//===== Section 8 figures ro resize var imagesSmall = ""; var imagesMedium = ""; var imagesLarge = ""; var imagesXlarge = "krugmanwellsmodulesmacro3-sect08-figure-11,krugmanwellsmodulesmacro3-sect08-figure-12,krugmanwellsmodulesmacro3-sect08-figure-18,krugmanwellsmodulesmacro3-sect08-figure-21,krugmanwellsmodulesmacro3-sect08-figure-24,krugmanwellsmodulesmacro3-sect08-figure-29,krugmanwellsmodulesmacro3-sect08-figure-30,krugmanwellsmodulesmacro3-sect08-figure-33,"; var imagesXXlarge = ""; //===== Section 8 Answers ============ xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m27-cyu-1a'] = "This is a shift of the aggregate demand curve. A decrease in the quantity of money raises the interest rate, since people now want to borrow more and lend less. A higher interest rate reduces investment and consumer spending at any given aggregate price level, so the aggregate demand curve shifts to the left."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m27-cyu-1b'] = "This is a movement up along the aggregate demand curve. As the aggregate price level rises, the real value of money holdings falls. This is the interest rate effect of a change in the aggregate price level: as the value of money falls, people want to hold more money. They do so by borrowing more and lending less. This leads to a rise in the interest rate and a reduction in consumer and investment spending. So it is a movement along the aggregate demand curve."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m27-cyu-1c'] = "This is a shift of the aggregate demand curve. Expectations of a poor job market, and so lower average disposable incomes, will reduce people’s consumer spending today at any given aggregate price level. So the aggregate demand curve shifts to the left."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m27-cyu-1d'] = "This is a shift of the aggregate demand curve. A fall in tax rates raises people’s disposable income. At any given aggregate price level, consumer spending is now higher. So the aggregate demand curve shifts to the right."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m27-cyu-1e'] = "This is a movement down along the aggregate demand curve. As the aggregate price level falls, the real value of assets rises. This is the wealth effect of a change in the aggregate price level: as the value of assets rises, people will increase their consumption plans. This leads to higher consumer spending. So it is a movement along the aggregate demand curve."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m27-cyu-1f'] = "This is a shift of the aggregate demand curve. A rise in the real value of assets in the economy due to a surge in real estate values raises consumer spending at any given aggregate price level. So the aggregate demand curve shifts to the right."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m27-ct-1'] = "
The two effects that cause the aggregate demand curve to have a downward slope are the wealth effect and the interest rate effect of a change in the aggregate price level.
The wealth effect: When the price level increases, the purchasing power of money decreases, causing consumers to scale back on spending. Because consumer spending is a component of aggregate demand, increases in the aggregate price level lead to decreases in the quantity of aggregate output demanded. The opposite is true for decreases in the price level. This negative relationship between the price level and the quantity of aggregate output demanded results in a downward-sloping aggregate demand curve.
The interest rate effect: Increases in the aggregate price level cause people to want to hold more money, which increases the demand for money and drives interest rates up. Higher interest rates reduce investment spending because it costs more to borrow money. Thus, a rise in the price level leads to less investment spending, which is a component of aggregate demand, and causes the quantity of aggregate output demanded to decrease (and vice versa). The result is a downward-sloping aggregate demand curve.
"; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m28-cyu-1a'] = "This represents a movement along the SRAS curve because the CPI—like the GDP deflator—is a measure of the aggregate price level, the overall price level of final goods and services in the economy."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m28-cyu-1b'] = "This represents a shift of the SRAS curve because oil is a commodity. The SRAS curve will shift to the right because production costs are now lower, leading to a higher quantity of aggregate output supplied at any given aggregate price level."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m28-cyu-1c'] = "This represents a shift of the SRAS curve because it involves a change in nominal wages. An increase in legally mandated benefits to workers is equivalent to an increase in nominal wages. As a result, the SRAS curve will shift leftward because production costs are now higher, leading to a lower quantity of aggregate output supplied at any given aggregate price level."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m28-cyu-2'] = "You would need to know what happened to the aggregate price level. If the increase in the quantity of aggregate output supplied was due to a movement along the SRAS curve, the aggregate price level would have increased at the same time as the quantity of aggregate output supplied increased. If the increase in the quantity of aggregate output supplied was due to a rightward shift of the LRAS curve, the aggregate price level might not rise. Alternatively, you could make the determination by observing what happened to aggregate output in the long run. If it fell back to its initial level in the long run, then the temporary increase in aggregate output was due to a movement along the SRAS curve. If it stayed at the higher level in the long run, the increase in aggregate output was due to a rightward shift of the LRAS curve."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m28-ct-1'] = "If there is a fall in the aggregate price level, then the price received by the perfectly competitive firm for its output will also fall. Since many production costs are fixed in the short run, the price will fall by more than production costs will fall. This will reduce profit per unit and, therefore, the perfectly competitive firm will reduce output."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m28-ct-2'] = "An imperfectly competitive firm is not a price taker and can change price in response to changes in demand. If there is an increase in demand, then the firm can sell more output. The imperfectly competitive firm is likely to increase the price it charges in order to increase profit per unit."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-cyu-1a'] = " An increase in the minimum wage raises the nominal wage and, as a result, shifts the short-run aggregate supply curve to the left. As a result of this negative supply shock, the aggregate price level rises and aggregate output falls."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-cyu-1b'] = "Increased investment spending shifts the aggregate demand curve to the right. As a result of this positive demand shock, both the aggregate price level and aggregate output rise."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-cyu-1c'] = "An increase in taxes and a reduction in government spending both result in negative demand shocks, shifting the aggregate demand curve to the left. As a result, both the aggregate price level and aggregate output fall."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-cyu-1d'] = "This is a negative supply shock, shifting the short-run aggregate supply curve to the left. As a result, the aggregate price level rises and aggregate output falls."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-cyu-2'] = "As long-run growth increases potential output, the long-run aggregate supply curve shifts to the right. If, in the short run, there is now a recessionary gap (aggregate output is less than potential output), nominal wages will fall, shifting the short-run aggregate supply curve to the right. This results in a fall in the aggregate price level and a rise in aggregate output. As prices fall, we move along the aggregate demand curve due to the wealth and interest rate effects of a change in the aggregate price level. Eventually, as long-run macroeconomic equilibrium is reestablished, aggregate output will rise to be equal to potential output, and the aggregate price level will fall to the level that equates the quantity of aggregate output demanded with potential output."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-cyu-3a'] = "An economy is overstimulated when an inflationary gap is present. This will arise if an expansionary monetary or fiscal policy is implemented when the economy is currently in long-run macroeconomic equilibrium. This shifts the aggregate demand curve to the right, in the short run raising the aggregate price level and aggregate output and creating an inflationary gap. Eventually nominal wages will rise and shift the short-run aggregate supply curve to the left, and aggregate output will fall back to potential output. This is the scenario envisaged by the speaker."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-cyu-3b'] = "No, this is not a valid argument. When the economy is not currently in long-run macroeconomic equilibrium, an expansionary monetary or fiscal policy does not lead to the outcome described. Suppose a negative demand shock has shifted the aggregate demand curve to the left, resulting in a recessionary gap. An expansionary monetary or fiscal policy can shift the aggregate demand curve back to its original position in long-run macroeconomic equilibrium. In this way, the short-run fall in aggregate output and deflation caused by the original negative demand shock can be avoided. So, if used in response to demand shocks, fiscal or monetary policy is an effective policy tool."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-cyu-4'] = "Those within the Fed who advocated lowering interest rates were focused on boosting aggregate demand in order to counteract the negative demand shock caused by the collapse of the housing bubble. Lowering interest rates will result in a rightward shift of the aggregate demand curve, increasing aggregate output but raising the aggregate price level. Those within the Fed who advocated holding interest rates steady were focused on the fact that fighting the slump in aggregate demand in the face of a negative supply shock could result in a rise in inflation. Holding interest rates steady relies on the ability of the economy to self-correct in the long run, with the aggregate price level and aggregate output only gradually returning to their levels before the negative supply shock."; xBookUtils.showAnswers['krugmanwellsmodulesmacro3-s08m29-ct-1'] = "Since output Y1 is above potential output, there is an inflationary gap. The low level of unemployment will cause nominal wages to rise, causing production cost to rise. This will shift the SRAS curve up and to the left. As the price level rises, there is a movement along the AD curve and output returns to its potential level.
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