Chapter 10: Bringing in the Supply Side- Unemployment and Inflation

Question 1

Too little spending leads to a __________________ gap

Answer 1

recessionary
- which also causes unemployment

Question 2

Too much spending leads to a __________________ gap

Answer 2

inflationary

Question 3

Stagflation

Answer 3

the simultaneous occurrence of high unemployment AND high inflation

Question 4

Aggregate supply curve

Answer 4

shows, for each price level, the quantity of goods and services that all the nation’s businesses are willing to produce during a specified period of time, holding all other determinants of aggregate quantity supplied constant

Question 5

The volume of goods and services that profit-seeking enterprises will provide depth on what?

Answer 5

1.) prices they obtain for their outputs
2.) on wages and other production costs
3.) on the capital stock
4.) on the state of technology
5.) etc.

Question 6

The aggregate supply curve slopes _____ because firms normally can purchase labor and other inputs at prices that are fixed for some period of time. Thus, higher selling prices for outputs make production more attractive

Answer 6

upward

Question 7

Nominal wage rate

Answer 7

account for 70% of all input costs because higher wage rates mean higher production costs and lower profits at any given selling prices

Question 8

An increase in the nominal wage shifts the aggregate supply curve ______, meaning that the quantity supplied at any price level declines

Answer 8

inward

Question 9

A decrease in the nominal wage shifts the aggregate supply curve ______, meaning that the quantity supplied at any price level increases

Answer 9

outward

Question 10

The aggregate supply curve is shifted to the______ (inward) by an increase in the price of any input to the production process, and it is shifted to the ______ (outward) by any decrease

Answer 10

left; right

Question 11

Productivity

Answer 11

Amount of output produced by a unit of input

Question 12

Improvements in productivity shift the aggregate supply curve _____

Answer 12

outward

Question 13

As the labor force grows or improves in quality, and as investment increases the capital stock, the aggregate supply curve shifts _______ to the right, meaning that more output can be produced at any given price level

Answer 13

outward

Question 14

Inflation ______ the size of the multiplier

Answer 14

reduces

Question 15

Any ________ in AD will push up the price level; higher prices, in turn will drain off some of the higher real demand by eroding the purchasing power of consumer wealth and by reducing net exports. Thus, inflation reduces the value of the multiplier below what is suggested by the oversimplified formula

Answer 15

increase

Question 16

As long as the aggregate supply curve slopes upward, any outward shift of the aggregate demand curve will _______ the price level

Answer 16

increase

Question 17

Inflationary gap

Answer 17

amount by which equilibrium real GDP exceeds the full employment level of GDP

Question 18

Recessionary gap

Answer 18

amount by which the equilibrium level of real GDP falls short of potential GDP

Question 19

When AD is low, the economy may get stuck with a _____________ gap for a long time

Answer 19

recessionary

Question 20

rising nominal wages add to business costs, which shift the aggregate supply curve to the _____

Answer 20

left

Question 21

Higher energy prices shift the economy’s aggregate supply curve _______

Answer 21

inward (to the left)

Question 22

For any given growth rate of aggregate supply, a ______ growth rate of aggregate demand will lead to more inflation and faster growth of real output

Answer 22

faster

Question 23

For any given growth rate of aggregate supply, a ______ growth rate of aggregate demand will lead to less inflation and slower growth of real output

Answer 23

slower

Question 24

The economy experiences a favorable supply shock, as it did in the late 1990s, so the aggregate supply curve shifts ________ at an unusually rapid rate

Answer 24

outward

Question 25

If fluctuations in economic activity emanate mainly from the supply side, higher rates of inflation will be associated with ______ rates of economic growth

Answer 25

lower

Question 26

T/F Unfavorable supply shocks tend to push unemployment and inflation up at the same time

Answer 26

True