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77 Cards in this Set

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The production of goods and services that an economy achieves in the long run when unemployment is at its normal rate:
natural rate of output
What effect would a new law that requires the government to cover the full cost of medicines for the elderly have on the model of aggregate demand and aggregate supply?
It would cause the aggregate demand curve to shift to the right.




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A period of declining real incomes and rising unemployment:
recession
Suppose the economy is in long run equilibrium. If aggregate demand increases, we can expect that in the short run output will ________, and in the long run output will ________.
increase, decrease
A curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level:
aggregate-demand curve
Suppose that the prices of inputs (such as wages or oil prices) increase. What effect would this have on the model of aggregate demand and aggregate supply?
It would cause the short run aggregate supply curve to shift to the left, but it would have no effect over the long run aggregate supply.




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A period of falling output and rising prices:
stagflation
The model that most economists use to explain short-run fluctuations in economic activity around its long-run trend:
model of aggregate demand and aggregate supply
Whenever the economy is in recession, we can expect ________ to decrease.
investment
Suppose the economy is in long run equilibrium. If the stock market crashes, we can expect the price level to ________, and output to ________
decrease, decrease
A severe recession:
depression
The long run aggregate supply curve is ________, because in the long-run, nominal variables, such as the price level, ________ affect real variables, such as the production of goods and services in the economy.
vertical, do not
Suppose the economy is in long run equilibrium. If the price of oil increases substantially, we can expect the price level to ________, and output to ________
increase, decrease
When will the long run aggregate supply curve shift to the right?
Whenever the factors of production (such as labor and capital) increase.
What effect will there be on the model of aggregate demand and aggregate supply and demand if the minimum wage increases?
Aggregate supply shifts left, the price level rises, and real output falls.




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What effect would an increase in the productivity of the labor force have on the model of aggregate demand and aggregate supply and demand?
It would cause an increase (shift to the right) in a nation's long-run aggregate supply curve.




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The increase in the wealth of households and businesses resulting from the increased value of money as the price level declines:
The wealth effect
What characteristics did business cycles in the U.S. during the 20th century have?
They have not been consistent in either duration or severity.
Suppose the European economy emerges from a recession. What will happen in the short run?
Aggregate demand shifts right, the price level rises, and real output rises.




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Economists use the phrase "business cycle" when referring to:
The pattern of fluctuations in economic activity.
What will lead to an increase in net exports to foreigners?
A DECREASE in the price level.
A fall in prices makes consumers feel more wealthy. What will happen as a result?
There will be a movement down a given aggregate demand curve.
What effect will a change in price expectations have on the model of aggregate demand and aggregate supply and demand?
It will shift short-run aggregate supply, but not long-run aggregate supply.
Supose the economy is producing at its natural rate of output. Consumers and businesses become more pessimistic about the economic outlook. As a result, in the short run:
Output will fall below its natural rate.
The aggregate supply curve shows the relationship between:
The price level and the various quantities producers will supply.
Suppose Congress enacts a tax increase in order to decrease budget deficits. What will happen in the short run?
Aggregate demand shifts left, the price level falls, and real output falls.




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In the long run, equilibrium output in the economy must equal:
The economy's long-run capacity.
Suppose the economy is in a short-run equilibrium and is producing output below its natural rate. Over the long run, when will output return to its natural rate?
When short-run aggregate supply increases.
Suppose there is a broad increase in the price of stocks which causes an increase in the real wealth of individuals. Consumption spending rises in response to the increase in wealth. What will this cause?
It will cause the rate of unemployment to decrease.
The aggregate demand for goods and services is composed of the purchases of:
households, businesses, governments, and net exports
Most ______ ______ fluctuate together.
macroeconomic quantities
The aggregate demand curve indicates the relationship between:
The quantity demanded of all goods and services in the economy and the price level.
Which one of the following is most likely to reduce short-run aggregate supply?

a. regulatory action that generates more benefits than costs
b. a technological advance that reduces the cost of energy
c. a higher than expected price level
d. an increase in the nation's net investment rate
c. a higher than expected price level
What 3 things occur during a recession?
a)an increase in unemployment

b)a decrease in real output

c)a decrease in real income
What does a vertical long-run aggregate supply curve indicate?
It indicates that an increase in the price level will not expand an economy's output in the long run.
During the 1970s, the real price of crude oil increased sharply on the world market. How did such an unanticipated rise in oil prices influence the price level and real output of oil-importing nations such as the U.S.?
Real output fell and the price level rose.
Why does the aggregate demand curve slope downward to the right?
Because as the price level declines, the real value of money increases and thus stimulates expenditures.
An improvement in technology would shift which curves?
It would shift the short-run and long-run aggregate supply curves.




