Term
Inflation causes
1. a movement up and to the left along a stationary aggregate demand curve (i.e., a decrease in the
quantity of real GDP demanded).
2. a movement down and to the right along a stationary aggregate demand curve (i.e., an increase in
the quantity of real GDP demanded).
3. the aggregate demand curve to shift left (i.e., a decrease in aggregate demand).
4. the aggregate demand curve to shift right (i.e., an increase in aggregate demand). |
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Definition
1. a movement up and to the left along a stationary aggregate demand curve (i.e., a decrease in the
quantity of real GDP demanded).
Inflation (an increase in the price level) causes a decrease in the quantity of real GDP
demanded, so the economy moves up and to the left along a stationary aggregate demand curve. |
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Term
True or False?
Deflation causes an increase in consumption, investment, government purchases, and net exports. |
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Definition
FALSE.
Deflation (a decrease in the price level) causes an increase in consumption (the wealth
effect), investment (the interest-rate effect), and net exports (the international-trade effect), but
not in government purchases, which are fixed by policy and do not change when the price level
changes. |
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Term
A(n) _____ in the price level or a(n) _____ in the money supply decreases the interest rate, which
encourages households and firms to borrow _____.
1. increase; increase; more
2. increase; increase; less
3. decrease; decrease; more
4. decrease; decrease; less
5. increase; decrease; more
6. increase; decrease; less
7. decrease; increase; more
8. decrease; increase; less |
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Definition
7. decrease; increase; more
A decrease in the price level decreases households’ demand for funds to buy goods and
services, which increases the supply of loanable funds (saving), which decreases the interest rate. An
increase in the money supply decreases the interest rate. A lower interest rate encourages firms to
borrow more to invest in capital and households to borrow more to invest in new housing and to
spend on consumer durables. |
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Term
True or False?
If the interest rate changes for any reason, then the aggregate demand curve will shift. |
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Definition
FALSE.
If the interest rate changes because of a change in the money supply, then the aggregate
demand curve will shift, but if the interest rate changes because of a change in the price level, then
the economy will move along a stationary aggregate demand curve to a new quantity of real GDP
demanded. |
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Term
The federal government can shift the aggregate demand curve right by _____ government purchases
and/or _____ personal income taxes and business taxes.
1. increasing; increasing
2. increasing; decreasing
3. decreasing; increasing
4. decreasing; decreasing |
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Definition
2. increasing; decreasing
An increase in government purchases shifts the AD curve right. A decrease in personal
income taxes increases consumption spending by households, which shifts the AD curve right. A
decrease in business taxes increases investment spending by firms, which shifts the AD curve right. |
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Term
If U.S. real GDP begins to grow more slowly than foreign real GDPs, then U.S. _____ will grow more
slowly than U.S. _____, which will _____ U.S. net exports and shift the aggregate demand curve _____.
1. imports; exports; increase; right
2. imports; exports; decrease; left
3. exports; imports; increase; right
4. exports; imports; decrease; left |
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Definition
1. imports; exports; increase; right
A decrease in the growth rate of U.S. real GDP (income) relative to the growth rates of
foreign real GDPs (incomes) increases U.S. imports more slowly than U.S. exports, which increases
U.S. net exports and shifts the AD curve right. |
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Term
Last month, ten British pounds could purchase one U.S. dollar. This month, it takes twelve British pounds
to purchase one U.S. dollar. This change in the value of the U.S. dollar will _____ U.S. exports to Great
Britain, _____ U.S. imports from Great Britain, and _____ U.S. aggregate demand.
1. increase; decrease; increase
2. increase; decrease; decrease
3. decrease; increase; increase
4. decrease; increase; decrease |
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Definition
4. decrease; increase; decrease
The increase in the value of the U.S. dollar relative to the British pound makes U.S. exports
to Great Britain more expensive and U.S. imports from Great Britain cheaper, which decreases U.S.
exports to Great Britain and increases U.S. imports from Great Britain, which decreases U.S. net
exports, which decreases U.S. aggregate demand |
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Term
True or False?
Potential GDP is determined by the number of workers, the capital stock, and the available technology in
the economy. |
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Definition
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Term
If wages and input prices are fixed by contract when the economy begins to experience inflation, then, in
the short run, firms' profits will _____, so firms will _____ the quantity of goods and services supplied.
1. increase; increase
2. increase; decrease
3. decrease; increase
4. decrease; decrease |
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Definition
1. increase; increase
If wages and input prices are fixed by contract when the economy begins to experience
inflation (an increase in the price level), then firms' costs stay the same while their revenues increase,
so their profits increase, leading them to increase the quantity of goods and services supplied. |
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Term
True or False?
