Aggregate Models Review

Aggregate Demand and Supply Review

1. What does aggregate demand represent?

(A) The total demand for goods and services in an economy

(B) The partial demand for goods and services in an economy

(C) The total demand for goods in an economy

(D) The partial demand for goods in an economy

2.What information is needed in order to maximize the usefulness of the aggregate demand curve?

(A) The interest rate

(B) The aggregate supply curve

(C) The price level

(D) The output level

3.What is the AS-AD model?

(A) A model of the interest rate

(B) A labor market representation

(C) A supply and demand model for the entire economy

(D) A model of savings and consumption

4.What does the aggregate supply curve show?

(A) The total demand for goods and services in an economy

(B) The supply of goods in an economy

(C) The supply of services in an economy

(D) The total supply of goods and services in an economy

5.What is the slope of the aggregate demand curve?

(A) Downward

(B) Upward

(C) Vertical

(D) Horizontal

6.What is the slope of the short-run aggregate supply curve?

(A) Downward

(B) Upward

(C) Vertical

(D) Horizontal

7. What is the slope of the long-run aggregate supply curve?

(A) Downward

(B) Upward

(C) Vertical

(D) Horizontal

8.Why is the long-term aggregate supply curve vertical?

(A) In the short run, output never changes

(B) In the short run, output is fixed by the factors of production

(C) In the long run, output never changes

(D) In the long run, output is fixed by the factors of production

9.What are the factors of production?

(A) Capital and labor

(B) Capital and investment

(C) Labor and investment

(D) Investment and output

10.What is one way that the long-run aggregate supply curve can shift?

(A) In the short run due to investment

(B) In the short run due to consumption

(C) In the long run due to investment

(D) In the long run due to consumption

11.Which curve usually shifts in the AS-AD model?

(A) Neither

(B) Both

(C) Aggregate demand

(D) Aggregate supply

12.Which of the following curves does not appear in the AS-AD model?

(A) Short-run aggregate supply

(B) Long-run aggregate supply

(C) Aggregate demand

(D) Long-run aggregate demand

13.Which of the following cannot shift the aggregate demand curve?

(A) Treasury

(B) Fed

(C) Government

(D) Consumers

14.Which way does expansionary policy shift the aggregate demand curve?

(A) Right

(B) Left

(C) No change

(D) Need more information

15.Which way does contractionary policy shift the aggregate demand curve?

(A) Right

(B) Left

(C) No change

(D) Need more information

16.What is aggregate supply fixed by in the long run?

(A) Aggregate demand

(B) Output

(C) Interest rates

(D) Factors of production

17.What do you call the intersection of the long-run aggregate supply curve and the aggregate demand curve?

(A) Long-run equilibrium

(B) Short-run equilibrium

(C) Unstable equilibrium

(D) Need more information

18.What do you call the intersection of the short-run aggregate supply curve and the aggregate demand curve?

(A) Long-run equilibrium

(B) Short-run equilibrium

(C) Unstable equilibrium

(D) Need more information

19.What is the short-run effect on output and the price level of the Fed pursuing expansionary monetary policy?

(A) Output falls and the price level rises

(B) Output rises and the price level falls

(C) They both rise

(D) They both fall

20.What is the long-run effect on output and the price level of the Fed pursuing expansionary monetary policy?

(A) Output falls and the price level rises

(B) Output rises and the price level falls

(C) They both rise

(D) Output is unchanged and the price level rises

21.What is the short-run effect on output and the price level of the Fed pursuing contractionary monetary policy?

(A) They both fall

(B) They both rise

(C) Output falls and the price level rises

(D) Output rises and the price level falls

22.What is the long-run effect on output and the price level of the Fed pursuing contractionary monetary policy?

(A) Output falls and the price level is unaffected

(B) Output is unaffected and the price level falls

(C) They both rise

(D) They both fall

23.What is the short run effect on output and the price level of an adverse supply shock?

