chapter 20

Question 1

during RECESSIONS…

Answer 1

there is a period in which incomes fall and there is rising unemployment
normally happen within a short amount of time between two but there can be long periods without a recession
recessions DO NOT occur at regular intervals

Question 2

model of aggregate demand and aggregate supply

Answer 2

a way economists best analyze short run fluctuation.
how real and nominal variables interact

price level and the quantity of output adjust to bring aggregate demand and aggregate supply into balance.

Question 3

which variable best shows short-run changes in an economy?

Answer 3

gdp is the variable most commonly used to monitor short-run changes in economy because it is the most comprehensive measure of economic activity.

Question 4

most macroeconomic quantities fluctuate together, what does this mean?

Answer 4

when real GDP falls in a recession, so do personal income, corporate profits, consumer and investment spending, industrial production, retail sales, home sales, auto sales, and so on..
even though they fluctuation together, they fluctuate by different amounts.
since they are economy-wide, they show up in many sources of macroeconomic data.

Question 5

as output falls…

Answer 5

unemployment rises

Question 6

what describes the world economy in the long run?

Answer 6

classical theory: beyond a period of several years, changes in the money supply affect prices and other nominal variables but DO NOT affect REAL GDP. (called the neutrality of money)
NOminal: measured in terms of money
real: quantity and relative prices

This is “money is a veil” only looking at nominal

Question 7

aggregate-demand curve:

Answer 7

shows quantity of goods and services the households, firms and gov. and cust. ABROAD want to buy at each price level

Question 8

aggregate supply curve

Answer 8

quantity of goods and services that firms produce and sell at each price level.

Question 9

movement along the aggregate demand curve

Answer 9

a decrease in price level increase the quantity of goods and services demanded..

Question 10

a decrease in price level and interest rates lower…

Answer 10

lowers the US interest rate. in responds to the lower interest rate in US the real value of the dollar declines in foreign exchange markets. this deprecation stimulates US net exports and there by increase the quantity of goods and services demanded

Question 11

an increase in price level and the interest rates RISE

Answer 11

. Conversely, when the US price level rises and causes US interest rates to rise, the real value of the dollar increase and this appreciation reduces the US net exports and the quantity of goods and services demanded.

Question 12

wealth affect: when prices fall

Answer 12

a decrease in price RAISES the real value of money and makes consumers WEALTHIER which encourages them to spend more. and INCREASEin consumer spending means a Larger quantity of goods and services demanded.

Question 13

wealth affect: when prices rise

Answer 13

an increase in price level REDUCES the real value of money and makes consumers poorer, which in turn REDUCES consumer spending and the quantity of goods and services demanded.

Question 14

Why does the aggregate- demand curve slope downward?

Answer 14

The first reason for the downward slope of the aggregate demand curve is Pigou’s wealth effect. Recall that the nominal value of money is fixed, but the real value is dependent upon the price level. This is because for a given amount of money, a lower price level provides more purchasing power per unit of currency.

wealth affect (price level and consumption)
Interest Rate effect ( price level and investment)
The exchange-rate effect (price level and net exports)

Question 15

why the aggregate demand curve might shift

Answer 15

Shifts Arising from Changes in Consumption: An event that causes consumers to spend more at a given price level (a tax cut, a stock market boom) shifts the aggregate-demand curve to the right. An event that causes consumers to spend less at a given price level (a tax hike, a stock market decline) shifts the aggregate-demand curve to the left.
Shifts Arising from Changes in Investment: An event that causes firms to invest more at a given price level (optimism about the future, a fall in interest rates due to an increase in the money supply) shifts the aggregate-demand curve to the right. An event that causes firms to invest less at a given price level (pessimism about the future, a rise in interest rates due to a decrease in the money supply) shifts the aggregate-demand curve to the left.
Shifts Arising from Changes in Government Purchases: An increase in government purchases of goods and services (greater spending on defense or highway construction) shifts the aggregate-demand curve to the right. A decrease in government purchases on goods and services (a cutback in defense or highway spending) shifts the aggregate-demand curve to the left.
Shifts Arising from Changes in Net Exports: An event that raises spending on net exports at a given price level (a boom overseas, speculation that causes an exchange-rate depreciation) shifts the aggregate-demand curve to the right. An event that reduces spending on net exports at a given price level (a recession overseas, speculation that causes an exchange-rate appreciation) shifts the aggregate-demand curve to the left.

Question 16

which direction does the aggregate demand shift due to circumstances?

