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Aggregate Demand and Aggregate Supply 241
54. Stagflation results from continued decreases in aggregate demand.
a. True
b. False
55. If the central bank increased the money supply in response to a decrease in short-run aggregate
supply, unemployment would return towards its natural rate, but prices would rise even more.
a. True
b. False
56. John Maynard Keynes advocated policies that would increase aggregate demand as a way to
decrease unemployment caused by recessions.
a. True
b. False
242 Aggregate Demand and Aggregate Supply
57. The long-run trend in real GDP is upward. How is this possible given business cycles? What
explains the upward trend?
58. What variables besides real GDP tend to decline during recessions? Given the definition of real
GDP, argue that declines in these variables are to be expected.
Aggregate Demand and Aggregate Supply 243
59. What do most economists believe concerning the relation between the price level and real output?
60. Make a list of expenditures whose sum equals GDP.
244 Aggregate Demand and Aggregate Supply
61. Explain how an increase in the price level changes interest rates. How does this change in
interest rates lead to changes in investment and net exports?
62. Make a list of things that would shift the aggregate demand curve to the right.
Aggregate Demand and Aggregate Supply 245
63. Make a list of things that would shift the long-run aggregate supply curve to the right.
64. Illustrate the classical analysis of growth and inflation with aggregate demand and long-run
aggregate supply curves.
246 Aggregate Demand and Aggregate Supply
65. Use sticky-wage theory to explain why an increase in the expected price level shifts the
aggregate supply curve.
66. Keynes thought that the behavior of the economy in the short run was influenced by what he
called "animal spirits." By this he meant that business people sometimes felt good about the
economy, and carried out lots of investment, and at other times felt bad about the economy, and so
cut back on their investment spending. Explain how such fluctuations in investment would lead to
fluctuations in real GDP and prices.
Aggregate Demand and Aggregate Supply 247
67. Suppose that a decrease in the demand for goods and services pushes the economy into
recession. What happens to the price level? If the government does nothing, what ensures that the
economy still eventually gets back to the natural rate of output?
248 Aggregate Demand and Aggregate Supply
Problems
1. Explain how a recession differs from a depression.
2. Identify the direction of the change during a recession in each of the following: consumption
expenditures, investment expenditures, and unemployment.
3. Name two macroeconomic variables that decline when an economy goes into recession, and name
one macroeconomic variable that rises.
Aggregate Demand and Aggregate Supply 249
4. Briefly state the three key facts about economic fluctuations.
Figure 33-12.
5. Refer to Figure 33-12. Identify periods 1 and 2.
250 Aggregate Demand and Aggregate Supply
6. Refer to Figure 33-12. Explain how the aggregate demand and aggregate supply model changed
during periods 1 and 2.
7. What curve shows the quantity of goods and services that households, firms, the government, and
customers abroad want to buy at each price level?
8. What curve shows the quantity of goods and services that firms choose to produce and sell at
each price level?
Aggregate Demand and Aggregate Supply 251
9. List the three reasons for why the aggregate-demand curve slopes downward.
10. The wealth effect helps explain what feature in the aggregate demand and aggregate supply
model?
11. The exchange-rate effect helps explain what feature in the aggregate demand and aggregate
supply model?
252 Aggregate Demand and Aggregate Supply
12. Suppose a boom in stock market prices helps make people feel wealthier. Using the model of
aggregate demand and aggregate supply, identify the curves that are affected, and which way
these curves would shift.
13. Suppose the government raises taxes. Which curves in the aggregate demand and aggregate
supply model would be affected, and which way would they shift?
14. Suppose speculators lost confidence in foreign economies and bought more U.S. bonds. How
would this affect net exports in the U.S., and which way would this cause the aggregate demand
curve to shift?
Aggregate Demand and Aggregate Supply 253
15. Suppose a recession overseas reduces a country’s exports. Which curve(s) in the aggregate
demand and aggregate supply model would be affected, and which way would it (they) shift?
16. Suppose a country offers a new investment tax credit. Which curve(s) in the aggregate demand
and aggregate supply model would be affected, and which way would it (they) shift?
17. Suppose technology advances within a nation. Which curves in the aggregate demand and
aggregate supply model would be affected, and which way would they shift?
254 Aggregate Demand and Aggregate Supply
18. Suppose a nation experiences increased immigration from abroad. Which curves in the aggregate
demand and aggregate supply model would be affected, and which way would they shift?
19. List the three alternative explanations for the upward slope of the short run aggregate supply
curve.
20. The sticky-price theory helps explain what feature of the aggregate demand and aggregate supply
model?
