Exam 14: Aggregate Demand and Aggregate Supply

What has been suggested as a cause of the Great Depression?

Which of the following best defines business cycles?

When taxes decrease, consumption increases. How is this situation represented in the aggregate demand and aggregate supply model?

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Which government action will shift the aggregate demand left?

We could explain continued increases in both output and the price level by supposing that only long-run aggregate supply shifted right over time.

What are the recessions of the 1970s often most attributed to?

Scenario 14-1 The economy is in long-run equilibrium. Suddenly, due to improved international relations, a boom experienced by a major trading partner, and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time. -Refer to the Scenario 14-1. In the short run, which statement describes the changes that take place in the economy?

What would cause prices to rise and real GDP to fall in the short run?

How do prices change due to an economic contraction that is caused by a shift in aggregate demand?

This problem compares two economies: Economy A, having a lower elasticity of the short-run aggregate-supply curve, and economy B, with higher elasticity. Draw a graph representing an aggregate-demand curve and two short-run aggregate-supply curves, ASA and ASB, such that ASB is flatter than ASA. Both economies are in long-run equilibrium at the same output and price level. Suppose a sharp decline in the housing prices and a subsequent financial meltdown reduces the aggregate demand by the same amount in both economies. Use the graph to explain the differences in output and price declines in the two economies. What do we learn from this exercise?

Which statement is consistent with an increase in the price level?

Other things the same, a decrease in the price level makes the interest rate increase, which leads to an appreciation of the dollar in the foreign-currency exchange.

What is the current estimate of the natural rate of unemployment in Canada?

Technological progress shifts the long-run aggregate-supply curve to the right.

Scenario 14-2 The economy is in long-run equilibrium. Suddenly, due to corporate scandals, a recession experienced by a major trading partner, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They maintain this level of pessimism for a long time. -Refer to the Scenario 14-2. Initially, which curve shifts in which direction?

According to misperceptions theory, if a firm thought that inflation was going to be 3 percent and actual inflation was 4 percent, how may the firm be affected?

In the 1970s people had become accustomed to high inflation. In 1979, the Bank of Canada decided to fight inflation and decreased the money supply growth rates. Many people thought that the Bank of Canada's action would cause a recession. Is this thinking consistent with the aggregate demand and aggregate supply model? Explain. According to monetary misperceptions theory, what should have happened to output if the inflation rate fell relative to what people expected? Explain.

Suppose that there has been bad weather resulting in a temporary decrease in the availability of oil and the economy has reached its new short-run equilibrium. What happens as the economy moves from this short-run equilibrium to long-run equilibrium?

Scenario 14-1 The economy is in long-run equilibrium. Suddenly, due to improved international relations, a boom experienced by a major trading partner, and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time. -Refer to the Scenario 14-1. What is predicted by the aggregate demand and aggregate supply theory?