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Why do most economists believe that the long-run aggregate supply curve is vertical?
Because in the long run, output depends on resources and the available production technology, not the price level.
Which of the following will lead to a reduction in aggregate demand in the United States?

a. a higher price level
b. rapid growth of real income in Japan and Western Europe
c. an increase in consumer confidence
d. an increase in real interest rates
d. an increase in real interest rates
Which of the following is most likely to cause an increase (shift to the right) in the long-run aggregate supply curve?

a. an increase in the size of the national debt
b. an increase in marginal tax rates
c. an increase in the economy's rate of capital formation
d. a new regulation that increases the cost of producing computers
c. an increase in the economy's rate of capital formation
Which of the following is most likely to cause an increase in short-run aggregate supply in the goods and services market?

a. a decline in the productivity of labor
b. an increase in expected prices
c. a reduction in resource prices
d. an increase in the price level
c. a reduction in resource prices
What effect would a decrease in investment tax credits have on the nation's aggregate demand curve?
It would shift the aggregate demand curve left.





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What is most likely to increase long-run aggregate supply?
An advance in technology.
An increase in the price level is accompanied by an increase in the interest rate. As a result, firms spend less on capital equipment. This is an example of the:
interest-rate effect
Starting with initial long-run equilibrium, a sudden increase in optimism about future business conditions will cause (in the short run):
An increase in both output and the price level.




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Which of the following will cause the aggregate demand curve to slope downward to the right as the price level declines?

a. an increase in exports
b. a decrease in the real wealth of people holding money balances
c. an increase in real interest rates
d. an increase in resource prices
a. an increase in exports
In the short run, the aggregate supply curve slopes ______, but in the long run it is ______.
SHORT RUN: upward to the right

LONG RUN: vertical
Suppose a decline in productivity causes short-run aggregate supply to decrease. What would the economy experience?
stagflation
Suppose the economy is at a short-run equilibrium where it is producing above the natural rate of output. What will happen over the long run?
Price expectations will rise, shifting the short-run aggregate supply curve to the left and returning the economy to its natural rate of output.




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What is most likely the initial impact of an increase in aggregate demand?
A decrease in the unemployment rate.
What will happen if a broad increase in the price of stocks causes an increase in the real wealth of individuals?
The aggregate demand curve will shift to the right.
For an oil importing country such as the United States, the immediate effect of an increase in the price of imported oil would tend to be:
A decrease in real output and employment, and an increase in the price level.
During a recession, _____ rises while _____ and _____ fall.
unemployment, real income, real output
Suppose output currently exceeds the natural rate of output. What will happen as the economy adjusts to a new long-run equilibrium position?
There will be an increase in the price level.
What has happened with the performance of the U.S. economy since the 1960s?
The levels of employment, production, and growth have fluctuated.
What does a vertical long-run aggregate supply curve indicate?
Indicates that an increase in the price level will NOT expand an economy's output in the long run.
Which of the following would shift the nation's short-run aggregate supply curve leftward?

a. an increase in wages.
b. an increase in productivity.
c. a decrease in consumer spending.
d. a decrease in net exports.
a. an increase in wages.
Economists use the phrase "business cycle" when referring to the pattern of fluctuations in:
The economy
On average over the past 50 years, production in the U.S. economy has grown about how much per year?
3 percent per year.
How are the average level of prices in the economy measured?
They are measured by the CPI or the GDP deflator.
What do most economists believe describes the world's economic fluctuations in the long run?
The classical theory
Shifts in the aggregate demand curve might arise from changes in what 4 things?
1) Consumption
2) Investment
3) Government Purchases
4) Net Exports
What does real GDP measure in an economy?
The economy’s output of goods and services.
Most economists believe that classical theory describes the world in the _____ but not in the _____.
long run, short run
Short-run economic fluctuations in the economy:
The business cycle
Shifts in the aggregate supply curve might arise from changes in what 4 things?
1) Labor
2) Capital
3) Natural Resources
4) Technological Knowledge
What are the 3 key facts about economic fluctuations?
1) Economic fluctuations are irregular and unpredictable.
2) Most macroeconomic variables fluctuate together.
3) As output falls, unemployment rises.
What measures the economy’s output of goods and services?
Real GDP
What would happen if the quantity of money in the economy were to double? What would remain constant?
PRICES and INCOMES would double.

REAL VARIABLES would remain constant.
What 3 things cause the aggregate demand curve to slope downward?
1) The Wealth Effect

2) The Interest Rate Effect

3) The Exchange-Rate Effect
When is the aggregate-supply curve is upward sloping?
In the short run.
Changes in the money supply affect _____ but NOT _____ in the long run.
nominal variables, real variables
What does the CPI and the GDP deflator measure in an economy?
They measure the average level of prices.
What are the 2 most important forces that govern the economy in the long run?
1) technology

2) monetary policy
In what to ways should policymakers respond to a recession?
1) Do nothing and wait for prices and wages to adjust.
2) Take action to increase aggregate demand by using monetary & fiscal policy.
In the long run, shifts in aggregate demand affect ____ but do not affect ____.
the overall price level, output