Econ 260 CH 10 Study Plan

Many economists view the natural rate of unemployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. There can be positive unemployment in this situation because

information is costly and rigidities always exist causing some types of unemployment​ (frictional and​ structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes.

The long-run aggregate supply curve is determined by

the full-employment level of real output.

The​ long-run aggregate supply curve shifts outward when

there is economic growth.

The long-run aggregate supply curve

is vertical because changes in the price level have no effect on real output.

Year to year rightward shifts in long-run aggregate supply leads to

a long-run trend path for real GDP

The long-run aggregate supply curve (LRAS) is equivalent to the full-employment level of real GDP.

True

The shape of the long-run aggregate supply curve (LRAS) is

vertical

Economic growth is represented by the long-run aggregate supply curve (LRAS) shifting

outward to the right

The long-run aggregate supply curve (LRAS) is _____ line determined by amounts of available resources such as labor and capital and by technology and resource productivity. The position of the LRAS gives the full-information and full-adjustment level of real GDP year.

a vertical

The ____ rate of unemployment occurs at the long-run level of GDP per year given by the position of the LRAS.

natural

If labor or capital increases from year to year or if the productivity of either of these resources rises from one year to the​ next, the LRAS shifts ______. In a growing economy, therefore, real GDP per year gradually ______ over time.

rightward / increases

Suppose that there is a sudden rise in the price level. As a​ consequence, economywide planned spending on purchases of goods and services will _____.

decrease

Suppose that there is a sudden riserise in the price level. As a​ consequence, economywide planned spending on purchases of goods and services will

The substitution effect

From the list​ below, match the letter of the outcome each of the following events produces upon the AD curve.

A – Shifts to right B – Shifts to left C – Movement up along D – Movement down along

Deflation has occurred during the past year

D – Movement down along

Real GDP levels of all the nation’s major trading partners have declined

B – Shifts to the left

There has been a decline in the foreign exchange value of the nation’s currency

A – Shifts to the right

The price has increased this year

C – Movement up along

Total expenditures for domestically produced goods and services consist of

consumer​ spending, business​ spending, government​ spending, and net foreign spending.

Which one of the following is not a component of total​ expenditures?

Merchandise inventories

What determines the total value of annual U.S.​ GDP?

The spending and production decisions of​ consumers, firms,​ governments, and foreigners.

The total of all planned real expenditures in the economy is

aggregate demand

The aggregate demand curve

shows planned purchase rates of goods and services at various price levels.

The aggregate demand curve slopes downward because of the

​real-balance, interest rate and open economy effects.

According to the​ real-balance effect, an increase in the price level

reduces an​ individual’s expenditures due to a decrease in the real value of cash balances.

According to the interest rate​ effect, an increase in the price level

reduces borrowing and spending increases nominal interest rates reduces the aggregate quantity of goofs and services demanded

Which of the following will generate an increase in aggregate​ demand?

Government spending for the onset of a war.

The U.S. aggregate demand curve would shift to the left if

the Federal Reserve Board caused the real interest rate to increase.

The aggregate demand curve would shift to the right as a result of

a drop in the foreign exchange value of the dollar.

All of the following would cause the aggregate demand curve to shift except

price level changes.

In an open​ economy, the total value of GDP is based on the spending decisions of​ individuals, firms,​ governments, and foreign residents.

True

The components of GDP as calculated using the expenditure approach are identical to the components of aggregate demand.

True

The shape of the aggregate demand curve ​(AD​) is

downward sloping.

A change in the price level has no effect on the real value of cash balances.

False

The idea that higher price levels in the United States result in foreign residents desiring to buy fewer​ U.S.-made goods and U.S. residents desiring to buy more​ foreign-made goods is referred to as the

open economy effect.

The lower the price​ level, the greater the total planned spending on goods and services.

True

The aggregate demand curve is essentially the same as the demand curve for an individual product.

False

An increase in the price level shifts the aggregate demand curve ​(AD​) to the left.

False

Aggregate demand is the total of all planned _____ in the economy, and aggregate supply is the total of all planned ______ in the economy. The aggregate demand curve shows the various qualities of total planned ____ on final goods and services at various price levels; it is downward sloping.

expenditures / production / spending

There are three reasons why the aggregate demand curve is downward sloping. They are the ____ effect, the_____ effect, and the ______ effect.

real-balance / interest rate / open-economy

The ____ effect occurs because price level changes alter the real value of cash​ balances, thereby causing people to desire to spend more or​ less, depending on whether the price level decreases or increases.

real-balance

The ____ effect is caused by interest rate changes that mimic price level changes. At higher interest​ rates, people seek to buy ____ houses and cars, and at lower interest rates, they seek to buy _____.

interest rate / fewer / more

The open economy effect occurs because of a shift away from expenditures on _____ goods and a shift toward expenditures on ____ goods when the domestic price level increases.

domestic / foreign

Suppose that the full employment level of nominal GDP rises in one year from ​$16.816.8 to ​$18.018.0 trillion. The​ long-run equilibrium price​ level, however, remains unchanged at 120120.
By how much​ (in real​ dollars) has the​ long-run aggregate supply curve shifted to the right from one year to the​ next?

