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Exam 24: Aggregate Demand and Aggregate Supply Analysis

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Question 31

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What is potential GDP?

A) It is the level of real GDP in the long run.
B) It is the difference between current GDP and maximum GDP.
C) It is the level of real GDP in the short run.
D) It is the level of GDP at which inflation is constant.

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Question 32

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Stagflation occurs when

A) inflation rises and GDP rises.
B) inflation falls and GDP rises.
C) inflation rises and GDP falls.
D) inflation falls and GDP falls.

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Question 33

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Figure 24-3 -Refer to Figure 24-3. Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long-run equilibrium be?

According to ________, entrepreneurship does not contribute anything of value to production.

Explain how each of the following events would affect the short-run aggregate supply curve. a. A decrease in the price level b. A decrease in what the price level is expected to be in the future c. A price level that is currently lower than expected d. An unexpected decrease in the price of an important raw material e. A decrease in the labor force

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

Inflation will

Declines in spending on residential construction are often due to increases in interest rates. The collapse in residential construction prior to and during the recession of 2007-2009 was due more to ________ than to higher interest rates.

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what will happen to the price level in year 2?

When the price level in the United States falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise.

An increase in the price level shifts the aggregate demand curve to the left.

Inflation is generally the result of total spending growing faster than total production.

Use the dynamic model of aggregate demand and supply to illustrate a situation where the economy is growing but experiencing inflation in the long run.

Figure 24-2 -Refer to Figure 24-2. Ceteris paribus, a decrease in the expected price of an important natural resource would be represented by a movement from

An increase in exports decreases aggregate demand.

A supply shock causes the long-run aggregate supply curve to shift left, decreasing the price level.

In the dynamic aggregate demand and aggregate supply model, what is the result of aggregate demand increasing faster than potential real GDP?

Higher personal income taxes

Explain how the aggregate demand and aggregate supply model can be made more dynamic.

An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.