ch.34

Question 2

What are economic fluctuations?

Answer 2

Irregular and unpredictable changes in economic activity

Question 3

What characterizes a recession?

Answer 3

Periods of falling real incomes and rising unemployment

Question 4

What is a depression?

Answer 4

A severe recession

Question 5

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

Answer 5

The model of aggregate demand and aggregate supply

Question 6

What are three key facts about economic fluctuations?

Answer 6

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

Question 7

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

Answer 7

Separation of variables into real and nominal (Classical Dichotomy)

Question 8

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

Answer 8

Changes in the money supply affect nominal but not real variables

Question 9

What is the slope of the aggregate-demand curve?

Answer 9

Downward

Question 10

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

Answer 10

C falls due to the wealth effect

Question 11

What is the interest rate effect?

Answer 11

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

Question 12

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

Answer 12

NX falls

Question 13

List factors that might shift the aggregate-demand curve.

Answer 13

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

Question 14

What is the natural rate of output (YN)?

Answer 14

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

Question 15

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

Answer 15

An increase in P does not affect YN

Question 16

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

Answer 16

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

Question 17

What is the sticky-wage theory?

Answer 17

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

Question 18

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

Answer 18

Expectations of prevailing price levels

Question 19

What are the two main causes of economic fluctuations?

Answer 19

• Shifts in aggregate demand
• Shifts in aggregate supply

Question 20

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

Answer 20

real value

Question 21

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

Answer 21

AD curve shifts left

Question 22

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

Answer 22

NX rises, AD curve shifts right

Question 23

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

Answer 23

The curve shifts left

Question 24

What is the result of a contraction in aggregate demand?

Answer 24

Decrease in output and increase in unemployment

Question 25

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

Answer 25

False

Question 26

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

Answer 26

Output (Y) and price level (P)

Question 27

What are short-run fluctuations in GDP characterized by?

Answer 27

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

Question 28

What defines a recession?

Answer 28

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

Question 29

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

Answer 29

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

Question 30

Why does the aggregate-demand curve slope downward?

Answer 30

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

Question 31

What factors can shift the aggregate-demand curve?

Answer 31

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 32

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

Answer 32

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

Question 33

What determines output in the long run?

Answer 33

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

Question 34

How does output behave in the short run?

Answer 34

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 35

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

Answer 35

* 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 36

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

Answer 36

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

Question 37

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

Answer 37

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

Question 38

What happens over time after a fall in aggregate demand?

Answer 38

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

Question 39

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

Answer 39

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 40

What is stagflation?

Answer 40

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

Question 41

What occurs over time during stagflation?

Answer 41

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