HW Chapter 08: Aggregate Demand and Supply Starting from short-run equilibrium, the folloing o!!urs: the money supply in!reases and labor produ!ti"ity in!reases# What is the the effe!t on the pri!e le"el and $eal %D& in the short run' a# $eal %D& falls falls and the pri!e pri!e le"el ne!essarily ne!essarily rises# rises# b# $eal %D& rises and the pri!e le"el ne!essarily ne!essarily rises# !# $eal %D& %D& rises rises and the effe!t effe!t on the pri!e pri!e le"el !annot be be determined determined## d# $eal %D& %D& falls falls and and the effe!t effe!t on on the pri!e pri!e le"el le"el !annot !annot be determin determined# ed# e# none none of the the abo abo"e "e A !hange in labor produ!ti"ity affe!ts (((((((((( and a !h ange in the e)!hange rate affe!ts ((((((((((# a# S$AS* S$AS b# AD* AD !# S$AS* AD d# AD* S$AS e# none none of the the abo abo"e "e An aggregate demand +AD !ur"e shos the a# amount of a parti!ular parti!ular good people people are illi illing ng and able able to buy at at a parti!ula parti!ularr pri!e, pri!e, !eteris paribus# b# real output +$eal %D& people are illing and able to sell at different different pri!e le"els, !eteris paribus# !# real output output +$eal +$eal +%D& people are are illing illing and able able to buy and to sell sell at diffe different rent pri!e pri!e le"els, !eteris paribus# d# real output output +$eal %D& %D& people are are illing illing and able to buy at differe different nt pri!e le"els, le"els, !eteris !eteris paribus# Whi!h of the folloing statements is false' a# he e)!hange e)!hange rate is the the pri!e of of one +!ountry.s +!ountry.s !urren!y !urren!y in terms terms of another another +!ountry.s +!ountry.s !urren!y# b# A !urren!y !urren!y has appre!iated in "alue if more of a foreign !urren!y is needed to buy it# !# A !hang !hangee in the money money supp supply ly !an !hange !hange aggre aggregat gatee demand# demand# d# A !hange !hange in business business ta)es ta)es !an !hange !hange in"estment in"estment,, hi!h !an !an !hange aggregate aggregate demand# demand# e# none none of the the abo abo"e "e /f total e)penditures fall at a gi"en pri!e le"el, then the a# quantit quantity y deman demanded ded of of $eal $eal %D& %D& rises# rises# b# quantity demanded of $eal %D& falls# !# AD !ur !ur"e "ess shif shifts ts to to the the right right## d# AD !ur !ur"e "e shi shift ftss to the the lef left# t# e# none none of the the abo abo"e "e Can a !hange in the pri!e le"el !hange aggregate demand' a# es, es, as the pri!e pri!e le"el le"el rises, rises, aggregat aggregatee demand demand falls# falls# b# es, es, but only under the !ondition that the real balan!e effe!t is operational#
!# 1o, only only a !hange !hange in a nonpri!e nonpri!e fa!tor fa!tor !an !an !hange !hange aggregate aggregate demand# d# 1o, a !hange !hange in in the pri!e le"el !an only !hange aggregate aggregate supply supply## e# none none of the the abo abo"e "e An appre!iation of the 2#S# dollar tends to (((((((((( 2#S# net e)ports and shift the 2#S# AD !ur"e to the ((((((((((# a# raise* ri right ght b# raise* left !# loe oer* ri right d# loe oer* le left he produ!t of (((((((((((((((((((( and ((((((((((((((((( is equal to the total amount of spending in an e!onomy# a# the money money suppl supply* y* the pri!e pri!e le"el le"el b# "elo!ity* the pri!e le"el !# the the mone money y supp supply ly** "elo "elo!i !ity ty d# "elo! "elo!it ity* y* the the le" le"el el of output output Whi!h of the folloing ill !ause a mo"ement from one point on an AD !ur"e to another point on the same AD !ur"e' a# a !ha !hange nge in !onsu !onsump mpti tion on b# a !hange in go"ernment e)penditures !# a !han !hange ge in net net e)p e)por orts ts d# a !hang !hangee in in the the pri pri!e !e le" le"el el e# all all of of the the abo abo"e "e As in!ome ta)es rise, disposable in!ome ((((((((((, !ausing (((((((((( the AD !ur"e# a# in!r in!rea ease ses* s* mo"e mo"eme ment nt don don along along b# in!reases* a rightard shift of !# de!re de!reas ases es** mo"em mo"emen entt up alo along ng d# de!reas de!reases* es* a left leftar ard d shif shiftt of of A !hange in the money supply !an affe!t one or more of the !omponents of spending and therefore shift the short-run aggregate supply +S$AS !ur"e# a# $23 b# 4A5S3 4A5S3 Whi!h of the folloing is an e)ample of an ad"erse supply sho!6' a# a nation nationide ide drough droughtt lasti lasting ng for many many month monthss b# an outbrea6 of ar among se"eral of the 7iddle 3astern oil-produ!ing !ountries !# an influena influena "irus "irus that that affe!ts affe!ts 90 90 per!ent per!ent of the labor for!e for!e for for to ee6s d# a, b, and ! e# a and !
