Module 6 Flashcards by Nancy Berg

Modern day economists whether Keynesian or classical, believe the aggregate supply curve is upward sloping. They still disagree on how big an effect increasing output has on the price level. Keynesians believe the slope of the AS curve is _____________, whereas classical economists believe the slope is ____________?

Steep and flat

Flat and steep

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True or false. Firms often do not purchase inputs at prices that stay fixed for considerable periods of time.

False

Firms define decide how much to produce by comparing their selling prices with their costs of production, and production costs depend, among other things, on input prices.

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The composite aggregate supply is what in the classical region.

Horizontal

Vertical

Upward sloping

Vertical

In the classical region, attempts to expand total real output will only drive up the price level.

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True or false. A shift of the aggregate demand curve to the right will have the greatest impact on the price level if the aggregate supply curve is horizontal.

False

Since the aggregate supply curve is horizontal, there will be no impact on the price level that remains constant.

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True or false. The aggregate production function shows how much total real output can be produced by various amounts of labor, given the amount of capital and available technology.

True

The aggregate production function shows the relationship between the total real output and the inputs available.

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The economy growth rate for 2151 is 15% and it’s inflation rate is 14.8%. To get to this current situation, what curve shifted and how?

AS increased

AD decreased

AD increased

AS decreased

AD increased

Increasing AD increases both the price level and output.

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According to Keynes the government should use its power to ____________ and tax people in order to shift aggregate demand to the right, __________ output and employment.

Spend and decreasing

Spend and increasing

Save and decreasing

Safe and increasing

Spend and increasing

According to Keynes, through spending and taxing the government can affect the aggregate demand curve and the government should increase aggregate demand to increase output and employment.

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The total of all planned expenditures in the entire economy is

1 aggregate demand

2 the open economy effect

3 aggregate supply

4 long run aggregate supply

The aggregate demand curve is the total planned expenditures in an economy.

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Using the production function, what happens to employment when the new energy source begins to be used in production?

Output increases and employment increases

Output increases and employment decreases

Output decreases and employment decreases

Output decreases and employment increases

Output increases and employment increases

New resources increase output. Since technology has not changed, more workers will be needed.

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True or false. If the price level increases, net exports, assets, government spending and household wealth all decrease.

True

When the price level increases the economy will move up and to the left on the aggregate demand curve.

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True or false. The classical theory claims that most government economic policies are ineffective, ill-timed, or downright harmful, and the market system works best in macroeconomics, as well as microeconomics, when left alone.

True

Classical economists assumed that the market is self regulating and that no government intervention is necessary.

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True or false. Classical theory follows laissez faire and Says’ law, so they believe there is no role for government to play in the economy.

True

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True or false. Equilibrium values of the price level and real output is determined by the intersection of aggregate supply and aggregate demand.

True

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The relationship between price level and aggregate supply _______________.

Is positive

Is negative

Varies from time to time

Depends upon a nation’s economy

Is positive

At higher price levels across the economy, firms expect that they can sell their final products at higher prices.

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True or false. Classical theory thinks government action will not work because of time lags making it hard for the government to successfully time policies to the business cycle.

True

It takes time for the government to recognize a problem in the economy; more so than it does to create a legislative policy to deal with it and then to enact the policy. By the time that is accomplished, the economy will be at a different place in the business cycle and need different policies.

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True or false. A family spending on electricity is a consumer’s expenditure.

True

Money that is spent on maintaining a household is considered a consumers expenditure. Examples could include food, gas, and clothing.

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If aggregate demand and nominal GDP increases while the price level is constant one would conclude that the

Aggregate supply curve is horizontal

Economy is already at full employment

Aggregate demand curve is vertical

Aggregate supply curve is upward sloping

Aggregate supply curve is horizontal

Graphically, if aggregate supply is horizontal, shifts in aggregate demand can only affect the output level.

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True or false. A decrease in net exports spending caused by an appreciation of the US dollar would cause the aggregate demand curve to shift to the left.

True

Net exports are one of the components of aggregate demand. If they decrease, aggregate demand will shift left.

