978-1259723223 Test Bank Chapter 32 Part 1

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subject Words 5184
subject Authors Campbell McConnell, Sean Flynn, Stanley Brue

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CHAPTER 32
Aggregate Demand and Aggregate Supply
A. Short-Answer, Essays, and Problems
1. What is meant by aggregate when discussing aggregate supply and aggregate demand? Why is this concept
important?
2. Why is there a need for an aggregate demand and aggregate supply model of the economy? Why can’t the
supply and demand model for a single product explain developments in the economy?
3. What is the aggregate demand curve? What is the character of its slope?
4. What is the difference in the explanation of the shape of the aggregate demand curve and a single product
demand curve? After all, both demand curves show an inverse relationship between price and quantity.
5. Why can’t the substitution and income effects be used to explain the downward slope of the aggregate
demand curve?
6. Explain the three reasons given for the downward slope of the aggregate demand curve.
7. The determinants of aggregate demand “determine” the location of the aggregate demand curve. What are
the four basic determinants of aggregate demand?
8. Identify three factors that affect consumer spending. How does a change in consumer spending affect
aggregate demand?
9. Identify two basic factors that affect investment spending. How does a change in investment spending
affect aggregate demand?
10. How does a change in investment spending affect aggregate demand?
11. State two basic factors that affect net export spending. How does a change in net export spending affect
aggregate demand?
12. Identify the ways in which each of the following determinants would have to change if each was causing a
decrease in aggregate demand: consumer wealth, consumer expectations, business taxes, national income
in countries abroad, exchange rates.
13. Describe the likely effect of the following events would on the aggregate demand (AD) curve.
(a) A boost in research and development by computer companies produces more powerful and efficient
computers and equipment.
(b) Income falls in several countries that trade heavily with the U.S.
(c) Prices fall across several industries.
(d) After a budget surplus, Congress moves to cut personal income taxes.
14. What are the three time horizons used to categorize aggregate supply? What is the difference between the
immediate short-run and the short-run aggregate supply?
15. Define aggregate supply. Describe the characteristics of the aggregate supply curve in the immediate short-
run, short-run and long-run perspectives.
16. Explain the rationale for the shape of the short-run aggregate supply curve in the immediate short run.
17. Explain the reasoning behind the shape of the short-run aggregate supply curve in the short run.
18. What factors determine the vertical shape of the aggregate supply curve in the long-run? Explain.
19. Discuss the shape of the aggregate supply curve as time moves from the immediate short run, to the short
run, to the long run. Why do economists tend to use the short run aggregate supply curve in analysis?
20. Identify the three major factors that can cause a shift in aggregate supply.
21. What are two underlying factors affecting input prices? How does a change in input prices affect aggregate
supply?
22. How will a change in productivity increase or decrease aggregate supply?
23. What two factors affect the legal-institutional environment? Discuss the effect of changes in the legal-
institutional environment on aggregate supply.
24. Describe the change in aggregate supply that should result from each of the following changes in
determinants. Assume that nothing else is changing besides the identified change. (Use “Decrease” or
“Increase.”) (a) A rise in the average price of inputs; (b) An increase in worker productivity; (c)
Government antipollution regulations become stricter; (d) A new subsidy program is enacted for new
business investment in productive equipment; (e) Energy prices decline.
25. Prepare a list of events that would shift the aggregate supply curve leftward.
26. List four government tax or spending policy options that would tend to shift the aggregate supply curve
rightward.
27. What determines the equilibrium price level and the level of real domestic output in the aggregate demand
aggregate supply model?
28. What happens to bring the ADAS system back into equilibrium when prices are below the equilibrium
level? Above the equilibrium level?
29. Suppose that a hypothetical economy has the following relationship between its real domestic output and
the input quantities necessary for producing that level of output.
Input quantity
Real domestic output
400
800
300
600
100
200
(a) What is the level of productivity in this economy?
(b) What is the unit cost of production if the price of each input is $2.00?
(c) If the input price decreases from $2 to $1.50, what is the new per unit cost of production? In what
direction would the aggregate supply curve move? What effect would this shift have on the price level
and the level of real domestic output if the economy is initially operating in the intermediate range?
(d) Suppose that instead of the input price decreasing, the productivity had increased by 25 percent. What
will be the new unit cost of production? In what direction would the aggregate supply curve move?
What effect would this shift have on the equilibrium price and output level if the economy?
30. Suppose the aggregate demand and supply schedules for a hypothetical economy are as shown below.
Amount of real
domestic output
demanded, billions
Price level
(price index)
Amount of real
domestic output
supplied, billions
$ 200
300
$800
400
250
800
600
200
600
800
150
400
1000
100
200
(a) Use these sets of data to graph the aggregate demand and supply curves on the below graph.
