Short-Term Output Adjustments and VSRAS

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Which of the following is NOT a component of GDP in the equation GDP = C + I + G + (X - M)?

Gross private domestic investment (I)

Consumer spending (C)

Imports (M) (correct)

Government spending (G)

According to the text, which effect is one of the reasons for the downward slope of the aggregate demand curve?

The interest rate effect

The real exchange rate effect

The wealth effect (correct)

The nominal money supply effect

What happens to the demand for money when the price level increases, according to the text?

The interest rate decreases

The interest rate increases

The demand for money increases (correct)

The demand for money decreases

What is the effect of a decrease in the price level on the interest rate, according to the text?

The interest rate decreases Signup and view all the answers

Why is holding extra money in liquid form considered to have an opportunity cost?

Because it earns interest Signup and view all the answers

Which of the following is true about the interest rate effect?

Higher interest rates decrease demand for goods and services Signup and view all the answers

What happens to the real exchange rate when the domestic price level increases?

The real exchange rate appreciates Signup and view all the answers

What is the relationship between interest rates and the real exchange rate?

Higher interest rates lead to a higher real exchange rate Signup and view all the answers

What does the aggregate supply curve represent?

The level of domestic output at each price level Signup and view all the answers

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

The short-run curve is downward sloping, while the long-run curve is upward sloping Signup and view all the answers

Which of the following best describes aggregate demand (AD)?

The quantity of goods and services that households, businesses, government, and international customers want to buy at any given level of prices Signup and view all the answers

What does the aggregate demand curve represent?

The relationship between aggregate expenditure and aggregate income Signup and view all the answers

What is the relationship between price level and quantity demanded in the aggregate demand curve?

Quantity demanded increases as the price level declines Signup and view all the answers

What is aggregate supply (AS)?

The quantity of goods and services that producers are willing to supply at any given level of prices Signup and view all the answers

What factors does aggregate supply (AS) reflect?

The amount of labor and capital that households are willing to offer into the marketplace at given real wage rates and cost of capital Signup and view all the answers

According to the text, when does an increase in government spending shift the AD curve to the right?

When aggregate capacity utilization reaches 82%–85% Signup and view all the answers

What is the main distinction between open-market operations and interest rate targeting?

Open-market operations involve buying and selling securities, while interest rate targeting involves adjusting the target interest rate Signup and view all the answers

What happens to the aggregate supply curve when the economy is already in long-run equilibrium and the central bank expands the money supply?

The aggregate supply curve becomes steeper Signup and view all the answers

What is the effect of a reduction in the money supply on the AD curve?

The AD curve shifts to the left Signup and view all the answers

What are some channels through which an increase in the money supply may induce additional expenditures?

Lower interest rates, increased borrowing, and increased investment Signup and view all the answers

According to the text, in the very short run, companies will increase or decrease output without changing prices. This is represented by the horizontal line labeled VSRAS. What is the name of the upward sloping curve that represents the dynamic over somewhat longer periods?

SRAS Signup and view all the answers

In the short run, wages and other input costs are relatively inflexible and do not fully adjust to changes in output prices. However, over the long run, wages and other input prices tend to 'catch up' with the prices of final goods and services. This is illustrated by which curve in Exhibit 10?

LRAS Signup and view all the answers

According to the text, what determines the position of the LRAS curve in Exhibit 10?

The potential output of the economy Signup and view all the answers

In the classical model of aggregate supply, the long-run equilibrium level of output is referred to as the full employment or natural level of output. At this level, the economy's resources are deemed to be fully employed and unemployment is at its natural rate. What is the assumption about the macroeconomy when referring to the natural rate of unemployment?

Companies have enough spare capacity to avoid bottlenecks Signup and view all the answers

According to the text, what is the business cycle a result of?

Short-term fluctuations of real GDP Signup and view all the answers

Which of the following factors can cause a shift in the aggregate demand (AD) curve?

Changes in household wealth Signup and view all the answers

What is the primary reason households save a portion of their current income?

To accumulate wealth for consumption in the future Signup and view all the answers

How does an increase in household wealth affect consumer spending?

Increases consumer spending Signup and view all the answers

What factors can directly or indirectly influence the level of aggregate expenditures and cause the aggregate demand (AD) curve to shift?

Changes in household wealth, consumer and business expectations, capacity utilization, monetary policy, exchange rate, growth in the global economy, and fiscal policy Signup and view all the answers

What impact does consumer and business confidence have on aggregate demand (AD)?

Increases aggregate demand (AD) Signup and view all the answers