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According to the classical model, the income generated by production is

Enough to purchase all the goods and services produced

Enough to meet the needs of everyone in society

Insufficient to purchase all the goods and services produced

Fully spent on savings

Enough to purchase all the goods and services produced.

According to classical economists, production is the source of demand.

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A Keynesian economist completely follows Keynes’ belief about the shape of the aggregate supply curve. She vocally argues that the AS is

Mildly upward sloping

Sharply upward sloping

Vertical

Horizontal

Keynes believe that increasing production would have no effect on the price level because of unused resources, especially labor.

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What is a possible reason for AD to increase?

New technology

Increase in imports

Decrease in consumption

Increase in investment

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One possible result of a fall in aggregate demand coupled with a stable short run aggregate supply is a

Recession

Economic expansion

Rise in the stock market

Increase in employment

Recession

When aggregate demand decreases, the graph shows a recessionary gap in which employment is below its natural level

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The aggregate demand curve is

Horizontal

Upward sloping

Downward slope in

Vertical

Downward sloping

There is a negative relationship between the price level in the amount of expenditures demanded by each sector in the economy.

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True or false. The slope of the aggregate supply curve depends on how costs change when firms change the level of production or quantity of output supplied.

True

When costs go up as firms attempt to increase output the AS curve is upward sloping.

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Classical economists thought that the economy tended naturally toward for what. Unemployment Employment

Employment

The composite aggregate supply is what in the Keynesian region? Horizontal Vertical Upward sloping

Horizontal In the Keynesian region, output can be increased without driving up prices.

Which of the following is an example of consumption expenditure, which is one of the components of AD? 1 Production of cell phones that are ship to Europe and sold to foreign buyers 2 Government spending on building public schools 3 The company's purchases of capital goods, like machines and tools 4 A family's purchase of a durable good, such as a new refrigerator

4 Consumption expenditure include spending on consumer durables as well as services and nondurables.

As the price level rises, the purchasing power of financial assets owned by households Rises Declines Stays the same

Declines If the prices increase, purchasing power is reduced.

If the aggregate supply curve shifts to the right and the aggregate demand curve shifts to the left, what happens to the price level and real output? The price level rises, and real output rises The price level rises, but the effect on real output cannot be determined The price level rises, in real output falls The price level falls, but the effect on real output cannot be determined

The price level falls, but the effect on real output cannot be determined. If both curves shift in opposite directions, in general, we cannot determine the real output without knowing the extent of the shifts.

And aggregate supply curve shifts to the _______________ when any non-price-level factor decreases the total cost of production. Left Right

Right

Which of the following will cause an increase in aggregate supply? Decreased input prices Decreased competition Increased marginal tax rates

Decreased input prices A decrease in input prices makes it cheaper to produce goods and increases aggregate supply.

True or false. An increase in capital or any improvement in technology will shift the aggregate production function.

True Capital and technology are the ceteris parabus factors that will cause a shift of the production function when they change.

True or false. Aggregate supply and demand combined with the aggregate production function determine not only the price level and real output, but also the level of employment and, by extension, the level of unemployment.

True By extending the AD/AS equilibrium to the production function, you can determine the level of employment and unemployment at every level of real output.

If changes in the price level have no effect on real output, aggregate supply is Upward sloping Downward sloping Vertical Horizontal

Vertical A fixed real output level and a variable price level imply a vertical aggregate supply curve.

The relationship between the inputs employed by a firm and the maximum output that it can produce with those inputs is the firm's Production function Supply curve Average product of labor Marginal product of labor

Production function A production function shows how much a firm can produce with the inputs available.

A decrease in aggregate demand will cause Aggregate supply to fall, according to classical economists, and prices to fall, according to Keynes Prices to fall, according to classical economists, and unemployment to increase, according to Keynes Aggregate supply to fall, according to Keynes and unemployment to increase, according to classical economists Prices to fall in unemployment to increase, according to both classical economists and Keynes

Prices to fall, according to classical economists, and unemployment to increase, according to Keynes.

True or false. Goods and services for export, such as chemicals, entertainment, and financial services, are also a key component of aggregate supply.