(b) What will be the equilibrium price and output level in this hypothetical economy? Is it also the full-
employment level of output? Explain.
(c) Why won’t the 150 index be the equilibrium price level? Why won’t the 250 index be the equilibrium
price level?
(d) Suppose demand increases by $400 billion at each price level. What will be the new equilibrium price
and output levels?
(e) What factors might cause a change in aggregate demand?
31. Suppose the aggregate demand and supply schedules for a hypothetical economy are as shown below.
Amount of real
domestic output
demanded, billions
Price level
(price index)
Amount of real
domestic output
supplied, billions
$ 60
350
$240
120
300
240
180
250
180
240
200
120
300
150
60
(a) What will be the equilibrium price and output level in this hypothetical economy? Is it also the full-
employment level of output? Explain.
(b) Why won’t the 200 index be the equilibrium price level? Why won’t the 300 index be the equilibrium
price level?
(c) Suppose demand increases by $120 billion at each price level. What will be the new equilibrium price
and output levels?
(d) List five factors that might cause a change in aggregate demand.
32. Describe each of the following outcomes in terms of shifts in aggregate demand or aggregate supply
curves.
(a) A recession deepens while the rate of inflation increases
(b) The price level rises sharply while real output and employment increase
(c) The price level falls, but the unemployment rate rises
(d) Real output rises, unemployment rate falls, and the price level rises
33. Evaluate the effect of the following on the AD curve, AS curve, equilibrium price level and equilibrium
output.
(a) The U.S. imposes tariffs on foreign goods to promote domestic industry. In retaliation, foreign
countries impose tariffs on U.S. goods.
(b) Congress decides to decrease personal income taxes, and to compensate for the lost revenue they
decrease business subsidies.
(c) A technology boom improves technology across industries, improving their productivity.
(d) U.S. oil companies discover new large oil reserves in the U.S. The international price of oil falls.
34. Illustrate the following by drawing a short-run aggregate supply curve and aggregate demand graph in the
appropriate graph spaces below:
(a) A new technology allows workers to be more productive.
(b) A recession causes consumer wealth to fall.
(c) The dollar depreciates relative to the euro.
(d) The regulations associated with Obamacare are enforced.
35. What is the effect of the multiplier when aggregate demand increases and there is a large increase in the
price level? What happens when there only is a small increase in the price level?
36. In the table below are aggregate demand and supply schedules.
Price level
Real domestic output
Demanded
Supplied
(1)
(2)
(3)
(4)
250
1400
1900
2000
225
1500
2000
2000
200
1600
2100
1900
175
1700
2200
1700
150
1800
2300
1400
125
1900
2400
1000
100
2000
2500
500
(a) On the graph below, plot the aggregate demand curve shown in columns (1) and (2) in the above table,
and label this curve AD1.
(b) On the graph below, plot the aggregate supply curve shown in columns (1) and (4) in the above table;
and label this curve AS.
(c) What is the level of equilibrium real domestic output and price level?
(d) Now assume that aggregate demand changes. Use columns (1) and (3) to plot the new aggregate
demand curve; and label this curve AD2.
(e) What is the new level of equilibrium real domestic output and price level?
37. Use this aggregate demandaggregate supply schedule for a hypothetical economy to answer the following
questions.
Real domestic
output demanded
(in billions)
Price level
Real domestic
output supplied
(in billions)
$3000
350
$9000
4000
300
8000
5000
250
7000
6000
200
6000
7000
150
5000
8000
100
4000
(a) What will be the equilibrium price level and quantity of real domestic output?
(b) If the quantity of real domestic output demanded increased by $2000 at each price level, what will be
the new equilibrium price level and quantity of real domestic output?
(c) Using the original data from the table, if the quantity of real domestic output demanded increased by
$5000 and the quantity of real domestic output supplied increased by $1000 at each price level, what
would the new equilibrium price level and quantity of real domestic output be?
38. What are five reasons for the downward price-level inflexibility, especially as it pertains to wages and
prices?
39. Is there downward price inflexibility applicable to today’s economy? What factors might explain it?
40. (Consider This) What is the ratchet effect? How does it apply to price level changes in the economy as
aggregate demand changes?
41. Explain “cost-push” inflation using aggregate demand–aggregate supply analysis.
42. Some economists argue that it is easier to resolve demand-pull inflation than it is cost-push inflation. Use
the aggregate demand and aggregate supply model to explain this assertion.
43. Examine the effect the following events would have on either aggregate supply or aggregate demand.
(a) The minimum wage increases and all employers must pay their workers at least $15.00 an hour.
(b) The personal income taxes increase in order to pay down government debt.
(c) The average consumer is becoming wealthier during a period of expansion during the business cycle.
