Notes

Which of the following best describes the aggregate demand curve?
total spending on domestic goods and services at each price level
aggregate demand curve is a economic graph that indicates how many goods and services households, firms, and the government are willing and able to pay at each price level

what is the relationship between the price level and real output along the aggregate demand curve?

wages and prices are sticky, which of the following will happen as a result of an increase in the price level?
An increase in the price level will increase profits and production

why does the aggregate supply curve slope upward?
The short-run aggregate supply curve is upward sloping because the quantity supplied increases when the price rises. When the curve shifts outward the output and real GDP increase at a given price.

Suppose a nation opened its borders to the free flow of workers from other nations. How would this event likely affect the long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation?
More workers would mean both curves shift to the right.

Suppose that the prices of labor and inputs to production are fixed in the short run but not in the long run. What is a consequence of this flexibility in the long run?
The long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run.

Which of the following explains the relationship between the price level and real output along the aggregate demand curve?
At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods.

Assume the economy of Country A is in long-run equilibrium. Which of the following will happen in the short run in Country A if one of its major trading partners, Country B, experiences a recession?
Aggregate demand will decrease and the price level will decrease. A recession in Country B will result in a decrease in income and a decrease in imports. Since Country B is a major trading partner of Country A, a decrease in imports in Country B will result in a decrease in Country A's exports. Therefore, aggregate demand in Country A will decrease and the price level will decrease.

At the same time, productivity increased due to new technology. What is the likely short-run impact on the economy?
Both the aggregate demand (AD) and the short-run aggregate supply (SRAS) curves shift right, resulting in a higher output level and indeterminate price level.

Suppose that the economy is in a recession. In the absence of government policy action to restore the economy to full employment, how will the economy adjust in the long run? The SRAS2 curve shifts to the right as nominal wages decrease and full employment is restored

If the natural rate of unemployment exceeds the actual rate of unemployment, which of the following will occur in the long run in the absence of government intervention?
nominal wages increase

Which of the following is true about the equilibrium real output in the aggregate demand-aggregate supply (AD-AS) model in the short run?
Equilibrium real output can be above, equal to, or below full employment.

Which of the following best explains how income taxes can moderate a business cycle during an expansion?
income taxes moderate a business cycle during expansion by increasing the tax payments which lessens consumption spending. Income tax UP, consumption spending DOWN. TAXES UP, CONSUMPTION DOWN
tax payments increase automatically as gross domestic product (GDP) rises, which dampens consumption spending.

How will automatic stabilizers affect the economy during a recession?
They will shift the aggregate demand curve to the right, increasing real output.
(Fiscal policy, expansionary fiscal policy is used during a recession. So, AD moves to right, trying to get back to potential output)


gain inflation, lose unemployment

long run no unemployment cause it if resources are fully maxed out.
inflation doesn't matter to LRAS, but effects the SRAS.

questions 4-6
4. Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion?
1/(1-MPC)= multiplier by gov spending
1-.75-.25
1/0.25 = 4
100x4=400

Work on-
Short-Run Aggregate Supply (SRAS)
Changes in the AD-AS Model in the Short Run
Long-Run Self-Adjustment
Fiscal Policy

MCQ NOTES:
The aggregate demand curve describes the relationship between the price level and quantity of goods and services demanded by households, firms, the government, and the rest of the world.
The three reasons the aggregate demand curve has a negative slope are the wealth effect, the interest rate effect, and the exchange rate effect. At a lower price level, domestic goods will become relatively cheaper compared to foreign goods, exports increase, and spending on domestic goods increases. This is the exchange rate effect.
When inflation decreases, the prices drop and people won't need as much money to buy them.
A movement along the aggregate demand curve occurs when there is a change in the price level. Aggregate demand is the sum of four components: consumption spending (C), investment spending (I), government spending (G), and net exports. An increase in C, I, G, or net exports will increase AD. Therefore, the increase in government spending will shift the AD curve to the right.
A one-dollar change in autonomous expenditure leads to a greater-than-one-dollar increase in aggregate demand for goods and services.
Formula for MPC is
MPC = change in consumption/change in disposable income
The increase in the price level results in an upward movement along the short-run aggregate supply curve (not a shift of the curve) to a higher real output level.
steel is resource, tariff (tax) on steel makes it more expensive, SRAS will decrease.
Inflation produces more goods, price of product goes up, profit goes up as long as worker wages are the same.
open borders, more workers=more resources. PPC and LRAS will increase.
In the long run, wages and input prices are flexible to automatically adjust to full employment. A consequence of flexible long-run prices and wages is the lack of a long-run trade-off between inflation and unemployment and a vertical long-run aggregate supply curve.
SRAS equilibrium where it meets with LRAS
increase in stock and home prices increases wealth, which will result in an increase in consumer spending and shift the AD curve to the right. The rise in productivity decreases production costs, which will shift the SRAS curve to the right.
what happens to short run in Country A if one of its major trading partners, Country B, experiences a recession?
Aggregate demand will decrease and the price level will decrease. A recession in Country B will result in a decrease in income and a decrease in imports. Since Country B is a major trading partner of Country A, a decrease in imports in Country B will result in a decrease in Country A’s exports. Therefore, aggregate demand in Country A will decrease and the price level will decrease.

how does economy correct itself in recession without government?
problem during recession is unemployment, inflation is not a problem thoguh so real income is increased, workers will acept pay cuts. SRAS will shift right (increase) and econoomy is restored in long run.
how econmoy corrects tiself in inflationary gap?
inflation is problem, unemployment not problem, real wages decrease and people demand wage increases which will cause nominal wages to increase. SRAS will decrease without government interference.
government increases taxes, government spending, and decreasing transfer payments to get out of inflationary gap.
A contractionary fiscal policy reduces aggregate demand and is used to control inflation when there is an inflationary gap.
tax payments increase during expansionary period, this dampens consumer spending.