Chapter 10

Question 1

what is aggregate demand curve (AD)?

Answer 1

the curve that shows the level of real GDP purchased by households, businesses, government, and foreigners (net exports) at different possible price levels during a time period, ceteris paribus

Question 2

T or F the aggregate demand curve and the demand curve are the same concept

Answer 2

False

Question 3

what are real balances?

Answer 3

the impact on total spending (real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value?

Question 4

what is the interest-rate effect?

Answer 4

the impact on total spending (real GDP) caused by the direct relationship between the price level and the interest rate

Question 5

what is the causation chain for the real balances effect?

Answer 5

price level decreases > purchasing power rises > wealth rises > consumers buy more goods > real GDP demanded increases

Question 6

what is the causation chain for interest-rate effect?

Answer 6

price level decreases > purchasing power rises > demand for fixed supply of credit falls > interest rates fall > businesses and households borrow and buy more goods > real GDP demanded increases

Question 7

what is the causation chain for net exports effect?

Answer 7

price level decreases > U.S. goods become less expensive than foreign goods > Americans and expensive than foreign goods > Americans and foreigners buy more U.S. goods > exports rise and imports fall > real GDP demanded increases

Question 8

T or F any change in the individual components of aggregate expenditures shifts the aggregate demand curve

Answer 8

True

Question 9

what is the aggregate supply curve (AS)?

Answer 9

the curve that shows the level of real GDP produced at different possible price level during a time period, ceteris paribus

Question 10

When the aggregate supply curve is horizontal and an economy is recession below full employment, the only effects of an increase in aggregate demand are increases in real GDP and employment, while the price level does not change. stated simply, the Keynesian view that is “demand creates its own supply”

Answer 10

memorize this card

Question 11

when the aggregate supply curve is vertical at the full-employment GDP, the only effect over time of a change in aggregate demand is a change in the price level. Stated simply, the classical view is that “supply creates its own demand”

Answer 11

memorize

Question 12

Keynesian theory rejects classical theory for an economy in recession because Keynesians argue that during a recession prices and wages do not adjust downward to restore an economy to full-employment real GDP

Answer 12

memorize

Question 13

what is the Keynesian range?

Answer 13

the horizontal segment of the aggregate supply curve, which represents an economy in a severe recession

Question 14

what is intermediate range?

Answer 14

the rising segment of the aggregate supply curve, which represents an economy as it approaches full-employment output

Question 15

what is classical range?

Answer 15

the vertical segment of the aggregate supply curve, which represents an economy at full-employment output

Question 16

when do sellers neither overestimate nor underestimate the real GDP demanded at the prevailing price level

Answer 16

at macroeconomic equilibrium

Question 17

what happens to the price level as aggregate demand increases

Answer 17

price level remains constant as real GDP expands

Question 18

in the intermediate range, increases in aggregate demand increase both the price level and the real GDP

Answer 18

memorize

Question 19

once the economy reaches full employment output in the classical range, additional increases in aggregate demand merely cause inflation, rather than more real GDP

Answer 19

memorize

Question 20

what is a stagflation?

Answer 20

the condition that occurs when an economy experiences the twin maladies of high unemployment and rapid inflation simultaneously

Question 21

what is cost-push inflation?

Answer 21

an increase in the general price level resulting from an increase in the cost of production that causes the aggregate supply curve to shift leftward

Question 22

the business cycle is a result of shifts in the aggregate demand and aggregate supply curves

Answer 22

memorize