Answer 16

A ten-year-old investment tax credit expires.
I falls, AD curve shifts left.
B. The U.S. exchange rate falls.
NX rises, AD curve shifts right.
C. A fall in prices increases the real value of consumers’ wealth.
Move down along AD curve (wealth-effect).
D. State governments replace sales taxes with new taxes on interest, dividends, and capital gains.
C rises, AD shifts right.

Question 17

if speculators lost confidence in foreign economies, and wanted to buy more US bonds..

Answer 17

they want to move some of their wealth into the US economy. in doing so, they BID UP the value of the US dollar in the foreign echange market. this APPRECIATION of the dollar makes US goods more EXPENSIVE compared ot foreighn goods, which DEPRESSES net exports and shifts the aggregate-demandcurve to the LEFT.

Question 18

if speculation causes a DEPRECIATION of the dollar

Answer 18

stimulates net exports and shifts the aggregate-deman curve to the RIGHT

Question 19

Long run aggregate supply curve

Answer 19

when the price changes, it does not affect the quantity of goods and services supplied in the long run. it is only vertical in the long run

Question 20

the long run aggregate supply curve is some times called

Answer 20

potential output or full-employment output.

Question 21

natural level of output

Answer 21

shows what economy produces when the rate of production toward which the economy gravitates in the long run. any change in the economy that alters the natural level of output SHIFTS the long run aggregate supply curve..

Question 22

what shifts the long run supply aggregate curve?

Answer 22

Shifts arising from changes in Labor; if workers leave, or unemployment rises, the curve shifts left

shifts arising from changes in capital: an increase of capital shifts it to the right

Shifts arising from changes in natural resources: a change in weather patterns that make farming more difficult shifts the long run curve to the left

shifts arising from changes in technological knowledge: because opening up international trade has similar effects to inventing new technology and allows a country to specialize in a higher-productivity industries; it will shift the curve to the right. If the gov passes regulations, then it shifts left.

Question 23

long run vs short run trends

Answer 23

long-run trends are the background on which short-run fluctuation are superimposed. the short run fluctuation in OUTPUT and the PRICE Level

Question 24

The three theories of Short run supply curve slopes upward

Answer 24

Sticky wage theory: wages tend to be sluggish or sticky because of contracts, social norms and notions of fairness.

Sticky price theory: revenue is higher, but labor cost is not.
Production is more profitable, so firms increase output and employment.

The misperceptions theory :

Firms may confuse changes in P with changes in the relative price of the products they sell.
If P rises above PE (price expected), a firm sees its price rise before realizing all prices are rising.

Question 25

sticky price theory:

Answer 25

If P > PE, revenue is higher, but labor cost is not.
Production is more profitable, so firms increase output and employment.
Hence, higher P causes higher Y, so the SRAS curve slopes upward.

PE means prices expected

Question 26

misperceptions theory:

Answer 26

Imperfection: Firms may confuse changes in P with changes in the relative price of the products they sell.
If P rises above PE (price expected), a firm sees its price rise before realizing all prices are rising.
The firm may believe its relative price is rising, and may increase output and employment.
So, an increase in P can cause an increase in Y, making the SRAS curve upward-sloping

Question 27

short run aggregate supply curve. quantity of output supplied formula

Answer 27

Natural leve of output+ a(actual price level - expected price level) a represent how much out put responds to unexpected changes in price level

Question 28

the average price level is determined by…

Answer 28

gdp deflator

Question 29

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on.

Refer to U.S. Financial Crisis. What would happen in the market for foreign-currency exchange?

Answer 29

shifts to the right and the exchange rate will fall

Question 30

how an increase or decrease will affect the long-run supply

Answer 30

In the long run, the economy’s real GDP depends on labor, capital, natural resources, and technological knowledge. Since changes in the quantity of money do not influence these factors, they do not influence the long-run level of output. If the Fed increases money growth, the price level will rise more quickly, and the inflation rate will increase, but the economy’s long-run potential output will not change. In the long run, two related propositions hold: Real and nominal variables are separate (the classical dichotomy), and changes in the quantity of money impact only nominal prices, not production (monetary neutrality).

Question 31

the upward slope of the short-run aggregate supply curve

Answer 31

In the short-run, the aggregate supply curve is upward sloping. There are two main reasons why the quantity supplied increases as the price rises: The AS curve is drawn using a nominal variable, such as the nominal wage rate. In the short-run, the nominal wage rate is fixed.