Chapter 10: Aggregate Supply and Aggregate Demand Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

increase by 10 percent; an increase in BMWs profits Consider a BMW automobile plant. If the price of BMWs increase by 10 percent and the money wage rate and other costs ________, there will be ________. increase by 10 percent; an increase in BMWs profits do not change; an increase in BMW’s production and profit increase by 10 percent; an increase in BMWs production do not change; no change in production B. do not change; an increase in BMW’s production and profit Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

business cycle fluctuations. The aggregate supply/aggregate demand model is used to help understand all of the following EXCEPT inflation. business cycle fluctuations. the aggregate value of stock traded in the stock market. growth of potential GDP. C. the aggregate value of stock traded in the stock market. Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

If the price level in Great Britain increases from 102 to 105 (holding all else constant), real wealth ________ and there is a movement ________ along Great Britain’s aggregate demand curve. decreases; upward increases; upward decreases; downward increases; downward A. decreases; upward Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

both investment and aggregate demand will increase. As world economies start to recover from the 2008 financial crisis and firms expect profits to increase, the price level in the U.S. will decrease as firms increase investment. the U.S. short-run aggregate supply curve immediately will shift rightward. investment will increase and there will be a movement up along the aggregate demand curve. both investment and aggregate demand will increase. D. both investment and aggregate demand will increase. Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

Inflation occurs over time as a result of long-run aggregate supply increasing faster than aggregate demand. long-run aggregate supply increasing faster than short-run aggregate supply. decreases in aggregate demand. aggregate demand increasing faster than long-run aggregate supply. D. aggregate demand increasing faster than long-run aggregate supply. Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

An above full-employment equilibrium occurs when aggregate demand decreases while neither the short-run nor long-run aggregate supply changes. short-run aggregate supply decreases while neither aggregate demand nor long –run aggregate supply changes. the equilibrium level of real GDP is greater than potential GDP. the equilibrium level of real GDP is less than potential GDP. C. the equilibrium level of real GDP is greater than potential GDP. Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

In the long-run equilibrium, an increase in the quantity of capital leads to an increase in the equilibrium price level and an increase in equilibrium real GDP. a decrease in the equilibrium price level and an increase in equilibrium real GDP. a decrease in the equilibrium price level, but no change in equilibrium real GDP. no change in the equilibrium price level, but an increase in equilibrium real GDP. B. a decrease in the equilibrium price level and an increase in equilibrium real GDP. Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

a decrease in the quantity of money Suppose that the economy begins at a long-run equilibrium. Which of the following raises the price level and decrease real GDP in the short run? a decrease in the quantity of money an increase in the price of oil that decreases aggregate supply an increase in the stock of capital that increases aggregate supply an increase in government expenditures B. an increase in the price of oil that decreases aggregate supply Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

taxes would be decreased and the money supply should be increased In 2008, Japan’s economy suffered as world economies slowed. If authorities in Japan followed the monetarist viewpoint, ________ to bring the economy back to full employment. taxes would be decreased and the money supply should be increased nothing should be done aggregate supply would shift leftward the money supply would be kept growing at a steady pace D. the money supply would be kept growing at a steady pace Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition

Keynesian viewpoint that supports increases in the money supply In 2008, Germany passed a stimulus package of $29 billion as its economy slowed. This policy action follows the ________ to restore full employment. Keynesian viewpoint that supports increases in federal government expenditure Keynesian viewpoint that supports increases in the money supply monetarist viewpoint that supports increases in expenditure by the federal government new classical viewpoint that discourages the use of expenditure by the federal government A. Keynesian viewpoint that supports increases in federal government expenditure Parkin © 2010 Pearson Addison-Wesley. All rights reserved. Macroeconomics, Ninth Edition