/f businesses buy feer !apital goods, and no thing else !hanges, then total e)penditures on 2#S# goods and ser"i!es ill de!rease# And if total e)penditures de!rease, then (((((( (((( ill de!rease* !onsequently, the (((((((((( !ur"e ill shift ((((((((((# a# aggregat aggregatee demand demand +AD +AD** AD* AD* righ righta tard rd b# short-run aggregate supply +S$AS* S$AS* leftard !# aggregat aggregatee demand demand +AD +AD** AD* AD* left leftar ard d d# intere interest st rates* rates* AD* AD* left leftar ard d e# pri! pri!es es** AD* right righta ard rd A fall in the pri!e le"el !hanges the pur!hasing poer of money# his is rele"ant to the (((((((((( effe!t# a# inte intern rnat atio iona nall trad tradee b# real balan!e !# aggr aggreg egat atee dem demand and d# inter nteres estt rate rate e# aggr aggreg egat atee supp supply ly /f !onsumption !hanges be!ause of a !hange in a fa!tor other than the pri!e le"el, then the a# e!onomy mo"es from from one point on on an AD AD !ur"e to another another point point on the the same !ur"e# !ur"e# b# AD !ur"e shifts# !# e!onomy mo"es from from one point on on a short-run short-run aggregate aggregate supply supply +S$AS +S$AS !ur"e !ur"e to another another point on the same !ur"e# d# S$AS S$AS !ur" !ur"ee shi shift fts# s# e# none none of the the abo abo"e "e $efer to 3)hibit 8-# Assume that the e!onomy is originally in in equilibrium at point A# /f businesses be!ome more optimisti! about future sales, at hi!h hi!h point is the e!onomy most li6ely to end up in the short run' a# A b# ; !# C d# D he interest rate effe!t, the real balan!e effe!t, and the international trade effe!t all result from a !hange in the pri!e le"el# a# $23 b# 4A5S3 4A5S3 A de!rease in the pri!e le"el a# shifts shifts the S$AS S$AS !ur"e !ur"e to the right# right# b# shifts the S$AS !ur"e to the left# !# !auses an upard upard mo"ement mo"ement along the e)isting e)isting S$AS S$AS !ur"e# !ur"e# d# !auses a donard donard mo"ement mo"ement along along the the e)isting e)isting S$AS !ur"e# e# none none of the the abo abo"e "e
Suppose a drop in sto!6 pri!es ma6es people feel less ealthy# his ould !ause (((((((((( the e!onomy.s AD !ur"e# a# mo"e mo"eme ment nt don don alon along g b# mo"ement up along !# a rig right hta ard rd shif shiftt of of d# a lef left tar ard d shi shift ft of An in!rease in the interest rate (((((((((( pur!hases of !onsumer ((((((((((# a# in!r in!rea ease ses* s* dur durab able less b# in!reases* nondurables !# redu redu!e !es* s* dura durabl bles es d# redu redu!es !es** nondu nondura rabl bles es A rise in the pri!e le"el prompts an in!rease in the demand for !redit# his is rele"ant to the (((((((((( effe!t# a# inte intern rnat atio iona nall trad tradee b# real balan!e !# aggr aggreg egat atee dem demand and d# inter nteres estt rate rate e# b and ! $efer to 3)hibit 8-# Assume that the e!onomy is originally in in equilibrium at point A# /f foreign real national in!ome rises, at hi!h point is the e!onomy most li6ely to end up in the short run' a# A b# ; !