(A) They both fall

(B) They both rise

(C) Output falls and the price level rises

(D) Output rises and the price level falls

24.What is the long-run effect on output and the price level of an adverse supply shock?

(A) They both fall

(B) They both rise

(C) Output rises and the price level is unaffected

(D) Output is unaffected and the price level rises

25.What is a possible result of an adverse supply shock?

(A) Healthy economy

(B) Low prices

(C) Stagflation

(D) High employment

26.When the short-run aggregate supply curve shifts, what shifts in response?

(A) Both the long-run and the short run aggregate supply curves

(B) Long-run aggregate supply curve

(C) Short-run aggregate supply curve

(D) Aggregate demand curve

27.When the aggregate demand curve shifts, what shifts in response?

(A) Short-run aggregate supply curve

(B) Long-run aggregate supply curve

(C) Aggregate demand curve

(D) Both the long-run and the short-run aggregate supply curves

28.When does the long-run aggregate supply curve shift?

(A) When consumers purchase more goods and services

(B) When the capital stock increases

(C) When producers create more output

(D) When foreign countries import more goods

29.Which of the following is an example of an adverse supply shock?

(A) Increase in consumption

(B) Increase in profits

(C) Large increase in oil prices

(D) Decrease in wage costs

30.Which of the following is best for the economy?

(A) Right shift of the aggregate supply curve

(B) Left shift of the aggregate supply curve

(C) Right shift of the aggregate demand curve

(D) Left shift of the aggregate demand curve

31.Which of the following is not a possible result of a right shift of the aggregate supply curve?

(A) Left shift of the aggregate demand curve

(B) Lower output

(C) Higher output

(D) Lower price level

Schools of Economics Notes

Student Note Pages:  Teacher Key

Classical Economics: 1776 to the 1930s, 1980s to the present

Also known as:	1.neoclassical2.supply side
	3.trickle down4.Monetarist
Key historic figures	1.A. Smith       2.J.B. Say
	3. D. Ricardo 4.A. Marshall
	5.F. Hayek      6.M. Friedman
Fundamental Premise of Classical Economics	Competition is Good
Competition will cause businesses to always ____________ products in order to win the market.	improve
Competition will also cause businesses to _________ prices in order to win the market.	lower
This trend is known as the:	Invisible Hand
Consumers will get products that are __________ and __________.	better, cheaper
The inefficient companies will:	leave/disappear
If new companies enter the market, they must be more_________ in order to compete.	efficient
Jean Baptiste Say built on Smith’s analysis and gave us the theory that is known today as:	Say’s Law
If suppliers overproduce, they can correct the surplus by cutting ­­­­­_________ and lowering _________.	production, prices
The economy will re-balance because wages are _________ but so are _______.  Real wealth balances.	lower, prices
If suppliers under-produce, they can correct the shortage by increasing ________ and raising _______.	production, prices
The economy will re-balance because wages are ______ __but so are _________. Real wealth balances.	higher, prices
The summary is often stated as “Supply creates its own ________.”	Demand
Government in this Classical world has a critical role. Government must make sure that _________ occurs.	competition
Government must stop ____________ or _________, which inhibit competition.	monopolies, unions
Classical theorists also want to always lower _______ in order to reduce government interference	taxes
In the Long Run, the Economy will __________ near efficient Full Production.	balance