If some firms are slow to adjust the prices of their final goods and services because of menu costs, then
the sales of those firms will decrease in response to deflation. |
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Definition
TRUE.
If some firms are slow to adjust the prices of their final goods and services because of
menu costs, then the sales of those firms will decrease in response to deflation because those firms'
prices will be relatively higher than the prices of firms that did decrease their prices in response to
deflation. |
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Term
When workers and firms producing inputs adjust to the price level being lower than expected, it causes
1. a movement up and to the right along a stationary short-run aggregate supply curve (i.e., an
increase in the quantity of real GDP supplied).
2. a movement down and to the left along a stationary short-run aggregate supply curve (i.e., a
decrease in the quantity of real GDP supplied).
3. the short-run aggregate supply curve to shift left (i.e., a decrease in short-run aggregate supply).
4. the short-run aggregate supply curve to shift right (i.e., an increase in short-run aggregate supply). |
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Definition
4. the short-run aggregate supply curve to shift right (i.e., an increase in short-run aggregate supply).
When workers and firms producing inputs adjust to the price level being lower than
expected, they are willing to accept lower wages and input prices, which decreases the costs of firms
producing final goods and services, which shifts the short-run aggregate supply curve right. |
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Term
In the short run, household and firm optimism causes _____, _____ cyclical unemployment, and _____.
1. recession; positive; deflation
2. recession; positive; inflation
3. recession; negative; deflation
4. recession; negative; inflation
5. expansion; positive; deflation
6. expansion; positive; inflation
7. expansion; negative; deflation
8. expansion; negative; inflation |
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Definition
8. expansion; negative; inflation
Household and firm optimism shifts aggregate demand right. |
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Term
In the short run, households expecting future income to decrease causes _____, _____ cyclical
unemployment, and _____.
1. recession; positive; deflation
2. recession; positive; inflation
3. recession; negative; deflation
4. recession; negative; inflation
5. expansion; positive; deflation
6. expansion; positive; inflation
7. expansion; negative; deflation
8. expansion; negative; inflation |
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Definition
1. recession; positive; deflation
Households expecting future income to decrease shifts aggregate demand left. |
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Term
In the short run, an adverse supply shock causes _____, _____ cyclical unemployment, and _____.
1. recession; positive; deflation
2. recession; positive; inflation
3. recession; negative; deflation
4. recession; negative; inflation
5. expansion; positive; deflation
6. expansion; positive; inflation
7. expansion; negative; deflation
8. expansion; negative; inflation |
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Definition
2. recession; positive; inflation
An adverse supply shock shifts short-run aggregate supply left. |
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Term
In the long run, if the government takes no action, then household and firm optimism or pessimism
only affect
1. real GDP.
2. the unemployment rate.
3. real GDP and the unemployment rate.
4. the price level. |
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Definition
4. the price level
In the long run, if the government takes no action, then the automatic mechanism moves
the economy back to long-run macroeconomic equilibrium at a higher (after optimism) or lower
(after pessimism) price level. |
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Term
True or False?
In the long run, if the government takes no action, then an increase in the price of an important input
does not affect real GDP, the unemployment rate, or the price level. |
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Definition
TRUE.
In the long run, if the government takes no action, then the automatic mechanism moves
the economy back to long-run macroeconomic equilibrium at the original price level. |
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Term
True or False?
The government can successfully fight both components of stagflation simultaneously. |
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Definition
FALSE.
Stagflation refers to simultaneous recession and inflation that occurs when short-run
aggregate supply shifts left. If the government fights inflation by shifting aggregate demand left, it
makes recession worse; if it fights recession by shifting aggregate demand right, if makes inflation
worse. The government cannot successfully fight inflation and recession simultaneously. |
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Term
The automatic mechanism refers to a shift in ____ that returns the economy to long-run
macroeconomic equilibrium.
1. aggregate demand.
2. short-run aggregate supply.
3. long-run aggregate supply.
4. both short-run and long-run aggregate supply. |
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Definition
| 2. short-run aggregate supply |
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Term
True or False?
After an increase in aggregate demand moves the economy to a short-run macroeconomic equilibrium,
workers' willingness to accept lower wages and firms' willingness to accept lower input prices moves the
economy back to long-run macroeconomic equilibrium. |
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Definition
FALSE.
After an increase in aggregate demand moves the economy to a short-run
macroeconomic equilibrium, workers negotiate higher wages and firms negotiate higher input
prices, which shifts the short-run aggregate supply curve left and moves the economy back to longrun
macroeconomic equilibrium. |
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Term
True or False?
Business cycle fluctuations are most often caused by shifts in aggregate demand. |
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Definition
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