Chapter 12

Question 1

staglation

Answer 1

combination of high inflation and rising unemployment

Question 2

demand shocks

Answer 2

Short-run economic fluctuations

Question 3

Aggregate demand curve

Answer 3

Shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world

Question 4

Wealth effect of a change in the aggregate price level

Answer 4

The effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of counsumers assets

Aggregate price level up

Consumer spending Down

*leads to downward-sloping aggregate demand curve

Question 5

Interest rate effect of a change in the aggregate price level

Answer 5

The effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of conusmers’ and firms’ money holdings

interest rate up

consumption down

*leads to downward-sloping aggregate demand curve

Question 6

When consumers and firms become more optimsitic

Answer 6

aggregate demand increases

Question 7

When the real value of household assets rises…

Answer 7

aggregate demand increases

Question 8

When the existing stock of physical capital is relatively small….

Answer 8

aggregate demand increases

Question 9

When consumers and firms become more pessimistic

Answer 9

aggregate demand decreases

Question 10

When real value of household assets falls

Answer 10

aggregate demand decreases

Question 11

When existing stock of physical capital is relatively large

Answer 11

aggregate demand decreases

Question 12

When the government increases spending or cuts taxes

Answer 12

aggregate demand increases

Question 13

When the government reduces spending or raises taxes

Answer 13

aggregate demand decreases

Question 14

When the central bank increases the quantity of money

Answer 14

aggregate demand increases

Question 15

When the central bank reduces the quantity of money…

Answer 15

aggregate demand decreases

Question 16

The prime rate

Answer 16

The interest rate banks charge their best customers

Question 17

aggregate supply curve

Answer 17

Shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

Question 18

Profit per unit of output =

Answer 18

Price per unit of output - production cost per unit of output

Question 19

Wages

Answer 19

Refers to all forms of worker compensation, such as employer-paid health care, and retirement benefits in addition to earnings

Question 20

nominal wage

Answer 20

the dollar amount of the wage paid

Question 21

Sticky wages

Answer 21

Nominal wages that are slow to fall even in the face of high unemployment and slow to rise in the face of labor shortages

Question 22

Perfectly competitive markets

Answer 22

Producers take prices as given

Question 23

Imperfectly competitive markets

Answer 23

Producers have some ability to choose the prices they charge

Question 24

Short-run aggregate supply curve

Answer 24

Shows the relationship between the aggregate price level and quantity of aggregate output supplied that exists in the short run, the time period when many production costs can be taken as fixed

Question 25

average nominal wage

Answer 25

the nominal wage averaged over all workers in the economy \*falls when there is a steep rise in unemployment

Question 26

When commodity prices fall

Answer 26

aggregate supply increases

Question 27

When commodity prices rise

Answer 27

aggregate supply increases

Question 28

When nominal wages fall

Answer 28

aggregate supply increases

Question 29

When nominal wages rise

Answer 29

aggregate supply decreases

Question 30

When workers become more productive

Answer 30

aggregate supply increases

Question 31

When workers become less productive

Answer 31

aggregate supply decreases

Question 32

Changes in the aggregate price level \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Answer 32

do not change the quantity of aggregate output supplied in the long run

Question 33

Long run

Answer 33

the period of time over which all prices are fully flexible

Question 34

Long-run aggregate supply curve

Answer 34

Shows the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

Question 35

LRAS is \_\_\_\_\_\_\_\_

Answer 35

vertical at it's potential output

Question 36

potential output

Answer 36

The level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible

Question 37

AD-AS Model

Answer 37

The aggregate supply curve and aggregate demand curve are used together to analyze economic functions

Question 38

Short-run macroecnomic equilibrium

Answer 38

When quantity of aggregate output supplied is equal to quantiy demanded

Question 39

Short run equilibrium aggregate price level

Answer 39

The aggregate price level in the short-run macroeconomic equilibrum price level at Esr, Pe

Question 40

Short-run equilibrium aggregate output

Answer 40

The quantity of aggregate output produced in the short-run macroeconomic equilibrium Esr, Ye

Question 41

Pe

Answer 41

Short run equilibrium aggregate price level

Question 42

Ye

Answer 42

Short-run equilibrium level of aggregate output

Question 43

Demand shock

Answer 43

An event that shifts the aggregate demand curve

Question 44

stagflation

Answer 44

The combination of inflation and falling aggregate output

Question 45

Long-run macroeconomic equilibrium

Answer 45

When the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve

Question 46

Recessionary gap

Answer 46

When aggregate output is below potential output

Question 47

In the end, the economy is ____________ in the long run

Answer 47

self-correcting

Question 48

inflationary gap

Answer 48

When aggregate output is above potential output

Question 49

Output gap

Answer 49

The percentage difference between actual aggregate output and potential output _Actual aggregate output - potential output_ potential output X100 \*Tends to go towards zero

Question 50

Economy is **self correcting**

Answer 50

When shocks to aggregate demand affect aggregate output in the short run, but not the long run

Question 51

Stabilization policy

Answer 51

The use of government policy to reduce the severity of recessions and rein in excessively strong expansions