Chapter 34 Aggregate Supply and Demand. Macroeconomics

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The graph included below approximates United States business cycles between quarter one of 1947 and quarter three of 1951. The shaded region denotes periods of six or more consecutive months of declining real gross domestic product (real GDP).
Notice that real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as

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A majority of economists believe that in the long run, real economic variables and nominal economic variables behave independently of one another.
For example, an increase in the money supply, a ________ A majority of economists believe that in the long run, real economic variables and nominal economic variables behave independently of one another.
For example, an increase in the money supply, a _________ variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a ___________ variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as __________

Nominal
Nominal
real
monetary neutrality

However, in the short run, most economists believe that real and nominal variables are intertwined. Economists use the model of aggregate demand and aggregate supply to examine the economy's short-run fluctuations around the long-run output level. The following graph shows an incomplete short-run aggregate demand (AD) and aggregate supply (AS) diagram—it needs appropriate labels for the axes and curves. In the questions that follow you will identify some of the missing labels.
The aggregate ________ curve shows the quantity of goods and services that firms produce and sell at each price level.

supply

The horizontal axis of the aggregate demand and aggregate supply model measures the overall

quantity of output

The graph below shows the aggregate demand (AD) curve for a hypothetical economy. At point X, the quantity of output demanded is $500 billion, and the price level is 120. Moving up along the AD curve from point X to point Y, the quantity of output demanded falls to $300 billion, and the price level rises to 140.
As the price level rises, the cost of borrowing money will _______,
causing the quantity of output demanded to ______
This phenomenon is known as the _________ effect

rise
fall
interest rate

Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to ______
in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore _________,
, and the number of foreign products purchased by domestic consumers and firms (imports) will ______
Net exports will therefore ______
causing the quantity of domestic output demanded to _______
This phenomenon is known as the ________ effect

rise
fall
rise
fall
fall
exchange rate

The graph below is associated with a hypothetical country. Consider an increase in aggregate demand (AD). Specifically, aggregate demand shifts to the right from AD1AD1 to AD2AD2, causing the quantity of output demanded to rise at each price level. For instance, at a price level of 140, output is now $400 billion, where initially it was $300 billion.
The following table lists several determinants of aggregate demand.

Fill in the missing values in the table by selecting the change in each scenario required to increase aggregate demand.
Change required to increase AD:

Expected rate of return on investment :
Incomes in other countries:
Consumer expectations about future profitability
Government spending

Increase
Increase
Increase
Increase

Assume the Federal Reserve triples the growth rate of the quantity of money in circulation. In the long run, this increase in money growth will affect which of the following? Check all that apply.

Inflation rate
Price level

Suppose when unemployment is at its natural rate the economy produces a level of real GDP equal to $50 billion.
Using the purple points (diamond symbol) plot the economy's long-run aggregate supply (LRAS) curve on the graph.

Straight vertical line on $50 billion

Suppose now the government passes a law that significantly increases the minimum wage. This change in policy will cause the natural rate of unemployment to ________ , which will:

rise
Shift the long-run aggregate supply curve to the left

Complete the following table by determining how each event impacts the position of the long-run aggregate supply (LRAS) curve.
Direction of LRAS Curve Shift:

A government-sponsored training program increases the skill level of the workforce.
Many workers leave to pursue more lucrative careers in foreign economies.
Left A scientific breakthrough significantly increases food production per acre of farmland

Right
Left
Right

Chapter 34 Aggregate Supply and Demand. Macroeconomics

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