5 Written Questions
5 Matching Questions
- aggregate demand
- inflation, multiplier effect
- menu costs
- a Increases in aggregate demand to the right of the full-employment output cause BLANK and positive GDP gaps (actual GDP exceeds potential GDP). An upsloping aggregate supply curve weakens the BLANK BLANK of an increase in aggregate demand because a portion of the increase in aggregate demand is dissipated in inflation.
- b An aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level.
- c 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.
- d A schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels.
- e 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.
5 Multiple Choice Questions
- Shifts of the aggregate demand curve to the left of the full-employment output cause BLANK, negative GDP gaps, and BLANK unemployment. The price level may not fall during recessions because of downwardly BLANKABLE prices and wages. This results from fear of price wars, menu costs, wage contracts, efficiency wages, and minimum wages. When the price level is fixed, changes in aggregate demand produce full-strength multiplier effects.
- 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.
- A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.
- 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.
- 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.
5 True/False Questions
demand, supply → Rightward shifts of the BLANK BLANK curve, caused by large improvements in productivity, help explain the simultaneous achievement of full employment, economic growth, and price stability that occurred in the United States between 1996 and 2000. The recession of 2001, however, ended the expansionary phase of the business cycle. Expansion resumed in the 2002-2007 period, before giving way to the severe recession of 2007-2009.
aggregate demand → Rightward shifts of the BLANK BLANK curve, caused by large improvements in productivity, help explain the simultaneous achievement of full employment, economic growth, and price stability that occurred in the United States between 1996 and 2000. The recession of 2001, however, ended the expansionary phase of the business cycle. Expansion resumed in the 2002-2007 period, before giving way to the severe recession of 2007-2009.
immediate-short-run → An aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level.
AD-AS model → The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output.
cost-push → Leftward shifts of the aggregate supply curve reflect increases in per-unit production costs and cause BLANK-BLANK inflation, with accompanying negative GDP gaps.