Exam 2 Chapter 12

Question 1

The model of aggregate demand and aggregate supply shows you what?

Answer 1

Ties in output, prices, and employment all into one equilibrium

Question 2

What how is aggregate demand calculated?

Answer 2

Y = C + I + G + NX

Question 3

What are 3 things that cause the aggregate demand curve to slope downward?

Answer 3

• wealth effect (consumption)
• interest rate effect (investment)
• foreign purchases effect (NX)

Question 4

Wealth Effect

Answer 4

People decrease consumption as price of the good rises.
Because purchases decrease their wealth

*Wealth Effect doesn’t occur if prices increase proportionally with working wages

Question 5

Interest Rate Effect

Answer 5

Says as prices rise, interest rates rise also

causes a decrease in investments

Question 6

Foreign Purchase Effect

Answer 6

Says as U.S. price of goods increase, people begin to Import more goods

*Don’t want to pay high domestic prices

Question 7

What constitutes a movement along the Aggregate Demand curve?

What constitutes a shift?

Answer 7

Change in overall prices = movement

Shift = change in non-price factor

Question 8

What is it called when the Aggregate Demand curve shifts left or right?

Answer 8

Positive demand shock
or
Negative demand shock

Question 9

___ is the sum total of the production of all the firms in the economy

Answer 9

Aggregate supply

Question 10

The ___ shows the relationship between the overall price level in the economy and total production by firms.

Answer 10

aggregate supply curve

Question 11

What are the 5 factors that shift AD curve through consumption?

Answer 11

• taxes on consumers
• interest rates
• housing markets
• stock market
• consumer’s confidence

Question 12

3 facts that shift AD curve through investments?

Answer 12

• taxes on capital
• business’s confidence
• interest rates

Question 13

What does the LRAS curve show? What does it stand for?

Answer 13

• long-run aggregate supply

- shows the potential output for economy if it operates at full capacity

Question 14

The long run production (LRAS) can shift due to these to things:

Answer 14

• Productivity

- Quantities of factors of production

Question 15

True or False: The potential output of the LRAS curve is affected by price level.

Answer 15

False

Question 16

What is potential output labeled as on the graph?

Answer 16

Y*

Question 17

___ are fluctuations of output around the level of potential output.

Answer 17

Business Cycles

Question 18

Describe and economic boom and economic recession

Answer 18

Economic Boom
output > potential output (Y*)

Economic Recession
output (Y) < potential output

Question 19

What are sticky input prices?

Answer 19

price of final goods increases at faster rate than input prices

due to set contracts with suppliers

Question 20

What are sticky input prices effect on the Aggregate Supply curves

Answer 20

Causes it to slope upward

Question 21

The “long-run” part of the LRAS curve is the time required for ___to fully adjust to economic conditions.

Answer 21

input prices

Question 22

What causes a change in the SRAS curve but not the LRAS curve and why?

Answer 22

Change in Price of Inputs

because of “Sticky input Prices”
*In long run, the input prices get adjusted

Question 23

Lowering minimum wage below the equilibrium wage has what effect on unemployment?

Answer 23

Stays the Same

Question 24

Raising minimum wage above the equilibrium wage has what effect on unemployment?

Answer 24

Increases it

Question 25

True or False: Consumption is maximized when Unplanned Inventories = Planned Inventories

Answer 25

False

Question 26

If a foreign economy china crashes, how does this affect AD/AS?

Answer 26

AD shifts less

*China has less money to spend on U.S.

Question 27

Do the LRAS and SRAS have a positive slope or negative?

Answer 27

SRAS positive slope

LRAS no slope (is a vertical line)

Question 28

The economic growth of the U.S. in the past 100 years was ___ %

Answer 28

2%

Question 29

How do you calculate the MPC?

Answer 29

(change in consumption) / (change in output Y)