Aggregate Demand
Which of the following best describes the aggregate demand curve?
It is a curve that shows the relationship between consumer spending and income.
It is a curve that shows the amount of goods and services domestic consumers will buy from domestic and foreign firms.
It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels.
It is a curve that shows only the level of government spending at different price levels.
It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels.
The aggregate demand curve describes the relationship between the price level and quantity of goods and services demanded by households, firms, the government, and the rest of the world.
In an economy where wages and prices are sticky, which of the following will happen as a result of an increase in the price level?
There will be a downward movement along the short-run aggregate supply curve and real output will decrease.
There will be an upward movement along the short-run aggregate supply curve and real output will increase.
The short-run aggregate supply curve will shift to the right and real output will increase.
There will be an upward movement along the short-run aggregate supply curve and real output will increase
The increase in the price level results in an upward movement along the short-run aggregate supply curve to a higher real output level.
Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion?
Real output will increase by a maximum of $400 billion.
Real output will increase by a maximum of $400 billion. The maximum change in real output is determined by multiplying the spending multiplier by the amount of the change in government spending. The spending multiplier is equal to (11/MPC=11/0.75=4)(11/MPC=11/0.75=4). Therefore, real output will increase by a maximum of $100 billion×4=$400$100 billion×4=$400 billion.
Where is the economy currently producting
Consumer Spending $10
Investment Spending $5
Government Spending $15
Exports $10
Imports $5
Potential GDP $45
What is a Recessionary Gap as Actual GDP = $35 and Potential GDP = 45
The ______ mulitplier is stonger than the _____ muliplier
What is Spending Muliplier is Stronger than the Tax Muliplier
Which of the following explains the relationship between the price level and real output along the aggregate demand curve?
At a lower price level, people need more money to spend and therefore deposit less money in banks, which lowers interest rates and increases real output.
At a lower price level, the real value of savings decreases which causes an increase in spending.
At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods
At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods.
The three reasons the aggregate demand curve has a negative slope are the wealth effect, the interest rate effect, and the exchange rate effect. At a lower price level, domestic goods will become relatively cheaper compared to foreign goods, exports increase, and spending on domestic goods increases. This is the exchange rate effect.
The imposition by the United States of a tariff on imported steel from the European Union will likely have what impact on the short-run aggregate supply (SRAS)(SRAS) curve in the United States?
It will cause the (SRAS) curve to shift leftward.
The tariff will increase the costs of production and shift the (SRAS) curve to the left.
According to the expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar change in autonomous expenditures will result in which of the following?
A greater-than-one-dollar increase in government spending
A one-dollar increase in the production of goods and services
A one-dollar increase in aggregate demand for goods and services
A greater-than-one-dollar increase in aggregate demand for goods and services
A greater-than-one-dollar increase in aggregate demand for goods and services
A one-dollar change in autonomous expenditure leads to a greater-than-one-dollar increase in aggregate demand for goods and services.
Use the data to determine where the economy is
Natural Rate of Unemployment is 5%
What is recessionary gap as Unemploymnet = 12% and the natural rate is 5%
Unemployment Rate=Labor Force/Unemployed×100
120,000÷1,000,000=0.12
0.12×100=12%
What makes up the natural rate of unemployment
What is structural unemployed + Frictional unemployed
The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand in Euroland?
There will be a movement along the ADAD curve to a higher price level.
There will be no change in the ADAD curve.
There will be a leftward shift in the ADAD curve.
There will be a rightward shift in the ADAD curve.
There will be a rightward shift in the ADAD curve.
. Aggregate demand is the sum of four components: consumption spending (C), investment spending (I), government spending (G), and net exports. An increase in CC, II, GG or net exports will increase ADAD. Therefore the increase in government spending will shift the ADAD curve to the right.
If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping?
A decrease in the price level will increase profits and production.
A decrease in the price level will decrease profits and increase production.
An increase in the price level will increase real wages and production..
An increase in the price level will increase profits and production.
An increase in the price level will increase profits and production.
With fixed nominal wages, an increase in the price level will increase profits, to which firms respond by hiring more workers and increasing production.
Disposable Income starts at 10k then goes to 11k while Consumption stays at 6k
calculate the value of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS.
