Chapter 22

Question 1

Aggregate demand

Answer 1

Quantity of output demanded at each inflation rate

Question 2

Aggregate Supply

Answer 2

quantity of output supplied by firms at each inflation rate.

Question 3

four parts for aggregate demand

Answer 3

consumption expenditure

planned investment spending

government purchases

net exports

Y = C + I + G + NX

Question 4

shifts in aggregate demand

Answer 4

monetary policy r
government purchases G
taxes T
net exports NX
consumption expenditure C
Investment I
Financial frictions f

Question 5

how does an increase inautonomous monetary policy (r) impact AD curve?

Answer 5

shifts AD left

Question 6

how does an increase in government purchases impact AD curve?

Answer 6

shifts AD right

Question 7

how does an increase in taxes impact AD curve?

Answer 7

shifts AD left

Question 8

how does an increase in net exports impact AD curve?

Answer 8

shifts AD right

Question 9

how does an increase in consumption expenditure impact AD curve?

Answer 9

shifts AD right

Question 10

how does an increase in investment impact AD curve?

Answer 10

shifts AD right

Question 11

how does an increase in financial frictions impact AD curve?

Answer 11

shifts AD left

Question 12

why is there both SRAS and LRAS

Answer 12

takes time for prices and wages to adjust to long run levels

Question 13

what determines LRAS?

Answer 13

amount of capital, labor, and technology available

Question 14

at what point is LRAS vertical?

Answer 14

at the natural rate of output, which occurs when unemployment is at its natural rate

Question 15

when does LRAS curve shift? (4)

Answer 15

increase in capital

increase in labor supplied

increase in technology available

decline in natural rate of unemployment

Question 16

why is SRAS upward sloping?

Answer 16

wages and prices are sticky and slow to adjust

firms attempt to take advantage of short run profitability by creating more supply

Question 17

components of SRAS equation

Answer 17

expected inflation

output gap + sensitivity to ouput gap

inflation shock

Question 18

output gap formula

Answer 18

aggregate output - potential output

Question 19

shifts in SRAS

Answer 19

expected inflation

inflation shocks / price shocks

persistent output gap

Question 20

how does increase in expected inflation shift SRAS?

Answer 20

shifts AD left

Question 21

how does increase in inflation shock shift SRAS?

Answer 21

shifts AD left

Question 22

how does increase in persistent output gap shift SRAS?

Answer 22

shifts AD left

Question 23

keynesian self-correcting mechanism

Answer 23

slow - wages are sticky and there is a need for active government policy

Question 24

monetarists self-correcting mechanism

Answer 24

rapid - wages and prices are flexible and less need for government intervention

Question 25

what happens in positive demand shock

Answer 25

AD shifts right AS shifts left and brings output back to LR equilibrium inflation is permanently higher

Question 26

what happens in negative demand shock

Answer 26

AD shifts left AS shifts right output at LR equilibrium and inflation is permanently lower

Question 27

how does a temporary negative supply shock occur?

Answer 27

restriction in supply which results in a rise for prices

Question 28

what happens with a temporary negative supply shock

Answer 28

AS shifts left AS shifts back right back to LR equilibrium

Question 29

what happens with permanent negative supply shock

Answer 29

LRAS shifts left AS shifts left economy in LR equilibrium with output lower and inflation higher

Question 30

what happens with permanent positive supply shock?

Answer 30

LRAS shifts right AS shifts right permanent rise in output and decrease in inflation

Question 31

A shift in the aggregate demand curve affects output only in the ______ and has no effect on output in the ________.

Answer 31

Short run, long run

Question 32

a temporary ______ affects output and inflation in the short run and has no effect in the long run

Answer 32

supply shock

Question 33

how does a permanent supply shock affect output and inflation?

Answer 33

in the short run and the long run

Question 34

phillips curve

Answer 34

negative relationship between unemployment and inflation

Question 35

idea behind Phillips curve

Answer 35

when labor markets are tight and unemployment is low, firms have difficulty hiring workers, so they have to raise wages to attract in turn, they have to raise prices at a more rapid rate when unemployment is low

Question 36

when is there a trade off between unemployment and inflation?

Answer 36

only in the short run

Question 37

Okun's law

Answer 37

negative relationship between unemployment gap and output gap for every percentage point above potential output, a half percentage point lower in unemployment