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what does the aggregate demand curve show

the amount of real output which will be purchased at each possible price level

Why is the aggregate demand curve downward sloping?

Because of the real balances effect, interest rates, and foreign purchases

The interest-rate effect suggests that

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending

The foreign purchases effect

moves the economy along a fixed aggregate demand curve

True or False:
When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending?


Other things equal, if the national incomes of the major trading partners of the United States were to rise,
the U.S

AD would shift right

Which one of the following would not shift the aggregate demand curve

a change in price level

A decline in investment will shift the AD curve to the:

left by a multiple of the change in investment.

An increase in net exports will shift the AD curve to the

right by a multiple of the change in investment

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift

rightward by $50 billion at each price level

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial
spending because of the

Multiplier effect

The graphical relationship between the price level and the amount of real GDP that businesses will offer for
sale is known as the

AS curve

The aggregate supply curve (short-run) slopes upward and to the right because

wages and other resource prices adjust only slowly to the price level

The aggregate supply curve (short-run) is upsloping because:

per-unit production costs rise as the economy moves toward and beyond its full-employment real

Shifts in the aggregate supply curve are caused by changes in:

on or more of the determinants of AS

The determinants of aggregate supply:

include resource prices and resource productivity.

Productivity measures

real output per unit of input

Other things equal, appreciation of the dollar:

decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources.

Graphically, demand-pull inflation is shown as a

Rightward shift of the AD curve along an upsloping AS curve

Graphically, cost-push inflation is shown as a

leftward shift of AS curve

If aggregate demand decreases, and as a result, real output and employment decline but the price level
remains unchanged, we can assume that

the price level is inflexible downward and a recession has occurred

A rightward shift of the AD curve in the very steep upper part of the upsloping AS curve will:

increase the price level by more than real output

If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect

aggregate demand to decrease and aggregate supply to increase

In which of the following sets of circumstances can we confidently expect inflation?

aggregate supply decreases and aggregate demand increases

If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantity
supplied, we would expect:


What percentage of real GDP growth signifies inflation?

Greater than 5%

What percentage of CPI indicates a recession?

Less than 3%

What percentage of unemployment signifies a recession?

More than 7%

What percentage of CPI signifies inflation?

Greater than 5%

What percentage of unemployment signifies inflation?

Full Employment

What growth percentage of real GDP signifies a growth recession?

Less than or equal to 1%

What percentage of CPI signifies a growth recession?

Less than 3%

What percentage of unemployment signifies a growth recession?

Greater than 6%

Higher interest rates result in what?

A stronger American dollar

Why do higher interest rates result in a strengthening of the dollar?

Because more people want to put their savings in the U.S.

What is the net export effect?

When interest rates go down the dollar weakens resulting in an increase of exports and a decrease of imports

How do you calculate the amount the government should changes taxes by?

Gap/ MPC

What is the formula for the 3 amigos?

(Initial change in spending) (multiplier)= (change in GDP)


Income or euqilibrium

True or false: Classical thinkers believe that complete dependence on the marker will not produce the best government


True or false: Keynes thinkers believe the government should play a limited roll in the economy


True or false: Keynes thinkers believe large taxation in necessary to a stable economy


True or false: Classical thinkers feel the government should always have a balanced budget


True or false: Classical thinkers believe that wages, prices, and interest raters are not flexible enough to always self correct the government


What is Say's law?

Supply creates its own demand.

What is the real balances effect?

As APL increases, the value of financial assets fall so people buy less

R > I

Rate of return on investment must be greater than the interest paid on money borrowed to invest

What is the consumption function

The relationship between consumption spending and disposable income

What does the multiplier tell us and how is it found?

It is the cumulative change in real GDP given an initial change in spending. It is found by 1/(1-MPC)

What does the short run AS curve portray?

The amount of time it takes for you to adjust your monetary circumstances to inflation

What does the long run AS curve portray?

The price increases catching up to the cost increases and everything adjusting

True or false: A decline in aggregate demand will primarily affect real output and employment if prices are inflexible downward.


Prices and wages tend to be:

Flexible upward but inflexible downward

Efficiency wages are

above-market-wages that bring forth so much added work effort that per-unit production costs are lower than at market wages

When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of

Wage Contracts

True or false:An increase in imports (independently of a change in the U.S. price level) will increase both U.S. aggregate
supply and U.S. aggregate demand.


True or false: The greater the upward slope of the AS curve, the larger is the realized multiplier effect of a change in
investment spending.


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