Exam 24: Aggregate Demand and Aggregate Supply Analysis

Article Summary For reasons including overproduction in the United States, a decrease in global demand, and limited production cuts by OPEC, the price of oil continued to fall during 2017. The falling prices have led OPEC to institute further cuts in oil production, but this effort has been thwarted by OPEC member Libya, whose production increased to 855,000 barrels a day, roughly triple its daily output from the previous year. Libya has Africa's largest oil reserves, but political unrest and militia blockades have severely restricted output in recent years. Due to political instability, OPEC had excluded Libya, Nigeria, and Iran from its agreement to cut production in 2016, but now all three countries have increased production. According to Michael Lynch, president of Strategic Energy and Economic Research, "A lot of experts figured things were so unstable in Libya and politics were so opaque that they did not want to factor in more supply from there. OPEC has been wounded. It gets back to the problem that OPEC has a lot of members in bad shape, making it difficult for them to call on everybody to make sacrifices equally. So they excluded those three and now it's come back to bite them." In late May, OPEC announced an extension to its cutback agreement, but in the month that followed, oil prices fell 16 percent. The same month, Libya announced plans to increase oil production to 1.5 million barrels a day by the end of 2018, and to 2.2 million barrels a day by 2023. -Refer to the Article Summary. The unexpected increase in the supply of oil mentioned in the article summary resulted in a decrease in the price of oil. When the price of oil falls unexpectedly due to a supply shock, the equilibrium price level ________ and the unemployment rate ________ in the short run.

A decrease in the price level will

Potential GDP is also referred to as

Figure 24-3 -Refer to Figure 24-3. Suppose the economy is at point A. If the economy experiences a negative supply shock, where will the eventual short-run equilibrium be?

Figure 24-2 -Refer to Figure 24-2. Ceteris paribus, a decrease in the expected future price level would be represented by a movement from

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

In 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico. This subsequently drove up natural gas, gasoline, and heating oil prices. As a result, this should

Using aggregate demand and aggregate supply, explain what happens in the short run if the Federal Reserve raises interest rates in the economy. Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment. Assume that the economy is at full employment before the interest rate increase.

In the dynamic aggregated demand and aggregate supply model, inflation occurs if

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?

Because of the slope of the aggregate demand curve, we can say that

Long-run macroeconomic equilibrium occurs when

Proponents of the ________ model argue that the short-run supply curve is vertical.

Figure 24-1 -Refer to Figure 24-1. Ceteris paribus, a decrease in the value of the domestic currency relative to foreign currencies would be represented by a movement from

Figure 24-1 -Refer to Figure 24-1. Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium

Figure 24-1 -Refer to Figure 24-1. Ceteris paribus, a decrease in personal income taxes would be represented by a movement from

New Keynesian macroeconomic theory emphasizes the role of "sticky" prices in the economy.

The main belief of the monetarist model is that

Changes in ________ do not affect the level of aggregate supply in the long run.