Chapter 10

Question 1

factors that shift aggregate demand

Answer 1

1. changes in real wealth (stocks, housing)
2. changes in real interest rate (decrease in real interest increases AD)
3. changes in expectations of the economy (optimism leads to increase in AD)
4. changes in the expected rate of inflation (a rise in inflation = increase AD)
5. changes in income abroad (higher real incomes abroad = increase AD)
6. changes in exchange rates (a depreciation in foreign exchange value of a nation’s currency = increase AD; a stronger dollar reduces AD)
7. government policies (increase in monetary supply = AD increase)

Question 2

factors that shift LRAS

Answer 2

same as production possibilities curve;
1. increasing the resource base = increase in LRAS
2. technological advances = increase in LRAS
3. better institutions that reduce rent-seeking and promote growth = increase in LRAS

Question 3

factors that shift SRAS

Answer 3

1. changes in expected inflation/money wages
2. supply shocks (weather, wars, natural disasters)

Question 4

changes in real interest rates

Answer 4

• During a recession, real interest rates will tend to decline because of the weak demand for investment
• During a boom, real interest rates will tend to rise because of the strong demand for investment

Question 5

causes of recessions

Answer 5

unanticipated reduction in AD and unfavorable supply shocks

Question 6

self-corrective process

Answer 6

In macroeconomics: self-correction means that recessions and booms tend towards a natural unemployment rate or the LRAS equilibrium