$0.35 trillion x= [(NGDP Year B – NGDP Year A) x 100] / L-R Equilibrium Price

By how​ much, if​ any, has the aggregate demand curve shifted to the​ right?

AD has shifted exactly by ​$0.35 trillion. [INSERT ANSWER FROM PREVIOUS CALCULATIONS]

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP and increase in the equilibrium price level.

Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by a larger amount.

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of a decrease in equilibrium real GDP with no change in the equilibrium price level.

​Long-run aggregate supply schedule​ (LRAS) shifts to the left and aggregate demand schedule​ (AD) shifts to the left by an equal amount.

Identify the combined shifts in​ long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP with no change in the equilibrium price level.

Long-run aggregate supply schedule​ (LRAS) shifts to the right and aggregate demand schedule​ (AD) shifts to the right by an equal amount.

Suppose that during a given​ year, the quantity of U.S. real GDP that can be produced in the long run falls from ​$13 trillion to ​12.5 ​trillion, measured in base-year dollars.

During the​ year, no change occurs in the various factors that influence aggregate demand. As a​ result, the U.S.​ long-run equilibrium price level during this particular year will

increase

In Ciudad​ Barrios, El​ Salvador, the latest payments from relatives working in the United States have finally arrived. When the credit unions open for​ business, up to 150 people are already waiting in line. After receiving the funds their relatives have transmitted to these​ institutions, customers go off to outdoor markets to stock up on food or clothing or to appliance stores to purchase new stereos or televisions. Similar scenes occur throughout the developing​ world, as each year migrants working in​ higher-income, developed nations send around​ $200 billion of their earnings back to their relatives in less developed nations. Evidence indicates that the​ relatives, such as those in Ciudad​ Barrios, typically spend nearly all of the funds on current consumption.

Based on the above​ information, developing​ countries’ income inflows transmitted by migrant workers are primarily affecting their​ economies’ long-run aggregate _____ curves.

demand

The equilibrium price levels in nations that are recipients of large inflows of funds from migrants will likely

rise because there is an increase in the aggregate demand in these countries.

​Long-run equilibrium in the economy will occur

at the price level where total planned real expenditures equals real GDP at full employment.

The​ long-run equilibrium of an economy occurs

where the​ long-run aggregate supply curve meets the aggregate demand curve.

An increase in the U.S. price level can be caused by all of the following except

worsening economic conditions in Asia.

If economic growth causes the​ long-run aggregate supply curve to shift rightward over​ time, but the aggregate demand curve does not​ change, we expect

the​ long-run equilibrium price to​ decline, and there will be secular deflation.

A persistent decline in the price level due to economic growth with stable aggregate demand is

secular deflation

In the long​ run, persistent deflation in a growing economy can occur if

increases in the LRAS are proportionately larger than the increases in AD.

An increase in the LRAS curve that is larger proportionately than an increase in the AD curve will lead to

a decrease in the price level and an increase in output.

If the actual price level increases beyond the​ long-run equilibrium price​ level, all of the following will tend to occur except

firms offering fewer services than people wish to purchase.

If the LRAS shifts to the right over time and during this time AD does not noticeably​ change, real GDP will​ ________ and the price level will​ ________.

increase; decrease

When the economy is in​ long-run equilibrium, the price level adjusts to equate total planned real ______ by​ individuals, businesses, the​ government, and foreign​ (non-U.S.) residents with total planned ______ by firms.

expenditures / production

Economic growth causes the​ long-run aggregate supply schedule to shift ______ over time. If the position of the aggregate demand curve does not​ change, the​ long-run equilibrium price level tends to _____, and there is secular deflation.

rightward / decrease

Inflation can be caused by

decreases in the​ long-run aggregate supply curve or increases in the aggregate demand curve.

Consider this​ statement: "Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the​ long-run aggregate supply​ curve." This statement is describing

demand-side inflation

​Supply-side inflation can be caused by a continual

decrease in aggregate supply while aggregate demand remains unchanged.

Which of the following factors could cause the economy to experience​ supply-side inflation?

Government laws which say that the average work week must be reduced by one hour every year.

An increase in​ long-run aggregate supply cuases the price level to​ increase, and is therefore inflationary.

false

Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the​ long-run aggregate supply curve.

True

Inflation can be caused by an increase in aggregate ____ or by a decrease in aggregate _____.

demand / supply

____-side inflation cannot account for persistent inflation in a growing​ economy, but ____-side inflation can occur even as real GDP increases.

supply / demand

Because the U.S. economy has grown in recent​ decades, the persistent inflation during those years has been caused by the aggregate demand curve shifting ____ at a faster pace than the​ long-run aggregate supply curve.

rightward

There are underutilized and untapped resources in Greenland. Some economists believe that unfreezing these resources will

increase aggregate supply.

​Greenland’s glacial ice and small population have

limited the aggregate supply of real output.

​Greenland’s glacial ice and small population

are examples of the​ country’s limited endowments.