Economics Chapter 12

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The aggregate demand curve:

shows the amount of real output that will be purchased at each possible price level.

The aggregate demand curve is:

downsloping because of the interest-rate, real-balances, and foreign purchases effects.

The real-balances effect indicates that:

a higher price level will decrease the real value of many financial assets and therefore reduce spending.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will:

increase U.S. imports and decrease U.S. exports.

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes:

the foreign purchases effect.

The interest-rate effect suggests that:

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the:

determinants of aggregate demand.

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.:

aggregate demand curve would shift to the right.

Other things equal, a decrease in the real interest rate will:

expand investment and shift the AD curve to the right.

A decline in investment will shift the AD curve to the:

left by a multiple of the change in investment.

An increase in net exports will shift the AD curve to the:

right by a multiple of the change in investment.

If investment increases by $10 billion and the economy’s MPC is .8, the aggregate demand curve will shift:

rightward by $50 billion at each price level.

If investment decreases by $20 billion and the economy’s MPC is .5, the aggregate demand curve will shift:

leftward by $40 billion at each price level.

An economy’s aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the:

multiplier effect.

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)?

An appreciation of the U.S. dollar.

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = .6, how much will the change in investment increase aggregate demand?

$50 billion.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to:

increase aggregate demand.

The immediate-short-run aggregate supply curve represents circumstances where:

both input and output prices are fixed.

The aggregate supply curve:

shows the various amounts of real output that businesses will produce at each price level.

The aggregate supply curve (short run):

slopes upward and to the right.

Productivity measures:

real output per unit of input.

Per-unit production cost is:

total input cost divided by units of output.

Other things equal, a reduction in personal and business taxes can be expected to:

increase both aggregate demand and aggregate supply.

Other things equal, an improvement in productivity will:

shift the aggregate supply curve to the right.

The short-run aggregate supply curve represents circumstances where:

input prices are fixed, but output prices are flexible.

The economy’s long-run aggregate supply curve:

is vertical.

The economy’s long-run AS curve assumes that wages and other resource prices:

eventually rise and fall to match upward or downward changes in the price level.

The equilibrium price level and level of real output occur where:

the aggregate demand and supply curves intersect.

Graphically, demand-pull inflation is shown as a:

rightward shift of the AD curve along an upsloping AS curve.

Graphically, cost-push inflation is shown as a:

leftward shift of the AS curve.

If aggregate demand decreases, and as a result, real output and employment decline but the price level remains unchanged, it is most likely that:

the price level is inflexible downward and a recession has occurred.

In which of the following sets of circumstances can we confidently expect inflation?

Aggregate supply decreases and aggregate demand increases.

Prices and wages tend to be:

flexible upward, but inflexible downward.

Efficiency wages are:

above-market wages that bring forth so much added work effort that per-unit production costs are lower than at market wages.

When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of:

wage contracts.

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may:

reduce worker morale and work effort, and thus lower productivity.

Menu costs:

are the costs to firms of changing prices and communicating them to customers.

The fear of unwanted price wars may explain why many firms are reluctant to:

reduce prices when a decline in aggregate demand occurs.

(Consider This) The ratchet effect is the tendency of:

the price level to increase but not to decrease.

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