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The total of all planned production for the entire economy is known as

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aggregate supply

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The long-run aggregate supply curve is vertical because

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the economy has reached its potential real Gross Domestic Product (GDP) and is at full employment.

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The full-employment and full-adjustment level of Gross Domestic Product (GDP) in the economy is represented by

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the LRAS curve

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Over time in a growing economy, the long run aggregate supply curve will

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shift outward to the right

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Aggregate supply is

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the sum of all planned production in the economy

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Refer to the above figures. Which panel(s) represent economic growth?

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Panels A and C only

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Aggregate demand reflects

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planned total spending in the economy

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Another term for the real-balance effect is

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the wealth effect

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When interest rates rise,

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borrowing cost increase, and total planned real expenditures decline

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If the price level increases

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the buying power of your checking account falls

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What is one implication of the real-balance effect?

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The part of your wealth that you hold in the form of cash loses some of its value as the price level rises.

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An increase in U.S. prices relative to Japanese prices will

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increase U.S. imports and decrease U.S. exports

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A weakening in consumer confidence causes a

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shift of the aggregate demand curve to the left

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An increase in the U.S. price level causes

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movement up the U.S. aggregate demand curve

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A persistently declining price level resulting from economic growth and unchanged aggregate demand is called

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secular deflation

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The U.S. economy has had persistent inflation in recent past decades. A possible explanation for the inflation is that

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growth in aggregate demand has outpaced growth in aggregate supply.

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Supply-side inflation is caused by

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a decrease in aggregate supply and no change in aggregate demand

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Whenever the general level of prices rises because of continual increases in aggregate demand, we say that the economy is experiencing

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demand-side inflation

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In the above figure, the long-run equilibrium price level is

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130

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In the above figure, the long-run equilibrium real GDP is

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$11 trillion

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In the above figure, the price level is 150,

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total planned production exceeds total expenditures

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Say's Law states that

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supply creates its own demand

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The classical model uses the assumption that

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all wages and prices are flexible

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One key assumption of the classical model is

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money illusion cannot fool workers

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One tenet of classical economics is that

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the role of the governments should be limited, since the market will always be self-correcting

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If you become elated when you receive a 20 percent raise even when the price level also increases by 20 percent, then you are a victim of the

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money illusion

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The classical economist argued that planned savings and planned investment will always be equal because of changes in

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the price level

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Given the assumptions of the classical model,

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the market is a self-correcting mechanism

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Leakages in the circular flow model are

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caused by people deciding to save

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At higher rates of interest,

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households save more because they get a greater return on their savings

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The Keynesian model is essentially

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a short-run theory.

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The original Keynesian economic theory states that

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many prices, including wages, would not decline even when aggregate demand decreases

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Sticky wages inhibit growth because

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businesses are unable to adjust quickly to economic downturns

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Real GDP is ____ determined in the classical model and ____ determined in the Keynesian model.

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supply; demand

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According to Keynes, wages are inflexible becuase

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of unions and long-term contracts

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Which of the following would increase aggregate supply?

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all of the above: a reduction in input prices, increased training and education, a discovery of new raw material

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A temporary embargo on oil from the Middle East going in to the United States would

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shift only the short-run aggregate supply curve to the left

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A change in tastes for U.S. produced goods will

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lead to an aggregate demand shock

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An example of an aggregate supply shock is

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the cutoff of oil by the OPEC nations in the early 1970's.

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If the U.S. dollar becomes weaker in international foreign exchange markets, imported goods become more expensive. One result of this is that

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net exports increase

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If input prices rise in a country, ceteris paribus, there woul dbe

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cost-push inflation

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When you purchase Nautica clothing and tickets to see the Eminem concert

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you are buying consumption goods

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At a level of real disposable income of 0, suppose consumption is $2,000. Given this information, we known with certainty that savings equal

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-$2,000

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Saving is

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the amount one does not consume in a given period of time while savings is the accumulation of past periods of savings

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Spending by businesses on things such as machines and building which can be used to produce goods and services in the future is

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investment

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Which of the following is true?

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MPC + MPS = 1

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The relationship between households' planned consumption expenditures and households' level of disposable real income is called

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the consumption function

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When an individual spends more than her/his disposable income, this person iss

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dissaving

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In the above figure, line ABC is called

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the consumption function

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According to the above figure, autonomous consumption equals

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$5,000

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Where the consumption function intersects the 45-degree line,

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savings will be zero

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If the marginal propensity to save is 0.4 and disposable income increases from $1,000 to $1,500, saving will increase

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$200

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If consumption is $750 when real disposable income is $1,000, the average propensity to consume is

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0.75

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If the average propensity to consume is 0.8, then the average propensity to save is

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0.2

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What can we say about APC + APS and MPC + MPS?

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Each must sum to 1

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An increase in the interest rate will cause

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planned investment spending to decrease

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The investment function tells us, at any given interest rate,

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how much businesses will spend on adding to the capital stock

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The expression 1/MPS is defined as

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the multiplier

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Suppose that the MPS = .2. The value of the multiplier would be

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5

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Suppose that the MPC is .75 and there is an increase in investment spending of $100,000. As a result, equilibrium real Gross Domestic Product (GDP) would increase by

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$400,000

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If an economy saves 20 percent of any increase in real Gross Domestic Product (GDP), then an increase in investment of $2 billion can produce an increase in real Gross Domestic Product (GDP) of as much as

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$10 billion

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