True Traded goods are the components of aggregate supply.

True or false Keynesian economists focus on the short run wild classical economists focus on the long run.

True

Aggregate demand is downward sloping because a higher price level leads to Lower imports Lower exports Lower tax rates Lower interest rates

Lower exports Higher domestic prices mean that a country's exports become more expensive to foreigners, so the quantity demanded falls.

A key component of the Keynesian model is that Wages are flexible Prices are sticky Prices are flexible

Prices are sticky

How will the increase in resources (new energy source) affect the equilibrium outcome in the AS/AD model? Price level decreases and output decreases Price level increases and output decreases Price level decreases and output increases Price level increases and output increases

Price level decreases and output increases Lower production costs allow for more output to be produced at a lower price level.

The relationship between the number of workers and output, with a fixed amount of capital, is Positive and decreasing Positive and proportional Positive and increasing

Positive and decreasing Every additional worker will produce less output than the previous one with the resources available.

True or false. There is an inverse relationship between the price level and the quantity demanded of real GDP.

True The aggregate demand curve, like the demand curves for individual goods, is downward sloping.

A country develops a new energy source. What curve will this shift? Aggregate supply Aggregate demand

Aggregate supply When the amount of resources increase, this increases an economy's potential output, which will shift the aggregate supply curve.

True or false. Keynes challenged the classical school during the Great Depression. He advocated government intervention in the form of fiscal policy to shift aggregate demand.

True Keynes advocated government intervention to bring the economy back to equilibrium by shifting aggregate demand while classical theorists believe the market self regulated.

True or false. Aggregate demand = C + I +G + M - X, where C is consumption expenditure, I is investment expenditure, G is government expenditure, M is imports and X is exports.

false

True or false. Aggregate supply is defined as the total amount of goods and services (real output) produced and supplied by an economy's firms over a period of time.

True Aggregate supply represents the ability of an economy to deliver goods and services to meet demand.

Which of the following will not cause a leftward shift in the aggregate demand curve? An increase in taxes A decrease in taxes A reduction in the money supply A reduction in government spending

A decrease in taxes.

True or false. Keynesian theory believes the government should actively intervene to smooth out the business cycle, but will not be able to achieve long run growth.

True

True or false. If taxes increase and the aggregate supply curve is upward sloping, then output falls and the price level increases.

True An increase in taxes causes a decrease in aggregate demand. The new equilibrium will show a fall in output and increase in the price level.

The supply curve for an individual good is drawn under the assumption that Quantity demanded varies over the time period Quantity demanded is constant Input prices varies over the time period Input prices remain constant

Input prices remain constant As the price of good X rises, sellers' per unit costs of providing good X do not change.

Which of the following is not a component of aggregate supply? Public and merit goods Consumer goods Capital goods Government spending

Government spending Government spending is a part of aggregate demand.

True or false. A market demand curve is the same as an aggregate demand curve.

False A market demand curve relates to a particular good or service, while aggregate demand relates to all goods and services combined.

The amount of real output that can be produced by various amounts of labor can't be represented by Aggregate production function Production possibilities curve

Aggregate production function The relationship between real output and labor is represented by the aggregate production function.

The Keynesian short run aggregate supply (SRAS) curve is Horizontal Upward sloping Vertical Downward sloping

Horizontal

If aggregate demand increases and the aggregate supply curve is upward sloping and unchanged, Price ______________ and Y ________________. Price rises and output lowers Price lowers and output rises Price rises and output rises Price lowers and output lowers

Price rises and output rises When the aggregate demand shifts to the right, the new equilibrium will be at a higher price level. When the aggregate demand shifts to the right, the new equilibrium will be at a higher real output.

Keens challenge the classical school during the great depression. He suggested that the aggregate supply curve could be ___________ or at least very flat in the _____________. Horizontal and long-run Vertical and long-run Horizontal and short run Vertical and short run

Horizontal and short run

Which of the following would cause aggregate demand to decrease? The government increases personal income taxes Businesses and households believe that the economy is growing and feel secure about their jobs There is a decrease in the foreign exchange value of the dollar

The government increases personal income taxes When the government increases personal income taxes, consumer spending plans will decrease as they have less disposable income

True or false. If wages do not change, improvements in productivity stemming from improved technology will decrease business costs, improve profitability, and encourage more production.

