5 Written questions
4 Matching questions
- demand, supply
- real-balances effect
- determinants of aggregate supply
- aggregate demand
- a 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.
- b The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.
- c Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
- d A schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels.
5 Multiple choice questions
- The determinants of aggregate supply are BLANK BLANKS, BLANK, and the BLANK-BLANK environment. A change in any one of these factors will change per-unit production costs at each level of output and therefore will shift the aggregate supply curve.
- 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.
- 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.
- 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.
- Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.
5 True/False questions
foreign purchases effect → The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.
efficiency wages → 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.
cost-push → 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.
equilibrium price level → The price level at which the aggregate demand curve intersects the aggregate supply curve.
long-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.