Chapter 8 (AS/AD Model)
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1
What is the AS/AD model primarily designed to help explain?
Inflation and unemployment
2
What can the AS/AD model be used to analyze?
Fiscal policy, monetary policy, and the self-correcting mechanism
3
Why is the AS/AD model closely aligned with Keynesian economics?
It highlights the role of Aggregate Demand
4
What is the formula for Aggregate Demand?
AD = C + I + G + (X − M)
5
What does C represent in the AD equation?
Consumption
6
What does I represent in the AD equation?
Investment
7
What does G represent in the AD equation?
Government spending
8
What does X − M represent in the AD equation?
Net exports
9
What shifts the AD curve to the right?
An increase in government spending
10
What shifts the AD curve to the left?
A dollar appreciation or a stock market crash
11
How does a recession in a major U.S. trading partner affect U.S. AD?
U.S. exports decrease, shifting U.S. AD left
12
Along a given SAS curve, what happens when the price level P increases?
Profits increase and the economy moves up the SAS curve
13
What happens to profits when the price level P increases, ceteris paribus?
Profits increase
14
What happens to profits when wages W increase?
Profits decrease
15
What happens to SAS when wages increase?
SAS shifts left
16
What would shift the SAS curve to the right?
A decrease in wages
17
What would shift the SAS curve to the left?
An increase in wages or input prices
18
What does SAS represent?
Short-run aggregate supply
19
What does LAS represent?
Long-run aggregate supply
20
What can shift LAS to the right?
More labor, better institutions, or improved productivity
21
What does not shift LAS to the right?
An increase in the money supply
22
What determines the potential level of output?
Technology
23
What is an inflationary gap?
An economy producing above its potential level of output
24
What eventually happens during an inflationary gap?
Input prices rise and output falls
25
How can contractionary fiscal policy help end an inflationary gap?
Decrease government spending
26
How can contractionary monetary policy help end an inflationary gap?
Raise interest rates
27
How does raising interest rates affect AD?
It shifts AD left
28
Why did the Federal Reserve raise interest rates in 2022?
To shift AD left and end an inflationary gap
29
What type of policy did the U.S. government use in 2020 and 2021?
Expansionary fiscal policy
30
What was the purpose of the 2020–2021 government spending bills?
Increase AD to end a recessionary gap
31
What monetary policy did the Federal Reserve use during the COVID recession?
Lowered interest rates to increase AD
32
What happens to AD when interest rates decrease?
AD increases
33
Which economic approach supports expansionary fiscal policy during a recession?
Keynesian economics
34
Which economic approach favors laissez faire?
Classical economics
35
What is the difference between Keynesian and classical responses to unemployment?
Keynesian favors increasing AD; classical favors laissez faire
36
What is expansionary fiscal policy?
Policy that increases AD, such as increasing government spending
37
What is contractionary fiscal policy?
Policy that decreases AD, such as decreasing government spending
38
What is expansionary monetary policy?
Lowering interest rates to increase AD
39
What is contractionary monetary policy?
Raising interest rates to decrease AD
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