Macroeconomics Exam 3: Chapter 20

According to classical macroeconomic theory, changes in the money supply change nominal but not real variables.

When output rises, unemployment falls.

An increase in the money supply causes output to rise in the long run.

Although wages, incomes, and interest rates are most often discussed in nominal terms, what matters most are their real values.

A change in the money supply changes only nominal variables in the long run.

Most economist agree that money changes real GDP in both the short and long run.

The aggregate-demand curve shows the quantity of domestic goods and services that households, firms, the government, and customers abroad want to buy at each price level.

The aggregate demand and aggregate supply model helps us to understand both short-run economic fluctuations and how the economy moves from the short to the long run.

The downward slope of the aggregate demand curve is based on logic that as the price level rises, consumption, investment, and net exports all fall.

Aggregate demand shifts to the left if the money supply increases.

A decrease in the money supply causes the interest rate to rise so that investment falls.

An increase in the money supply causes the interest rate to fall, investment spending to rise, and aggregate demand to shift right.

An increase in the money supply shifts the long-run aggregate supply curve to the right.

Technological progress shifts the long-run aggregate supply curve to the right.

Other things the same, technological progress raises the price level.

Because the price level does not affect the long-run determinants of real GDP, the long-run aggregate-supply is vertical.

When the price level rises unexpectedly, some businesses may mistake part of the increase for an increase in the price of their product relative to others and so decrease their production.

All explanations for the upward slope of the short-run aggregate supply curve suppose that the quantity of output supplied increases when the actual price level exceeds the expected price level.

The only way to rationalize an upward slope for the short-run aggregate-supply curve is to argue that wages are sticky in the short run.

An increase in the actual price level does not shift the short-run aggregate supply curve, but an expected increase in the price level shifts the short-run aggregate supply curve to the left.

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending which shifts the aggregate-demand curve to the left.

Increased optimism about the future leads to rising prices and falling unemployment in the short run.

If aggregate demand shifts right, then eventually price level expectations rise. The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

If aggregate demand shifts right, then eventually price level expectations rise. This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.

In the long-run, an increase in aggregate demand increases the price level, but not real GDP.

Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

Stagflation results from continued decreases in aggregate demand.

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

If the central bank increased the money supply in response to a decrease in short-run aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.