True If the wage of a labor remains the same, the improvement in technology will decrease business costs and improve profitability because the output per hour of work is increased.

A country's leaders are worried that there will be a recession in the following year and asked the Keynesian economists for advice. What should be done to prevent the recession from happening? Increased government spending Do nothing Decreased government spending

Increased government spending Since Keynesian economists think recessions are caused by two little aggregate demand, and that private demand cannot be increased easily enough, the government should increase it's spending so aggregate demand would increase.

True or false. The aggregate supply and demand curves, taken together, determine the price level and the level of real output. Adding an aggregate production function also indicates the level of employment.

True By extending the equilibrium line from the AD/AS graph to the production function graph, you can identify the level of employment.

The classical aggregate supply curve was Horizontal Vertical

Vertical Classical economists assumed that the aggregate supply curve is vertical because prices will adjust so that output is always at full employment.

The vertical axis of the aggregate demand curve represents what? 1 price level 2 national income 3 nominal GDP 4 real GDP

1 The aggregate demand curve represents the total quantity of all goods and services demanded by the economy a different price levels.

What did classical economists assume? Wages are inflexible Prices are sticky Prices and wages are flexible

Prices and wages are flexible.

An economist holds pre-depression classical beliefs. He argues that the shape of the AS is Horizontal Sharply upward sloping Vertical Mildly upward sloping

Vertical This means resources are fully used, and trying to increase output would only increase the price level. Keynes wrote his theory during the Great Depression when there was 25% unemployment.

In the classical model, aggregate demand an aggregate supply will Not exist Intersect at less than full employment Intersect at the point of full employment Not intersect

Intersect at the point of full employment.

Which of the following statements is true? Inflation causes both exports and imports to fall. Higher price levels are associated with higher interest rates. Spending by state and local governments is not sensitive to changes in the price level. The purchasing power of financial assets owned by households increases when the price level increases.

Higher price levels are associated with higher interest rates. Borrowing usually falls when interest rates go up, so the quantity demanded is reduced.

The classical school advocated the laissez-faire approach. That means no government intervention, as the market will _______________. Stagnate Self regulate

Self regulate

The composite aggregate supply is what in between the classical region and the Keynesian region? Horizontal Vertical Upward sloping

Upward sloping In the intermediate region, attempting to expand output will drive up the price level, but will also result in more output.

An aggregate demand curve shifts to the right when any non-price-level factor _____________ total planned real spending. Increases Decreases

Increases An increase in aggregate demand means the curve has shifted to the right.

A country's leaders ask the classical economists what they think should be done about the projected recession. What advice is most likely given by the classical economists? Decreased government spending Increased government spending Do nothing

Do nothing Classical economists think the price of resources will decline as they are being underutilized. As prices decline, it will be cheaper to produce and so more output will be made at a lower price level without government involvement.

If an attempt is made to use aggregate supply to increase output, prices should Rise Fall

Fall When aggregate supply shifts to the right, real output will increase, but the price level will decrease.

Generally, when firms increase output using existing resources, higher costs lead to higher prices, resulting in an upward sloping supply curve. Which explanation does not help to explain why costs tend to increase with output? In order to raise production with given resources, some labor has to work overtime at a higher pay. If firms are using machines and tools more, they wear out faster and break down more often. Businesses purchasing more raw materials may be given volume discounts. When more entrepreneurs are trying to start or expand businesses, there is greater competition for loans, so interest rates rise.

Businesses purchasing more raw materials may be given volume discounts. Volume discounts result in a lower cost of materials, so this does not help explain why costs increase with output.

The classical model uses the assumption that Monopoly is widespread in the economy All wages and prices are flexible Interest rates are not flexible Economic markets are fragile and have no tendency to move towards an equilibrium

All wages and prices are flexible.

True or false. As the domestic price level rises, the demand for imports increases.

