Economic 2301 Chapter 26: The Aggregate Demand-Aggregate Supply Model

8 October 2022
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question
A small manufacturer, operating out of a rented space in a light-industrial area, produces inexpensive office supplies. Classify each aspect of the operation as an example of sticky input prices, menu costs, or money illusion.
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1- The warehouse space is on a 3-year lease, with two years still to go. : sticky input prices 2-The flagship product has been packaged and advertised as "The two-buck stapler." Changing the price would require new packaging and re-branding of the item: menu costs 3- Due to lower-than-usual inflation, workers get a smaller-than-usual annual raise, which hurts morale.: money illusion
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The Aggregate Demand-Aggregate Supply Model
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the unemployment rate has not change, but the worker are less productive
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Recessions in the United States occur with regular, predictable frequency; hence the term "business cycle."
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F
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Classify each event either as shifting the aggregate demand curve or as causing movement along the curve.
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correct 1- State governments cut their budgets for infrastructure maintenance. 2- Technological advances generate wealth in a broad range of industries.
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Which of these are conditions for long-run equilibrium in the aggregate demand-aggregate supply model?
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Correct Answer(s) Long-run aggregate supply equals aggregate demand. Short-run aggregate supply equals aggregate demand.
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Consider the following graph. Assuming that the U.S. economy begins with an aggregate demand curve equal to AD1, click on the aggregate demand curve you would expect to see following a decrease in the value of the U.S. dollar.You read a news article reporting that a nation's real output fell while its inflation rate temporarily jumped up. From this you can conclude that the recession was likely caused by which of these scenarios?
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AD2
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Imagine that the U.S. economy has an initial unemployment rate equal to the natural rate of unemployment. Identify each event as a factor that will either increase or decrease unemployment in the short run.
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increase 1- The U.S. dollar gains value against foreign currencies. 2- An oil cartel raises oil prices. decrease 1- American consumers expect higher income in the future. 2- U.S. real estate values rise. 3- Brazil experiences economic growth and increases its demand for U.S. exports.
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Consider the graph below, and assume that Ireland's economy initially has a short-run aggregate supply curve corresponding to SRAS1. Click on the SRAS curve that would most plausibly result if technological improvements lowered costs of production in Ireland.
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SRAS2
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Assuming the U.S. economy's initial aggregate supply curve is LRAS1, label the other two curves with the event most likely to cause a shift to each curve.
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- A new law prohibits employers from hiring anyone under the age of 21 : first line - Oil prospectors discover a previously unknown reserve of oil in California. : third lines
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Which of the following would result in a decrease in U.S. aggregate demand?
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Correct Answer(s) 1-A stock market crash erodes U.S. citizens' retirement savings. 2-Buyers become less optimistic about their future income. 3-South American nations experience a recession.
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Which of these scenarios would cause the U.S. short-run aggregate supply curve to shift to the left?
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Correct Answer(s) 1- Many workers signed contracts last year assuming 1% future inflation. This year, it was revealed that current inflation is nearly 5%. 2- A mysterious disease kills off half of the nation's corn crop.
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Consider a situation where the residents of a major U.S. trade partner see an increase in their income. Assuming the U.S. economy starts in equilibrium, order the following time periods by price level, from lowest to highest.
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1- immediately 2- a month after 3- several years
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Place the three components of aggregate demand in order of relative size, starting with the one representing the largest component of GDP.
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consumption investment next exports
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This graph illustrates an economy, initially in long-run equilibrium, which then experiences a decrease in short-run aggregate supply (from SRAS1 to SRAS2). Label the two short-run equilibria (before and after the shift) with the appropriate relation between u, the short-run equilibrium unemployment rate, and u*, the natural long-run rate.
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u > u* : b 105 u = u* : A 100
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There are three reasons for the downward slope of the demand curve: the wealth effect, the interest rate effect, and the international trade effect. Match each effect with the component of aggregate demand it most closely impacts.
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investment: the interest rate effect net exports: the international trade effect consumption: the international trade effect
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Which of the following phenomena help explain why the short-run aggregate supply curve is sloped instead of vertical?
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Correct Answer(s) menu costs sticky prices money illusion
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Fill in the blanks to complete the passage about the U.S. unemployment rate. Since 1985, the highest monthly unemployment rate in the United States was -; this happened in -. Following the recession of 1991-1992, GDP growth was generally strong, at one point exceeding 4% for four consecutive -.
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10% 2009 quarters
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Complete the following passage concerning the history of U.S. recessions. Since the beginning of the twentieth century, the United States has experienced - recessions. Of those, - have occurred since 1970
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22 7
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Which of these are consequences of an increase in long-run aggregate supply?
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Correct Answer(s) an increase in short-run aggregate supply an increase in full-employment outpu
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Please attach the most appropriate label to the curve in the graph below. Note that the curve is perfectly vertical.
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long-run aggregate supply
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Fill in the blanks to complete the following passage regarding firms' short-run supply. A simple model of a firm describes it as an entity that buys - (for example, labor) and sells - (goods and services). A firm's input prices, which affect costs, are generally - in the short run, while a firm's output prices, which affect revenue, are -. Therefore, an increase in the short-run price level raises revenue - than costs, so firms produce more in the short run. Consequently, the SRAS curve slopes upward.
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1- inputs 2- outputs 3- sticky 4- flexible 5- more
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Consider the graph below. Assume that, initially, an economy has long-run aggregate supply corresponding to LRAS, short-run supply corresponding to SRAS1, and aggregate demand corresponding to AD1. Where will the new equilibrium be in the long run if a virus renders a significant fraction of the nation's computers unusable for two months before a fix is found? (Do not assume that all curves shown actually come into play.)
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LRAS
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Assume that an economy initially has a long-run aggregate supply curve corresponding to LRAS1 in the graph below. Click on the long-run aggregate supply curve that would most likely result if a new shipping method, using drone technology, made it easier to transport goods between any two locations.
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LRAS2
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Which of the following are reasons the aggregate demand curve slopes downward, as shown in the figure?
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Correct Answer(s) 1- When the price level increases, the real value of wealth falls and therefore buyers want to purchase less. When the price level increases, U.S. exports become relatively more expensive for foreign buyers and they want to purchase less. 3- When the price level increases, people save less, thus interest rates rise and investment falls.
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How do aggregate demand and aggregate supply differ from regular demand and supply?
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regular demand and supply descried a market good for a single good... final good and service
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The U.S. economy's initial aggregate demand curve is AD1. Drag each event to the curve that would result from it.
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1- Foreign incomes increase: AD2 2- New communication technologies lower the production cost of many and the price level increase : AD1 3- The value of the U.S. dollar increases relative to other currencies.: AD3
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A supply shock is by definition an abrupt change in supply that raises a firm's production costs.
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f
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With the figure for reference, match each shift to the expected consequence on aggregate output (Y), the price level (P), and the unemployment rate (u).
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1- Y decreases, P increases: LRAS shifts to the left 2- Y increases, P increases:Aggregate demand shifts to the right. 3- u falls, P falls: SRAS shifts to the right. 4- Y falls, P falls: Aggregate demand shifts to the left.
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Of the four major components that make up aggregate demand, which one has the most significant impact on GDP?
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consumption
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When aggregate demand increases, output and employment rise in the short run before returning to their initial values in the long run. Therefore, everyone is better off in the short run.
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f
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Suppose that a new technology, nuclear fusion, makes it much cheaper to generate power. Would this development cause a shift in the short-run aggregate supply curve (SRAS), the long-run aggregate supply curve (LRAS), both, or neither?
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both curve shift
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Whenever the long-run aggregate supply curve shifts to the right as shown, the long-run unemployment rate will decrease.
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f
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Consider the following graph. Assuming that the U.S. economy begins with an aggregate demand curve equal to AD1, click on the aggregate demand curve you would expect to see following a rise in the U.S. price level.
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AD1
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Consider the graph below. Assume that, initially, an economy has long-run aggregate supply corresponding to LRAS, short-run supply corresponding to SRAS1, and aggregate demand corresponding to AD1. Where will the new equilibrium be in the short run if political events cause workers to lower their expectations of future income?
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AD2 - 95
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Consider the graph below, and assume that the U.S. economy initially has a short-run aggregate supply curve corresponding to SRAS1. Click on the SRAS curve that would most plausibly result if the Federal Reserve announced a plan to increase the U.S. money supply one year from now, and citizens responded by expecting higher prices in the future.
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SRAS3
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Match each of the following terms with the phrase that best describes it.
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1- the spending side of the economy: aggregate demand 2- a measure of consumers' expectations: consumer sentiment index 3- a measure of the price level: GDP deflator 4- the producing side of the economy: aggregate supply
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You read a news article reporting that a nation's real output fell while its inflation rate temporarily jumped up. From this you can conclude that the recession was likely caused by which of these scenarios?
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a decrease in aggregate supply
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Choose the term that best completes the following statement. Drag word(s) below to fill in the blank(s) in the passage. When the U.S. price level increases, Americans increase their demand for German cars, while Germans demand fewer American cars. This is an example of the
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international trade effect
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Put in chronological order the events that take an economy from its original long-run equilibrium to a new long-run equilibrium.
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1- stock price 2- aggregate 3- Gradually 4- Short run
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Complete the following passage concerning macroeconomics. Drag word(s) below to fill in the blank(s) in the passage. One branch of macroeconomics focuses on long-run growth and development, while the other branch focuses on -, which are fluctuations in -, typically over time periods of five years or -. One model that macroeconomists use to study these fluctuations, which are called recessions and expansions, is the - model.
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1- business cycles, 2- an economy's growth rate 3- less 4- aggregate demand-aggregate supply
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Imagine that the U.S. economy is initially operating at full-employment output (Y*). Identify each event as a factor that will either increase or decrease real GDP in the short run.
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Increase 1- The member nations of an oil cartel have internal disputes that lead to a temporary breakdown in the cartel's control of oil prices. 2- Cheap oil floods the world market. American workers expect a surge in their incomes due to upbeat media coverage of the economy.
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Assuming the U.S. economy's initial aggregate supply curve is LRAS1, label the other two curves with the event most likely to cause a shift to each curve.
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- A new law prohibits employers from hiring anyone under the age of 21. : first line - Oil prospectors discover a previously unknown reserve of oil in California. : the last line