Macroeconomics Quiz on Aggregate Supply and Demand

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What happens to U.S. exports if the exchange rate of the U.S. dollar increases?

Imports from other countries decrease.

Foreigners buy more U.S. exports.

U.S. exports become more expensive for foreigners. (correct)

Exports become cheaper for foreigners.

Which of the following elements does NOT affect net exports?

Price level in the U.S. relative to other countries.

Exchange rate of the U.S. dollar.

Consumer sentiment in the U.S. (correct)

Real GDP growth in the U.S. compared to other countries.

What is NOT a determinant of the long-run aggregate supply curve?

Capital stock.

Number of workers.

Current unemployment rate. (correct)

Level of technology.

Which of the following correctly describes the short-run aggregate supply curve?

It depicts quantity supplied responding to the price level. Signup and view all the answers

How did net exports change as a result of the falling value of the U.S. dollar during the recession?

They increased, becoming less negative. Signup and view all the answers

What is a key difference between short-run and long-run aggregate supply curves?

Long-run supply reflects all available resources, whereas short-run does not. Signup and view all the answers

What determines real GDP and price level in the short run?

The interaction between aggregate demand and short-run aggregate supply Signup and view all the answers

Why does the aggregate demand curve slope downward?

It reflects the inverse relationship between price level and planned aggregate expenditure Signup and view all the answers

Which component is NOT part of the formula for Real GDP?

Export subsidies (E) Signup and view all the answers

How is household consumption primarily determined?

Primarily by income but also influenced by wealth Signup and view all the answers

What effect does a rise in price levels have on household wealth?

It decreases the real value of household wealth Signup and view all the answers

What is the wealth effect?

How changes in price levels affect household consumption Signup and view all the answers

Which scenario could potentially cause a recession?

A decrease in any of the four components of real GDP Signup and view all the answers

What does the upward sloping aggregate expenditure curve represent?

A positive relationship between real GDP and aggregate expenditure Signup and view all the answers

What effect does an increase in the price level have on investment spending?

It leads to increased demand for money, raising interest rates and discouraging investment. Signup and view all the answers

What happens to net exports when U.S. price levels rise?

Net exports decrease as exports become more expensive and imports become cheaper. Signup and view all the answers

How does a shift in the AD curve differ from a movement along it?

A shift happens when external factors affect aggregate demand, while a movement results from price changes. Signup and view all the answers

What can lead to a shift in the aggregate demand curve?

A change in the level of interest rates managed by the Federal Reserve. Signup and view all the answers

Which of the following correctly outlines a fiscal policy action?

Increasing federal taxes to reduce disposable income and consumption. Signup and view all the answers

What effect does increasing optimism among households have on aggregate demand?

It boosts aggregate demand through higher consumption. Signup and view all the answers

How does a rise in interest rates impact investment spending?

It reduces investment due to higher costs of financing. Signup and view all the answers

What is the primary reason behind the downward slope of the AD curve?

Higher prices lead to reduced demand for goods and services. Signup and view all the answers

What characterizes the long-run aggregate supply curve?

It is vertical at full-employment GDP. Signup and view all the answers

Why is the short-run aggregate supply curve upward sloping?

Prices of inputs rise more slowly than final goods. Signup and view all the answers

What is meant by 'sticky' prices and wages?

They remain constant despite changes in supply and demand. Signup and view all the answers

Which of the following is a reason why firms might be reluctant to cut wages?

It negatively affects employee morale. Signup and view all the answers

How do 'menu costs' affect pricing decisions for firms?

They discourage any price changes due to incurred costs. Signup and view all the answers

What happens to short-run aggregate supply when the availability of factors of production decreases?

SRAS decreases. Signup and view all the answers

What is a common consequence firms face when adjusting wages?

Firing current workers. Signup and view all the answers

What role does technology play in the short-run aggregate supply?

It can enhance productivity. Signup and view all the answers

What happens when workers and firms expect future price levels to rise?

