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5 Written questions

5 Matching questions

  1. aggregate supply, flexibility
  2. productivity
  3. efficiency wages
  4. downsloping
  5. immediate-short-run
  1. a An aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curves shifts; a horizontal aggregate supply curve that implies an inflexible price level.
  2. b 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.
  3. c The BLANK BLANK curve shows the levels of real output that businesses will produce at various possible price levels. The slope of the aggregate supply curve depends upon the BLANKITY of input and output prices. Since these vary over time, aggregate supply curves are categorized into three time horizons, each having different underlying assumptions about the flexibility of input and output prices.
  4. d 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. e A wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover.

5 Multiple choice questions

  1. 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.
  2. Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
  3. 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.
  4. 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.
  5. 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.

5 True/False questions

  1. input prices, productivity, legal-institutionalThe 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.


  2. aggregate supplyThe BLANK BLANK curve shows the level of real output that the economy demands at each price level.


  3. inflation, multiplier effectIncreases 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.


  4. determinants of aggregate demandFactors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.


  5. equilibrium real outputThe gross domestic product at which the total quantity of final goods and services purchased (aggregate expenditures) is equal to the total quantity of final goods and services produced (the real domestic output); the real domestic output at which the aggregate demand curve intersects the aggregate supply curve.