# C d# D e# A !hange in in foreign foreign real nation national al in!ome in!ome ould ha"e ha"e no impa!t impa!t on the the domesti! domesti! e!onomy# An e!onomi! poli!y initiati"e results in the AD !ur"e shifting to the right# As a result, a# the the pri! pri!ee le" le"el el ill ill rise rise## b# the pri!e le"el ill stay !onstant# !# the the pri! pri!ee le" le"el el ill ill fall fall## d# $eal %D& ill ill rise rise in in the the short short run# run# e# a and d $efer to 3)hibit 8-<# ;ased on the gi"en !hange, hat ord +rises +rises or falls should go in blan6 += and blan6 +0, respe!ti"ely, to summarie the resulting impa!t on short run equilibrium' a# rises* es* ri rises b# falls* falls !# rises* es* fa falls d# fall fallss* rises ises &art of the story of the interest rate effe!t is that a loer pri!e le"el !auses (((((((((( in the supply of !redit, hi!h then !auses the interest rate to ((((((((((#
a# b# !# d#
a de! de!re reas ase* e* fall all a de!rease* rise an in!r in!rea ease se** fall fall an in!r in!rea ease se** ris risee
Whi!h set of !hanges is definitely predi!ted to raise $eal %D& in the short run' a# We Wealth alth in!reases in!reases and and there there is is an ad"erse ad"erse supply supply sho!6# sho!6# b# /ndi"iduals e)pe!t higher +future in!omes and age rates fall# !# ;usine ;usiness ss ta)e ta)ess rise rise and and age age rates rates fall# fall# d# he 2#S# dollar appre!iates appre!iates and and there is is a benefi!ial benefi!ial supply sho!6# e# none none of the the abo abo"e "e he AD !ur"e shos that, as the pri!e le"el falls, the quantity of a# %D& %D& dema demand nded ed in!r in!rea ease ses# s# b# %D& demand de!reases# !# $eal $eal %D& %D& dema demande nded d in!r in!rea ease ses# s# d# $eal $eal %D& %D& dema demande nded d de!re de!reas ases es## e# none none of the the abo abo"e "e /f labor produ!ti"ity rises at the same time that there is a benefi!ial supply sho!6, hat is the effe!t on short-run aggregate supply +S$AS' a# S$AS rises# b# S$AS falls# !# S$AS S$AS rema remain inss !ons !onsta tant nt## d# S$AS S$AS may rise rise,, fall, fall, or or remain remain !ons !onstant tant## he !hange in the pur!hasing poer of dollar-denominated assets +su!h as !ash holdings is the a# mone money y eff effe!t e!t# b# interest rate effe!t# !# ass asset eff effe!t# e!t# d# real real bala balan!e n!e effe effe!t !t## e# none none of the the abo abo"e "e /f foreign input pri!es in!rease and the 2nited S tates pur!hases those inputs, then the 2#S# a# AD !ur"e !ur"e ill ill shift shift leftard leftard and and 2#S# 2#S# pri!es pri!es ill ill fall# fall# b# AD !ur"e ill shift rightard and 2#S# pri!es ill rise# rise# !# S$AS !ur"e !ur"e ill ill shift shift leftard leftard and and 2#S# pri!es pri!es ill ill rise# rise# d# S$AS !ur"e !ur"e ill ill shift shift rightard rightard and and 2#S# pri!es ill fall
