ECON EXAM 3 QUESTIONS & ANSWERS
What is aggregate supply - Answers - The total of all planned production for the
economy.
The maximum the economy is able to produce
What is the shape of the long run aggregate supply curve and why - Answers - Vertical
line. It's the natural level of output that doesn't depend on price level. A change in price
level of goods and services has no real effect on real GDP per year in the long run. In
the long-run, everyone has full information and there is full adjustment to price level
changes.
Price level has no effect on to total output.
What is economic growth and how is it shown on a production possibilities curve -
Answers - Economic growth is when there's an increase in labor force participation
rates as a consequence to the increase of population, or an increase in capital stock as
a result of improved technology, which can also increase the productivity of labor.
It's shown on the production possibilities curve by shifting outward.
How is economic growth shown using the aggregate supply curve - Answers - The
aggregate supply curve will shift outward to the right
What is aggregate demand - Answers - total of all planned spending/expenditures in
the entire economy
What is the real balances effect - Answers - the change in expenditures resulting from
a change in the real value of money when the price level changes.
Ex: you have 100$
If the price level rises, the real value of your money decreases
If the price level lowers, the real value of your money decreases
What happens to exports/imports when the value of the dollar goes up or down -
Answers - When the value of the dollar goes up, there's a fall in exports (the amount of
real goods and services purchased in the U.S.) and a rise in imports.
When the value of the dollar goes down, there's an increase in exports and a decrease
in imports.
What is the relationship between the price level and real spending - Answers - The
higher the price level, the lower real spending
The lower the price level, the higher real spending
What are the components of aggregate demand - Answers - GDP= C + I + G + NX
Consumption expenditures
Investment expenditures
, Government Expenditures
Net foreign demand for domestic production
What would happen to the aggregate demand curve if the amount of money increased -
Answers - An increase in Aggregate Demand so a shift to the right
What are the determinants of aggregate demand - Answers - Any non-price level
change that increases aggregate spending (on domestic goods) shifts AD to the right.
Ex:
-an increase in the amount of money in circulation
-increased security about jobs and future income
-improvements in economic conditions in other countries
-A reduction in real interest rates not due to price level changes
-tax decreases
-a drop in the foreign exchange value of the dollar
Any non-price level change that decreases aggregate spending (on domestic goods)
shifts AD to the left.
Ex:
-a decrease in the amount of money in circulation
-decreased security about jobs and future income
-decline in economic conditions in other countries
-a rise in real interest rates not due to price level changes
-tax increases
-a rise in the foreign exchange value of the dollar
When would planned real spending exceed total planned production - Answers - When
the total of planned spending exceeds actual real GDP (LRAS). People spend more
than total planned production. So the price level would need to rise so individuals,
businesses, and the government cut back on spending.
When does the long run equilibrium occur - Answers - When total planned
expenditures for the entire economy is equal to actual real GDP produced by firms after
all adjustments have taken place.
at the point where the Aggregate Demand curve crosses the long-run Aggregate supply
curve.
When does the demand-side inflation occur - Answers - Whenever there's a rise in
aggregate demand for a given level of LRAS, the price level increases.
People want to spend more on a product but the business isn't able to produce more so
they increase prices.
the rise in AD leads to a general increase in price level.
The AD curve shifts rightward over time faster than the rightward progression of the
LRAS curve.
What is aggregate supply - Answers - The total of all planned production for the
economy.
The maximum the economy is able to produce
What is the shape of the long run aggregate supply curve and why - Answers - Vertical
line. It's the natural level of output that doesn't depend on price level. A change in price
level of goods and services has no real effect on real GDP per year in the long run. In
the long-run, everyone has full information and there is full adjustment to price level
changes.
Price level has no effect on to total output.
What is economic growth and how is it shown on a production possibilities curve -
Answers - Economic growth is when there's an increase in labor force participation
rates as a consequence to the increase of population, or an increase in capital stock as
a result of improved technology, which can also increase the productivity of labor.
It's shown on the production possibilities curve by shifting outward.
How is economic growth shown using the aggregate supply curve - Answers - The
aggregate supply curve will shift outward to the right
What is aggregate demand - Answers - total of all planned spending/expenditures in
the entire economy
What is the real balances effect - Answers - the change in expenditures resulting from
a change in the real value of money when the price level changes.
Ex: you have 100$
If the price level rises, the real value of your money decreases
If the price level lowers, the real value of your money decreases
What happens to exports/imports when the value of the dollar goes up or down -
Answers - When the value of the dollar goes up, there's a fall in exports (the amount of
real goods and services purchased in the U.S.) and a rise in imports.
When the value of the dollar goes down, there's an increase in exports and a decrease
in imports.
What is the relationship between the price level and real spending - Answers - The
higher the price level, the lower real spending
The lower the price level, the higher real spending
What are the components of aggregate demand - Answers - GDP= C + I + G + NX
Consumption expenditures
Investment expenditures
, Government Expenditures
Net foreign demand for domestic production
What would happen to the aggregate demand curve if the amount of money increased -
Answers - An increase in Aggregate Demand so a shift to the right
What are the determinants of aggregate demand - Answers - Any non-price level
change that increases aggregate spending (on domestic goods) shifts AD to the right.
Ex:
-an increase in the amount of money in circulation
-increased security about jobs and future income
-improvements in economic conditions in other countries
-A reduction in real interest rates not due to price level changes
-tax decreases
-a drop in the foreign exchange value of the dollar
Any non-price level change that decreases aggregate spending (on domestic goods)
shifts AD to the left.
Ex:
-a decrease in the amount of money in circulation
-decreased security about jobs and future income
-decline in economic conditions in other countries
-a rise in real interest rates not due to price level changes
-tax increases
-a rise in the foreign exchange value of the dollar
When would planned real spending exceed total planned production - Answers - When
the total of planned spending exceeds actual real GDP (LRAS). People spend more
than total planned production. So the price level would need to rise so individuals,
businesses, and the government cut back on spending.
When does the long run equilibrium occur - Answers - When total planned
expenditures for the entire economy is equal to actual real GDP produced by firms after
all adjustments have taken place.
at the point where the Aggregate Demand curve crosses the long-run Aggregate supply
curve.
When does the demand-side inflation occur - Answers - Whenever there's a rise in
aggregate demand for a given level of LRAS, the price level increases.
People want to spend more on a product but the business isn't able to produce more so
they increase prices.
the rise in AD leads to a general increase in price level.
The AD curve shifts rightward over time faster than the rightward progression of the
LRAS curve.
