Exam 33: Aggregate Demand and Aggregate Supply

The long-run aggregate supply is called:

Which of the following is the correct representation of GDP (Y) in an open economy?

The wealth effect implies that:

When an increase in the minimum wage raises the natural rate of unemployment:

The new classical misperceptions theory states that:

The long run aggregate supply curve is the summation of the short-run aggregate supply curves.

Which of the following variables is not held constant along a given aggregate demand curve?

When an increase in the economy's capital stock increases productivity:

The new Keynesian sticky-price theory suggests that an unexpected fall in the price level leaves some firms with higher-than-desired prices because of menu costs, causing sales to be depressed and inducing the firms to increase the quantity of goods and services they produce.

If there is an increase in both the price level and employment, which of the following could possibly explain this?

Keynes attempted to explain:

If the money supply increases, there will be:

A fall in the price level causes the aggregate supply to _____ in the short run.

Deteriorating economic conditions could be due to:

Pigou's wealth effect suggests that when the price level falls, consumers feel wealthier and so increase their spending. Another implication of falling prices, however, is that the real value of dollar-denominated debts will increase. For example, if you owe $100, the real value of your debt goes up, and you are worse off. If someone owes you $100, then falling prices make you better off. Now suppose that on average those who borrow money tend to spend a larger fraction of their income than do those who lend money. Will spending rise or fall as a result of a fall in the price level?

The new classical misperceptions theory, based on the work of Milton Friedman and Robert Lucas, suggests that a lower price level causes misperceptions about relative prices, which induces suppliers to increase the quantity of goods and services supplied.

Suppose the manager of a firm sees that the firm's output is selling at a price 5 per cent higher than she expected. Explain why she might decide to increase the firm's production in this case. Suppose that inflation actually accounts for the overall price level being 5 per cent higher than the manager expected. Is her decision to increase production correct? Explain how such behaviour can result in an upward-sloping aggregate-supply curve.

The upward slope of the aggregate-supply curve in the short run shows that:

The slope of the AD curve only reflects the total price demanded by consumers in the economy.

The aggregate-demand curve shows: