The long-run aggregate supply curve
Is vertical because changes in the price level have no effect on real output
Year to year rightward shifts in long-run aggregate supply leads to
A long-run trend path for real GDP
Total expenditures for domestically produced goods and services consist of
Consumer spending, business spending, government spending, and net foreign spending.
What determines the total value of annual U.S. GDP?
The spending and production decisions of consumers, firms, governments, and foreigners
The aggregate demand curve
Shows planned purchase rates of goods and services at various price levels.
The aggregate demand curve slopes downward because of the
Real-balance, interest rate and open economy effects
According to the real-balance effect, an increase in the price level
Reduces an individual's expenditures due to a decrease in the real value of cash balances
According to the interest rate effect, an increase in the price level
Increases nominal interest rates, reduces borrowing and spending, reduces the aggregate quantity of goods and services
The U.S. aggregate demand curve would shift to the left if
The Federal Reserve Board caused the real interest rate to increase
The aggregate demand curve would shift to the right as a result of
A drop in the foreign exchange value of the dollar.
What happens to the aggregate demand curve when deflation has occurred in the past year
Movement down along the curve
What happens to the aggregate demand curve when real GDP levels of all the nation's major trading partners have declined?
Shifts to the left
What happens to the AD curve when there has been a decline in the foreign exchange value of the nation's currency?
Shifts to the right
What happens to the AD curve when the price level has increased this year
Movement up along the curve
Long-run equilibrium in the economy will occur
At the price level where total planned real expenditures equals real GDP at full employment
The long-run equilibrium of an economy occurs
Where the long-run aggregate supply curve meets the aggregate demand curve
If economic growth causes the long-run aggregate supply curve to shift rightward over time, but the aggregate demand curve does not change, we expect
The long-run equilibrium price to decline, and there will be secular deflation
A persistent decline in the price level due to economic growth with stable aggregate demand is
In the long run, persistent deflation in a growing economy can occur if
Increases in the LRAS are proportionately larger than the increase in AD
An increase in the LRAS curve that is larger proportionately than an increase in the AD curve will lead to
A decrease in the price level and an increase in output
Supply-side inflation can be caused by a continual
Decrease in aggregate supply while aggregate demand remains unchanged
What can cause the economy to experience supply-side inflation
Government laws which say that the average work week must be reduced by one hour every year
One of the main conclusions off Say's Law was that
If people supply goods in order to then supply goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.
What is a possible explanation for sticky prices?
Labor contracts cause wages to be fixed over the contract period.
The Keynesian model argues that prices are sticky. One reason supporting this argument is that
Nominal wages are inflexible downwards
Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to
Reduce their workforce
The Keynesian model indicates that the economy will find an equilibrium, however the economy will not always
Reach full employment
What did Keynes mean when he said that prices are sticky?
Prices, especially the price of labor, are inflexible downward
If the prices were sticky, according to Keynes, this would then imply that the
Short-run aggregate supply curve is horizontal
An important difference between the Classical Model and Keynesian Model is that
Prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in Keynesian Model
The Modern Keynesian short-run aggregate supply curve is best described by what?
It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very Steep as real GPD surpasses full employment
In the Modern Keynesian Model the SRAS curve slopes upward. How could one explain the shape of the upward sloping SRAS curve by only focusing on the capital input?
Existing machinery can be used longer hours
How could one explain the shape of the upward sloping SRAS curve by only focusing on profits?
Firms are able to earn higher profits as long as the price level increases and the nominal wage Rate remains constant.
The modern Keynesian Model assumes that
The prices respond to changes in aggregate demand but not fully
Since the modern Keynesian Model allows for some price response, the aggregate supply curve
Is upward sloping
In the modern Keynesian Model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor input?
The workers are switched from uncounted production to counted production, thus enabling The firm to expand output as the price level expands
What is the best example of uncounted production?
An employee recalibrating a machine to maintain production within satisfactory tolerance Levels for machine parts
Suppose the rental rate of machinery decreased temporarily. The result of this would be described by
An increase in the SRAS curve only
What will increase both the SRAS and LRAS curves?
Younger workers in the labor force receive better and more training than their predecessors
What is true concerning shifts of the LRAS curve?
An increase in the LRAS curve is depicted as a rightward shift and an increase in real GDP
An economy is currently in long-run equilibrium. Suppose the US dollar depreciates, what is the best explanation of the outcome?
Aggregate demand increases.
Given that the economy is currently in a long run equilibrium the US dollar depreciates, the economy would the experience:
An inflationary gap
Suppose the economy is in long-run equilibrium. If the US dollar appreciates, what is the best description of the outcome?
Aggregate demand decreases
Suppose the economy is in long-run equilibrium. Given that the US dollar appreciates, the new short run position of the economy finds itself in is termed
A recessionary gap.
Inflation in an economy implies that
The average price level has increased over a stated period of time
Persistent inflation arises due to
The AD curve increasing by a larger proportion that the LRAS supply curve.
In economic terminology, personal disposable income, or income after taxes, can be either
consumed or saved
Suppose that disposable income increases in an economy. Which of the following relationships must always be true
The change in disposable income is equal to the change in saving plus the change in consumption
What best reflects the relationship between saving and savings?
Saving is a flow variable; savings is a stock variable
In the Keynesian model, if disposable income were to increase, households would
increase both their consumption and saving.
The relationship between the MPC and the MPS indicates that the entire increase in household disposable income
is distributed between consumption and saving.
What won't cause the planned investment function to shift rightward?
A decrease in the interest rate
In the Keynesian model equilibrium national income
equals planned consumption, investment, government, and net export expenditures
If real GDP falls below total planned expenditures the economy will see
production and employment increases
When government spending and net exports are added into the Keynesian model
the aggregate expenditures function shifts
What is true concerning the foreign sector in the simple Keynesian model?
Net exports are autonomous
If the price level rises the multiplier effect on real GDP will be
weaker than if the price level were constant
What is true when considering an economy with an upward sloping SRAS curve?
The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap
What is true of the multiplier in the Keynesian model when there is an increase in autonomous expenditures?
Expenditures increase by the same proportion during each round of spending