44. How would the following developments affect aggregate demand or aggregate supply?
(a) A reduction in personal income taxes.
(b) More funding for research and development in new technologies.
(c) An increase in business subsidies.
45. Suppose an economic advisor to the President recommended a personal income tax increase. Indicate the
expected effects on aggregate demand and on aggregate supply.
46. Use an aggregate demandaggregate supply analysis to explain the impact of the public’s expectations of
severe inflation on real domestic output and the price level.
47. How can an economy achieve full employment without igniting inflation?
48. (Last Word) Explain the Great Recession in terms of aggregate demand, before the recession and after the
recession.
49. (Last Word) Discuss the explanations economists give for the slow recovery after the Great Recession.
page-pf7
B. Answers to Short-Answer, Essays, and Problems
1. What is meant by aggregate when discussing aggregate supply and aggregate demand? Why is this concept
important?
2. Why is there a need for an aggregate demand and aggregate supply model of the economy? Why can’t the
supply and demand model for a single product explain developments in the economy?
3. What is the aggregate demand curve? What is the character of its slope?
4. What is the difference in the explanation of the shape of the aggregate demand curve and a single product
demand curve? After all, both demand curves show an inverse relationship between price and quantity.
5. Why can’t the substitution and income effects be used to explain the downward slope of the aggregate
demand curve?
6. Explain the three reasons given for the downward slope of the aggregate demand curve.
page-pf8
7. The determinants of aggregate demand “determine” the location of the aggregate demand curve. What are
the four basic determinants of aggregate demand?
8. Identify three factors that affect consumer spending. How does a change in consumer spending affect
aggregate demand?
9. Identify two basic factors that affect investment spending. How does a change in investment spending
affect aggregate demand?
10. How does a change in investment spending affect aggregate demand?
11. State two basic factors that affect net export spending. How does a change in net export spending affect
aggregate demand?
12. Identify the ways in which each of the following determinants would have to change if each was causing a
decrease in aggregate demand: consumer wealth, consumer expectations, business taxes, national income
in countries abroad, exchange rates.
page-pf9
13. Describe the likely effect of the following events would on the aggregate demand (AD) curve.
(a) A boost in research and development by computer companies produces more powerful and efficient
computers and equipment.
(b) Income falls in several countries that trade heavily with the U.S.
(c) Prices fall across several industries.
(d) After a budget surplus, Congress moves to cut personal income taxes.
14. What are the three time horizons used to categorize aggregate supply? What is the difference between the
immediate short-run and the short-run aggregate supply?
15. Define aggregate supply. Describe the characteristics of the aggregate supply curve in the immediate short-
run, short-run and long-run perspectives.
page-pfa
16. Explain the rationale for the shape of the short-run aggregate supply curve in the immediate short run.
17. Explain the reasoning behind the shape of the short-run aggregate supply curve in the short run.
18. What factors determine the vertical shape of the aggregate supply curve in the long-run? Explain.
19. Discuss the shape of the aggregate supply curve as time moves from the immediate short run, to the short
run, to the long run. Why do economists tend to use the short run aggregate supply curve in analysis?
20. Identify the three major factors that can cause a shift in aggregate supply.
page-pfb
21. What are two underlying factors affecting input prices? How does a change in input prices affect aggregate
supply?
22. How will a change in productivity increase or decrease aggregate supply?
23. What two factors affect the legal-institutional environment? Discuss the effect of changes in the legal-
24. Describe the change in aggregate supply that should result from each of the following changes in
determinants. Assume that nothing else is changing besides the identified change. (Use “Decrease” or
25. Prepare a list of events that would shift the aggregate supply curve leftward.
26. List four government tax or spending policy options that would tend to shift the aggregate supply curve
rightward.
page-pfc
27. What determines the equilibrium price level and the level of real domestic output in the aggregate demand
aggregate supply model?
28. What happens to bring the ADAS system back into equilibrium when prices are below the equilibrium
level? Above the equilibrium level?
29. Suppose that a hypothetical economy has the following relationship between its real domestic output and
the input quantities necessary for producing that level of output.
Input quantity
Real domestic output
400
800
300
600
100
200
(a) What is the level of productivity in this economy?
(b) What is the unit cost of production if the price of each input is $2.00?
(c) If the input price decreases from $2 to $1.50, what is the new per unit cost of production? In what
direction would the aggregate supply curve move? What effect would this shift have on the price level
and the level of real domestic output if the economy is initially operating in the intermediate range?
(d) Suppose that instead of the input price decreasing, the productivity had increased by 25 percent. What
will be the new unit cost of production? In what direction would the aggregate supply curve move?
What effect would this shift have on the equilibrium price and output level if the economy?

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