Chapter 10

Question 1

What is aggregate supply?

Answer 1

The total of all planned production for the economy.

Question 2

Describe the long-run aggregate supply curve.

Answer 2

The real GDP of the economy under conditions of full employment.

Question 3

Define endowments with respect to an economy.

Answer 3

The various resources in an economy, including both physical resources, and human resources (ingenuity and management skills).

Question 4

True or False
LRAS is the full information and full adjusted level of real output of goods and services. It is the level of real GDP that will continue being produced year after year, forever, if nothing changes.

Answer 4

True

Question 5

True or False

Another way of viewing LRAS is to think of it as the full employment level of real GDP.

Answer 5

True

Question 6

The natural unemployment rate consists of what two factors?

Answer 6

1. Frictional Unemployment

2. Structural Unemployment

Question 7

What are the determinants of growth in per capita real GDP?

Answer 7

The annual (per capita) rate of growth of:

1. Labor
2. Capitol
3. Productivity of labor and capital

Question 8

As the production possibilities curve shifts outward, what happens to the LRAS curve?

Answer 8

It shifts to the right.

Question 9

True or False

LRAS tells us only about the economy’s long-run real GDP.

Answer 9

True

Question 10

What is aggregate demand?

Answer 10

The total of all planned expenditures in the entire economy.

Question 11

What is the aggregate demand curve?

Answer 11

A curve showing planned purchase rates for all final goods and services in the economy at various price levels, all other things held constant.

Question 12

What are the components of GDP?

Answer 12

Consumption, spending, investment expenditures, government purchases, and net foreign demand for domestic production.

GDP = C + I + S + G + X

Question 13

True or False

The components of GDP have nothing to do with the components of aggregate demand.

Answer 13

False. All of the components of GDP correspond to aggregate demand determinants.

Question 14

True or False
The aggregate demand curve gives the total amount, measured in the current years’ dollars of real domestic final goods and services that will be purchased at each price level.

Answer 14

False. The aggregate demand curve gives the total amount measured in a base year’s dollars, not the current year’s dollars, of real domestic final goods and services.

Question 15

The higher the price level, the ___ the total real amount of final goods and services demanded in the economy.

Answer 15

Lower

Question 16

With respect to the aggregate demand curve, the lower the price level, the _______ the total real GDP demanded by the economy, everything else remaining constant.

Answer 16

higher

Question 17

What are the main three reasons that the aggregate demand supply curve slopes downward?

Answer 17

1. The real balance effect
2. The interest rate effect
3. The open economy effect.

Question 18

What is the real balance effect?

Answer 18

The change in expenditures resulting from a change in the real value of money balances when the price level changes.

Question 19

What is another name for the real balance effect?

Answer 19

The wealth effect.

Question 20

Explain why the real balance effect is coupled to purchasing power.

Answer 20

When the intrinsic value of your money drops, your purchasing power drops as well. This means that you will have to reduce your expenditures on goods and services.

Question 21

Describe the interest-rate effect.

Answer 21

Higher price levels increase interest rates, which in turn cause businesses and consumers to reduce desired spending due to the higher costs associated with borrowing.

Question 22

With respect to imports and exports, when domestic price levels rise, the result is a fall in _____ and a rise in ______.

Answer 22

Exports

Imports

Question 23

Briefly describe the open economy effect.

Answer 23

A higher price level induces foreign residents to buy fewer US-made goods and US residents to buy more foreign-made goods, thereby reducing net exports and decreasing the amount of real goods and services produced within the United States.

Question 24

What is the difference between a normal demand curve and the aggregate demand curve?

Answer 24

The aggregate demand curve looks at the entire economy as a whole, while a normal demand curve looks at an individual product or service.

Question 25

State the fundamental proposition of the aggregate demand curve.

Answer 25

Any non-price level change that increases aggregate spending on domestic goods shifts the aggregate demand curve to the right.

Any non-price level change that decreases aggregate spending on domestic goods shifts the aggregate demand curve to the left.

Question 26

List some of the determinants of aggregate demand.

Answer 26

1. Increase/decrease in the amount of money in circulation.
2. Increased/decreased security about future jobs or income.
3. Improvement/Declines in the economies of other countries.
4. A rise/reduction in real interest rates.
5. Tax Increases/decreases
6. Changes in foreign currency exchange rates.

Question 27

If all of the factors that affect total planned real expenditures are unchanged over any given period of time, what will happen to the aggregate demand curve?

Answer 27

Nothing, the curve will stay completely fixed.

Question 28

In a case where the aggregate demand curve does not change over a period of time, but in which the long-run aggregate supply curve shifts to the right, what will this cause with respect to inflation?

Answer 28

The economy as a whole would experience secular deflation.

Question 29

Define secular deflation.

Answer 29

A persistent decline in prices resulting from economic growth and the presence of stable aggregate demand.

Question 30

If the LRAS shifts to the left what will happen to the price level?

Answer 30

The price level will rise.

Question 31

If the long-run aggregate supply curve remains constant while the aggregate demand curve shifts to the right, what will happen to the price level?

Answer 31

The price level will increase.

Question 32

What could cause a leftward shift in the aggregate supply schedule?

Answer 32

1. Reductions in labor force participation.
2. Higher marginal taxes on wages.
3. Provision of government benefits that give households incentives not to supply labor services to firms.

Question 33

If an economy is growing under what circumstances will there be persistent inflation?

Answer 33

Aggregate demand outruns LRAS.

Explanation: Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the long-run aggregate supply curve.