ch.32

Question 1

What are economic fluctuations?

Answer 1

Irregular and unpredictable changes in economic activity

Question 2

What characterizes a recession?

Answer 2

Periods of falling real incomes and rising unemployment

Question 3

What is a depression?

Answer 3

A severe recession

Question 4

What model do economists use to analyze short-run fluctuations?

Answer 4

The model of aggregate demand and aggregate supply

Question 5

What are three key facts about economic fluctuations?

Answer 5

• They are irregular and unpredictable
• Most macroeconomic quantities fluctuate together
• As output falls, unemployment rises

Question 6

What does the classical economy assume about real and nominal variables?

Answer 6

Separation of variables into real and nominal (Classical Dichotomy)

Question 7

According to classical theory, what is the neutrality of money?

Answer 7

Changes in the money supply affect nominal but not real variables

Question 8

What is the slope of the aggregate-demand curve?

Answer 8

Downward

Question 9

What effect does a rise in the price level (P) have on consumption (C)?

Answer 9

C falls due to the wealth effect

Question 10

What is the interest rate effect?

Answer 10

A rise in P leads to higher interest rates, which decreases investment (I)

Question 11

What happens to net exports (NX) when the domestic exchange rate appreciates?

Answer 11

NX falls

Question 12

List factors that might shift the aggregate-demand curve.

Answer 12

• Changes in consumption
• Changes in investment
• Changes in government purchases
• Changes in net exports

Question 13

What is the natural rate of output (YN)?

Answer 13

The amount of output produced when unemployment is at its natural rate

Question 14

Why is the long-run aggregate-supply curve vertical?

Answer 14

An increase in P does not affect YN

Question 15

What can cause the long-run aggregate-supply curve to shift?

Answer 15

• Changes in labor
• Changes in capital
• Changes in natural resources
• Changes in technological knowledge

Question 16

What is the sticky-wage theory?

Answer 16

Nominal wages are slow to adjust when actual price levels differ from expected levels

Question 17

What does the short-run aggregate-supply curve depend on?

Answer 17

Expectations of prevailing price levels

Question 18

What are the two main causes of economic fluctuations?

Answer 18

• Shifts in aggregate demand
• Shifts in aggregate supply

Question 19

Fill in the blank: A fall in prices increases the _______ of consumers’ wealth.

Answer 19

real value

Question 20

What happens to the aggregate-demand curve when an investment tax credit expires?

Answer 20

AD curve shifts left

Question 21

What is the effect of a boom in Canada on the US economy?

Answer 21

NX rises, AD curve shifts right

Question 22

What happens to the short-run aggregate-supply curve when people’s expectations of the price level increase?

Answer 22

The curve shifts left

Question 23

What is the result of a contraction in aggregate demand?

Answer 23

Decrease in output and increase in unemployment

Question 24

True or False: Short-run fluctuations in GDP are predictable.

Answer 24

False

Question 25

What do shifts in aggregate supply affect in the short run?

Answer 25

Output (Y) and price level (P)

Question 26

What are short-run fluctuations in GDP characterized by?

Answer 26

Irregular and unpredictable patterns ## Footnote Fluctuations can lead to periods of recession and economic growth.

Question 27

What defines a recession?

Answer 27

Periods of falling real GDP and rising unemployment ## Footnote Recessions are significant economic downturns.

Question 28

Which model do economists use to analyze fluctuations in the economy?

Answer 28

The model of aggregate demand and aggregate supply ## Footnote This model helps explain the interaction between demand and supply in the economy.

Question 29

Why does the aggregate-demand curve slope downward?

Answer 29

Due to wealth effect, interest-rate effect, and exchange-rate effect ## Footnote These effects influence consumption, investment, and net exports.

Question 30

What factors can shift the aggregate-demand curve?

Answer 30

Changes in C, I, G, or NX, except a change in the price level ## Footnote C = Consumption, I = Investment, G = Government Spending, NX = Net Exports.

Question 31

What is the nature of the long-run aggregate-supply curve?

Answer 31

It is vertical ## Footnote This indicates that long-run output is unaffected by price level changes.

Question 32

What determines output in the long run?

Answer 32

Labor, capital, natural resources, and technology ## Footnote Changes in these factors will shift the long-run aggregate-supply curve.

Question 33

How does output behave in the short run?

Answer 33

It deviates from its natural rate when the price level is unexpected ## Footnote This leads to an upward-sloping short-run aggregate-supply curve.

Question 34

What are the three theories explaining the upward slope of the short-run aggregate-supply curve?

Answer 34

* Sticky-wage theory * Sticky-price theory * Misperceptions theory ## Footnote Each theory provides a different perspective on why prices and wages do not adjust immediately.

Question 35

What causes shifts in the short-run aggregate-supply curve?

Answer 35

Changes in the expected price level and shifts in the long-run aggregate supply curve ## Footnote These shifts reflect adjustments in economic expectations.

Question 36

What are the effects of a fall in aggregate demand in the short run?

Answer 36

Output and price level fall ## Footnote This often leads to economic contraction.

Question 37

What happens over time after a fall in aggregate demand?

Answer 37

Wages, prices, and perceptions adjust, shifting the short-run aggregate-supply curve rightward ## Footnote This adjustment process helps stabilize the economy.

Question 38

What is the long-run outcome after a change in aggregate demand?

Answer 38

The economy returns to natural rates of output and unemployment, but with a lower price level ## Footnote This reflects the economy's self-correcting nature.

Question 39

What is stagflation?

Answer 39

Falling output and rising prices due to a fall in aggregate supply ## Footnote Stagflation presents a unique challenge for policymakers.

Question 40

What occurs over time during stagflation?

Answer 40

Wages, prices, and perceptions adjust, leading to economic recovery ## Footnote The adjustment process can take time and may involve a painful transition.