Keynesian Economics: 1930’s to the present

Also known as:	Neo-Keynesian
Key historic figures:	1.J.M. Keynes2.Krugman
Fundamental Premise of Keynesian Economics	Competition is Good, But Flawed
In the Short Run, Smith’s Invisible Hand will always have the presence of companies that are:	inefficient
Say’s Law is generally a myth because businesses can’t really lower prices at will.  This is known as:	sticky prices
Consumers will also be paid by businesses, but will always __________ some of the income.	save
This will cause a constant __________ of wealth.	leakage/loss
Because of these problems, businesses will be under constant pressure to _______  jobs and production.	cut
Prices can also increase easily, but not decrease.  This is known as the ___________ Effect.	Ratchet
Markets can reach efficiency and full employment, but Keynesians assume that they will soon become:	inefficient/recessions
­­­­­_______________ will probably become the economic norm.	recessions
Government must now step in and correct the missing ________  ___________.	Aggregate Demand
Congress will represent the interests of the people best and will therefore use the tools of _____ and _______.	taxes and spending
Congress can’t wait for the potential Long Run Balance, because ___________ need help.	workers/citizens
Keynes summarized this as “In the Long Run we are all __________”	dead
When recessions occur, Congress should ______ taxes, _________ government spending.	cut, raise
When inflation occurs, Congress should _______ taxes, _________ government spending.	increase, cut
Congress can also create programs that keep the economy from crashing so much.  These are known as:	automatic stabilizers
Examples of these programs are:	Unemployment Insurance, Social Security

Monetary School Economics: (1913), 1970s to the present

Also known as:	1.Federal Reserve Policy
	2.Central Bank Policy
Current US Chairman of the system:	Ben Bernanke
Fundamental Premise of the Monetary School	Competition is Good, but needs Fine Tuning.
The average recession in the US will last about:	14 months
We only “know” a recession has started after at least _________ months have passed.	6 or more
Even if Congress agrees on a policy, it can take many more __________ to enact.	months
By the time the policy comes into force, the recession may have already:	ended naturally
Congress may be able to cut taxes during recessions, but they will never have the will to ________ taxes to fight inflation.	raise
Therefore, the best way to correct economic flaws is to have the ________ ________ act quickly.	Federal Reserve
In addition, this group can focus on stable __________ that helps control demand pull inflation.	prices
The group can always also focus on long run growth with realistic growth __________.	targets (2 to 3%)
This means that the government, through this non-political and independent agency can control national growth by manipulating __________ _______.	interest rates/money supply
This will keep _____ under control and healthy for businesses and other borrowers.	inflation
When recessions threaten, ________ interest rates on borrowing.	lower
When inflation threatens, _________ interest rates on borrowing.	raise

Aggregate Demand and Aggregate Supply Problems

Spending Multiplier

Spending Multiplier

 Terms and Concepts to Cover:

  Disposable Income = Consumption + Savings

  Average Propensity

  Marginal Propensity

  APC, APS (APC + APS = 1)

  MPC, MPS (MPC + MPS =1)

  Spending Multiplier Formulas:   __1___    or     __1___

                                                        1-MPC             MPS

  Links between changes in Consumption and Savings = Policy Goals

Disposable Income

APC (as a % or Fraction):  The average of what people will __________.

APS (as a % or Fraction):  The average of what people will __________.

APC + APS will always = ______.

Marginal Analysis:  What happens when a new unit is added?

MPC = What % of new DI will people ___________.

MPS = What % of new DI will people ___________.

MPC + MPS will always = ______.

The Spending Multiplier Effect

Assume new marginal income is created.  Example:  tax cut.

Assume that the tax cut averages a new $1000 of disposable income.

Assume that the current MPC will be 90% and the MPS will be 10%.

Person	MPC	MPS
First to get the new $
Second to use that $
Third to use that $
Fourth to use that $
Fifth to use that $
Total So Far of the Original $1000

Notice:  For each person getting a new $1000, several consumption events

can occur from that single amount of money.  How long will the pattern continue?  Economists use the Spending Multiplier Formula to estimate the number of times the pattern will repeat before the amount shrinks to a point where new spending stops.  The formula is:  1/1-MPC, or 1/MPS.

Therefore, if the MPC is .9, how many new dollars of consumption will be created if society receives $1 million dollars?  ________.

How many new dollars of consumption will be created if the MPC is only .5? ___________.

Answers to Unemployment Quiz

1. a
2. d
3. e
4. b
5.  c
6. d
7. a
8. d
9. b
10. d
11. b
12. d
13. c
14. d
15. c
16. e
17. a
18. c
19. d
20. e