN NX rise = AD shifts right

Question 12

Describe Automatic Adjustment Mechanism during an Inflationary Gap

Answer 12

demand for labor rises = MWR rise fast = SRAS shifts LEFT = Y falls & P rises = Inflationary Gap closes

Question 13

Describe Automatic Adjustment Mechanism during a Recessionary Gap

Answer 13

supply of labor increases = MWR falls = SRAS shifts RIGHT = Y rises & P falls = Recessionary Gap closes

Question 14

Increase in Aggregate Demand

Answer 14

right shift = opens IG = MWR rises = SRAS shifts LEFT = Y decreases & P increases

Question 15

Multiplier in SR vs LR

Answer 15

SR- multiplier smaller than expenditure multiplier when prices constant
LR- NO change in Real GDP, multiplier is 0