5 Written Questions
5 Matching Questions
- immediate-short-run, short-run, long-run
- interest-rate effect
- consumers, government, multiplier
- a Leftward shifts of the aggregate supply curve reflect increases in per-unit production costs and cause BLANK-BLANK inflation, with accompanying negative GDP gaps.
- b The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).
- c The BLANK-BLANK-BLANK aggregate supply curve assumes that both input prices and output prices are fixed. With output prices fixed, the aggregate supply curve is a horizontal line at the current price level. The BLANK-BLANK aggregate supply curve assumes nominal wages and other input prices remain fixed while output prices vary. The aggregate supply curve is generally upsloping because per-unit production costs, and hence the prices that firms must receive, rise as real output expands. The aggregate supply curve is relatively steep to the right of the full-employment output level and relatively flat to the left of it. The BLANK-BLANK aggregate supply curve assumes that nominal wages and other input prices fully match any change in the price level. The curve is vertical at the full-employment output level.
- d The determinants of aggregate demand consist of spending by domestic BLANKS, by businesses, by BLANK, and by foreign buyers. The extent of the shift is determined by the size of the initial change in spending and the strength of the economy's BLANK.
- e The aggregate demand curve is BLANKING because of the real-balances effect, the interest-rate effect, and the foreign purchases effect. The real-balances effect indicates that inflation reduces the real value or purchasing power of fixed-value financial assets held by households, causing cutbacks in consumer spending. The interest-rate effect means that, with a specific supply of money, a higher price level increases the demand for money, thereby raising the interest rate and reducing investment purchases. The foreign purchases effect suggests that an increase in one country's price level relative to the price levels in other countries reduces the net export component of that nation's aggregate demand.
5 Multiple Choice Questions
- Because the short-run aggregate supply curve is the only version of aggregate supply that can handle BLANK changes in the price level and real output, it serves well as the core aggregate supply curve for analyzing the business cycle and economic policy.
- The reluctance of firms to cut prices during recessions (that they think will be short-lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants.
- A wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover.
- The intersection of the aggregate demand and aggregate supply curves determines an economy's BLANK price level and real GDP. At the intersection, the quantity of real GDP demanded equals the quantity of real GDP supplied.
- The aggregate supply curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level.
5 True/False Questions
aggregate supply → A schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels.
input prices, productivity, legal-institutional → The determinants of aggregate demand consist of spending by domestic BLANKS, by businesses, by BLANK, and by foreign buyers. The extent of the shift is determined by the size of the initial change in spending and the strength of the economy's BLANK.
equilibrium price level → The price level at which the aggregate demand curve intersects the aggregate supply curve.
determinants of aggregate supply → Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
demand, supply → The aggregate BLANK-aggregate BLANK model (AD-AS model) is a flexible-price model that enables analysis of simultaneous changes of real GDP and the price level.