True As the domestic price level rises, foreign-made goods become relatively cheaper, so that the demand for imports increases.

An event that causes the aggregate demand curve to shift inward or outward is one that Causes aggregate supply to increase Causes aggregate supply to decrease Influences spending plans

Influences spending plans When consumers change their spending plans, aggregate demand will shift.

True or false. A change in the price level will not shift the aggregate supply curve.

True

True or false. Many private firms, such as those in construction, IT, and pharmaceuticals, rely on contracts to supply to the public sector.

True Goods and services produced by private firms for use by Central or local government are a significant component of aggregate supply.

Which of the following does not represent an aggregate demand? The sum of all individual demand curves across different markets The sum of all goods and services in the economy that will be purchased at all possible price levels All planned expenditures in the entire economy The real GDP of an economy

The sum of all the different individual demand curves across different markets.

A negative slope in demand curve is created because with a higher price level ___________ are increased and the purchase value of ___________ assets is decreased. Exports and financial Exports and fixed Imports and fixed Imports and financial

Imports and financial As price increases, the purchasing power of savings or other financial assets will be reduced. With higher domestic prices, residence demand cheaper imported goods.

True or false. Aggregate supply has a positive relationship with price level.

False The relationship between aggregate supply and price level is possible only when all other factors influencing production plans are held constant. For example, if a potential aggregate output is assumed, in any price change potential output is constant.

The aggregate supply curve will be vertical when The economy is operating at capacity The aggregate demand curve is shifting to the left Aggregate demand is absent Output and price levels rise together

The economy is operating at capacity According to classical macroeconomics, the AS curve is assumed vertical because it is assumed the long run or potential output level of the economy.

An increase in government spending will shift aggregate demand two The right The left

The right An increase in government spending increases aggregate demand, which is shown by shifting the curve to the right.

True or false. The aggregate demand curve shifts to the right when government spending increases.

True With increased government spending, business gets more revenue, they expand more, they employ more, and incomes rise, which leads to more spending.

Which of the following will shift the aggregate supply curve to the left? A decrease in productive resources A change in consumer wealth A decrease in political stability Technological development

A decrease in productive resources A decrease in the labor force or natural resources contributes to a decrease of the AS, shifting the curve to the left.

True or false. A shift of the aggregate demand curve to the right will have the greatest impact on the price level if the aggregate supply curve is horizontal.

Falls In this situation, a shift in AD will have a greatest impact on real GDP level, not on price level.

Which of the following is not correct about the aggregate production function? Technology and capital are held constant Labor is the dependent variable More workers will produce greater output New production is capital or technology changes

Labor is the dependent variable

At equilibrium of output and employment, a left shift in aggregate demand will cause a _________ in real output and a ___________ and employment? Decrease and increase Increase and decrease Increase and increase Decrees and decrease

Decrease and decrease With a large decrease in output of demand, firms will decrease their production level and be forced to lay off many workers. A left shift in aggregate demand causes a significant decrease in spending, which causes a large decrease in output. If firms decrease their output, they have to lay off many workers.

True or false. Classical economists believe that the aggregate supply curve is horizontal when the economy is at its full employment level.

False Classical economists believe that when a full employment level output is achieved, the AS curve is vertical.

Which of the following is correct about Keynesian theorists? They are concerned about the level of stock prices They are concerned about recurring high levels of unemployment They are concerned about fluctuations in the money supply They are concerned about conditions of overemployment

They are concerned about recurring high levels of employment. During a recession, output will fall and many people will become unemployed. Keynesians are concerned about solving this macroeconomic problem.

Classical economists believe that government intervention in aggregate demand will cause a ___________of inflation, where as Keynesians believe that government intervention will cause a blank and unemployment. Increase and decrease Increase and increase Decrease and increase Decrease and decrease

Increase and decrease For classical economists, aggregate supply is vertical, so any right shift in AD will increase price. Keynesians believe that government intervention in AD will cause a decrease in unemployment.

True or false. According to Keynesian theorists, an unemployment situation could be minimized by government monetary policy intervention.

False According to Keynesian theorists, an unemployment situation could be minimized by government fiscal policy.