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What does it mean when AD shifts right?

o Real GDP is greater than potential
o Unemployment less than natural rate
o Price level rises

What causes AD to shift right?

 Increase in real wealth
 Decrease in real interest rates
 Optimism about the future
 Rise in expected rate of inflation
 Higher real incomes abroad
 A fall in the value of a nation's currency

How are the shifts right or "booms" corrected in the long run?

by rising interest rates and resource prices. This will cause the SRAS curve will shift left, returning the economy to full employment

What occurs when AD shifts left?

o Real GDP is less than potential
o Unemployment greater than natural rate
o Cyclical unemployment present
o Price level falls

What causes AD to shift left?

 Decrease in real wealth
 Increase in real interest rates
 Pessimism about the future
 Fall in expected rate of inflation
 Lower real incomes abroad
 A rise in the value of a nation's currency

How are shifts to the left or "busts" corrected in the long run?

by falling interest rates and resource prices. This will cause the SRAS curve to shift right, returning the economy to full employment.

What happens when SRAS shifts right?

o Real GDP is greater than potential
o Unemployment less than natural rate
o Price level falls

What causes SRAS to shift right?

 Falling resource prices
 Falling expected inflation rate
 Favorable supply shocks (good weather or lower prices of imported resources)

What happens when SRAS shifts to the left?

o Real GDP is less than potential
o Unemployment greater than natural rate
o Cyclical unemployment present
o Price level rises

What causes SRAS to shift left?

 Rising resource prices
 Rising expected inflation rate
 Unfavorable supply shocks (bad weather or higher prices of imported resources)

What happens when LRAS shifts right?

it represents long term economic growth ,but not a boom or bust

What causes LRAS to shift right?

 Increase in resource supply
 Technology improvements
 Institutional changes that improve our productive capacity

What happens when LRAS shifts left?

oThis represents a permanent reduction in the economy's productive capacity, not a boom or bust

What causes LRAS to shift left?

 Decrease in resource supply
 Technology and productivity deteriorations
 Institutional changes

Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas?

an increase in the general level of prices

Which is most likely to cause a temporary spurt in the growth of GDP that cannot be maintained in the long run?

An unanticipated increase in aggregate demand.

Which of the following will most likely cause an increase (shift to the right) in both the long-run and short-run aggregate supply curves?

a technological improvement in robotics that substantially increases labor productivity

When output is less than the economy's long-run capacity, which of the following is most likely to occur?

reductions in real interest rates and real resource prices

Which of the following will most likely accompany an unanticipated increase in aggregate demand?

an increase in real output

Which of the following will cause an increase in aggregate demand within the AS/AD model?

a decrease in the real interest rate

During an economic contraction, housing and stock prices generally

fall, leading to a reduction in aggregate demand.

If the general level of prices is lower than business decision makers anticipated when they entered into long-term contracts for raw materials and other resources, which of the following is most likely to occur?

An actual rate of unemployment that is greater than the natural rate of unemployment

Which of the following would be most likely to cause a reduction in current aggregate demand in the United States?

The economies of key trading partners fall into a recession.

Which of the following will most likely increase the economy's long-run aggregate supply?

advances in technology

A rise in the price of oil would be most likely to cause which of the following in the United States?

an economic slowdown or recession

If European economies experience strong economic growth, U.S. net exports will

increase and AD will shift rightward.

An increase in the long-run aggregate supply curve indicates that

potential real GDP has increased.

If there is an unanticipated increase in aggregate demand, which of the following is most likely to occur?

an increase in the price level (inflation)

When an economy is experiencing an economic boom and operating beyond its long-run capacity,

strong demand for investment funds will push interest rates upward.

If a market economy was in a recession, which of the following would help direct it back toward the full employment rate of output?

lower resource prices and lower real interest rates

Which of the following would be most likely to cause an increase in current aggregate demand in the United States?

sharp increase in the value of stocks owned by Americans

Which of the following statements is most consistent with the view that the economy has a self-corrective mechanism?

When the economy is in a recession, falling resource prices and declining interest rates will direct the economy back to full employment.

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