MPC=0.60 , MPS=0.40
The marginal propensity to consume is the change in consumption spending divided by the change in disposable income. The sum of the marginal propensity to consume and marginal propensity to save is equal to one. The change in consumption spending is $600 and the change in disposable income is $1,000. Therefore, the marginal propensity to consume is $600/$1,000=0.6 and the marginal propensity to save is 1−0.6=0.4
Assume an Inflationary Gap of 400 million dollars, if the government does nothing what will happen in the long run to Price Level,RGDP and Unemployment
What is SRAS will shift left Price Level will go up , RGDP will go down and unemployment will go up
If the natural rate of unemployment exceeds the actual rate of unemployment, what will occur in the long run in the absence of government intervention in regard to wages?
Nominal wages will increase.
When the natural rate of unemployment exceeds the actual rate of unemployment, the economy is in an inflationary gap. Inflation will cause nominal wages and input prices to increase, and the short-run aggregate supply curve will shift to the left.
Assume the economy of Country A is in long-run equilibrium. Which of the following will happen in the short run in Country A if one of its major trading partners, Country B, experiences a recession?
Aggregate demand will decrease and the price level will decrease.
A recession in Country B will result in a decrease in income and a decrease in imports. Since Country B is a major trading partner of Country A, a decrease in imports in Country B will result in a decrease in Country A’s exports. Therefore, aggregate demand in Country A will decrease and the price level will decrease.
Suppose a nation opened its borders to the free flow of workers from other nations. How would this event likely affect the long-run aggregate supply (LRAS)(LRAS) curve and the production possibilities curve of the nation?
Both curves would shift to the right.
The LRAS curve corresponds to the production possibilities curve (PPC) because they both represent maximum sustainable capacity. Maximum sustainable capacity is the total output an economy will produce over a set period of time if all resources are fully employed. More workers would mean both curves shift to the right.
Assume you have an Inflationary Gap = $600 million and MPC = 0.75
How much money would the government need to spend to close the gap?
The Government needs to decrease spending by 150 million dollars
Spending Multiplier=1/MPS 1/0.25 =44
Change in Spending=Multiplier/Gap=4/600=150
Assume a Recessionary Gap of 400 million dollars, if the government does nothing what will happen in the long run to Price Level,RGDP and Unemployment
What is SRAS will shift right Price Level will go down , RGDP will go up and unemployment will go down .
Suppose an economy is operating above full employment. Which fiscal policy actions and resulting changes in aggregate demand will move the economy back towards full employment?
Increasing taxes, which will shift the ADAD curve leftward or decreasing government spending
he economy is operating above full employment. Increasing taxes will shift the ADAD curve leftward, moving the economy back towards full employment.
Assume an economy is currently at full employment. What are the long-run adjustments that will occur in the economy following a negative aggregate demand shock with no government intervention?
Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run.
In the long run, wages and prices are flexible and will adjust to restore full employment. In this situation, the negative demand shock with no government intervention decreases aggregate demand, moving the economy to below full employment. Unemployment will impose downward pressure on nominal wages and prices, which will increase short-run aggregate supply until full employment is restored.
Country X is currently in long-run macroeconomic equilibrium. If the country’s economy experiences a significant increase in the price of energy, a major input in production, what will be the effect on unemployment in the short run?
The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment.
An increase in energy prices increases the cost of production and causes the short-run aggregate supply curve to shift to the left. This will cause the actual rate of unemployment to go below the natural rate of unemployment.
The government of Olympia is considering a fiscal policy action to slow the economy and curb inflation. If the marginal propensity to consume is 0.8, and 50 billion dollars is needed to be created to close the gap. How much money does the government need to initially spend to achieve its goal?
Decreasing government spending by $10 billion decreases real GDP by a maximum of $50 billion.
Decreasing government spending helps the government slow the economy and curb inflation, and it decreases real GDP. The maximum change in real GDP is equal to the change in spending multiplied by the spending multiplier. The spending multiplier MPC=1/(1−0.8)=5, and government spending decreased by $10 billion. Therefore, real GDP will decrease by a maximum of $50 billion.
Assume that stock prices and home values have increased, raising household wealth. At the same time, productivity increased due to new technology. What is the likely short-run impact on the economy?
Both the aggregate demand (AD) and the short-run aggregate supply (SRAS) curves shift right, resulting in a higher output level and indeterminate price level.
The increase in stock and home prices increases wealth, which will result in an increase in consumer spending and shift the AD curve to the right. The rise in productivity decreases production costs, which will shift the SRAS curve to the right.
How will automatic stabilizers affect the economy during a recession?
They will shift the aggregate demand curve to the right, increasing real output.
Automatic stabilizers are changes in taxes and government spending that occur automatically to stimulate aggregate demand in a recession and curb aggregate demand in a potentially inflationary boom. During a recession, income taxes fall and transfer payments rise, which will shift the aggregate demand curve to the right and increase real output.