macroeconomics chapters 10-11

The long-run aggregate supply curve is determined by

The full employment level of real output

The long-run aggregate supply curve shifts outward when

There is economic growth

The long-run aggregate supply curve

Is vertical because changes in the price level have no effect on real output

Year to year rightward shifts in long-run aggregate supply leads to

A long-run trend path for real GDP

Total expenditures for domestically produced goods and services consist of

Consumer spending, business spending, government spending, and net foreign spending.

What is not a component of total expenditures?

Merchandise inventories

What determines the total value of annual U.S. GDP?

The spending and production decisions of consumers, firms, governments, and foreigners

The total of all planned real expenditures in the economy is

Aggregate demand

The aggregate demand curve

Shows planned purchase rates of goods and services at various price levels.

The aggregate demand curve slopes downward because of the

Real-balance, interest rate and open economy effects

According to the real-balance effect, an increase in the price level

Reduces an individual's expenditures due to a decrease in the real value of cash balances

According to the interest rate effect, an increase in the price level

Increases nominal interest rates, reduces borrowing and spending, reduces the aggregate quantity of goods and services

What will generate an increase in aggregate demand?

Government spending for the onset of a war

The U.S. aggregate demand curve would shift to the left if

The Federal Reserve Board caused the real interest rate to increase

The aggregate demand curve would shift to the right as a result of

A drop in the foreign exchange value of the dollar.

What wouldn't cause the aggregate demand curve to shift?

Price level changes

What happens to the aggregate demand curve when deflation has occurred in the past year

Movement down along the curve

What happens to the aggregate demand curve when real GDP levels of all the nation's major trading partners have declined?

Shifts to the left

What happens to the AD curve when there has been a decline in the foreign exchange value of the nation's currency?

Shifts to the right

What happens to the AD curve when the price level has increased this year

Movement up along the curve

Long-run equilibrium in the economy will occur

At the price level where total planned real expenditures equals real GDP at full employment

The long-run equilibrium of an economy occurs

Where the long-run aggregate supply curve meets the aggregate demand curve

If economic growth causes the long-run aggregate supply curve to shift rightward over time, but the aggregate demand curve does not change, we expect

The long-run equilibrium price to decline, and there will be secular deflation

A persistent decline in the price level due to economic growth with stable aggregate demand is

Secular deflation

In the long run, persistent deflation in a growing economy can occur if

Increases in the LRAS are proportionately larger than the increase in AD

An increase in the LRAS curve that is larger proportionately than an increase in the AD curve will lead to

A decrease in the price level and an increase in output

Inflation can be caused by

Decreases in the LRAS curve or increases in the AD curve

Supply-side inflation can be caused by a continual

Decrease in aggregate supply while aggregate demand remains unchanged

What can cause the economy to experience supply-side inflation

Government laws which say that the average work week must be reduced by one hour every year

The model of long-run equilibrium

Is the same as the Classical Model

One of the main conclusions off Say's Law was that

If people supply goods in order to then supply goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

What is a possible explanation for sticky prices?

Labor contracts cause wages to be fixed over the contract period.

The Keynesian model argues that prices are sticky. One reason supporting this argument is that

Nominal wages are inflexible downwards

Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to

Reduce their workforce

According to the Keynesian model, full employment is

Possible, but not guaranteed

Keynesians believe that the aggregate supply curve is

Horizontal in the short-run

The Keynesian model indicates that the economy will find an equilibrium, however the economy will not always

Reach full employment

What did Keynes mean when he said that prices are sticky?

Prices, especially the price of labor, are inflexible downward

If the prices were sticky, according to Keynes, this would then imply that the

Short-run aggregate supply curve is horizontal

An important difference between the Classical Model and Keynesian Model is that

Prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in Keynesian Model

The Keynesian Model was supported empirically by data from the decade of the


The Modern Keynesian short-run aggregate supply curve is best described by what?

It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very Steep as real GPD surpasses full employment

In the Modern Keynesian Model the SRAS curve slopes upward. How could one explain the shape of the upward sloping SRAS curve by only focusing on the capital input?

