Chapter 20 HW

Notice that real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as _________

the business cycle

True or False: Small ups and downs in real GDP follow a consistent, predictable pattern.

False

For example, an increase in the money supply, a ___ variable, will cause the price level, a _____ variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a ______ variable. The separation of real variables and nominal variables is known as _______

nominal, nominal, real, the classical dichotomy

The horizontal axis of the aggregate demand and aggregate supply model measures the overall ________

quantity of output

The aggregate ______ curve shows the quantity of goods and services that firms produce and sell at each price level.

supply

As the price level falls, the purchasing power of households’ real wealth will _____ , causing the quantity of output demanded to _____. This phenomenon is known as the ______ effect.

rise, rise, wealth

Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to ______ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore _____, and the number of foreign products purchased by domestic consumers and firms (imports) will _______. Net exports will therefore _____, causing the quantity of domestic output demanded to ______. This phenomenon is known as the _______ effect.

fall, rise, fall, rise, rise, exchange rate

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply.

1). The level of technological knowledge
2). The price level
3). The size of the labor force
4). The quantity of physical capital

2

Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to _____, which will:

1). Shift the long-run aggregate supply curve to the right
2). Shift the long-run aggregate supply curve to the left
3). Not affect the long-run aggregate supply curve

rise, 2

In the short run, the increase in government spending on infrastructure causes the price level to _____ the price level people expected and the quantity of output to ____ the natural level of output. The increase in government spending will cause the unemployment rate to _____ the natural rate of unemployment in the short run.

rise above, rise above, fall below

During the transition from the short run to the long run, price-level expectations will _____ and the ____ curve will shift to the _____.

adjust upward, short-run aggregate supply, left

In the long run, as a result of the increase in government spending, the price level _____, the quantity of output _____ the natural level of output, and the unemployment rate______ the natural rate of unemployment.

increases, returns to, returns to

The short-run economic outcome resulting from the increase in production costs is known as _______.

stagflation