Chapter 8

Question 1

What are the 2 changes that can occur during exogenous changes in the price level?

Answer 1

Changes in consumption
Changes in net exports

Question 2

What happens when the price level rises? When the price level falls?

Answer 2

A rise in the price level lowers the real value of money held by the private sector
A fall in the price level raises the real value of money held by the private sector

Question 3

How do changes in the price level affect the wealth of bondholders and bond issuers? Does this affect aggregate wealth?

Answer 3

It changes the wealth of bondholders and bond issuers, but these changes offset each other so there is no change in aggregate wealth

Question 4

In summary, what does a rise in the price level lead to?

Answer 4

It leads to a reduction in the real value of the private sector’s wealth

Question 5

What does a reduction in wealth lead to? How does it affect the AE function?

Answer 5

It leads to a decrease in autonomous desired consumption and to a downward shift in the AE function

Question 6

What does a fall in the price level lead to? How does it affect the AE function?

Answer 6

It leads to a rise in wealth and desired consumption and to an upward shift in the AE function

Question 7

What happens to Canadian goods when domestic price levels rise (and the exchange rate remains unchanged)?

Answer 7

Canadian goods become more expensive relative to foreign goods

Question 8

What do Canadian consumers do when domestic price levels rise?

Answer 8

They reduce their purchases of Canadian-made goods and increase their purchases of foreign goods

Question 9

What do foreign consumers do when domestic price levels rise in Canada?

Answer 9

They reduce their purchases of Canadian-made goods

Question 10

What does a rise in domestic price level (with a constant exchange rate) do to the net export function and the AE curve?

Answer 10

It shifts the net export function and AE curve downward

Question 11

What does a fall in domestic price level (with a constant exchange rate) do to the net export function and the AE curve?

Answer 11

It shifts the net export function and AE function upward

Question 12

What does the aggregate demand curve (AD) curve show?

Answer 12

It shows the combinations of real GDP and the price level that make desired aggregate expenditure equal to actual national income

Question 13

What does a rise in the price level do to the AE curve which also causes what kind of movement on the AD curve?

Answer 13

A rise in the price level causes the AE curve to shift downward and leads to a movement upward and to the left along the AD curve, reflecting a fall in the equilibrium level of GDP.

Question 14

What does a fall in the price level do to the AE curve which also causes what kind of movement on the AD curve?

Answer 14

A fall in the price level causes the AE curve to shift upward and leads to a movement downward and to the right along the AD curve, reflecting a rise in the equilibrium level of GDP.

Question 15

What does desired aggregate expenditure equal to?

Answer 15

It equals to actual national income

Question 16

What is the equation for aggregate demand?

Answer 16

AD = C+I+(X-IM)

Question 17

AD rises if…
C ___
I ___
G ___
X ___
IM ___

Answer 17

rises
rises
rises
rises
falls

Question 18

What are shifts/shocks?

Answer 18

They are changes that occur that are not caused by changes in price level

Question 19

What do we call the situation where the AE and AD curves shift due to the same change?

Answer 19

An AD shock

Question 20

What happens to the AE and AD curves when an increase in autonomous aggregate expenditure causes an aggregate demand shock?

Answer 20

It shifts the AE curve upward and the AD curve to the right

Question 21

What happens to the AE and AD curves when a fall in autonomous aggregate expenditure causes an aggregate demand shock?

Answer 21

It shifts the AE curve downward and the AD curve to the left

Question 22

What does the simple multiplier measure in the AD curve in response to a change in autonomous desired expenditure?

Answer 22

It measures the horizontal shift in the AD curve

Question 23

What is the equation for the horizontal shift of the AD curve?

Answer 23

Horizontal shift of the AD curve = simple multiplier x the increase in autonomous expenditure (ΔA)

Question 24

What is the aggregate supply (AS) curve?

Answer 24

It is a curve showing the relation between the price level and the quantity of aggregate output supplied, for given technology and factors

Question 25

What methods of production could have been used when output increases?

Answer 25

Less efficient standby plants may have to be used Less efficient workers may have been hired Existing workers may have to be paid overtime rates for additional work

Question 26

Why does unit cost, or cost per unit of output, increase?

Answer 26

Because of what the aggregate supply curve shows and because of how the aggregate supply curve reacts when output increases/decreases

Question 27

Is the AS curve positively or negatively sloped?

Answer 27

It is positively sloped

Question 28

The higher the level of output, the ____ unit costs tend to rise, so the AS curve becomes ____ as output rises

Answer 28

faster steeper

Question 29

What are shifts in the AS curve that are caused by exogenous forces called?

Answer 29

They are called aggregate supply shocks

Question 30

Where does the AS curve shift when factor prices rise?

Answer 30

to the left

Question 31

Where does the AS curve shift when factor prices fall?

Answer 31

to the right

Question 32

Where does the AS curve shift when an improvement in technology occurs?

Answer 32

to the right

Question 33

Where does the AS curve shift when a deterioration in technology occurs?

Answer 33

to the left

Question 34

Where is demand behaviour consistent with supply behaviour?

Answer 34

Only at the intersection of the AS and AD curves

Question 35

What do positive shocks do to equilibrium GDP? What do negative shocks do to equilibrium GDP?

Answer 35

Increase Reduce

Question 36

What do aggregate demand shocks do to price level and real GDP?

Answer 36

It causes the price level and real GDP to change in the same direction. Both rise with an increase in aggregate demand, and both fall with a decrease in aggregate demand

Question 37

Where does an increase in autonomous expenditure cause the AE curve to shift?

Answer 37

To shift upward

Question 38

Where does a rise in the price level cause the AE curve to shift?

Answer 38

To shift part of the way down

Question 39

What happens to the price level and real GDP when there are changes in equilibrium?

Answer 39

They both move in the same direction

Question 40

What happens to the price level and real GDP when AD increases?

Answer 40

Price level and real GDP increase

Question 41

What happens to the price level and real GDP when AD decreases?

Answer 41

Price level and real GDP fall

Question 42

What happens to price level when the multiplier is smaller?

Answer 42

The price level becomes non-constant

Question 43

What kind of multiplier does an upward sloping AS curve have?

Answer 43

smaller multiplier which is smaller than the simple multiplier

Question 44

What does a steeper AS curve have?

Answer 44

A greater price effect and a smaller output effect

Question 45

How are the effects divided when the AD curve shifts to the right?

Answer 45

The effects are divided between changes in real output and changes in price level

Question 46

What happens to the price level and real GDP when AS shocks occur?

Answer 46

They change in opposite directions

Question 47

Where does a negative supply shock cause the AS to shift?

Answer 47

To the left

Question 48

Where does a rise in price level cause the AE to curve?

Answer 48

to curve downward