They will adjust their wages and prices upwards. Signup and view all the answers

How do adjustments to errors in past expectations affect short-run aggregate supply?

They cause firms to decrease their output after realizing price increases. Signup and view all the answers

What effect does a supply shock have on the short-run aggregate supply curve?

It may increase or decrease the curve depending on the nature of the shock. Signup and view all the answers

What is the long-run macroeconomic equilibrium characterized by?

Intersection of AD and SRAS at the LRAS level. Signup and view all the answers

What contributes to a shift in the short-run aggregate supply due to expected future prices?

Widely-held expectations about future price increases. Signup and view all the answers

Which of the following scenarios would decrease short-run aggregate supply?

A sudden increase in oil prices. Signup and view all the answers

How do firms react to incorrect predictions about the price level?

They will adjust their prices and output to meet new expectations. Signup and view all the answers

Why do firms reduce output in response to increasing price levels, after initially underestimating them?

To avoid overproduction based on past predictions. Signup and view all the answers

What happens to aggregate demand (AD) when interest rates rise?

AD moves to the left as firms and households reduce planned investments. Signup and view all the answers

What is a likely outcome of firms becoming more optimistic about the future?

Increased investment shifting AD to the right. Signup and view all the answers

What effect does a supply shock, such as a sudden increase in oil prices, typically have on the economy?

Results in stagflation, characterized by inflation and recession. Signup and view all the answers

How do firms and workers typically adjust after a supply shock decreases output?

They accept lower wages and firms decrease prices. Signup and view all the answers

What role do fiscal or monetary policies play when restoring full employment after a supply shock?

They can increase aggregate demand leading to higher prices permanently. Signup and view all the answers

What usually causes inflation in an economy?

Total spending increasing faster than production. Signup and view all the answers

In what scenario does the SRAS curve move to the right?

When workers and firms expect lower prices. Signup and view all the answers

What is the effect of a shift in LRAS to the right?

It represents economic growth over time. Signup and view all the answers

Study Notes

Eco 1 Review of Aggregate Expenditure and Chapter 23: Analysis of Aggregate Demand and Aggregate Supply

Aggregate demand and aggregate supply model: Explains short-run fluctuations in real GDP and the price level.
Helps understand why real GDP, employment, and price levels fluctuate.
In the short run, real GDP and price level are determined by the intersection of aggregate demand (AD) and short-run aggregate supply (AS) curves.
Aggregate demand (AD) curve: Shows the relationship between price level and quantity of real GDP demanded by households, firms, and the government.
Short-run aggregate supply (AS) curve: Shows the relationship between price level and quantity of real GDP supplied by firms.

Aggregate Demand

Relationship between output and price level: Downward sloping, reflecting the inverse relationship between price level and level of planned aggregate expenditure.
Change in price level: A decrease in price level shifts AD curve up, causing equilibrium GDP to rise; an increase in price level shifts AD curve down, causing equilibrium GDP to fall.

Aggregate Expenditure

Relationship between spending and income: Upward sloping, reflecting the positive relationship between real GDP and aggregate expenditure.

The Four Components of Real GDP

Real GDP has four components: Consumption (C), Investment (I), Government Purchases (G), and Net Exports (NX).
Y = C + I + G + NX
Government purchases are determined by policymakers.
Other components depend on the price level.

The Wealth Effect

Household consumption is primarily determined by income but also affected by wealth.
Some wealth is held in nominal assets, so rising price levels decrease real value of household wealth, leading to reduced consumption.

Why is the AD Curve Downward Sloping?

Interest-rate effect: Higher prices cause demand for money to rise, increasing interest rates and discouraging investment.
International-trade effect: Higher U.S. prices make U.S. exports more expensive and imports cheaper, reducing net exports.
Each effect decreases real GDP as price levels rises.

Shifts of the AD Curve vs. Movements Along It

A change in price level causes a movement along the AD curve because the price level is a variable on the AD curve.
A change in other components of aggregate demand (like government spending or investment) shifts the AD curve itself.

