EC140 Lecture Notes - Lecture 9: Aggregate Supply, Aggregate Demand, Supply Shock

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Determine the effect on either the aggregate demand curve (is it a rightward or a leftward shift?), the aggregate short-term supply curve, and the long-term aggregate supply curve (does the upward sloping portions of the SAS curve shift left or right, or does the vertical portion of the LAS curve shift to the right or to the left?). Also determine the effect on the price level, the real output level and employment/unemployment. Provide an explanation and express this graphically using the AS/AD macro model.

From 1980 to 1985, the U.S. dollar appreciated over 60%. An appreciation of a country's currency makes its goods more expensive relative to foreign goods. This reduces its exports and increases its imports, shifting its AD curve to the left.

pearbutterfly598

In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.

	decreases; decreases; falls short of
	increases; decreases; equals
	decreases; increases; exceeds
	decreases; increases; equals
	increases; decreases; exceeds

The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that

	Y* is independent of the price level and that actual output Y > Y* in the long run
	Y* equals actual output (Y) in the long run
	Y* is independent of the price level and that actual output Y = Y* in the long run
	Y* is independent of the price level
	Y* is independent of the price level and that actual output Y < Y* in the long run

Stagflation arises in the context of the AD-AS model when some external factor causes

	the LRAS curve to shift to the right
	the AD curve to shift leftwards
	the SRAS curve to shift downwards
	the SRAS curve to shift upwards
	the AD curve to shift rightwards

If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.

	either an increase or a decrease
	no change
	an increase
	a decrease
	an initial increase, and then a decrease

Which of the following will shift the aggregate demand curve to the right?

	Consumers become pessimistic about the future
	A new technology is developed that will increase profits
	Income taxes are raised
	Foreign economies fall into recession, reducing their demand for domestic exports
	The government reduces purchases to balance the budget

Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?

	A leftward shift the AD curve
	There will be no movement of the AD curve
	A movement down the AD curve
	A movement up the AD curve
	A rightward of the shift the AD curve

An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of

	100
	110
	120
	90
	105

The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.

	recessionary; recessionary
	recessionary; expansionary
	expansionary; expansionary
	output; output
	expansionary; recessionary

The aggregate demand curve shows

	the amount of planned aggregate expenditure (and output) at the current price level
	the amount of planned aggregate expenditure (and output) at an average price level
	the amount of planned aggregate expenditure (and output) at a constant price level
	the amount of planned aggregate expenditure (and output) at various price levels
	the amount of planned aggregate expenditure (and output) at last year's price level

Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.

	an increase; left; Y = Y*
	a decrease; right; Y > Y*
	an increase; right; Y = Y*
	a decrease; left; Y > Y*
	no change; left; Y = Y*

In the Keynesian model

aggregate demand determines real GDP per year.

the short-run aggregate supply curve determines real GDP.

unemployment cannot persist for long periods of time.

the aggregate demand curve determines the price level.

A terrible winter storm causes enormous problems in the

northeastern

part of the United States. This would cause

the short-run aggregate supply curve to shift to the left, but would have no effect on the long-run aggregate supply curve.

both the short-run and the long-run aggregate supply curves to shift to the left, but the long-run aggregate supply curve would shift more than the short-run curve.

the short-run aggregate supply curve to shift to the left, and the long-run aggregate supply curve would shift to the right.

both the short-run and the long-run aggregate supply curves to shift to the right in equal amounts.

Equilibrium real GDP rises after the dollar strengthened. From this we can conclude that

the increase in aggregate demand was greater than the decrease in aggregate supply.

the decrease in aggregate demand was more than the increase in aggregate supply.

the decrease in aggregate demand was less than the increase in aggregate supply.

the increase in aggregate demand was less than the decrease in aggregate supply.

Saving is

the difference between real GDP and disposable income while savings is the difference between disposable income and consumption spending.

the amount one does not consume in a given period of time while savings is the accumulation of past periods of saving.

the difference between disposable income and spending on goods and serviceswhile savings is the difference between real GDP and disposable income.

the accumulation of past periods of savings while savings is the amount of disposable income that is not consumed in a given period of time.

A permanent reduction in investment spending leads to

a proportional decrease in real GDP.

a more than proportional decrease in real GDP.

a more than proportional increase in real GDP.

a less than proportional decrease in real GDP.

An increase in net exports leads to an increase in real GDP. Further,

consumption spending increases while investment spending decreases.

consumption spending increases but saving does not change.

consumption spending and saving increase.

government spending decreases to offset the increase in net exports.

An increase in aggregate spending that is caused by a factor other than the price level will lead to the

aggregate demand curve shifting to the right.

aggregate supply curve shifting to the right.

aggregate supply curve shifting to the left.

aggregate demand curve shifting to the left.

The marginal propensity to consume is 0.9. The multiplier is

0.9.

1.11.

0.1.

10.

When the SRAS curve slopes upward, the actual affect of an increase in real autonomous spending on equilibrium real GDP is smaller than predicted by the multiplier because

real GDP increases.

the price level rises

the price level falls.

real GDP decreases.

Other things equal, the lower the total real value of final goods and services demanded in the economy the

more the production possibilities cure shifts to the left.

lower the price level.

higher the price level.

lower the level of endowments.

The long-run aggregate supply curve can be thought of as the

level of output for which real GDP equals nominal GDP.

level of output that the nation is currently producing.

level of real GDP associated with a constant price level.

full-employment level of real GDP.

EC140 Lecture Notes - Lecture 9: Aggregate Supply, Aggregate Demand, Supply Shock

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