Existing machinery can be used longer hours

How could one explain the shape of the upward sloping SRAS curve by only focusing on profits?

Firms are able to earn higher profits as long as the price level increases and the nominal wage Rate remains constant.

The modern Keynesian Model assumes that

The prices respond to changes in aggregate demand but not fully

Since the modern Keynesian Model allows for some price response, the aggregate supply curve

Is upward sloping

In the modern Keynesian Model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor input?

The workers are switched from uncounted production to counted production, thus enabling The firm to expand output as the price level expands

What is the best example of uncounted production?

An employee recalibrating a machine to maintain production within satisfactory tolerance Levels for machine parts

The LRAS curve will not shift if there is a change in

The price level

What will not shift the SRAS and LRAS

A temporary change in input prices

Suppose the rental rate of machinery decreased temporarily. The result of this would be described by

An increase in the SRAS curve only

What will increase both the SRAS and LRAS curves?

Younger workers in the labor force receive better and more training than their predecessors

What is true concerning shifts of the LRAS curve?

An increase in the LRAS curve is depicted as a rightward shift and an increase in real GDP

An economy is currently in long-run equilibrium. Suppose the US dollar depreciates, what is the best explanation of the outcome?

Aggregate demand increases.

Given that the economy is currently in a long run equilibrium the US dollar depreciates, the economy would the experience:

An inflationary gap

Suppose the economy is in long-run equilibrium. If the US dollar appreciates, what is the best description of the outcome?

Aggregate demand decreases

Suppose the economy is in long-run equilibrium. Given that the US dollar appreciates, the new short run position of the economy finds itself in is termed

A recessionary gap.

Inflation in an economy implies that

The average price level has increased over a stated period of time

Cost-push inflation arises due to

A decrease in the short-run aggregate supply curve

What would create cost-push inflation?

An increase in wages paid to workers.

Demand-pull inflation arises due to

An increase in household income

What would create demand-pull inflation?

An increase in household income

Persistent inflation arises due to

The AD curve increasing by a larger proportion that the LRAS supply curve.

What best characterizes demand-pull and cost-push inflation?

Both are short run types of inflation

In economic terminology, personal disposable income, or income after taxes, can be either

consumed or saved

Suppose that disposable income increases in an economy. Which of the following relationships must always be true

The change in disposable income is equal to the change in saving plus the change in consumption

In the Keynesian model, businesses

pay no indirect taxes

The Keynesian model assumes that international trade

plays no role in the simple model

Current disposable income held to buy consumption goods in the future is referred to as


Consumption is what type of variable?


Saving is the portion of

disposable income that is not consumed

What best reflects the relationship between saving and savings?

Saving is a flow variable; savings is a stock variable

In the Keynesian model, if disposable income were to increase, households would

increase both their consumption and saving.

The relationship between the MPC and the MPS indicates that the entire increase in household disposable income

is distributed between consumption and saving.

Planned real investment is determined by the

rate of interest

What won't cause the planned investment function to shift rightward?

A decrease in the interest rate

An increase in the interest rate causes

a decrease in the amount of real planned investment

In the Keynesian model equilibrium national income

equals planned consumption, investment, government, and net export expenditures

If real GDP falls below total planned expenditures the economy will see

production and employment increases

When government spending and net exports are added into the Keynesian model

the aggregate expenditures function shifts

What is true concerning the foreign sector in the simple Keynesian model?

Net exports are autonomous

The greater the value of the marginal propensity to consume

the greater the value of the multiplier

The greater the value of the marginal propensity to save

the smaller the value of the multiplier

Nominal GDP is dependent on

the price level and output

If the price level rises the multiplier effect on real GDP will be

weaker than if the price level were constant

What is true when considering an economy with an upward sloping SRAS curve?

The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap

The multiplier is weakened in inflationary gaps because of

rapid price level increases

What is true of the multiplier in the Keynesian model when there is an increase in autonomous expenditures?

Expenditures increase by the same proportion during each round of spending

In this situation in which there is an increase in autonomous expenditures, in each successive round that the multiplier is applied

expenditures increase by a smaller amount than the previous round

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