AD Shifts: Changes in Monetary Policy

Federal Reserve actions to manage money supply and interest rates can shift AD.
Higher interest rates reduce investment spending, shifting AD to the left.
Lower interest rates increase investment spending, shifting AD to the right.

AD Shifts: Changes in Fiscal Policy

Changes in federal taxes and purchases (fiscal policy) can shift the AD curve.
Increased government purchases shift AD to the right.
Increased taxes reduce disposable income, reducing consumption and shifting AD to the left.

AD Shifts: Changes in Expectations

Optimistic expectations about the future increase consumption and investment shifting AD to the right, vice-versa.

AD Shifts: Changes in Foreign Variables

Changes in foreign incomes and exchange rates affect net exports and thus shift the AD curve.
Higher rates of domestic GDP relative to foreign GDP decrease net exports and shifts AD to the left.
Increased value of the US dollar decreases net exports and shifts AD to the left.

Recessions and the Components of AD

2007-2009 recession: Low consumption, falling residential investment, increased net exports. Factors were unusually low and decreasing consumption and falling residential investment. A decline in the US dollar value increased net exports during this recession.

Aggregate Supply

Aggregate supply refers to the quantity of goods and services firms are willing to supply.
Long-run aggregate supply (LRAS) curve: A vertical curve at the level of potential GDP in the long run; unrelated to price level.
Short-run aggregate supply (SRAS) curve: Upward sloping, not vertical like the long-run aggregate supply curve; relationship between price level and quantity of real GDP supplied in the short run.

Long-Run Aggregate Supply (LRAS) Curve

Relationship between price level and quantity of real GDP supplied in the long run.
Determined by factors unrelated to price level (number of workers, technology level, capital stock).
Vertical because price level does not affect these factors in the long run.

Short-Run Aggregate Supply (SRAS) Curve

Upward sloping because of sticky wages and prices.
Contracts, menu costs, and slow wage adjustments result in firms and workers often failing to anticipate changing price levels.
Sticky prices and wages affect SRAS differently than LRAS.

SRAS Shifts: Factors of Production and Technology

An increase in the availability of labor, capital, or technology increases production at each price level, shifting short-run aggregate supply to the right.
A decrease shifts SRAS to the left.

SRAS Shifts: Expected Future Prices

If firms and workers expect higher prices, they raise wages and prices, shifting SRAS to the left.
If firms and workers expect lower prices, shifts SRAS to the right

SRAS Shifts: Adjustments to Errors in Past Expectations

Firms and workers adjust to errors in past expectations by changing prices and wages respectively, causing the SRAS curve to shift

SRAS Shifts: Unexpected Changes in Prices of Resources

Unexpected increases in prices of resources (supply shock) decrease short-run aggregate supply.
Unexpected decreases in prices of resources increases short-run aggregate supply.

Long-Run Macroeconomic Equilibrium

Equilibrium occurs where AD and SRAS curves intersect on the LRAS curve.
Explains why long-run macroeconomic equilibrium cannot occur at any other level of output.
For simplicity, assumes no inflation and no long-run growth.

Long-Run Macroeconomic Equilibrium: Shifts

When AD shifts, the economy moves to a new short-run equilibrium, and eventually, to a new long-run equilibrium.
When SRAS shifts, the economy moves to a new short-run equilibrium, and eventually, to a new long-run equilibrium.
Supply shocks affect the price level and output.

Dynamic AD and AS Model

The dynamic AD and AS model allows for continually-increasing real GDP, so the LRAS curve shifts to the right, while SRAS and AD curves shift as well.

What Is the Usual Cause of Inflation?

Inflation is often caused by AD shifting right more than anticipated changes to LRAS and SRAS, increasing prices and output in the equilibrium.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge on key concepts in macroeconomics, including the effects of exchange rates on U.S. exports and the determinants of aggregate supply and demand. This quiz covers important trends from the 2007-2009 recession and evaluates your understanding of real GDP and consumption spending.